Mutual recognition of securities exchanges: Prospects for transatlantic cooperation
On March 4, GMF hosted a luncheon discussion on "Mutual recognition of securities exchanges: Prospects for transatlantic cooperation." A system such as this would allow foreign exchanges and broker-dealers to offer investment products to U.S. investors without first having to register with the U.S. Securities and Exchange Commission (SEC), an idea suggested last year by senior SEC officials and discussed at roundtable convened by the SEC. To better understand the issue, GMF hosted Randal K. Quarles of the Carlyle Group, Nicolas Véron of the Brussels-based think tank Bruegel, and Peter Chepucavage of the International Association of Small Broker Dealers and Advisors. The event was moderated by Richard Salt, GMF Transatlantic Fellow, as part of GMF's research program on international regulatory cooperation and the transatlantic marketplace. The event was attended by academics, journalists, think tank, and government representatives, as well as a variety of private sector participants.
Mr. Quarles highlighted two major questions that needed to be addressed: Why integrate securities regulation internationally and why pursue mutual recognition as opposed to some other solution, such as harmonization? With respect to the former, he pointed to the global nature of financial services and the already strong cooperation that occurs. Moreover, he argued that current market barriers do more to increase cost than they do to prevent transactions, weakening the case of those who might argue that barriers are there to protect investors. Further movement would create material benefits by reducing the cost of capital and increasing trading volumes. It would also help avoid regulatory arbitrage, a problem more prevalent in a fragmented regulatory system.
Regarding mutual recognition, Mr. Quarles noted the complexity of the principal alternative of harmonization. He pointed to the experience of pursuing a harmonization approach with the Basel II agreement in banking supervision. The effort, occupying nearly ten years of intense negotiation and manifesting itself in a long, technical document that, he noted, is read by few and understood by even fewer, highlights the difficulty that such an approach necessarily involves.
To guide the discussion, Mr. Quarles outlined the SEC's thinking on a possible framework, which can be broken down into four steps.
- 1. Foreign companies must files a request to be considered for mutual recognition.
- 2. The SEC would look at the requirements, especially the enforcement capabilities of each jurisdiction.
- 3. The foreign jurisdiction would have to agree to provide the SEC with any necessary information.
- 4. The SEC would solicit public comments.
Mr. Chepucavage, speaking directly to Mr. Quarles' comments, painted a more pessimistic picture of the SEC's thinking. Mr. Chepucavage called into question the ultimate fairness of any mutual recognition framework, arguing that this approach would favor the large Wall Street firms relative to small broker dealers who act as the conduit between international firms and also ignores those who have taken on the heavy burden of dual registration. He also pointed out that advocates of the proposed move tend also to assume that the benefits from further integration would be passed on to consumers, an assumption that he doesn't see as being wholly true. There are other loopholes, such as unsolicited transactions, that, he argued, also needed to be addressed before anything of this magnitude could, or should, be pursued.
He noted that the discussions were currently best described as a "staff suggestion" as opposed to a proposal, since the SEC had yet to express an official view on the subject. Pointing to the U.S. political environment, and the fact that the SEC currently lacked two Commissioners, he expressed doubt over the likelihood of any rapid moves.
Mr. Véron pointed to the changing context for transatlantic cooperation in financial markets. He pointed out that European financial markets have been integrating and globalizing rapidly, such that there was now multi-polarity in some financial markets, such as equities, though by no means all. But this also meant that Europe viewed financial integration through a more multi-tiered framework than the United States. From a policy perspective, the intra-EU level comes first, developing common frameworks and regulation to facilitate more closely integrated European markets; then comes the EU's relationship with the U.S.; and, finally, comes integration with the rest of the world. Not only does this complicate efforts to bring U.S. and European systems together, it creates an asymmetry in the way that the two look at international financial issues.
During the discussion that followed, different aspects of the remarks were revisited as well as new angles explored. It was noted that many of the existing arguments in favor tended to focus on the economic benefits for the firms issuing investment products, rather than the benefits that would accrue to investors; addressing this might help to stimulate support outside Wall Street. Criteria for comparability were also discussed, leaving open questions on how the SEC may weight different aspects of jurisdictional regulatory and enforcement practices.