Security Markets Consolidation and Its Implications
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SPEECH/07/776 Charlie McCreevy European Commissioner for Internal Market and Services Security Markets Consolidation and its Implications Austrian Financial Markets Authority and Vienna Stock Exchange Conference "Main Challenges for Supervisor & Exchanges in Central and Eastern Europe" Vienna, 30 November 2007 Introduction Ladies and Gentlemen, Let me begin by thanking the Austrian Financial Markets Authority and the Vienna Stock Exchange for its invitation to today's event. It comes at an exciting time in the evolution of Europe’s – and the world’s – stock exchanges. It is probably fair to say we are seeing the fastest pace of change in this industry in history – save perhaps for that remarkable burst of growth in the late 19th and early 20th centuries, when much of our modern financial system – including most of the stock exchanges – were established. Recent changes Firstly, let me outline just some of the remarkable changes we have seen in recent months. We have seen NYSE and Euronext merge into the first trans-Atlantic exchange. At the time, there were siren calls from some in the European Parliament and in the Member States who wanted to see me intervene to push a ‘European solution’ – in other words, the merger of Deutsche Börse and Euronext into one giant, monolithic utility. I said no. I would not intervene to create a ‘European champion’. Not because of any opinion on my side as to the attractiveness or not of that particular proposition from the perspective of investors and issuers. Rather, it was from my fundamental conviction that it is for markets and investors, rather than for politicians and bureaucrats, to make decisions on whether consolidation is desirable, and, if so, which combination will unlock the greatest value for all users of exchanges – intermediaries, issuers and investors. Which combination will lead to the greatest innovation and to the greatest range of products and services. This, of course, assumes that the ordinary regulatory concerns – about the fitness of management and the adequacy of resources – can be accommodated. And that the competition law aspects can be adequately handled. Furthermore, we were very clear that in any transatlantic mergers there should be no ‘regulatory spill-overs’ – in other words, no extra-territorial application of US law as a result of the transatlantic merger. No Sarbanes-Oxley, and other aspects of US law, to apply to European issuers and European exchanges. And in fact, for their own commercial reasons, the parties in the NYSE-Euronext case were very anxious to ensure that this was the case. So some quite elaborate safeguard arrangements were put in place to ensure that material adverse changes of US law – or, for that matter, of European law – would not affect the markets on the other side of the Atlantic. We also saw the introduction of the so-called ‘Balls clause’ in the UK to have the equivalent effect. In the case of the NYSE Euronext, the merger went ahead, after the regulators and the competition authorities agreed there were no fundamental reasons why the deal should falter. So far, so good for the merged entity, which is experiencing strong volume growth as well as a strong share price. Europe’s capital markets appear to be the stronger for it. And, interestingly, this is spurring demands for EU-US mutual recognition in securities – something we will work towards in 2008 – and I have more to say on this later. 2 Of course, it is not the only transatlantic deal we have seen in recent times. Currently the US-based International Securities Exchange is in the process of being acquired by the Deutsche Börse AG for $2.8 billion in cash. And we have also seen Borse Dubai and Nasdaq team up to make a joint bid for the Scandinavian and Baltic market operator OMX, a deal which is expected to be completed in the coming months. We have also seen the Qatari sovereign wealth fund as an active investor in both OMX and the LSE. The LSE, of course, recently teamed up with Borsa Italiana, and now has a significant representation of Italian banks on its shareholder register. The press has reported that the Vienna stock exchange is considering investing in its counterpart in Prague and perhaps other neighbouring countries too. The pace of change picks up So the world is changing fast, and the pace of change will only increase over time. Some of the causes of this acceleration are, of course, all around us – technological change being chief among them. Also, the rise and emergence of new centres of power and wealth – including the increasing importance of oil-exporting countries alongside China, India, Russia and Brazil. However, the pace of change can also be explained in terms of the regulatory environment. The introduction of the Financial Services Action Plan – and particularly the coming into force on 1st November of its cornerstone, MiFID – has seen a step-change towards a more competitive, more open pan-European market for the trading of securities and derivatives. As well as creating massive pressures for consolidation, MiFID has also introduced the kinds of market changes – in the form of new trading platforms, improved services at existing exchanges, new publication mechanisms and new and improved consultancy services – that were envisaged when the legislation was being painstakingly drawn up over the last seven or so years. We are also witnessing MiFID-driven innovation: the likes of Project Turquoise; Project Boat; Chi-X; ICAP’s new ideas; Equiduct. This is what we want. More competition. More innovation. Cheaper, more reliable capital. We hope to see more to come. Especially when your near neighbours – the Czechs and the Poles – finally complete their MiFID transposition efforts over coming months. Without all pieces of the MiFID jigsaw puzzle in place not all the benefits are realised. Please help us to keep the pressure on them to move forward! Regulatory implications and mutual recognition Leaving the MiFID picture aside, I am convinced that the present kinds of consolidation changes, while not creating a ‘European champion’ in the traditional sense, will make European capital markets stronger by locking Europe into a global exchange architecture. This will have profound consequences over time. 3 This architecture promises to delivery significant synergies over time to the benefit of investors and issuers. But it also throws up unique challenges to our decentralised system of financial regulation. It is for this reason that regulators and their counterparts in industry are starting to look beyond national – and European - boundaries and starting to think about how to build a truly global financial marketplace that is nevertheless secure for investors and safe from a systemic perspective. There are two different threads that need to be carefully separated. The first thread is the so-called ‘mutual recognition’ idea. Here we see a great scope of possibility for effective action within the framework of the G7 and the Transatlantic Economic Council. Earlier this year, the United States SEC signalled a fundamental change in its approach to the regulation of foreign brokers and exchanges. It signalled that in the right circumstances it might be prepared to allow foreign firms and exchanges to be active in US markets without the need for full SEC registration. In other words, it might be prepared to trust foreign regulators and foreign rulebooks. In Europe, we are already used to such a system – it is basically the MiFID approach. In the US, the CFTC also adopts this approach for derivatives markets, which have limited retail exposure. But no-one should underestimate how big a change this is for the SEC, and how many political difficulties there might be if things go wrong. At the moment, mutual recognition between EU and US in securities is just that – an idea. But it is one I support whole-heartedly. If we can get the conditions right the rewards could be immense. And not just in the transatlantic space but with third countries as well. And we have made a great start in the context of US GAAP – IFRS convergence just agreed by the SEC. But we won’t rush into this blindly. In recent months, we have been taking soundings with the Member States and stakeholders on a set of principles or ‘red lines’. Let me spell out the 5 most important of them: 1. A gradual approach EU-US mutual recognition in securities should be a gradual process, with successive steps carefully prepared by political understanding, working with regulators on both sides. It should be first addressed to the professional markets – and begin with rules on investment firms (broker-dealers) and stock exchanges. 2. A multilateral, not a unilateral process Only a genuine, mutually agreed co-operative approach will deliver the desired results of the initiative. Unilateral action by the SEC or bilateral deals between particular Member States and the Americans will fragment and distort the single market. 4 3. Equality of criteria for the assessment process The same assessment criteria should be used by the US and the EU when determining whether to grant access to firms and markets established in the other jurisdiction. These criteria will determine the 'substantial comparability' of regulation, effective enforcement and reciprocity of market access. The criteria must be objective, transparent and fairly applied. For our part, we think using the IOSCO principles and standards for securities markets regulation, with independent peer review, could be a good proxy for the comparability assessment. This would avoid a series of bilateral deals in favour of a multilateral, re-usable framework. Time will tell whether our American colleagues see the merits of this approach. 4. Consistent application. A situation where some EU jurisdictions would be excluded (even temporarily) from participating in the scheme for arbitrary, non-substantive reasons, would not be welcome for EU's integrating markets.