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May 9, 2008

Streamlining Cross-Border Trading

Foreign exchanges eye U.S. traders under SEC initiative

By Peter Chapman

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Securities and Exchange Commission plans that would make it easier for foreign exchanges to operate in the U.S. are getting mixed reviews. Foreign stock exchanges see business opportunities in the SEC's proposed scheme of "mutual recognition." U.S. broker-dealers and others are uncertain, although cautiously optimistic.

"We think it will make the U.K. market more attractive to U.S. investors," Adam Kinsley, the London Stock Exchange's director of regulation told Traders Magazine. "And that is something we are interested in doing."

From the Toronto Stock Exchange, spokesperson Steve Kee says: "We fully support it and believe it would be great for Canada. Given the amount of cross-border activity between Canada and the U.S., it's important that Canada be on the mutual recognition list."

Last month, the SEC announced a set of preliminary measures it hopes will pave the way for mutual recognition arrangements with foreign regulators.

The SEC hopes to ultimately sign memorandums of understanding with certain "high-quality" regulatory regimes. These will spell out to what extent the countries' exchanges and broker-dealers can operate in the U.S.

The idea is to let foreign exchanges and brokers solicit U.S. customers for the trading of foreign securities without coming under SEC registration. And by cooperating with foreign regulators, the SEC will still be able to protect U.S. investors.

The plan follows statements SEC officials made last year indicating it was exploring the possibility of easing restrictions on foreign players as long as it was comfortable with the rules and practices of their home regulators.

The first country to get the thumbs up from the SEC, despite its relatively small share of U.S. investors' wallets, is Australia. In a statement, the SEC said it had begun "formal discussions to develop a mutual recognition arrangement" with the Australian Securities and Investment Commission and the Australian Treasury Department.

Investments in Australian equities by U.S. investors totaled only $102 billion in 2006, the last year for which data is available, according to a survey conducted jointly by the Federal Reserve and the U.S. Treasury. That compares to investments of $674 billion in U.K. names, $544 billion in Japanese stocks, and $298 billion in Canadian stocks.

Most of the pressure on the SEC to loosen its rules governing foreign exchanges and broker-dealers has come from the Europeans and the Canadians.

Direct Members

As it stands now, a foreign stock exchange wanting to recruit U.S.-based broker-dealers for membership must register as a U.S. stock exchange. "As we have no interest in trading U.S. securities," Kinsley explains, "that is something we would not look to do."

It means U.S.-based broker-dealers cannot-except in very limited circumstances-become direct members of the LSE and other overseas exchanges.

Those U.S. brokers that are members of foreign exchanges have all established offices in the exchanges' countries or nearby countries. By and large, they are exclusively the large global brokerages.

Because of this, any mutual recognition scheme is unlikely to benefit the bigger firms. It is the mid-sized brokers that the foreign exchanges have their eyes on.