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October 14, 2008

Aussie Mart Chants 'USA' with Pact

By Peter Chapman

The Australian Stock Exchange is bullish on mutual recognition. Following the signing in August of the historic international regulatory pact by the Securities and Exchange Commission, the Australian Securities and Investments Commission (the SEC's Australian equivalent) and the Australian government, the ASX is predicting an easier time of it in winning business from U.S. broker-dealers.

"We are very happy with the SEC, ASIC and our government for doing this," said Richard Murphy, general manager, equity markets, at the ASX, a division of the Australian Securities Exchange. "Our attempts at sales and marketing in the U.S. over the past decade have been quite hampered. This frees things up."

Local Australian brokers, he added, have told him they have market-maker clients in the U.S. that are keen on operating directly on the ASX. Heretofore they haven't wanted to establish a separately regulated entity in Australia to do so.

The mutual recognition arrangement, which is in pilot phase and could face opposition in the U.S., allows Australian brokers and exchanges to do business in the U.S. without registering here. It also grants U.S. exchanges and broker-dealers the same privilege.

Underlying the newfound freedom is the belief of the SEC and the ASIC that their regulatory regimes are comparable. Thus, because Australian exchanges and brokers, for instance, are subject to rules and regulations similar to those found in the U.S., they should be free to do business in the U.S. without falling under U.S. regulatory oversight.

Also, the two regulatory bodies are signing memorandums of understanding that will facilitate investigative and enforcement activities in either country.

Both regulators will begin considering exemptions for exchanges and broker-dealers to each other's rules on a case-by-case basis early next year.

The ASX plans to file for an exemption then, Murphy said. After that, it will decide how aggressively to approach U.S. broker-dealers. It will take into account the opinions of local Australian brokers, he added.

Much of the attraction of the mutual recognition arrangement for the ASX is the ability to solicit direct-access business. The exchange is setting up a co-location facility on its premises so that broker-dealers, local and U.S-based, can place their servers next to the exchange's. That reduces network latency to zero, Murphy explained.

"By November, we will have the boxes of our top 10 brokers, mostly global investment banks, in the data room of the exchange," he said. "In turn, they are looking at brokers in the U.S. who might also want to have their boxes down here."

Those brokers could go through the systems of existing members or bring in their own boxes. The largest brokers in Australia, according to a recent survey, are UBS, Macquarie Group, Goldman Sachs, Credit Suisse, Citi, Deutsche Bank, Merrill Lynch and ABN Amro.

About 40 percent of all flow coming into the exchange comes from overseas, Murphy says, and the preponderance of that is from the U.S. and Europe.

In the U.S., opinions about the impact of mutual recognition are mixed. While some see a benefit in going direct to foreign exchanges, others say the plan is no big deal. Peter Gaffney, president of AXES, an electronic agency broker that trades exclusively in foreign markets through local brokers, calls mutual recognition a "non-event." He says it will have a "negligible impact" on his business.

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