After effecting an aggressive face-off among U.S. exchanges, the Securities and Exchange Commission has raised the specter of additional future competition-with exchanges abroad. For the first time in its 73-year history, the SEC is considering regulations that could ease U.S. investors’ access to non-U.S. securities products and services through cross-border trading.
“We are looking toward potential action this year on this topic,” SEC chairman Christopher Cox said recently.
This is a significant departure from the past. The SEC has historically nixed the idea of foreign-market and brokerage access to U.S. investors. According to Benn Steil, a senior fellow at the Council on Foreign Relations, this served as a way to protect U.S. exchanges from competition.
“But the world has changed dramatically in the last year, with cross-border mergers among exchanges,” Steil said. “There is a lot of pressure on the SEC now to accommodate greater integration of markets.” Indeed, Cox in June said cross-border mergers, such as the one that formed NYSE Euronext and the proposed merger between Nasdaq and OMX Group, are part of an industry-wide trend toward cross-border trading.
Discussions are under way at the SEC about the potential structure and benefits of a regulatory “mutual recognition” scheme. Under such a program, the SEC could allow exchanges and broker-dealers registered with foreign regulators that pass muster to gain access to U.S. investors without having to meet the SEC’s registration requirements for foreign financial services firms and issuers.
Those exchanges and brokers could be granted exemptions from U.S. registration if the securities laws in their countries are comparable to those in the U.S. and if their regulators have oversight and enforcement powers deemed by the SEC to be sufficiently similar to its own. This would constitute a “system of substituted compliance with SEC regulations,” according to a paper by Ethiopis Tafara and Robert J. Peterson, the two executives in the SEC’s Office of International Affairs who put together the mutual-recognition framework the commission is now considering.
By and large, the beneficiaries of this regulatory shift would be retail investors, whose access to non-U.S. stocks is currently more limited than that of institutional investors, who can work around existing restrictions by trading through foreign broker-dealers or foreign affiliates of U.S. brokers. But the consequences of mutual recognition are far-reaching, since the proposed access is likely to kick-start global competition between exchanges. That could potentially lead to the global trading of equities.
For U.S. exchanges, the SEC’s new openness to foreign-market access raises competitive issues. “Clearly, once you [the SEC] have dropped the bar, or dropped the regulatory standard, you are going to put us at a competitive disadvantage in terms of registration, because this is a way to get around U.S. registration requirements,” said Meyer (“Sandy”) Frucher, chairman and CEO of the Philadelphia Stock Exchange, at a June SEC roundtable on mutual recognition.
If foreign markets gain access to U.S. investors, Frucher said, U.S. exchanges would also want to trade those securities. He added that the SEC would have to “catch up to the marketplace.”
At the same roundtable, Catherine Kinney, president and co-chief operating officer of NYSE Euronext, urged the SEC to start down the path to cross-border trading by first adopting a mutual-recognition scheme for cross-border registration statements. That would enable U.S. exchanges to trade foreign-registered securities from SEC-approved regulatory jurisdictions. Then, she said, the SEC should globalize trading by allowing U.S. investors to access foreign securities through foreign brokers on foreign exchanges.
Kinney also noted that the SEC’s Department of Market Regulation would have to become more agile as U.S. exchanges face new product competition from non-U.S. exchanges. She said she hoped that “when we put a rule filing down [to the SEC]-to be able to compete with London when they have their screens in the U.S. and are trading U.K. securities that we’d also like to have listed and would list here, I hope-that it doesn’t take a year or longer to get that approved.”
“When those [foreign] competitive forces are unleashed on us, we need to be able to compete and respond quickly,” agreed Chris Concannon, executive vice president for transaction services at Nasdaq. He added that U.S. exchanges must have the flexibility to offer new products akin to those that foreign exchanges are able to offer investors trading in their home markets.
