15 June 2006

European Voice: The world puts its stock in the NYSE - the EU doesn't

By a series of high-profile public statements, the US has been informed, in no uncertain terms, that plans for the giant New York Stock Exchange (NYSE) to bulldoze its way into the Eurozone's securities trading business by buying Euronext, the Paris-led stock market, are not welcome. The NYSE had formally launched its 7.8 billion euro bid for Euronext on 1 June.

First, French President Jacques Chirac indicated that he favoured a European stock market merger between Euronext and its Frankfurt-based rival, Deutsche Börse, in terms of trading volumes the second- and third-largest exchanges in Europe.

A French president putting his weight behind a French-led concern's business activities comes as no surprise to anybody. But then, a day later, Jean-Claude Trichet, President of the European Central Bank (ECB) dropped a bombshell. In answer to a reporter's question, Trichet made it clear that he too preferred consolidation of euro-area or European stock exchanges to transatlantic takeovers.

For a leading central banker to comment on a merger situation is, to say the least, rare. So, although Trichet gave no explanation for his judgement, it has to be assumed that serious public policy considerations lay behind it. He was just not saying what they were. Significantly, three weeks earlier, the European Commission had also, indirectly, intervened in the debate about the future of share-trading in Europe. It released on 24 May a series of papers, one from DG Competition entitled 'Competition in EU securities trading and post-trading', and the others from DG Internal Market which focus on post-trading - or clearing and settlement activities.

What impact these papers will have on Commission policy recommendations remains to be seen. But they underline how unhappy Brussels is about the barriers to competition in the current market structure and the inefficiencies that are raising the costs of clearing and settling securities deals.

The DG Competition paper takes direct aim at Deutsche Börse's vertical silo model of integrated trading, clearing and settlement, saying: 'Where exchanges control the services offered by post-trading institutions, this may limit the potential for competition to develop in trading and post-trading.'

This judgement may help to explain why Deutsche Börse is now offering, as part of its proposed merger deal with Euronext in opposition to the New York exchange, to adopt the non-vertical Euronext model outside Germany. The political opposition to an American takeover of Euronext reflects, in part, fears that if the NYSE or its rival Nasdaq, which has bought a 24.9% blocking stake in London's stock exchange, got control of their EU targets, the next step would be to put pressure on the EU markets to adopt US-style regulation.

Critics point out that the planned NYSE/Euronext holding company would be based in the state of Delaware and so would be regulated by the US Securities and Exchange Commission. Others fear that US corporate governance rules, such as the Sarbanes-Oxley law introduced after the Enron and WorldCom scandals, could be shipped across the Atlantic - without much justification since the rules are so unpopular on Wall Street. The Euronext/NYSE negotiators are trying to allay these concerns.

But in a reversal of London's earlier position, Sir Callum McCarthy, chairman of the Financial Services Authority (FSA), the City's financial markets regulator, warned that a takeover of the London Stock Exchange, in which America's Nasdaq exchange has a 25.1% stake, could leave regulation of UK markets in the hands of US regulators. Whatever the specifics, it is likely that, were the US exchanges to get control of a leading European bourse or two, it would strengthen the American authorities' persistent efforts to press for US-style regulatory norms to be adopted not only in Europe, but also around the world.

Just look at the battle over international accounting standards or America's reluctance to sign up to the Basel II capital adequacy rules for banks. Ben Bernanke, the new Federal Reserve Board chairman, is now on the record opposing regulation of hedge funds just when the ECB is going public with its concerns about their activities. The issues at stake involve regulatory culture which reflects societal norms.

Were the US to start dominating EU share trading on stock exchanges just as its investment banks, courtesy of the Markets in Financial Instruments Directive (MiFID), are poised to dominate 'systemically internalised' share-dealing within banks, then US influence on the structure of securities laws would be strengthened. It would be better placed to exploit the nationalistic rivalries in Europe, rivalries which are obstructing even co-operation between EU bank and securities market regulators and about which the May Ecofin Council expressed its concerns.

A wider and vaguer worry is that US ownership of European exchanges will introduce a new dimension of political risk into their activities. Washington has recently been levying heavy fines on European banks for some of their dealings with Iran in breach of US law. America's penchant for legal extra-territoriality is well known.

It is not hard to imagine that, in a future geopolitical confrontation with say China, a president or congress might seek to put political pressure on its adversary, or the EU, through US ownership of securities trading operations.

The worries of EU politicians leaders, including members of the European Parliament, and economic policymakers about the future ownership of EU securities markets trading structures need to be taken seriously.
By Stewart Fleming

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