21 May 2002

Joint Position Paper: International Financial Bodies firmly reject attack on “Internalisation”

Proposals that all orders in securities must be routed to exchanges for execution would protect neither the integrity of the markets nor the interests of investors, argues a position paper to be presented to the European Commission today by a prominent group of international financial associations.

The group’s paper, “ Innovation, Competition, Diversity, Choice: A European Capital Market for the 21st Century” challenges a proposal from Euronext that in order to preserve and improve the quality of Europe’s securities markets, all orders in securities should be routed to exchanges for execution.

The paper argues that, while exchanges play an important role, investors also seek to use the services of investment firms in executing orders, and that choice should continue to be available in the marketplace. Any “one size fits all” approach would be catastrophic for the European capital market, says the paper, which claims it would be an impractical and retrogressive move which would fail to reflect today’s trading environment.

The paper argues that if Europe adopts the recommendations of Euronext, liquidity will be severely damaged, the majority of investors will receive worse prices and the cost of capital for issuers will rise. The proposals jeopardise the healthy, efficient, innovative securities market in Europe.

According to the paper, if Europe’s capital market fails to innovate, there is a real risk that institutional investors will route orders increasingly to the US. For Europe’s aspirations in the global economy, this would be fatal.

The paper concludes that markets, and the investors and issuers they serve, can only thrive in an open, competitive system. As part of the debate on the review of the Investment Services Directive, the paper recommends that investment firms, investors, issuers, regulated markets, regulators and legislators should work together to create a capital market fit for the 21st century, able to play its full part in achieving the EU’s goal of making Europe the world’s leading knowledge-based economy by the end of the decade.

Sir David Walker, Chairman of the London Investment Banking Association, said: “Although these issues are technical, they have large implications for the European economy. Substantial progress has been made over the past twenty years in the development of efficient and liquid securities markets in Europe, greatly to the advantage of both investors and issuers. This has been achieved in an environment that has fostered innovation and flexibility to meet changing client preferences and needs. It is important that similar dynamism and creativity should continue to drive market developments in the next phase, which will be so critical for Europe. It would be seriously retrograde to cramp this development by restrictive provisions designed to favour any particular channel.”

John Langton, Chief Executive and Secretary General of the International Securities Market Association, said: “The creation forty years ago of the Eurobond market, and its evolution into the world’s largest market for corporate debt, would not have happened if Europe’s exchanges had been able to dictate terms of business to the market. Europe’s prosperity depends on its continuing to encourage innovation in the delivery of financial products and services.”

Angela Knight, Chief Executive APCIMS-EASD, said 'The customer is best served and best protected by competition that gives him choice. If Europe is to be competitive it must be an open, diverse, and responsive market with exchanges, ATSs, ECNs and investment firms sensibly regulated. If exchanges are monopolies they serve to increase their profits to the detriment of the customer.'

Joint Position Paper: Innovation, Competition, Diversity, Choice: A European Capital Market for the 21st Century

© LIBA - London Investment Banking Association