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The US and European Union on Friday agreed to start work on creating the first system of “mutual recognition” between their respective financial regulators under which both sides would recognise many of each other’s rules to allow cheaper and easier cross-border trading.
The move, agreed between Christopher Cox, Securities and Exchange Commission chairman, and Charlie McCreevy, EU internal markets commissioner, is another sign of how regulators are changing their behaviour to cope with the globalisation of capital markets.
The SEC and EU agreed to start work on a “framework” for mutual recognition. This would allow stock exchanges outside the US to provide direct trading access to US investors through US-based brokers for the first time, provided the exchanges’ and brokers’ home country regulators had “comparable” standards to those used by the SEC. Foreign broker-dealers would also be allowed to solicit US investors directly.
An EU-US mutual recognition arrangement for securities “would have the potential to facilitate access for EU and US investors to a broader and deeper transatlantic market, increase the availability of information about foreign investment opportunities, promote greater diversification of securities portfolios, significantly reduce transatlantic trading and transaction costs, and increase oversight co-ordination among regulators”, the SEC said.
The policy, spearheaded by Mr Cox, marks a profound shift in the SEC’s approach to foreign regulators and markets. It has been prompted by a recognition that technology has empowered investors to invest globally, amid an increasing appetite among US investors for foreign securities.
Added impetus has come from the creation of cross-border exchanges such as NYSE Euro-next and the convergence of global accounting standards.
“The pace of events in the world’s capital markets over the last few years has made the ... integration of markets, hence global regulatory co-operation, the most pressing issue for both investor protection and healthy capital markets,” Mr Cox told the European-American Business Council in Washington on Friday.
Mr McCreevy said: “This is a welcome evolution in their approach. And it has to be the way forward. Trading is global. Our exchanges are becoming global. Professional investors on both sides of the Atlantic are well used to dealing in US and Europe.
“So I support whole-heartedly this idea of ‘mutual recognition’. If we can get the conditions right, the rewards could be immense.”
By Jeremy Grant in Washington