By Jeremy Grant in Washington

When the world’s regulators of stock and derivatives exchanges gathered in Hong Kong this month for their annual meeting, an evening trip to the Happy Valley horse racecourse was a chance for some relaxed conviviality.

But only two weeks later relations between regulators – and the markets they oversee – threaten to become fraught with uncertainty.

This week, the UK’s Financial Services Authority fired off a memo raising the possibility that any ownership of the London Stock Exchange by a US exchange could, under extreme circumstances, lead to the UK stock market coming under US regulation.

And the Futures and Options Association, representing the interests of European players in the derivatives markets, raised alarm over a review by the US futures industry regulator of what defines a non-US futures exchange.

The moves are a sign of how quickly decades of regulatory certainty have been replaced by doubts over who regulates what, as exchanges start to consolidate, blurring geographical boundaries and raising questions about US regulatory “creep” across the Atlantic.

The trigger was the proposed merger between the New York Stock Exchange and Euronext, the pan-European stock and derivatives exchange. That has led to fears in Europe that tough Sarbanes-Oxley laws might eventually apply across the Atlantic. This is denied by the protagonists.

But the uncertainties are emerging because exchanges and the seamless nature of electronic trading are pushing new business models for which there is not yet a regulatory template.

Anthony Belchambers, FOA chief executive, says: “It looks as if we’ve got a wave of regulatory uncertainty that could be quite damaging.”

At the same time, while regulators have long known exchange consolidation was inevitable, they do not yet have immediate answers to the business reality forming in front of their eyes.

Ethiopis Tafara, director of the office of international affairs at the Securities and Exchange Commission, says: “I think that the issues that the proposed mergers present are not in any way novel but they are, by virtue of the mergers, potentially more urgent.”

In the US, there is nervousness about moves by exchanges to hunt for more lenient regulatory jurisdictions outside the US as they seek to build their businesses – a process known as regulatory arbitrage.

Politicians fear that the trickle of stock market listings moving abroad is already eroding America’s lead as the dominant global centre for capital formation.

The NYSE’s planned merger with Euronext is widely seen as an attempt to skirt the dampening effect that Sarbanes-Oxley has had on the US listings business and build a listings business instead in Europe.

Similarly, the Atlanta-based Intercontinental Exchange’s use of London – and thus UK regulation – as the base for a new West Texas crude oil futures contract also distributed in the US has prompted the US futures regulator to study what constitutes a “foreign” futures exchange.

Some suspect that the review, to be held by the Commodity Futures Trading Commission this month, is a response to US politicians’ calls to examine whether it is in the US national interest to see a contract perceived as economically important to the country “migrate” away to a foreign jurisdiction.

Mr Belchambers says the coincidence of the CFTC review and the regulatory issues raised by NYSE/Euronext have now created an atmosphere of “growing regulatory uncertainty that must be resolved”.

In the NYSE/Euronext case, the uncertainty stems from the fact that until more is known about the future business plans of a merged exchange, regulators cannot say with cast-iron certainty what the regulatory consequences will be.

The FSA memo raised the spectre of the LSE falling under US regulation in a distant hypothetical scenario of harmonised trading platforms and trading rules. NYSE and Euronext officials have not spelled out whether this is on the cards.

Mr Tafara is clear that, for now, Sarbanes-Oxley would not apply to NYSE/Euro-next, as it is proposed.

He says: “There are many points of integration possible between the exchanges that wouldn’t result in the need for the non-US exchange to register with the SEC. Indeed, lots must happen before you get to the point where an integrated exchange subjects itself to registration with the SEC, thereby requiring the companies listed thereon to comply with Sarbanes-Oxley.”

Relations between the world’s regulators will be tested. There are grounds for optimism, given that regulators on both sides of the Atlantic have a history of close co-operation.

Walt Lukken, a CFTC commissioner, points out that relations between agencies remain good: “Regulation is as much about relationships as it is about laws.”

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