A “co-operation” is not the most obvious choice as collective noun for a group of financial regulators. Indeed, many practitioners might put it further down the list than an “onus” or a “duplication”. Yet there have been recent and welcome signs that national watchdogs recognise they have no option but to work more closely together.
The most important convert to the co-operative cause has been the Securities and Exchange Commission. In particular, the SEC is examining how brokers and exchanges outside the US might be able to provide services for US investors without coming under SEC rules as well as their own domestic regulatory regimes. At present, a US investor who wants to deal in foreign securities must contact a US broker and use that broker to trade through an overseas affiliate.
The change would involve a reciprocal arrangement. This would include the SEC being ready to exempt a broker-dealer or exchange from complying with its own requirements on the basis that the foreign regime was robust enough to provide investor protection. These are early days – a roundtable discussion of the necessary rule change is not expected for a couple of months – but that is only to be expected when protection of the retail investor is such a core element in the SEC’s duties.
The move has several origins. One is the increasing interest of US investors in overseas assets. Another is the specific focus on cross-border regulation arising from the New York Stock Exchange’s acquisition of Euronext and the failed bid by Nasdaq for the London Stock Exchange. A third is the rapid development of trading technology. Concerns about whether Wall Street is becoming less competitive as a global financial centre may also have played a part.
Christopher Cox, SEC chairman, has done well to effect this change of attitude. Moving from principle to practice will be the next challenge. The involvement of practitioners should help to ensure that effort in this difficult area is focused on aspects that will make the most difference. Going at a steady pace is also critical. A gradual approach, for example through a pilot scheme that recognises just one or two jurisdictions or a plan that limits access to foreign brokers initially to qualified institutional investors, is the most likely way to produce sustained progress.
Timely co-operation may bring a further prize. As deeper and more liquid capital markets develop in emerging economies such as India and China, investors in these countries are likely to become increasingly interested in foreign assets. If more mature capital markets have gone some way towards reciprocal recognition among themselves, they should be better placed to argue that their domestic regulatory standards be accepted by these emerging economies.