In the article by Ethiopis Tafara and Robert Peterson, the authors propose a framework to apply to foreign financial services providers accessing the U.S. capital market (the “Blueprint”). Rather than requiring foreign stock exchanges and foreign broker-dealers to register with the Securities and Exchange Commission (“SEC”), as is currently the case, the Blueprint instead recommends “a system of substituted compliance with SEC regulations.” I appreciate the invitation to provide a commentary on the Blueprint, which comes at such a critical juncture in time.
In this commentary, I discuss the global factors and recent developments that are exerting, and will continue to exert, inevitable pressure on securities regulators to open up cross-border access in financial services. In commenting on the Blueprint, I suggest the need for a framework and associated criteria to aid in assessing such a framework. Alternative approaches are outlined and discussed, including a description of the Canada-U.S. Multijurisdictional Disclosure System (“MJDS”), the EU system, and a recent proposal by the Toronto Stock Exchange Group (“TSX Group”).
The Blueprint begins with the observation that capital markets are global. This observation is self-evident and support for it is omnipresent. Globalization is a fact. Innovative technologies are driving faster and more efficient trading, and they do not recognize national borders. Capital market participants are expanding their business activities into foreign markets. Investors are seeking international investment opportunities. The impact of these changes is profound and not yet fully realized.
Consider the recent flurry of media articles reporting on potential capital tie-ups, mutual listings, alliances, takeovers, and mergers between stock exchanges around the world. Recently, NASDAQ made a bid for the London Stock Exchange (“LSE”) which, although rebuffed, resulted in NASDAQ acquiring a significant interest in the LSE. Shortly thereafter, the New York Stock Exchange (“NYSE”) Group made an offer for Euronext N.V., the second-largest European stock exchange. The Paris-based Euronext signaled its support for a deal with the NYSE, maintaining that such an alliance would be “advantageous to Europe while leveraging transatlantic synergies.” Contemporaneously, the Deutsche Boerse of Frankfurt apparently continues to pursue its plan to create a pan-European exchange, which would include Italy’s Borsa Italiana. Euronext and the NYSE Group have reportedly said that they remain willing to negotiate with Deutsche Boerse and Borsa Italiana with a view to combining their European cash equity businesses.
The Chicago Mercantile Exchange recently announced plans to buy the Chicago Board of Trade, which would create the world’s biggest market with a market value of U.S. $25 billion. In addition, the TSX Group has struck a deal with Brazil’s São Paulo Stock Exchange (“BOVESPA”) that could lead to an interlisting of stocks, with some speculating that the move is designed to draw some of South America’s largest mining firms to Toronto indices.
Recent media reports have suggested that the “merger frenzy” among exchanges appears to be spreading to Asia. There is talk of an “alliance” between the NYSE Group and the Tokyo Stock Exchange, two of the world’s largest stock markets measured by total market value of stocks listed. It appears these discussions are “focus[ed] on cross-listing, technology sharing and, possibly, small investments by each exchange in the other.” In addition, NASDAQ is reportedly exploring co-operative agreements with both Japan’s Jasdaq Securities Exchange and the Korea Exchange, Inc. in areas that may be “in the interests of maintaining fair and orderly markets and in the best interests of listed companies” in both jurisdictions.
This chess game of proposed exchange mergers, capital tie-ups, and alliances being played out on the global stage bears witness to the truism that capital markets are global. Proponents argue that cross-listings will benefit the following categories: (a) issuers by expanding their sources of capital, (b) investors by expanding their investment opportunities internationally, and (c) capital markets generally through the enhanced liquidity and potential analyst coverage that should naturally flow as a result of these events.
Accepting that these developments are occurring is not a difficult stretch. An in-depth analysis of why they are occurring is beyond the scope of this brief commentary. The emergence of new technologies has resulted in enhanced capital mobility and access to foreign markets and investors. Some claim that the increased regulatory burden in the United States, combined with mounting concerns over exposure to U.S.-style class actions and more aggressive enforcement, may be driving companies to raise capital in foreign markets. The rise of the LSE in popularity and international appeal is also most likely a relevant factor, along with the ever-increasing depth and liquidity of the European and Asian capital markets. Another influential factor is the demutualization of exchanges and their conversion to “for-profit” entities. This has, in turn, unleashed pressure from shareholders to increase profits through expansion, investment in new technology, and cost cutting, forcing these for-profit entities to eschew nationalistic or protectionist tendencies in the bid for value maximization.
It is clear that these developments bring with them increasing pressure on regulators to develop models for better coordinating their regulatory oversight in an effort to ensure that domestic regulation does not unduly hamper the pursuit of business strategies and to ensure that domestic regulation is not indirectly exported to issuers and markets extraterritorially. Although the Blueprint is not directly related to or contingent upon these internationally focused developments at the exchange level, it is against this backdrop and historically significant context that the Blueprint has been developed….
* This excerpt does not include citations. To read the entire article, including supporting notes, please download the PDF.