Monday, January 29, 2007

The cost of compliance

Various media reports in the last few months have contemplated the demise of New York as a major financial center, with US Treasury Secretary Henry Paulson, blaming over-regulation in the form of Sarbanes-Oxley and others pointing to the litigious environment in the US. Are there any lessons for Europe to heed in all of this?

The London Stock Exchange has been a major beneficiary of companies' decision to choose European markets over the US for capital raising. And it seems that US banks and other interested parties are closely watching how the Markets in Financial Instruments Directive (MiFID) plays out in Europe.

With MiFID granting investment firms a European passport for selling investment services and competition between national exchanges and multilateral trading facilities expected to increase significantly in Europe, American investment banks are watching with interest, having witnessed it all before in the US market where the emergence of ECNs threatened the hegemony of the NYSE and Nasdaq.

Interestingly, those ECNs left standing (ArcaEX and INET)have since been swallowed up by the very exchanges they threatened. Are we likely to see the same events unfold in Europe in response to MiFID? Will Project Turquoise, if it ever gets off the ground, eventually be bought by the LSE or Deutsche Bourse?

The bigger question however, is what impact will MiFID have on the international competitiveness of the European securities markets? Will MiFID create a more cost effective and efficient securities market that gives Europe a competitive edge over the US as a major financial centre? Or are we in danger of repeating the mistakes the Americans made with over-regulation of financial and capital markets?

There is a real danger of the cost of compliance with regulations such as MiFID outweighing the benefits. Will MiFID and the spate of other regulations designed to impose harmonisation and standardisation on a fragmented Europe, discourage companies from wanting to list, invest or do business in the UK and other major European financial centres?

Further to that point, the FT reported this week that European investment banking lobby groups would join forces to state their case to the European Commission and the Committee of European Securities Regulators, which may be a step in the right direction if Europe is to avoid over-regulation.

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