Callum McCarthy, Chairman of the Financial Services Authority, has made the following statement to encourage discussion of the potential longer term implications of any change of ownership of a UK Recognised Investment Exchange.
"The FSA in discharging its responsibilities will always seek to be neutral concerning the nationality of the management or ownership of the entities it regulates. We recognise the benefits that this policy has brought to the UK in assisting in it becoming one of the most international capital markets in Europe and worldwide. We made this policy clear in our public statement of 4 February 2005 on the potential longer term implications of any change of ownership of the London Stock Exchange plc (LSE)1 or its ultimate holding company.
"Against this background, we maintain the same approach in respect of the LSE or any other UK Recognised Investment Exchange (UK RIE): as long as it remains a UK exchange the FSA will continue to require that it meets its regulatory obligations as set by us under the Financial Services and Markets Act (FSMA). As we mentioned in our February 2005 statement these relate, inter alia, to sufficient financial resources, appropriate governance arrangements, and robust trading technology and strong internal risk management systems and controls. In respect of Euronext.Liffe2, another UK RIE, the same considerations apply and we are working with our fellow regulators in the Euronext Regulatory College3 to consider the issues raised by the proposed transaction between the Euronext group and the New York Stock Exchange.
"As set out in our February 2005 statement, we consider a takeover of the LSE might have wider and longer-term implications, including where the regulation of the LSE's markets would take place. In making our statement then our intention was to ensure that the market and all the LSE's stakeholders were fully aware of these implications and could carefully consider how bidders address these potential issues. We believe it helpful to make a comparable statement now, in light of developments over the last three months.
"We note that the Nasdaq Stock market, Inc. (NASDAQ) in its public announcement of 10 March 2006, stated that following any acquisition the LSE would continue to be a RIE regulated by the FSA and that it was committed to preserving an FSA regulated Main Market and AIM. While Nasdaq has withdrawn its indicative offer, it has subsequently acquired 25.1 per cent of the issued share capital of the LSE and has stated its desire to work constructively with the LSE as its major shareholder. If a bid for the LSE should progress, we would expect the bidder to make clear its intentions in respect of maintenance of the UK RIE. We note that no bid may be forthcoming and that any bid may or may not be accepted by shareholders. This is a matter for the management and shareholders concerned.
"The possibility of ownership of the LSE by a US entity has raised questions about whether, and to what extent, US law and regulation might impinge on the operation of the exchange and its markets and the companies listed on them. We would expect any bidder to make clear whether its proposals might lead to such a possibility. Any such implications would need to be considered by all stakeholders.
"For our part, we have been discussing with the relevant authorities in the United States the regulatory issues raised by combined groups operating exchanges in the UK and the US, with a view to considering for example whether arrangements to exchange information or strengthen cooperation in the oversight of such groups are necessary.
"In respect of the LSE, neither the FSA nor the Securities and Exchange Commission (SEC) consider that US ownership of the LSE, in and of itself, would result in US regulations, including Sarbanes-Oxley, applying to companies listed or quoted on its markets or member firms of the LSE. As is currently the case, some companies on the Exchange's markets may have - or choose to seek - registration with the SEC.
"Over time, a combined group, although continuing to operate separate subsidiary exchanges, may seek to harmonise aspects of both markets in respect of its trading platform, rules, membership arrangements and listings of companies. Certain aspects of integration, such as the development of a common trading platform technology, would be relatively straightforward from a regulatory standpoint. However, harmonisation of listing and membership would present greater regulatory issues between jurisdictions.
"A common trading platform technology could be developed and operated by the respective exchanges. This would need to comply with existing regulations to ensure that the systems were adequate and that reliable and appropriate controls were in place. Further integration steps could lead to the creation of a single market, covering all the securities of both exchanges with access by common members serving investors in both jurisdictions. This would require compliance with the rules of both jurisdictions unless the differing regulatory frameworks were to be aligned, including consideration of whether standards could be deemed equivalent and whether legislative change is required.
"Harmonisation of trading rules would need to be consistent with US and UK standards, including those required by the Markets in Financial Instruments Directive - to be effective by November 2007. Securities admitted to a regulated market in the EU would require compliance with European Directives such as the Prospectus, Transparency and Market Abuse Directives. In addition, a UK exchange could choose to have issuers meet additional requirements on its markets, for example for a dual UK/US listing. Member firms of a UK exchange undertaking a regulated activity in the UK would need to be authorised by the FSA or fit within a relevant exclusion. The provision of trading screens in the US by a UK exchange would require its registration as a US National Securities Exchange and consequent registration of all issuers.
"However, we believe that there could be circumstances where a more complex regulatory position might arise. Theoretically, in the longer term, a new entity might seek to achieve further benefits from rationalisation of its regulatory structure. This could at the extreme involve the LSE no longer being subject to UK regulation as an RIE. Its services might be provided from outside the UK, either from the US, another EU member state or an alternative location, through the provision of trading screens in the UK and with securities admitted to trading on the market operated from elsewhere. Such a move, were it to occur, would potentially have significant implications for various aspects of the wider regulatory regime as indicated in our February 2005 statement. If such a market were to be operated from the US it would require member firms and issuers to be registered with the SEC and subject to its oversight.
"We have sought to set out in this note some of the potential longer term implications of ownership of a UK Recognised Investment Exchange by a US entity to ensure that all stakeholders, including the exchanges' users, members and issuers, can consider these implications. For its part the FSA will continue to explore the regulatory implications of any such proposals, in conjunction with other regulatory authorities such as the SEC, the Commodities and Futures Trading Commission and the Euronext Regulatory College."
Background
- The London Stock Exchange plc is a Recognised Investment Exchange. It is owned by the London Stock Exchange Group plc following a scheme of arrangement effective on the 15th May 2006.
- Liffe Administration and Management is a UK RIE and is a subsidiary of Euronext N.V., a group which includes exchanges in the United Kingdom, Belgium, France, the Netherlands and Portugal.
- The Euronext Regulatory College comprises the national securities regulators of the United Kingdom, Belgium, France, the Netherlands and Portugal
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
- The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness
