European Affairs

The regulation and organization of U.S. financial markets have consistently been called the "envy of the world." They still are, if only for the strong leadership of the two main markets and regulators, as well as for the large number of active private and institutional investors (pension funds and the insurance sector).

Europe has made enormous progress over the last ten years. The introduction of the euro into financial and capital markets, for example, went exceedingly well; professionals and millions of investors readily adjusted to the new situation. The numbers of European private investors have increased dramatically over the last ten years, and an equity culture is even developing in the traditionally more financially conservative countries.

Although a number of continental European countries have lower ratios of equity market capitalization to GDP than the United States, others, like Switzerland, the Netherlands and the UK, have surpassed U.S. levels. Similarly, the number of new companies coming to the officially listed markets is impressive and showed no signs of abating until the dotcom fire cooled off.

Equally important, Europe's "traditional" Stock Exchanges and futures and options markets have modernized to such a dramatic extent that the chairman of a major U.S. investment bank has called their technology "light years ahead of others." Demutualization of their governance structures by moving from intermediaries' owned organizations to profit motivated companies and total electronization of their markets - including clearing and settlement - are two of the most striking aspects.

Most telling perhaps, is that Europe's legislative and regulatory structure - although still split across jurisdictions - has made great strides. Its standards, norms, implementation and enforcement are now among the best in the world.

The electronization of the markets and intermediaries has enabled millions of online investors to trade faster, more cheaply, and with an impressive and ever expanding universe of mostly free financial information at their command.

No European exchange, however, has given the private investor direct access to its trading engines, as the security and safety requirements of their trading, clearing, and settlement arrangements rightly take priority. The installation of electronic filters between client and intermediary or between intermediary and exchange, however, has enabled the electronic order routing of business to grow very rapidly and practically without restraints without endangering market operations.

American institutional and private investors could trade nearly directly on Europe's Exchanges if the U.S. Securities and Exchange Commission would drop its insistence that European exchanges offering such services in the United States place themselves fully under its jurisdiction.

Other options mentioned in the SEC's admirable draft concept release of 1997 have not been seriously discussed so far - with a welcome, but limited, exception for Tradepoint. It is noteworthy that the Commodities Futures Trading Commission (CFTC), with a remit especially in the futures markets, has taken a different approach and that the U.S. Congress has endorsed internationalization in the recent modernization of the U.S. commodities legislation.

After intensive bilateral discussions, the CFTC has allowed a number of European futures markets - including LIFFE (London), EUREX (Frankfurt/Zurich), and EURONEXT (Paris) - to approach the American investor with their product and trading facilities without endangering the protection that the private investor expects and should receive.

The SEC, whose motto is "We are the investor's advocate," is wary of foreign jurisdictions. In its 1999 publication "International Investing - Get the Facts," the SEC - without much differentiation between foreign markets - warns American investors against the pitfalls and dangers that lurk behind the bushes in strange countries.

Now that a new American administration has embraced open international trading environments as an important part of American policies, one would hope that the ability of Europe's electronic markets to provide cheaper, faster service to American investors will be recognized, and appropriate arrangements drawn up. The commitment to private investor protection and quality financial markets is as strong in Europe as it has always been in the United States.

LIFFE's recent introduction of single-stock futures, ahead of SEC-CFTC approval of that product in the United States, is another argument for further strengthening cross-Atlantic regulatory cooperation. In trade relations, "reciprocity" and "mutual recognition" are terms that are often interchangeable.

In this area, however, I would stress the need for mutual recognition of each other's accomplishments - while keeping an open eye for possible failures - rather than reciprocity, which can often come close to retaliation when there are disagreements.

Europe's financial markets welcome the ever-deepening penetration of American financial market actors that add vibrancy and liquidity to Europe's financial marketplace. Access to American investors would further increase the liquidity and quality of Europe's equity and derivatives markets. It would enhance the restructuring and growth of the European economy - so important for the United States as well.


This article was published in European Affairs: Volume number II, Issue number II in the Spring of 2001.