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REGULATING TRANSATLANTIC STOCK EXCHANGES

Published online by Cambridge University Press:  18 November 2008

Pierre Schammo
Pierre Schammo
Affiliation:
Lecturer in Law, School of Law, University of Manchester.
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Abstract

This paper examines the regulatory questions surrounding transatlantic stock exchange consolidation. Underlying these questions is, in essence, a problem of fit between, on the one hand, the market space and, on the other hand, the regulatory space. Legislation which has predominantly a domestic focus is outdated in view of the increasingly global focus of financial market actors. High-profile mergers such as NYSE Euronext have brought the problem of the regulation of transatlantic or indeed global stock exchanges to the fore. Which national securities laws apply? What consequences does technological integration have for the regulatory position of exchanges and financial market actors? What are the extraterritorial implications? This article takes these questions as a starting point for investigating the problems of, and solutions to, transatlantic stock exchange consolidation.

Type
Articles
Information
International & Comparative Law Quarterly , Volume 57 , Issue 4 , October 2008 , pp. 827 - 862
Copyright
Copyright © 2008 British Institute of International and Comparative Law

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References

1 Note that the terms ‘merger’, ‘combination’ and ‘consolidation’ are used fairly loosely hereafter.

2 By financial market actors, I mean investment firms, such as broker-dealers, that operate on exchanges.

3 eg statutory laws such as the US Securities Act of 1933 and the Securities Exchange Act of 1934 including the Sarbanes-Oxley Act, or the UK Financial Services and Markets Act, but also rules and regulations made by national securities authorities such as the US SEC or the UK Financial Services Authority (hereafter, the FSA).

4 eg E Tafara and R Peterson, ‘A Blueprint for Cross-Border Access to U.S. Investors: A New International Framework’ (2007) 48 Harvard International Law Journal 31; A Nazareth, ‘Remarks Before the Securities Industry and Financial Markets Association Annual Meeting’ (9 November 2007 Florida) <http://www.sec.gov/news/speech/2007/spch110907aln.htm> visited 13 January 2008.

5 ‘A Blueprint for Cross-Border Access to U.S. Investors’ (n 4).

6 ‘Mutual Recognition Arrangement between the United States Securities and Exchange Commission and the Australian Securities and Investments Commission, together with the Australian Minister for Superannuation and Corporate Law’ (Washington 25 August 2008) <http://www.sec.gov/about/offices/oia/oia_mututal_recognition/australia/framework_arrangement.pdf>visited 28 August 2008.

7 For an evaluation of the CFTC's approach to market access, see, for instance, R Karmel, ‘The Once and Future New York Stock Exchange: The Regulation of Global Exchanges’ (2007) 1 Brooklyn Journal of Corporate, Financial & Commercial Law 355; H Jackson, A Fleckner and M Gurevich, ‘Foreign Trading Screens in the United States’ (2006) 1 Capital Markets Law Journal 54.

8 The former acting as agents, buying and selling securities for the account of others (investors), and the latter trading as principals, that is for their own account.

9 A good introduction to electronic trading and the issues it raises is given by H Stoll, ‘Electronic Trading in Stock Markets’ (2006) 20 The Journal of Economic Perspectives 153.

10 Note that the term ‘trading system’ may be defined in more or less broad terms. For instance, a broad definition of a trading system may encompass trade reporting. Increasingly, however, exchanges have standardized reporting systems which may take a feed from the trading system, but are separate. Stoll (ibid 154–5) describes the trading process as a four-step process: (1) the entry of the order into the system; (2) the routing—in other words, the delivery of the order—to a market; (3) the execution of the order and (4) the payment and transfer of ownership.

11 A Fleckner, ‘Stock Exchanges at the Crossroads’ (2006) 74 Fordham Law Review 2541, 2566–7.

12 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC [2004] OJ L145/1. ‘Regulated market’ is defined in Mifid Art 4(14) as ‘a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments—in the system and in accordance with its non-discretionary rules—in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorized and functions regularly and in accordance with the provisions of Title III [Mifid]’. ‘MTF’ is defined in Mifid Art 4(15) as ‘a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments—in the system and in accordance with non-discretionary rules—in a way that results in a contract in accordance with the provisions of Title II [Mifid]’.

13 eg ‘Electronic Trading in Stock Markets’ (n 9) 2565; R Karmel ‘Motivations, Mechanics and Models for Exchange Demutualizations in the United States’ in Asian Development Bank Demutualization of Stock Exchanges: Problems, Solutions and Case Studies (Asian Development Bank 2002) 59, 61 <http://www.adb.org/Documents/Books/Demutualization_Stock_Exchanges/chapter_03.pdf> visited 12 January 2008; R Lee ‘Changing Market Structures, Demutualization and the Future of Securities Trading’ (2003) 5 Annual Brooking/IMF/World Bank Financial Markets and Development Conference 13-6 (examining the potential benefits of demutalisation) <http://www.oecd.org/dataoecd/5/15/18450470.pdf> visited 12 January 2008.

14 By the same token, members have lost influence over the pricing of trading fees. Steil argues that by reducing the influence which local intermediaries exercise on the exchange's strategic decisions, demutualization facilitates the transition from floor-based trading to electronic trading. He points out that as a member-owned mutual organization, exchanges are more likely to resist the migration to electronic trading because electronic trading does not fit well the members' incentive structure which is based on profit margins of trade intermediation services. See B Steil, ‘Changes in the Ownership and Governance of Securities Exchanges: Causes and Consequences’ 2002 Brookings-Wharton Papers on Financial Services 61, 63; B Steil, ‘Creating Securities Markets in Developing Countries: A New Approach for the Age of Automated Trading’ (2001) 4 International Finance 257, 260.

15 J McAndrews and C Stefanadis, ‘The Consolidation of the European Stock Exchanges’ (2002) 8 Current Issues in Economics and Finance 1, 2.

16 ibid.

17 Liquidity can be defined as ‘the ability to buy or sell an asset quickly and at a price similar to the prices of previous transactions, assuming no new information is available’. See ‘The Consolidation of the European Stock Exchanges’ (n 15) 2.

18 ‘Electronic Trading in Stock Markets’ (n 9) 170. See also R Aggarwal and S Dahiya ‘Demutalization and Public Offerings of Financial Exchanges’ (2006) 18 Journal of Applied Corporate Finance 96, 101 (noting that the marginal cost of adding additional trades is close to zero).

19 R Lee, ‘The Future of Securities Exchanges’ (2002) Brookings-Wharton Papers on Financial Services 11 <http://fic.wharton.upenn.edu/fic/papers/02/0214.pdf> visited 12 January 2008.

20 ibid.

21 Both terms were coined by Castells when describing the meaning of space from the viewpoint of social theory. See M Castells, The Rise of the Network Society (Blackwell, Oxford, 1999); M Castells, The Informational City: Information Technology, Economic Restructuring and Urban-Regional Process (Blackwell, Oxford, 1989).

22 ibid (1999) 413.

23 cf SEC Chairman C Cox, ‘Re-Thinking Regulation in the Era of Global Securities Markets’ (34 Annual Securities Regulation Institute, California, 24 January 2007) <http://www.sec.gov/news/speech/2007/spch012407cc.htm> (last visited 3 August 2007) noting that ‘ … exponential advances in computer technology and telecommunications have all but eliminated the remaining physical barriers to market access. Today, almost any business, or any trader, can pick up a phone, or just press the “Enter” key on her computer, and effect significant transactions half a world away’.

24 The Rise of the Network Society (n 21) 412.

25 ibid 412.

26 ibid 470.

27 eg W Patterson, ‘Defining the Reach of the Securities Exchange Act: Extraterritorial Application of the Antifraud Provisions’ (2005) 74 Fordham Law Review 213, 221; W Haseltine, ‘International Regulation of Securities Markets: Interaction between the United States and Foreign Laws’ (1987) 36 International and Comparative Law Quarterly 307, 317–8; F Mann ‘Statutes and the Conflict of Laws’ in The Royal Institute of International Affairs The British Year Book Of International Law 1972–1973 (OUP London 1975) 117, 127.

28 The territorial principle is firmly established in international law as a basis of jurisdiction. Jurisdictional claims can also be made on the basis of nationality. But the latter is used less frequently. See V Lowe, ‘Jurisdiction’ in M Evans (ed), International Law (2nd edn, OUP 2006) 335, 345. Other principles, of lesser importance for the present purposes, are the universal principle or the protective principle. For a proposal to change the US approach to issuer disclosure to a nationality-based approach, see M Fox, ‘The Political Economy of Statutory Reach: U.S. Disclosure Rules in a Globalizing Market for Securities’ (1998) 97 Michigan Law Review 696.

29 Admittedly, from the perspective of international law, territoriality, as a basis of jurisdiction, is itself a linking point for the exercise of jurisdiction. See ‘Jurisdiction’ (n 28) 336.

30 See below ‘B. Reflections on the Regulatory Space’.

31 See also FSMA s 418 which extends the scope of FSMA to five cases in which a person, not otherwise regarded as carrying on an activity in the UK, will be so regarded (eg in the case of a UK-based firm which is carrying on a regulated activity in another EEA State and is entitled to exercise rights under an EC Single Market Directive).

32 See FSMA s 22(1) for further details.

33 Note, however, that following the implementation of Mifid, the RAO now includes a new Art 25D which deals with the specified activity of operating a MTF.

34 W Blair et al, Banking and Financial Services Regulation (Butterworths Lexis Nexis 2002) 116. Under the RAO, ‘arranging deals in investments’ is divided into ‘making arrangements for another person (whether as principal or agent) to buy, sell, subscribe for or underwrite a particular investment …’ (RAO Art 25(1)) and ‘making arrangements with a view to a person who participates in the arrangements buying selling, subscribing for or underwriting investments …’ (RAO 25(2)). The FSA has issued guidance in order to further clarify the meaning of these provisions. In relation to the former, it notes that it is aimed at ‘arrangements that would have the direct effect that a particular transaction is concluded (that is, arrangements that bring it about)’. In relation to latter, the FSA states that it is aimed at cases ‘where it may be said that the transaction is ‘brought about’ directly by the parties. This is where this happens in a context set up by a third party specifically with a view to the conclusion by others of transactions through the use of that third party's facilities. This will catch the activities of persons such as exchanges, clearing houses and service companies (for example, persons who provide communication facilities for the routing of orders or the negotiation of transactions). A person may be carrying on this regulated activity even if he is only providing part of the facilities necessary before a transaction is brought about'. See FSA Handbook PERG 2.7.7B. <http://fsahandbook.info/FSA/html/handbook/PERG> visited 12 January 2008. See also the RAO itself, which in Art 26 excludes arrangements that do not bring about the transaction in question.

35 FSMA s 21(2) and (5). The FSA has provided guidance on the content and scope of FSMA s 21 in its Perimeter Guidance Manuel (PERG 8) <http://fsahandbook.info/FSA/html/handbook/PERG> visited 12 January 2008.

36 J Ramsay ‘Rule 15a-6 and the International Marketplace: Time for a New Idea?’ (2002) 33 Law and Policy in International Business 507, 511 (in relation to ‘solicitation’). Ramsey notes further that, while business conducted ‘outside the jurisdiction of the United States’ is generally excluded from the scope of the Securities Exchange Act of 1934 under section 30(b), ‘the construction of this term by the courts and the [SEC] has been so limited so as to deprive it of any independent significance’ (ibid 510).

37 Securities Exchange Act 1934 § 15(a)(1) (15 U.S.C § 78o(a)(1)).

38 Given the wording of section 15(a)(1) of the 1934 Act (15 U.S.C § 78o(a)(1)) and in particular the broad definition of ‘interstate commerce’ referred to therein, the SEC noted that ‘virtually any transaction-oriented contact between a foreign broker-dealer and the US securities markets or a US investor in the United States involves interstate commerce and could provide the jurisdictional basis for broker-dealer registration’ (see Registration Requirements for Foreign Broker-Dealers, Exchange Act Release No. 27017 (11 July 1989) 54 Fed. Reg. 30013, 30015). 15 USC § 78c(a)(17) defines interstate commerce as meaning ‘trade, commerce, transportation, or communication among the several States, or between any foreign country and any State, or between any State and any place or ship outside thereof. …’.

39 Registration Requirements for Foreign Broker-Dealers (n 38) 30016. The territorial approach is complemented by an ‘entity approach’ for registered broker-dealers. That is to say, ‘if a foreign broker-dealer physically operates a branch in the United States, and thus becomes subject to US registration requirements, the registration requirements and the regulatory system governing US broker-dealers would apply to the entire foreign broker-dealer entity. If the foreign broker-dealer establishes an affiliate in the United States, however, only the affiliate must be registered as a broker-dealer: the foreign broker-dealer parent would not be required to register’. See ibid 30017.

40 ibid 30016.

41 ibid 30017.

42 17 CFR § 240.15a-6. Foreign-broker dealers may nevertheless be put off by the fear of U.S. liability attaching to them (‘A Blueprint for Cross-Border Access to U.S. Investors’ (n 4) 48).

43 15 USC § 77(e).

44 17 CFR §§ 230.901–905.

45 15 USC § 78e. ‘Facility of an exchange’ is defined generously in 15 USC § 78c(a)(2) as including the exchange's ‘premises, tangible or intangible property whether on the premises or not, any right to the use of such premises or property or any service thereof for the purpose of effecting or reporting a transaction on an exchange (including, among other things, any system of communication to or from the exchange, by ticker or otherwise, maintained by or with the consent of the exchange), and any right of the exchange to the use of any property or service’.

46 SEC Office of International Affairs and Divisions of Market Regulation and Corporation Finance ‘Fact Sheet on Potential Cross-Border Exchange Mergers’ (16 June 2006) <http://www.sec.gov/news/press/2006/2006-96.htm> visited 10 December 2007.

47 ibid.

48 ibid.

49 15 USC § 78c(a)(3)(A), 15 USC § 78f(c)(1), 15 USC § 78l(a).

50 R Aggarwal, A Ferrell, J Katz, ‘U.S. Securities Regulation in a World of Global Exchanges’ (John M. Olin Discussion Paper No. 569 12/2006) 21–3 <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=950530> visited 12 December 2007.

51 For details, see H Jackson, A Fleckner and M Gurevich, ‘Foreign Trading Screens in the United States’ (2006) 1 Capital Markets Law Journal 54.

52 As provided for under section 6 of the Securities Exchange Act of 1934 (15 USC § 78(f)).

53 15 USC § 78(e).

54 For an example where the SEC granted a UK Recognised Investment Exchange (ie Liffe which is now Euronext.liffe) a no-action letter, subject to various requirements and conditions, see SEC no-action letter ‘Trading of Flex style options on the London International Financial Futures and Options Exchange (“LIFFE”)’ (6 March 1996) <http://www.lexisnexis.co.uk> visited 10 January 2008. Note in this context that the SEC has recently proposed to amend Rule 15a-6 by enacting an exemption which will (inter alia) allow a foreign option exchange to engage in limited activities aimed at familiarizing certain US actors that are reasonably believed to be ‘U.S. qualified investors’, with the exchange itself and the products being traded. See also ‘B. Recent Developments’ below.

55 FSA Handbook PERG 2.4.2.

56 Financial Services Authority v Fradley [2005] EWCA Civ 1183, [2005] All ER (D) 314 (Nov) (in relation to the operation of a collective investment scheme).

57 ibid [52].

58 ibid.

59 FSMA s 21(1) (setting out the restriction), s 21(2) and (5).

60 FSA Handbook PERG 8.8.1.

61 ibid.

62 FSA Handbook PERG 8.8.2. However, note that the Financial Promotion Order (Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529)) made by the Treasury specifies the scope of FSMA section 21 further. According to Art 12(1) of the Financial Promotion Order, the restriction on financial promotion does not apply if the communication, which originates overseas or within the UK, is made to a person ‘who receives the communication outside the United Kingdom’ or if it is directed ‘only at persons outside the United Kingdom’. As a result, section 21(1) does not apply to a communication which originated overseas but which is not directed at a person in the UK. Note that in respect of an ‘unsolicited real time communication’, the communication must originate from outside the United Kingdom and be made for the purposes of a business which is entirely carried on outside the UK for the Article 12(1) exemption to apply (see also FSA Handbook PERG 8.12.4.). The directive on electronic commerce (Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market [2000] OJ L178/1) also affects Art 12(1). Thus under Art 12(7) of the Order, the exemption will not apply to an electronic commerce communication which is made from an establishment in the UK to a person in another EEA State. Likewise, the country of origin principle of the directive affects the jurisdictional scope of FSMA s 21. Art 20B(1) of the Financial Promotion Order provides that the financial promotion restriction in s 21 does not apply to ‘incoming electronic commerce communications’ which are electronic commerce communications ‘made from an establishment in an EEA State other than the United Kingdom’ (Financial Promotion Order Art 6(g)) to a person which is a user of an electronic commerce activity (FSA Handbook PERG 8.12.38). See also Art 20(B)(2) for communications to which Art 20B(1) does not apply.

63 EEOC v Arabian Am Oil Co 499 U.S. 244 (1991).

64 T Edmonds ‘Investment Exchanges & Clearing Houses Bill’ (Research Paper 06/58 House of Commons Library 23 November 2006) 7 <http://www.parliament.uk/commons/lib/research/rp2006/rp06-058.pdf> visited 3 August 2007.

65 eg K Chang, ‘Multinational Enforcement of U.S. Securities Laws: The Need for the Clear and Restrained Scope of Extraterritorial Subject Matter Jurisdiction’ (2003) 9 Fordham Journal of Corporate and Financial Law 89; D Langevoort, ‘“Schoenbaum” Revisited: Limiting the Scope of Antifraud Protection in an Internationalized Securities Marketplace’ (1992) 55 Law and Contemporary Problems 241. Note that the closest parallel to the U.S. anti-fraud provisions can be found in FSMA s 397 which has a very wide jurisdictional reach.

66 eg Leasco Data Processing Equipment Corp. v. Maxwell 468 F.2d 1326 (2d Circuit 1972).

67 eg Schoenbaum v. Firstbrook 405 F.2d 200 (2d Circuit 1968). Note that the conduct and effects tests have not been applied in a consistent manner by the Courts.

68 Europe and Overseas Commodity Traders, S.A. v. Banque Paribas London, Paribas Global Bond Futures Fund, Paribas Asset Management Ltd. and John Arida 147 F.3d 118 (2d Circuit 1998) (adapting the conduct and effects tests after examination of Regulation S, but finding that there was insufficient conduct or effect in the U.S.).

69 15 USC § 7216(a). The definition of issuer is found in 15 USC § 7201(7).

70 eg Clearly Gottlieb Steen & Hamilton LLP ‘Summary of certain U.S. legal aspects of the proposed combination between Euronext and NYSE Group Inc’ (6 December 2006) <http://www.euronext.com/fic/000/010/901/109019.pdf> visited 13 January 2008.

71 433 F.3d 1 (1st Circuit 2006).

72 18 U.S.C. § 1514A.

73 An even more recent case that addressed the question of the potential extra-territorial reach of section 806 is O'Mahony v Accenture (07 Civ. 7916). The defendant claimed that section 806 did not have extra-territorial reach. The District Court of the Southern District of New York distinguished Carnero v Boston Scientific Corporation on its facts and, after examination, found that it had subject-matter jurisdiction over the defendant in this case ‘because the alleged wrongful conduct and other material acts occurred in the United States by persons located in the United States …’. As a result, the district judge considered that the resolution of the dispute would not implicate an extra-territorial application of U.S. law.

74 K Nicolaidis and G Shaffer ‘Transnational Mutual Recognition Regimes: Governance Without Global Government’ (2005) 68 Law and Contemporary Problems 263, 267.

75 ibid.

76 See below ‘B. Recent Developments’.

77 eg E Greene ‘Resolving regulatory conflicts between the capital markets of the United States and Europe’ (2007) 2 Capital Markets Law Journal 5, 7; ‘The Once and Future New York Stock Exchange’ (n 7) 359. See also E Greene, D Braverman and J Schneck ‘Concepts of Regulation—The U.S. Model’ in F Oditah (ed) The Future for the Global Securities Market—Legal and Regulatory Aspects (Clarendon Press Oxford 1996) 157.

78 ‘A Blueprint for Cross-Border Access to U.S. Investors’ (n 4) 48 (noting that ‘[g]enerally speaking, American retail investors interested in these foreign investment opportunities trade non-U.S. registered securities listed on a foreign exchange through registered U.S. brokers. But the U.S. brokers typically funnel the trade order through their foreign affiliates—a process that tends to involve somewhat higher transaction costs (and may take more time) than if the U.S. investors had conducted the transactions directly with the foreign affiliates or foreign brokers’).

79 ibid.

80 ibid. More specifically, the authors note that the lack of information is due to the fact that foreign actors which are not registered with the SEC are not allowed to solicit U.S. retail investor directly. Moreover, US registered broker-dealers cannot provide US investors with research or information on foreign investment opportunities unless they are directly requested to do so by the investor.

81 See generally H Scott and P Wellons International Finance—Transactions, Policy, and Regulation (Foundation Press New York 2007) 68–94; J Board, C Sutcliffe and S Wells ‘Distortion or Distraction: U.S. restrictions on EU Exchange Trading Screens’ (London School of Economics and Corporation of London, City Research Series Number Three, November 2004) 25–33 <http://www.cityoflondon.gov.uk/NR/rdonlyres/0C234A1F-022B-48E0-9128-1994192B4973/0/BC_RS_distortion_0411_ES.pdf> visited 12 December 2007.

82 On the proposed amendments, see below ‘B. Recent Developments’.

83 ‘Distortion or Distraction’ (n 81) 22.

84 C Olson Houston and R Ann Jones ‘The Multijurisdictional Disclosure System: Model for Future Cooperation?’ (1999) Journal of International Financial Management and Accounting 227, 228, cited in ‘Distortion or Distraction’ (n 81) 22.

85 International Finance—Transactions, Policy, and Regulation (n 81) 79.

86 17 CFR § 230.144A.

87 ‘Distortion or Distraction’ (n 81); SEC ‘Unofficial Transcript of Roundtable Discussion on Mutual Recognition’ (12 June 2007) <http://www.sec.gov/news/openmeetings/2007/openmtg_trans061207.pdf> visited 13 January 2008.

88 SEC Release ‘Regulation of Exchanges’ No. 34-38672 (1997). According to the SEC ‘[t]he market member [typically, the investor's broker-dealer] provides a direct, automated link between the customer and the foreign market by connecting the customer's computer system directly to its own, which is also connected with the foreign market. … The member's systems will then automatically distribute market information to the U.S. investor and route the investor's orders directly to the market. Through these types of “pass-through” linkages, the non-member customer can enjoy electronic trading capabilities that are equivalent to the trading privileges of a member of the foreign market’.

89 ‘Distortion or Distraction’ (n 81) 31.

90 ‘Roundtable Discussion on Mutual Recognition’ (n 87).

91 eg R Bernard ‘International linkages between securities markets: “A ring of dinosaurs joining hands and dancing together”?’ (1987) 2 Columbia Business Law Review 321, L Loss and J Seligman Fundamentals of Securities Regulation (Aspen Publishers New York 2005) 750–1.

92 Further details can be found in SEC ‘Internationalization of the Securities Markets’ (Report of the Staff of the SEC to the Senate Committee on Banking, Housing and Urban Affairs, and the House Committee on Energy and Commerce, July 1987) V-49–V-55 <http://www.sechistorical.org/collection/papers/1980/1987_IntSecMarketsRep/> visited 15 February 2008.

93 ibid V-57.

94 ibid V-56.

95 Fundamentals of Securities Regulation (n 91) 750.

96 Directive (EC) 2003/71 of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC [2003] OJ L345/64.

97 PD Art 2(1)(m)(i).

98 Art 2(1)(i) Directive (EC) 2004/109 of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC [2004] L390/38.

99 PD Art 2(1)(m)(iii) states that ‘for all issuers of securities incorporated in a third country, which are not mentioned in [Art 2(1)(m)(ii)]’ the home Member State is the Member State ‘where the securities are intended to be offered to the public for the first time after the date of entry into force of this Directive or where the first application for admission to trading on a regulated market is made, at the choice of the issuer, the offeror or the person asking for admission, as the case may be, subject to a subsequent election by issuers incorporated in a third country if the home Member State was not determined by their choice’.

100 TD Art 2(1)(i). See also TD Art 23 which exempts third-country issuers from complying with certain provisions of the TD.

101 Parts of Mifid also apply to credit institutions which provide investment services or perform investment activities (Art 1(2)). These credit institutions benefit, inter alia, of Arts 31(1) and 32(1) which are examined hereafter.

102 For the definition of ‘regulated market’, see (n 12). An investment firm is defined in Mifid Art 4(1)(1) as ‘any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis’. Investment services and activities are listed in Section A of Annex I. These are the reception and transmission of orders in relation to one or more financial instruments, the execution of orders on behalf of clients, dealing on own account, investment advice, the underwriting of financial instruments and/or the placing of financial instruments on a firm commitment basis, the placing of financial instruments without a firm commitment basis and the operation of MTFs (for the definition of ‘MTF’, see (n 12)). A market operator is a person ‘who manages and/or operates the business of a regulated market. The market operator may be the regulated market itself’ (Art 4(1)(13)). Note also that a MTF may either be operated by an investment firm or a market operator (Art 4(1)(15)).

103 Mifid Art 4(1)(20)(a)(i) and (iii).

104 Mifid Art 4(1)(20)(a)(ii).

105 Mifid Art 4(1)(20)(b).

106 ibid.

107 For details on the content of the information which they must provide to the home state regulator, see Art 31(2). See also HM Treasury ‘UK Implementation of the EU Markets in Financial Instruments Directive (Directive 2004/39/EC)’ (Consultation Document December 2005) 15 <http://www.hm-treasury.gov.uk/media/6/8/ukimplementationeumarkets151205.pdf> visited 12 December 2007.

108 Mifid Art 32(2).

109 See Mifid Art 32(7) which refers to the matters governed by Art 19 (conduct of business obligations), Art 21 (best execution), Art 22 (client order handling rules), Art 25 (transaction reporting/record keeping), Art 27 (pre-trade transparency) and Art 28 (post-trade transparency).

110 Mifid Art 33(2).

111 Mifid Art 42(6).

112 Mifid Art 42(6) para 2.

113 Mifid Art 42(6).

114 The notification obligation is found in Mifid Art 31(6).

115 FSMA s 312A(1) (implementing Mifid Arts 31(5) and 42(6)). Operators of MTFs benefit of the same rights.

116 FSMA s 312A(2).

117 FSMA s 418(1) and (2).

118 European Commission ‘Your questions on MiFID’ (Question no. 41.2—Update 21 February 2008) (in relation to third-country investment firms) <http://ec.europa.eu/internal_market/securities/docs/isd/questions/questions_en.pdf> visited 26 February 2008. See also EC Treaty Art 49 which lays down the right for a service provider to provide services on a cross-border basis. Service providers are nationals of a Member State who provide services in a state other than the one in which they are established. Article 49 para 2. envisages the situation of third country nationals. It provides that the Council can extend the rights to third country nationals on a proposal by the Commission. There is no indication that Mifid sought to extend the cross-border service rights to third country nationals. On the contrary, recital (28) explicitly states that branches of investment firms authorised in third countries ‘should not enjoy the freedom to provide services under the second paragraph of Article 49 of the Treaty or the right of establishment in Member States other than those in which they are established’.

119 In relation to branches of third-country investment firms, Art 5 of the Investment Services Directive—the predecessor of Mifid—provided that Member States should not treat them more favourably than branches of Community firms. Mifid no longer includes this provision (but see recital (28)). The Commission considers that the ISD principle continues to apply under Mifid. See ‘Your questions on MiFID’ (n 118). See also Financial Services Authority ‘Reforming Conduct of Business Regulation’ (Consultation Paper 06/19 October 2006) 7 <http://www.fsa.gov.uk/pubs/cp/cp06_19.pdf> (adopting the same position).

120 R Finney, R Pretorius and M Philipp ‘Regulating Exchanges Internationally in a Competitive Age—the NYMEX Europe Example: Part I’ (2006) 8 Journal of International Banking Law and Regulation 456, 458.

121 FSA Handbook REC 6.1.2.

122 FSMA s 292(3).

123 FSMA s 292(4).

124 FSMA s 292(3).

125 ‘Regulating Exchanges Internationally in a Competitive Age’ (n 120) 458 (noting further that [t]his is, in broad terms, the interpretation of the FSA, except to allow an ROIE to maintain local representation and operational support'.

126 Euronext's Rulebook I includes harmonized listing and trading rules, rules relating to membership, conduct and enforcement. Rulebook II sets out those rules which are not (yet) harmonized or which relate to particular non-regulated markets.

127 Note that, in an effort to facilitate listings of SEC registered companies on Euronext, NYSE Euronext has recently announced that it will offer secondary ‘technical’ listings on Euronext exchanges for which certain SEC filings can be used (following the decision of Euronext regulators to accept these filings). The scheme takes advantage of PD Art 20. See J Grant, ‘NYSE set to challenge LSE in Europe’ (FT 14 April 2008).

128 SEC, ‘Written Statement of the U.S. Securities and Exchange Commission—A Global View: Examining Cross-Border Exchange Mergers’ (Subcommittee on Securities, Insurance, and Investment of the U.S. Senate Committee on Banking, Housing, and Urban Affairs 12 July 2007) <http://www.sec.gov/news/testimony/2007/ts071207sec.htm> visited 20 December 2007.

129 eg ‘A Blueprint for Cross-Border Access to U.S. Investors’ (n 4).

130 See generally R McCormick, Legal Risk in the Financial Markets (OUP, Oxford, 2006).

131 eg H Scott and G Dallas, ‘End of American Dominance in Capital Markets’ (FT 19 July 2006).

132 A Gangahar, R Beales and G Tett, ‘NYSE on the move as deal with Euronext is completed’ (FT 4 April 2007); A Gangahar, ‘Exchanges step up the march east’ (FT 12 April 2007).

133 FSMA s 2(2).

134 FSMA s 2(3) states that ‘[i]n discharging its general functions the Authority must have regard to (a) the need to use its resources in the most efficient and economic way; (b) the responsibilities of those who manage the affairs of authorised persons; (c) the principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction; (d) the desirability of facilitating innovation in connection with regulated activities; (e) the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom; (f) the need to minimise the adverse effects on competition that may arise from anything done in the discharge of those functions; (g) the desirability of facilitating competition between those who are subject to any form of regulation by the Authority’.

135 ibid.

136 ‘Foreign Trading Screens in the United States’ (n 7).

137 ‘A Blueprint for Cross-Border Access to U.S. Investors’ (n 4) 44.

138 ‘Resolving regulatory conflicts between the capital markets of the United States and Europe’ (n 77) 21. See also ‘A Blueprint for Cross-Border Access to U.S. Investors’ (n 4) 48 (noting that investor protection was also the reason for limiting U.S. investors' access to foreign investment opportunities).

139 ibid 42.

140 See generally G Majone, ‘International regulatory cooperation: a neo-institutionalist approach’ in G Bermann, M Herdegen and P Lindseth (eds), Transatlantic Regulatory Cooperation—Legal Problems and Political Prospects (OUP Oxford 2000) 119.

141 SEC, ‘SEC Takes Action to Improve Consistency of Disclosure to U.S. Investors in Foreign Companies’ (Press Release 2007/235, 15 November 2007) <http://www.sec.gov/news/press/2007/2007-235.htm> visited 10 January 2007.

142 Exemption of Certain Foreign Brokers or Dealers; Proposed Rules, Exchange Act Release No 58047 (8 July 2008) 73 Fed. Reg. 39182.

143 15 USC § 78c(a)(54).

144 In particular, the new definition allows covering interactions with institutional investors that own and invest on a discretionary basis $25 million or more in investments and individuals who own and invest on a discretionary basis $25 million or more in investments. ‘Exemption of Certain Foreign Brokers or Dealers’ (n 142) 39185–6.

145 ibid 39188–96.

146 ibid 39197.

147 An ‘OTC options processing service’ is defined as ‘a mechanism for submitting an options contract on a foreign security that has been negotiated and completed in an over-the-counter transaction to a foreign options exchange so that the foreign options exchange may replace that contract with an equivalent standardized options contract that is listed on the foreign options exchange and that has the same terms and conditions as the over-the-counter options’ (ibid 39197). The SEC considered that whilst the OTC options processing service might be regarded as a ‘facility of an exchange’ (see n 45), the service ‘would not effect any transaction in a security or report any such transaction’. Hence, it concluded that the registration requirements of section 6 of the Exchange Act would not be triggered (ibid 39198).

148 (n 6).

149 MR Agreement Rec (8).

150 MR Agreement Item Two.

151 MR Agreement Item One, paras 7 and 8.

152 ibid.

153 MR Agreement Item Four, para 17(a), (b), (f) and (g). Note that, for the time being, references to ‘Australian markets’ in Item Four are meant to be references to Australian markets which are operated by the Australian Securities Exchange (ASX) (Item Four, para 17(a)(i)). Applications for exemptive relief can also therefore be made only for ASX-operated financial markets. Moreover, US markets which want to do business with Australian investors will, for the time being, need to do so via an Australian broker-dealer which is a participant of ASX (Item Four, para 17(b)(i)).

154 MR Agreement Item Five, para 20(b).

155 eg R Campos, ‘The Current Role of Capital Market Regulation’ (SEC Speech Rio de Janeiro 5 September 2006), A Nazareth ‘Remarks Before the NYSE Regulation Second Annual Securities Conference’ (SEC Speech 20 June 2006); SEC ‘A Global View: Examining Cross-Border Exchange Mergers’ (n 128) <http://www.sec.gov> visited 12 February 2008.

156 C McCreevy, ‘Security Markets Consolidation and its Implications’ (Austrian Financial Markets Authority and Vienna Stock Exchange Conference ‘Main Challenges for Supervisor & Exchanges in Central and Eastern Europe’ 30 November 2007) available at <http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/07/776&format=HTML&aged=0&language=en> visited 12 February 2008.

157 ibid.

158 For regulatory and oversight purposes, Euronext regulators—ie the Belgian, Dutch, French, Portuguese and UK regulatory authorities—meet within a college of Euronext regulators. Within the college, the activities and operations of Euronext are examined from a group perspective (ie from the perspective of the regulators as a group). Two Memoranda of Understanding underpin this approach.

159 ‘Memorandum of Understanding Concerning Consultation, Cooperation and the Exchange of Information Related to Market Oversight’ (25 January 2007) <http://www.sec.gov/news/press/2007/2007-8_mou.pdf> visited 14 February 2008.

160 MOU Opening Statement.

161 MOU Art 2 para 6.

162 MOU Art 2 para 13. Besides foreseeing changes in the corporate and governance structure of NYSE Euronext (Art 3 para 17), the MOU also foresees further integration and harmonisation steps (Art 3 paras 18 and 19). It specifically envisages the case in which NYSE Euronext would seek to harmonise trading rules (Art 3 para 18). The MOU provides that the signing authorities will work together in order to coordinate their approval processes and will seek to facilitate the development of consistent rules. Coordination efforts are also envisaged in relation to integration steps such as the restructuring and the creation or the closing of new exchanges/facilities.

163 J Grant, ‘Deal would pose new dilemma’ (FT 16 March 2007) (citing Charlie McCreevy, EU Internal Market Commissioner).

164 The regulatory dialogue also includes discussions between CESR and the SEC (and between CESR and the CFTC). Note that the transatlantic economic council, which was set up in 2007, is the latest body which was designed to promote closer transatlantic economic integration and cooperation <http://www.eurunion.org/partner/summit/Summit20070430/TransatlEcoIntegratFramew.pdf> visited 14 February 2008.

165 Majone reminds us that network models are a feature of the regulatory landscape in many sectors of activities. See ‘International regulatory cooperation: a neo-institutionalist approach’ (n 140) 137–41.

166 The Balls Act, also known as the Investment Exchanges & Clearing Houses Act 2006, was the response of the British government to the fears voiced in the City of London that, as a result of a takeover, a UK Recognised Investment Exchange (such as the London Stock Exchange) or a Recognised Clearing House could introduce rule changes which would adversely impact on the UK financial markets. The Balls Act, which amended FSMA, was thus described as the result of three developments: ‘First the flotation of the London Stock Exchange (LSE) [which] opened up the possibility of it being taken over by, crucially, a foreign buyer. Secondly, the introduction of significantly more onerous audit and accounting regulations on companies listed in the United States regardless of where their main business areas are. Thirdly, the perceived tendency of U.S. law, especially business law, to be applied across national borders’ (see ‘Investment Exchanges & Clearing Houses Bill’ (n 64) 7). The Balls Act essentially ensures that the FSA can exercise control over any future rule changes.

167 The arrangements laid down in the NYSE Euronext MOU could provide a context for such learning. MOU Art 3 para 15 states that the SEC and the Chairmen's Committee of the College of Euronext Regulators, which is formed by the chairman of each of the Euronext regulatory authorities, will endeavor to meet on an annual basis in order to identify and debate issues of regulatory concern, as well examine the regulatory implications of any future integration steps taken by NYSE Euronext.

168 SEC and ASIC ‘Memorandum of Understanding, Cooperation and the Exchange of Information related to Market Oversight and the Supervision of Financial Services Firms’ (Washington 25 August 2008) <http://www.sec.gov/about/offices/oia/oia_mututal_recognition/australia/supervisory_mou.pdf> visited 28 August 2008; SEC and ASIC ‘Memorandum of Understanding, Cooperation and the Exchange of Information related to the Enforcement of Securities Laws’ (Washington 25 August 2008) <http://www.sec.gov/about/offices/oia/oia_mututal_recognition/australia/enhanced_enforcement_mou.pdf> visited 28 August 2008.

169 Staff exchange programs can a priori contribute to foster rapprochement and learning and should therefore be promoted. Similar suggestions were made by CESR in order to strengthen ties between European regulators. See Committee of European Securities Regulators ‘The role of CESR at “Level 3” under the Lamfalussy Process—Action Plan for 2005’ (October 2004) available at <http://www.cesr.eu/index.php?page=document_details&from_title=Documents&id=2550> visited 13 February 2008.