Thursday, September 28, 2006

SEC Chairman Cox meets with Euronext regulators

Securities and Exchange Chairman Christopher Cox met on Tuesday with the heads of the Portuguese, Dutch, Belgian and French financial regulators, along with the head of the United Kindom's Financial Services Authority's division of market regulation. The meeting was designed to demonstrate to Europe that regulatory issues regarding a proposed merger between Euronext and the New York Stock Exchange are all under control. In particular, Cox's venture to Lisbon was a signal that the SEC has no intention of imposing SEC regulations or the Sarbanes-Oxley Act on European stock exchanges.

The make-up of the meeting was very interesting, and indicative of the shape of this merger. Euronext is a pan-European stock exchange, a combination of the former Paris, Brussels, Amsterdam and Lisbon stock exchanges, plus the London derivatives market LIFFE. The New York Stock Exchange is the world's largest stock exchange, by several times. Within Europe, Euronext is a smaller competitor to the London Stock Exchange (which rank 5th and 4th in the list of the world's largest stock exchanges, following NASDAQ, Tokyo and New York in the 3, 2 and 1 spot.) Euronext formed precisely in order to compete with London and other large stock exchanges, both in Europe and the rest of the world. Yet these mergers have yet to give it the critical size it feels it needs to be competitive.

Consequently, the rest of this saga reads like a Jane Austin novel.

Euronext currently has two suitors — the NYSE and the Deutsche Börse in Frankfurt (currently tied in the number 6 spot with Toronto). The NYSE originally had its eyes on London, but NASDAQ (that low-class rogue) swept in and bought a controlling share of the LSE by borrowing to the hilt. However, the LSE wants to remain independent and unmarried, particularly where the likes of an American are involved. Miss Euronext, by contrast, has been pursued very persistently by Mr. Deutsche Börse, to the point where his offer, on paper at least, appears the better — €600 million better, in fact.

Nonetheless, Miss Euronext is taken by Mr. New York. His offer is cheaper, but he's huge (umm... maybe I should rephrase that.) His parents, the SEC, have a nasty reputation, but they live far far away. And Mr. New York is just so nice. He's promised to let his lovely wife have the European villa to redecorate in any way she sees fit. Mr. Deutsche Börse, by contrast, is well-known for his Teutonic domineering attitude, and his parents live way too close for comfort. In fact, Miss Euronext already has five parents (she comes from an "alternative lifestyle" family — but she's European, so what do you expect) and all she needs are the Germans to be added into the Porto-French-Belgi-Dutch-Brit mix. I mean, please! Aren't there enough inbred impoverished European aristocratic families out there already? As inlaws, the SEC, by contrast, could be interesting. Miss Euronext knows that her own parents hate them (one of the reasons why her French parent, the Autorité des Marchés Financiers, has been encouraging Mr. Deutsche Börse). But this fact may well play into her hands, since it just means that much fewer tense family get-togethers she must attend.

Mr. New York, on the other hand, sees Miss Euronext as the perfect way to enter upper European society. He's rich, but his overbearing parents (and his positively God-awful half-uncle, Eliot Spitzer) have been driving business to Europe. With Miss Euronext, he can have a foot in both worlds — his puritanical, but extremely profitable home in New York, but also a relaxing, almost libertine estate in Europe.

The fly in this ointment are the British. Everyone knows that the London Stock Exchange has been the FSA's favorite daughter, particularly since LIFFE went off and hooked up with those Continental types. Now, a Euronext-NYSE merger poses a direct threat to the LSE, and may even give those damned Frenchies an opportunity to lord it over their British betters. Even worse, it might just drive the LSE into the waiting, grubby arms of that cowboy, NASDAQ. Intolerable!

But, at this point, there isn't much they can do about it. The British spread innuendo at every turn ("did you hear that those Yanks intend to force Euronext into a Sarbanes-Oxley corset?") And they certainly won't be a party to any of this dowry discussion (which is why the UK FSA sent a relatively junior director to Lisbon, while everyone else, including the SEC, sent their chairmen). But, still, at the moment, they grumble and pray that those damned Americans make a faux pas — maybe drink directly out of the punch bowl like a horse. One can only hope...

A Euronext-NYSE merger will prove interesting. It will create enormous competitive pressures on both NASDAQ and the LSE, while also creating for the NYSE a two-tiered market — a high-regulation market in New York, and a comparatively low-regulation market in Europe. This way, if it proves that US regulation is excessive, money is still to be made on the Continent. If, however, investors place a premium on a highly regulated market, the NYSE makes money on that, too. On the other hand, it will prove extremely expensive for the NYSE, and Euronext's Continental regulators, while weak, are not exactly as "hands off" as their UK counterparts. NYSE faces the daunting task of turning Euronext into a truly global brand, while London is already there and has been for quite some time.

That said, it will be interesting to see what happens next. Pressure to further integrate Euronext and the NYSE will come, from both investors and broker-dealers. How will the SEC respond to this brave new world?

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