Tuesday, December 19, 2006

NYSE and Euronext to vote on merger today

The New York Stock Exchange and Euronext announced today that they had formally agreed to a merger. (Euronext's press release can be read here. The NYSE's website announced it as a "merger of equals" -- much like the merger of British Petroleum and Amoco and Daimler Benz and Chrysler were mergers of equals as well...)

This was supposedly a done-deal for the past several weeks, notwithstanding some recent maneuvering by various European governments to extract a few more concessions out of the deal. (See Norma Cohen's and Ian Bickerton's FT article, Dutch seek control of NYSE body. A copy of the Dutch Finance Minister Gerrit Zalm's letter to Euronext and the NYSE can be found here.)

Which brings to mind this question: is the NYSE buying itself another Airbus? The recent Dutch push isn't just an attempt to protect against American "regulatory creep". That's been a red-herring from the very beginning. What it is, rather, is an attempt for the Dutch finance ministry to remain relevant. In addition to a promise that there would be no "spill-over" of U.S. financial regulation into Europe (something that would not be possible without the consent of European governments at any rate), Zalm's letter demands:
-- Safeguards for the local operation of Euronext NV and Euronext Amsterdam NV, to be ensured (among others) by the availability of adequate resources; and

-- Safeguarding proper and effective supervision by local supervisors on the securities exchanges in the Netherlands.
So, basically, the Dutch want to make sure that the New York Stock Exchange won't consolidate the Amsterdam exchange or render the Dutch AFM (the Netherlands financial regulator) irrelevant. But this, fundamentally, is not a US-Europe issue. It's a intra-European issue. Europe right now has dozens of small stock exchanges and dozens of small financial regulators, at a time when the pressure to consolidate, converge and harmonize has just gotten a whole lot more pressing. How relevant will individual European financial regulators remain, when overarching regulatory policy is now set in Brussels?

More importantly, what happens next? Despite the SEC's honest assurances that the United States has no intention of "exporting" its regulation to Europe, European regulators are already greatly affected by what goes on in the U.S. (See, for example, this post about how much of Europe has already adopted significant provisions of the Sarbanes-Oxley Act, even as they have criticized SOX as excessive.) What would happen if the SEC were to adopt some kind of "mutual recognition" model (as the European Union regularly demands), but this model were based on some type of regulatory convergence? Would the EU insist on "going its own way," if "importing" certain U.S. provisions were to give European financial firms more direct access to the enormous U.S. investor base?

Second, what now happens in London? The London Stock Exchange continues to fight against NASDAQ's hostile onslaught. (See Norma Cohen's LSE rejects Nasdaq approach.) Will it still try to hold out, now that it is no longer the most significant stock exchange in Europe? Will UK financial regulators attempt to lower their regulatory requirements even further, to make the London market even more attractive to foreign issuers (even if this approach has recently backfired with the LSE's Alternative Investment Market)?

Third, what happens now with the United States' own Chicago-based derivatives exchanges? Last October, the Chicago Mercantile Exchange and the Chicago Board of Trade merged to form the world's largest derivatives exchange. The CME and CBOT have studiously avoided any talk of buying out one of America's smaller equities exchanges, so as to avoid falling under the jurisdiction of the SEC. (The SEC's smaller cousin, the Commody Futures Trading Commission, seems so much easier to deal with...) But now the CME Group faces NYSE Euronext, which, because it owns Liffe (the London derivatives exchange), has a foot in both worlds. Will this put pressure on the CME Group to get into the equities business? (If the CME does, will this be enough to finally push a combination of the SEC and CFTC? And what would such a beast look like?)

It all looks like it will be an interesting New Year.

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