WASHINGTON In a radical move, the Securities and Exchange Commission is opening the door to permitting foreign exchanges direct access to U.S. investors.
Innovations in technology have eliminated many barriers to cross-border access between U.S. and foreign markets, SEC Chairman Christopher Cox said last week in a statement announcing a June 12 roundtable on the subject in Washington.
Consequently, it is imperative that the commission consider the implications of increased U.S. investor demand for foreign investment opportunities. At the same time, we are seeing the international coalescence of a group of securities regulators who share many of the same concerns about investor protection and market efficiency that we at the SEC have a development that I believe could greatly improve investor protection worldwide, he added in the statement.
Earlier this month, Mr. Cox had told a Security Traders Association conference that the SEC staff is examining whether foreign exchanges could place their screens with U.S. brokers, in the U.S. without need of dual or multiple registrations in two or more countries.
While access to the American market would likely be limited to foreign exchanges governed by standards that are comparable to U.S. rules, the reform would represent a revolutionary departure from the SECs long-standing opposition to letting markets outside of its jurisdiction operate in the United States.
While our historical justification for requiring foreign broker-dealers and exchanges to register with the SEC is sound, it may be that, by working with our foreign counterparts, we can find ways to lower costs and increase opportunities for investors while still maintaining the highest standards of investor protection, Mr. Cox also told the STA.
If the reform materializes, it would be cheered by asset managers with an appetite for global investments as they could expect easier market access and lower trading costs. It may also diminish interest in American depository receipts, which were created in 1920s to give investors an exposure to foreign securities.
Dramatic market changes, from the rise of global trading to the emergence of transnational exchange groups such as NYSE Euronext, are driving the need for reform.
The NYSE could place its screens in Europe, and Euronext could do the same in the U.S., for an expected surge in cross-border trading volume.
The SEC is expected to open up the U.S. market under reciprocal agreements with other regulators that would allow American exchanges to put up their screens in Europe or Asia. The Commodity Futures Trading Commission adopted a similar model 10 years ago, granting foreign derivatives exchanges the right to directly reach the American market. U.S. derivatives exchanges enjoyed the same ability to do so abroad, a major factor in their rapid growth.
The global tide
Regulators are also under pressure to respond to the wave of new investment and trading tools that the financial industry is coming up with to satisfy demand from global portfolio managers and electronic arbitrageurs.
Pension plan investors are gradually losing their home-country bias. Its not going away, but investors, especially U.S. investors, are diminishing their overweight to domestic exposure, said Dan Bienvenue, portfolio manager for global equities at the $245.3 billion California Public Employees Retirement System, Sacramento.
David Lerman, director for equity listings at the Chicago Mercantile Exchange, identified various constituencies that would benefit from direct access to global cash markets, the same way they do with derivatives markets. The CMEs E-mini MSCI EAFE futures contract, which was launched last year, has been experiencing a surge in volume another gauge of the wide-ranging interest in listings that provide exposure to worldwide investments.
If you look at all the successful futures index products, they have five things in common: large underlying cash market; large component of proprietary traders or hedge funds; large component of hedgers; presence of arbitrage players; and presence of spread traders, Mr. Lerman said.
While regulators ponder the fate of international investing, broker-dealers have wasted no time in meeting the demand for multiasset, cross-border trading. Goldman Sachs Execution & Clearing LP, New York, has just released the 7.0 version of RediPlus, its global gateway to world markets.
Generally, market trends drive regulations, said Rishi Nangalia, vice president for product development for electronic trading at Goldman Sachs, who pointed out that technology is another factor pushing global trading and investment. Mr. Nangalia noted the adoption of electronic books by major exchanges was an irreversible process driving globalization that has enticed asset managers to make room on their desks for the latest technology.
With so many forces converging to create a global marketplace, regulators have little choice but to consider how regulations can best serve investors in this new environment, which Mr. Cox said is happening because we are now beginning to realize that some of the old ways of doing things have grown obsolete.