Report calls for regulatory reform to cut transatlantic trading costs

Report calls for regulatory reform to cut transatlantic trading costs

Transatlantic securities trading costs could be cut by up to 60% if protectionist regulatory barriers to exchange access are removed. This is the conclusion of a new expert report published by the International Securities Market Association (Isma) in cooperation with the independent New York-based research centre, the Council on Foreign Relations.

The report, authored by Benn Steil, director of international economics at the Council on Foreign Relations, urges a US-EU accord on transatlantic exchange access to jumpstart integration of the two mammoth securities markets.

The document analyses the economic impact of the recent expansion of automated trading networks, and concludes that the benefits of US-EU market integration far outweigh those of the current EU initiative to liberalise intra-European market access.

In particular, argues Steil, combining less costly US institutional brokerage with more efficient EU exchange trading systems would lower trading costs on each side of the Atlantic by about 60%.

A trading cost decline of this magnitude would reduce the cost of capital for the most widely traded American and European companies by about nine per cent, he estimates.

"Current regulatory barriers to transatlantic securities trading, particularly those in the United States, impose major inefficiencies in the investment process without any corresponding benefit in terms of investor protection," the paper states.

Steil cites the requirement for EU companies listed on US exchanges to issue American depository receipts as a major cost barrier to greater integration.

The report proposes an alternative mutual recognition regime that would allow exchanges authorised on one side of the Atlantic to offer direct trading access to professional investors based on the other.

Under this scheme, US exchanges operating in the EU would be regulated by the SEC and EU exchanges operating in the US would be regulated by their respective home market authorities. Direct electronic trading access to the exchanges would be limited to broker-dealers and so-called "qualified institutional buyers", although individual investors would be able to place orders through registered local brokers in accordance with current retail investment law in the investor's jurisdiction.

Such an agreement would provide huge benefits to European companies looking to attract US investor interest, argues Steil, eliminating the necessity of a redundant US exchange listing and removing the crippling costs imposed by extraterritorial US legal initiatives.

The proposals have been welcomed by American Century Ventures president Harold Bradley: "Trading technology offers the potential for instantaneously interconnected markets. I think that many existing barriers represent protectionist policies which are maintained for the benefit of traditional exchange venues."

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