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Building the Financial System of the 21st Century: An Agenda for the EU and the U.S.

Building the Financial System of the 21st Century: An Agenda for the EU and the U.S. Session I Issuance of Securities: Corporate Governance and Liability Regimes in the EU and the U.S. Private Enforcement. Europe

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Building the Financial System of the 21st Century: An Agenda for the EU and the U.S.

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  1. Building the Financial System of the 21st Century:An Agenda forthe EU and the U.S.

  2. Session IIssuance of Securities: Corporate Governance and Liability Regimes in the EU and the U.S.

  3. Private Enforcement • Europe • Procedural obstacles (rights, judicial competence, lack of discovery, fee shifting) • Low incentives: small recoveries • Europe should be very cautious about importing class actions • U.S. • Millstone? • Deeply embedded in culture, legal system and politics • Permit shareholder choice (e.g. class actions, jury trials, ADR)

  4. Public Enforcement: EU • More institutional market • Not done at EU level – all done by member states • Citizens cannot directly insure enforcement • Cumbersome infringement procedure • FSA has prudential approach, so hard to measure enforcement • Is public enforcement (e.g. by fines, restitution) adequate? • Resource problem – FSA self-financed

  5. Public Enforcement: U.S. • Less prudential, more “gotcha” • NAAG problem (a.k.a. Spitzer): federal vs. state enforcement • Race to “over the top” • Federal criminal enforcement issues – U.S. attorney generals’ prosecution of companies • Liability system encourages overly cautious behavior, e.g. SOX 404 audits, but broader problem as well

  6. Transatlantic Agenda • Importance of competitiveness to both sides: jobs and GDP • Approach: combination of mutual recognition plus convergence, issue by issue • Mechanism: Merkel and EU-U.S. regulatory dialogue and/or G7 • need for political involvement but when? • Some key issues • Should U.S. take a multilateral (EU) or bilateral (EU country) approach? • U.S. acceptance of EU rules depends on EU enforcement • EU acceptance of U.S. rules depends on U.S. changing its rules • Some enforcement decisions should be made at transatlantic or global level, e.g. auditor prosecution that affects all countries • Desirable level of regulatory competition?

  7. Governance - I • What does it mean? • Shareholder activism – is it good or bad? • Who has power? EU (U.S. Federal) or EU member state (U.S. States) • Right approach dependent on shareholder structure: more reliance on shareholders, where large blocks, on directors where wide dispersion

  8. Governance - II • Executive compensation • Winner take all trend: higher salaries at successful companies • Shareholder advisory votes? • Arbitrage to private markets: public company limits may cause better managers to move to private equity where compensation is not controlled • Shareholder voting process • Issuers do not know shareholders • Hedge fund vote buying • One share one vote: EU (not now) vs. U.S. (yes)

  9. Session IITrading of Securities: Market Regulation and Structure

  10. Trading Rules: Key Differences Between NMS and MiFID • Overall: most important objective of NMS is to protect retail investors, while MiFID is focused on creating a single market • Best Execution (next slide) • Data fees: regulated under NMS, not MiFID • Prohibition of sub-penny pricing under NMS, but not under MiFID • Dark pools: more pre-trade transparency under MiFID?

  11. Best Execution • NMS: price priority in fast markets (trade-through rule) vs. MiFID’s general duty, taking account of multiple factors • No opt-out in NMS, while easy wholesale opt-out under MiFID, but mechanics of retail opt-out left to member states • Role of clearing and settlement: slow/inaccurate process in EU could affect market choice

  12. NMS – MiFID Integration • Is it necessary given predominance of home-country trading? But transatlantic exchanges (NYSE Group) must now operate under two systems • What country’s rules should apply for mutual recognition? • Place of execution (exchange)? • Place of purchaser? • Where are these places for electronic trading? • Do we need harmonization? Of which rules?

  13. Other Observations • High cost for small intermediaries – barriers to entry • EU deadline may need adjustment (NMS postponed several times) • Do both NMS/MiFID discourage innovation? • Enforcement nightmare

  14. Session IIIDerivative Markets: Alternative Products and Financial Stability Monitoring

  15. Derivatives • Do they increase or decrease financial stability? • What will be the implications of trading credit derivatives on exchanges? • Competition between OTC and exchanges • Greater retail potential on exchanges • Conversion from physical to cash settlement: does the ISDA “Dura Protocol” auction procedure solve the problem?

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