Archive for the ‘Financial Markets’ Category

John Coffee wrote in FT.com that conventional wisdom holds that the London Stock Exchange is winning the international battle for listings and offerings, in large measure because of the “regulation-lite” policies of the UK’s Financial Services Agency. The reality is, however, more complex. A significant enforcement gap exists between the US and the UK, and its impact creates a regulatory dilemma for both countries.

London’s Alternative Investment Market has been spectacularly successful but does that success prove the value of a “light touch” on enforcement? The answer probably depends on what a country most wants its capital markets to do: either attract foreign listings, transactions and trading volume, or reduce the cost of capital to issuers.

A growing body of economic research shows the cost of equity capital varies with the regulatory and disclosure environment. In particular, these studies show that when a foreign company cross-lists on a big US exchange it incurs a significant reduction in its cost of capital and also displays a valuation premium (often 30 per cent or more) over non cross-listed companies from its home country. This pattern has continued for nearly 20 years, varying only in degree. Conversely, when a foreign company cross-lists on the London Stock Exchange, no valuation premium results and there is no reduction in its cost of capital. This pattern has also persisted since at least 1990.

What can explain this puzzle? The most plausible explanation is that stricter enforcement in the US causes investors to view the cross-listed company’s financial results and projections with greater trust and confidence and assign a higher valuation. Put simply, deterrence works.

Ultimately, stricter enforcement yields a trade-off: it deters many companies from cross-listing, but it also implies a lower cost of capital for both domestic and cross-listed companies. Companies with controlling shareholders may spurn this benefit and avoid the US in order to continue to enjoy the private benefits of control, which is worth more to them. Still, the important point to remember is that a lower cost of capital carries potential benefits for the broader society: namely, a higher gross domestic product and lower unemployment.

A public/private conflict easily arises over the desirability of strong enforcement. From the private perspective of market professionals, low enforcement means increased business. But from a public perspective, low enforcement implies greater insider trading and market manipulation, which in turn raises the cost of equity capital.

How great then is the current enforcement gap? First, viewed in terms of “enforcement inputs” (that is, regulatory budgets and staff size), common law countries invest much more in enforcement than do civil law countries, such as France, and the principal common law jurisdictions – the US, the UK, Canada and Australia – are all roughly comparable.

Second, viewed in terms of “enforcement outputs” (enforcement actions brought and penalties levied), however, the US and Australia are at the high end of the continuum and the UK at the opposite end. Even after adjustment for differences in market capitalisation, the financial penalties levied for securities violations in the US exceed those imposed by the FSA by at least 10 to one.

Third, over recent years, the FSA has allocated between 8 and 12 per cent of its budget to enforcement, while the US allocates about 40 per cent and Australia around 45 per cent. Finally, the US actively uses criminal penalties for insider trading and “cooking the books” by publicly held companies. Criminal enforcement of securities offences is virtually unknown in the UK and even civil insider trading cases remain rare.

Why are these differences so dramatic given otherwise close similarities in the disclosure systems of the two countries? Three reasons stand out: First, the UK probably does have stronger substantive corporate governance rules than the US and to a degree that mitigates the need for enforcement. Second, the City of London and the FSA both tend to view the capital markets as a polite club in which gentle guidance and a regulatory frown are sufficient. Third, the US market is much more retail oriented. Because the American middle class holds its retirement savings in the stock market, there is a stronger political demand for enforcement.

These differences seem likely to persist. But, in a globalising world, the view of the capital market as a gentlemen’s club seems anachronistic. Strangers are increasingly dealing with strangers and gentle guidance does not deter the predatory. Given the hidden costs of insider trading, perhaps the time has come for the UK to take enforcement more seriously.

The writer is the Adolf A. Berle professor of law at Columbia University Law School and director of its Center on Corporate Governance.

CSA Partners visited Oslo Stock Exchange, several leading law firms and listed companies to get an understanding of the market abuse situation in Norway.”We learned that the insider regulation in Norway is strict and the local FSA is doing the market monitoring with a really good care,” said Martin Villig, Managing Partner of CSA Partners. He added that the CSA Partners team will definitely visit Oslo again very soon to meet with the local securities market authorities and some other leading law firms to discuss about possible co-operation.

Please feel free to contact us if you would be interested in the INSIDeR products demonstration as well as meeting with the CSA Partners in Norway.

The European Commission has welcomed the Council’s formal adoption of the Directive on the exercise of shareholders’ rights, which means that the Directive is now officially part of EU law.

This key measure will enable shareholders of listed companies throughout the European Union to exercise their rights and have their say. The formal adoption follows agreement at first reading by the Council and the European Parliament in February 2007. Member States now have two years to implement the Directive in their national laws.

Internal Market and Services Commissioner Charlie McCreevy said:

“I congratulate all parties on the swift adoption of this Directive and call upon Member States to ensure equally swift implementation at national level. These new rules will mean that shareholders, no matter where they are located in the EU, can have their say about the way companies are run and can hold management accountable. This is good news for all shareholders, for the integration of EU financial markets and for the economy as a whole.”

The Directive introduces minimum standards to ensure that shareholders of companies whose shares are traded on a regulated market have a timely access to the relevant information ahead of the general meeting (GM) and simple means to vote at a distance.

It also abolishes share blocking and introduces minimum standards for the rights to ask questions, put items on the GM agenda and table resolutions. The Directive allows Member States to take additional measures to facilitate further the exercise of the rights referred to in the Directive.

The Directive features the following key provisions:

• Minimum notice period of 21 days for most GMs, which can be reduced to 14 days where shareholders can vote by electronic means and the general meeting agrees to the shortened convocation period;

• Internet publication of the convocation and of the documents to be submitted to the GM at least 21 days before the GM;

• Abolition of share blocking and introduction of a record date in all Member States which may not be more than 30 days before the GM;

• Abolition of obstacles on electronic participation to the GM, including electronic voting;

• Right to ask questions and obligation on the part of the company to answer questions;

• Abolition of existing constraints on the eligibility of people to act as proxy holder and of excessive formal requirements for the appointment of the proxy holder;

• Disclosure of the voting results on the issuer’s internet site.

The Commission proposed the Directive in January 2006. The Council of Ministers and the European Parliament reached agreement on the content of the future Directive in a single reading in February 2007.

In May 2007 the Commission also published a consultation paper regarding a possible Commission recommendation on shareholders’ rights that could complement the rules of the Directive. More information on the Directive and the consultation is available at:

• http://ec.europa.eu/internal_market/company/shareholders/indexa_en.htm

The boards of directors of the NASDAQ Stock Market, Inc. (NASDAQ) and OMX AB (publ) jointly announced on May 25, 2007 that they have entered into an agreement to combine the two companies (Combination), creating the world´s premier exchange and technology company.The Combination will create the largest global network of exchanges and exchange customers linked by technology.

The Combination is expected to create:

• PREMIER GLOBAL EXCHANGE COMPANY: NASDAQ is the premier US equities exchange, handling more shares and listing more companies than any other US exchange. NASDAQ’s open and innovative market platform is the first choice for issuers as well as investors.  OMX Nordic Exchange is a highly integrated, efficient equities and derivatives market for leading European companies. Together, the NASDAQ and OMX exchanges will process an average daily volume of 7.4 million trades, representing a value of approximately $61 billion (SEK418 billion). The NASDAQ and OMX exchanges will have approximately 4,000 (the world´s number one in terms of number of traded companies) companies listed from 39 countries with an aggregate market capitalization of approximately $5.5 trillion (SEK37.6 trillion);

• WORLD EXCHANGE TECHNOLOGY LEADER: OMX has been a pioneer in   creating a truly integrated cross-border stock market. OMX also has created a world-renowned technology customer base of equity, debt, and derivatives exchanges with 60 clients in 50 countries worldwide, including Hong Kong, Singapore, Australia, and the US. NASDAQ pioneered electronic trading, and has continued to innovate over the last thirty years and now has the fastest, most efficient trading platform in the US. Together, the Combined Group will provide the technology for the world’s increasingly competitive and demanding capital markets;

• INCREASED VISIBILITY AND ACCESS TO THE GLOBAL INVESTMENT MARKETPLACE FOR ISSUERS: Issuers will be associated with an innovative, future-focused company with blue-chip peers in all industry sectors. Listed companies will have access to a broad base of investors and deep pools of liquidity.

Read more: www.omxgroup.com

In 1999 the Basel Committee on Banking Supervision published guidance to help banking supervisors promote the adoption of sound corporate governance practices by banking organizations in their jurisdictions.Following public consultation in July 2005, the Committee has now published a revised version of its guidance. The paper is not, however, intended to establish a new regulatory framework in addition to existing national legislation, regulations or codes.

The paper sets out 8 sound corporate governance principles which stipulate that:

1) Board members should be appropriately qualified and have a clear understanding of their role in corporate governance;

2) the Board should establish strategic objectives and corporate values and communicate these throughout the banking organisation;

3) clear lines of responsibility and accountability should be set throughout the organisation;

4) there should be appropriate oversight by senior management which is consistent with Board policy;

5) the Board and senior management should effectively use the work conducted by the internal and external auditors and internal control functions;

6) compensation policies and practices should be consistent with the bank’s corporate culture, long-term objectives and strategy, and control environment;

7) the bank should be governed in a transparent manner; and

8) the Board and senior management should understand the bank’s operational structure.

These principles are to be implemented in a manner which is proportionate to the size, structure, complexity, risk profile and economic significance of the bank and group (if any) to which it belongs.

The paper also highlights the role of a bank’s board of directors and senior management and sets out a number of principles that are designed to help supervisors assess bank corporate governance.

See for more: http://www.bis.org/press/p060213.htm