Prepared Remarks of Richard E. Thornburgh
The 3rd Annual European Financial Services Conference
"The New Policy Agenda For Financial Services"
Tuesday, January 25th, 2005
Good morning. I'm Dick Thornburgh. And I'm very pleased to be here. I am executive vice chairman of Credit Suisse First Boston and a member of the Credit Suisse Group Executive Board, as well as a member of the Board of the Securities Industry Association. In all of those capacities, I am delighted to have this chance to share my views of the Financial Services Action Plan ("FSAP" or "the plan") with you today.
I would like to address two key issues posed by this panel: 1) whether there should be a pause in EU financial services legislation; and, 2) the implications for the transatlantic and global financial markets. But first I would like to say a brief word about SIA, and its new International Advisory Council.
Newly Formed SIA International Advisory Council
The Securities Industry Association brings together nearly 600 U.S. securities firms to accomplish common goals. Its members are active in virtually every market in the world, and in all phases of corporate and public finance. The transatlantic character of these firms is particularly remarkable: SIA's largest members receive roughly 20 percent of their net revenues (not counting interest) from European markets. That is nearly double the earnings from their Asian operations.
In recognition of the centrality of international issues to securities firms, SIA is forming a new International Advisory Committee that I will be chairing. This senior level Council will offer guidance and recommendations to SIA's Board on trends and issues affecting the global capital markets.
Among other things, this Council will focus on two of the very important themes that underpin this seminar: 1) development of efficient and integrated global capital markets that meet the needs of issuers, investors, and financial intermediaries; and, 2) convergence of high-level regulatory approaches to reduce impediments to cross-border business.
U.S.-EU Relationship Characterized By Extensive Economic Linkages
Developing an integrated, efficient and globally competitive EU capital market is necessary if the EU is to remain a competitive marketplace, and if it is to attract and efficiently allocate the investment that will create jobs and support its long-term economic growth. In fact, we believe this is consistent with discussion in the U.S. to spur economic growth and more efficient allocation of resources through policies that encourage an "ownership society." That is to say, FSAP will spur economic growth and the more efficient allocation of resources by encouraging widespread individual ownership of assets in the form of stocks and bonds. Successful implementation of FSAP will stimulate the demand and supply of funds to be intermediated by securities markets, thereby increasing the importance of securities markets and securities ownership.
The simple reality is that the U.S. and EU are one another's largest trading partners. A few specific examples help underscore the economic importance of this relationship.
- The U.S. and EU are the two largest economic regions in the world, with GDP of about $11 trillion and more than $12 trillion, respectively.
- 362 of the globe's 500 largest companies call the transatlantic marketplace home.
- Overall, commercial sales between the U.S. and the EU total $2.5 trillion – exceeding the GDP of all countries except for the U.S. and Japan.
- EU transactions in U.S. securities are projected to total $14.2 trillion in 2004, while U.S. transactions in EU stocks and bonds will reach about $3.7 trillion.
The export and import of goods and services between the two regions totals about $500 billion. Further development of a transatlantic capital market will help bolster international trade in goods and services as companies will have increased access to financing, new solutions for managing risk, and a broader array of products available.
The flow of trade and investment between our two regions exceeds $1 trillion annually – solid evidence of the U.S.-EU partnership. And, this two-way transfer of trade, investment, and capital is directly related to the livelihood of citizens in both regions. U.S. companies employ about 3.3 million people in Europe, while EU companies based in the U.S. accounted for around 3.7 million U.S. jobs.
These extensive linkages create greater liquidity for investors, a deeper pool of capital for companies, and increased financing for trade in goods and services. This is why SIA has a strong and abiding interest in the development of the EU's capital markets – and in the success of the Financial Services Action Plan. As the EU's High Level Group 1 , chaired by Wim Kok, noted, "Dynamic and highly competitive financial markets are not only desirable in themselves — they are an essential driver of growth in all other sectors of the economy and must be a cornerstone of efforts to boost the EU's economic performance." Indeed, this is all the more critical at a time when demographic trends project an aging Europe, and a declining population. Higher levels of economic growth and productivity will be essential if the rise in claims on pension resources, and increased expenditures for long-term healthcare are to be met.
Focus On Implementation/Enforcement of FSAP
Turning now to the first question posed by the panel – whether there should be a pause in EU financial services legislation – SIA strongly favors such a pause. The legislative phase of the Financial Services Action Plan is now officially over. We congratulate the Commission and its staff, Parliament, the Council and CESR – each of which has been important in advancing the FSAP program – on completion of this ambitious agenda. But meeting the FSAP legislative deadline is only a first step. Obviously, these measures must now be transposed into national law, which may be an even more difficult process. Given this, we believe the Commission should strongly resist proposing any new financial services legislation for the time being.
Instead, we urge the Commission to focus its energies on ensuring that FSAP is implemented and enforced as intended, and that the FSAP's goal of creating an integrated single capital market is properly served by the national laws and regulations adopted to implement it. The Kok Report made clear its frustration with the lack of Member State commitment to implementing EU legislative measures, and noted that such behavior "must no longer be tolerated." Among the report's recommendations is to create an implementation scoreboard, ranking the 25 Member States on their progress toward implementation. 2
Where measures at the Member State level are implemented incorrectly, the Commission should ensure the problems are promptly resolved. We suggest that the Commission consider developing a dispute resolution mechanism that would allow implementation complaints to be brought to the Commission's attention without fear of retribution at home country level. We would also recommend that the Commission create a position specifically dedicated to monitoring and providing reports and evaluations on areas of discrepancy in FSAP implementation.
Implementation and enforcement will determine the extent to which the FSAP results in more integrated and efficient EU capital markets. As our moderator Alex Schaub noted in his recent remarks to the European Savings Bank Group, "In an enlarging Europe, there is increased risk that late or incorrect transposition of legislative measures will result in fragmentation of the internal market – to the detriment of businesses and consumers." We agree completely with Doctor Schaub's assessment.
Consider three critical measures, with huge market implications regarding their implementation: MiFID, Transparency Obligations Directive and IAS 39. Their proper implementation and enforcement will, in my view, be critical to FSAP success and to global financial markets convergence more broadly.
Transparency Obligations Directive (TOD)
TOD is intended to augment and improve the information made available to investors about publicly traded companies on EU regulated securities markets. With limited exceptions, the Directive will require U.S. issuers listed on European exchanges to prepare accounts in accordance with European IAS unless U.S. GAAP is found to be "equivalent" for these purposes. We urge CESR to recommend to the Commission that an equivalence determination be made for GAAP as a whole, rather than calling for direct comparisons to be made between individual standards and interpretations. Failing to make a positive equivalence determination could have a profound negative impact on the depth and liquidity of the EU capital markets. The uncertainty about equivalence determinations has already prompted exchanges in Singapore, Switzerland and Hong Kong to consider luring issuers away from the EU markets.
MiFID
This critical piece of FSAP legislation has to be implemented in EU member states by April 30, 2006. Much of the time before this deadline will be used for legislative work at the European and member state levels. Consequently there will be little time available for firms to make the substantial technology updates needed to meet the Directive's complex measures. In addition, revised compliance procedures also take time to develop, to be road-tested with regulators, and to be rolled out to staff through training programs. As a result, we request a delay in implementation. Most market participants take the view that an additional year is the minimum required to manage the process in a sensible way, with the bulk of this time being given to the industry for implementation.
IAS 39
We strongly believe that the convergence of accounting standards is a key condition for creating deep and liquid capital markets. We are therefore concerned over the recent compromise on IAS 39 in which fair value accounting was the subject of a negotiated "carve-out". We are troubled that the goal of international accounting convergence may be compromised in the absence of agreement on the fair valuation of derivatives. As a result, we hope the IASB and the EU will make another determined effort to reach agreement on this critical issue.
Preventing Regulatory Overspill Through Regulatory Dialogue
The second question posed by the panel is about the broad implications of FSAP for the transatlantic and global financial markets. The growing linkages between the U.S. and European markets create opportunities for regulations to spill over from one jurisdiction to another. We have seen it in the cases of the U.S. Sarbanes-Oxley Act and in the EU's Financial Conglomerates Directive…and I do not think we have seen the last of it. As a result, SIA has been among the strongest and most vocal supporters of the U.S.-EU Financial Markets Dialogue.
SIA has confidence that this pioneering effort – a regular, flexible dialogue at all levels among relevant U.S. and EU officials and regulators, with continuing input from the private sector – has the capacity to strengthen and possibly over time even transform the transatlantic economic relationship, while helping to overcome the inevitable disagreements that occur in a close relationship.
For that reason we applaud the recent announcement by the U.S. Securities and Exchange Commission and the EU's Committee of European Securities Regulators to open discussions with the goal of further regulatory convergence in the transatlantic capital markets.
The SEC-CESR dialogue is critically important. Our firms face regulatory frameworks in the U.S. and the EU that are largely geographically based and do not adequately reflect the global nature of financial services. Consequently, SIA urges regulators to view this Dialogue as more than just a way to solve problems once they have arisen, but rather as a forum to engage on a forward-looking agenda, in concert with industry.
Enhanced cooperation and understanding can be used pro-actively to minimize regulatory differences and help make the transatlantic capital markets more efficient and accessible to investors and issuers. An uncoordinated approach leads to new regulatory hurdles and barriers that raise costs for all market participants. By contrast, an integrated, transatlantic capital market is clearly in the best interests of consumers, investors, and companies, as well as the global economy.
We believe this so strongly that SIA is supporting a project being led by the Futures and Options Association that will compare and contrast U.S. and EU rules in the equity and related derivatives markets, evaluate the substantive differences in such rules, and propose ways such differences might be accommodated, mitigated, or perhaps removed altogether. We hope that this project will serve as a first step in the regulatory convergence dialogue and, at the least, contribute to the already promising dialogue between U.S. and EU financial services officials and regulators.
In conclusion, SIA is committed to work with the Commission and Member States to deliver the promises of FSAP as they work on implementation and enforcement. We also look forward to working with the U.S. SEC and CESR to reduce unnecessary inconsistencies in regulations that govern the transatlantic capital markets.
Thank you very much for your attention.
Footnotes:
1. Facing the Challenge, The Lisbon strategy for growth and employment, Report of the High Level Group chaired by Wim Kok, page 26, November 2004.
2. The Report made two key recommendations to faster transposition: 1) at the beginning of 2005, the Commission should produce a full list of internal market legislation still awaiting transposition in each of the 25 Member States, to be annexed to the Spring European Council conclusions. This list should be sorted by Member State, beginning with the worst offender; and 2) in the light of this scoreboard, the 2005 Spring European Council should set a final deadline by which transposition should be completed.
