Comparing European and U.S. Securities Regulations

Comparing European and U.S. Securities Regulations

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This paper, aimed at professionals, scholars, and government officials in the field of securities regulations, compares the European (specifically the Market in Financial Instruments Directive-MiFID) and U.S. securities regulations. The analysis focuses on the regulatory and supervisory framework, trading venues, and the provision of investment services. We show that although there may be regional differences in the structure and rules of current securities regulation, the objectives and some outcomes of regulation are comparable. Similarly, as the current global financial and economic crisis exposed gaps in securities regulations worldwide, regulators in both regions face similar challenges. This study will be particularly useful for World Bank member countries that are looking at either the European or U.S. regulations when conducting market reforms.

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Publié le 12 janvier 2010
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EAN13 9780821382547
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WORLD BANK WORKING PAPER NO. 184
Comparing European and
U.S. Securities Regulations
MiFID versus Corresponding U.S. Regulations
Tanja Boskovic
Caroline Cerruti
Michel Noel
THE WORLD BANKWORLD BANK WORKING PAPER NO. 184
Comparinguropeannd
U.S.ecuritiesegulations
MiFIDersusorresponding.S.egulations
Tanjaoskovic
Carolineerruti
Micheloel
























WP_184_web_12-09-09.pdf 1WP_184_web_12-09-09.pdf 1 12/9/2009 11:55:13 AM12/9/2009 11:55:13 AMCopyright010
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Contents
Acknowledgments...................................................................................................................iv
Acronymsndbbr eviations.................................................................................................v
Executiveummary ............................................................................................................. .....vi
Introduction................................................................................................................................1
1.egulatoryFramework ndversight .............................................................................. 2
EUecuritiesra mework..................................................................................................2
U.S.ecurities Framework3
2.copeftheecur itiesegulations ................................................................................... 7
TheUecuritiesegulationsocusnnvestment irmsndradingenues.....7
The.S.ecuritiesegulationsocusn Brokerealersnd xchanges.................9
3.bjectivesoftheecuritiesegulationsnuropendhenitedStates.............. 14
ObjectivesfheUecurities egulations ..................................................................14
Objectivesfhe.S. Securitiesegulations ................................................................15
4.mplementationfhe ifferent Objectives17
Asegardsompetition/Fairnd rderlyarket s....................................................17
Asegardsnvestors’r otection....................................................................................22
Asegardsriceiscovery: rendostTraderanspa rencyequirements......24
5. Post-Financial Crisis Lessons............................................................................................... 29
Betterupervisionfargendnterconn ectedinancial Institutions....................29
IncreaseMarketransparen cy........................................................................................30
Enhanceapitalndiquidityeq uirements..............................................................30
6. Conclusion and Areas for Future Research........................................................................ 33
Appendixes.................................................................................................................... ...........36
Technicalppendix:re andostraderansparency Requirements,urope
andhenited States................................................................................................ 37
Technicalppendix:etailed omparativenalysis .............................................. 39
References ...........172


iii
WP_184_web_12-09-09.pdf 3WP_184_web_12-09-09.pdf 3 12/9/2009 11:55:33 AM12/9/2009 11:55:33 AM
Acknowledgments
hisReporthasbeenpreparedbyTanjaBoskovic,CarolineCerruti,andMichelTNoelallorldank).
TheauthorsthankSophieSirtaine(SectorManager,ECSPF,WorldBank)forher
guidance and support. They thank the peer reviewers: Burçak Inel Martenczuk
(Deputy Secretary General, Federation of European Securities Exchanges), Oliver
Fratzscher(SeniorFinancial Economist,GCMSM,WorldBank),andTadashiEndo
(Senior Financial Sector Specialist, GCMSM, World Bank) for agreeing to provide
commentsonthereport.TheauthorsaregratefultoJohnPollner(LeadFinancial
Officer,ECSPF,WorldBank),LucaFossati(PolicyAdviser,SecuritiesMarketsPolicy
and Company Law, Federation of European Securities Exchanges), Rosa Armesto
(Economics and Statistics Adviser, Federation of European Securities Exchanges),
Thomas Gira (Executive Viceresident, FINRA), and Jon Kroeper (Senior Vice
President,FINRA)fortheirvaluableinputs.All errorsandomissionsareauthors’
alone.
Theauthors’viewsexpressedinthispublicationdonotnecessarilyreflectthe
viewsfheorldank rnyftsffiliates.


iv
WP_184_web_12-09-09.pdf 4WP_184_web_12-09-09.pdf 4 12/9/2009 11:55:33 AM12/9/2009 11:55:33 AMAcronymsndAbbreviations
AML Antioneyaundering
ATS Alternativeradingystem
BIS Bankornternationalettlements
CAR Capitaldequacyequirement
CDS Creditefaultwaps
CESR Committeefuro peanecuritiesegulators
CFTC Commodityuturesradingommission
DJIA Dowonesndustrialverage
ECN ElectronicommunicationNetwork
EU Europeannion
EC Europeanommission
FESE Federationfuropean ecuritiesxchanges
FHC Financialoldingompanies
FINRA Financialndustryegulatoryuthority
FRB Federaleserveoard
FSAP Financialervicesctionlan
IOSCO InternationalOrganizationofecuritiesommission
ISD Investmentervicesirective
MiFID Marketninancialnstrumentsirective004/39/EC
MTF Multilateralradingacility
NASD Nationalssociationfecuritiesealers
NASDAQociation ofecuritiesealersAutomateduotations
NMS NationalMarketystem
NYSE Neworktockxchange
OTC Overheounter
RegTS Regulationlternativeradingystems
RegMS Regulationationalarketystem
RM Regulatedarket
SEC Securitiesndxchangeommission
SI Systematicnternalizer
SRO Selfegulatoryrganization
TRACE Tradeeportingndompliancengine
UCITS Undertakingorollective Investmentsnransferableecurities


v
WP_184_web_12-09-09.pdf 5WP_184_web_12-09-09.pdf 5 12/9/2009 11:55:33 AM12/9/2009 11:55:33 AMExecutiveummary
hepurposeofthispaperistocomparetheEUandU.S.securitiesregulations.InTNovember2007,theMarketinFinancialInstrumentsDirective2004/39/EC(MiFID)
came into force in the EU, and brou ght about deep changes in the market
infrastructure.ThesameyearRegulationNMSintheUnitedStateswasfully enacted
andreformedequitiesmarkets.ThisstudycomparesMiFIDwiththecorresponding
U.S.regulations,andprimarilyfocusesontheregulatoryandsupervisoryframework,
tradingvenues,andtheprovisionofinvestment services.Implementationoftherules,
enforcement,andrighttoredressarebeyondthescopeofthispaper.Likewise,the
paperdoesotntendoudgeheffectiv enessfhewoegulatorysystems.
Theinternationalfinancialcrisisevidencedsomegapsinsecuritiesregulations.
Main issues have focused on the imperfect oversight of large interconnected
institutions,thelowtransparencyofOTCmarkets,especiallyderivatives,andthe
insufficientliquidityandcapitalacrossfinancialinstitutions. Regulatorsonbothsides
havennouncedlans oddresshem:

Abettersupervisionoflargeandinterconnectedinstitutions :UndertheU.S.
regulatory reform plans, the Federal Reserve would have the power to
conductconsolidatedsupervisionandregulationofalllargeinterconnected
financial firms. These firms will be sub ject to the noninancial activities
restrictionsoftheBankHoldingCompanyAct,regardlessofwhetherthey
owninsureddepositaryinstitutions.IntheEU,aSystemicRiskCouncilwould
be established to identify systemic risks to the financial system, and the
EuropeanSystemofFinancialSupervisorswouldenhancethesupervisionof
crossborder institutions. One substantial difference remains the plan to
separatefinancialand commercialactivitiesintheUnitedStates,whilethisis
noturrentlyonsiderednurope.
Increasemarkettransparency: IntheUnitedStates,theTreasuryunveileda
comprehensivereformofOTCderivativesinMay2009:all“standardized”
OTC derivatives would be cleared, dealers and firms who create large
exposures to counterparties would be subject to tough regulation (with
conservative capital requirements, business conduct standards, margin
requirements),andunlearedtradeswouldbereportedtoaregulatedtrade
repository.TheEUCommissionisexaminingseveralcoursesofactionfor
OTCderivatives:standardization,centraldatarepository,centralcounterparty
clearingandmovingtradingtomorepublicvenues.Inbothregions,thereisa
riskofaddingcarveutstothe regulationofderivativesasindustrialfirms
claimthattheclearingwouldincursignif icantcosts.AsregardsOTCequity
markets,theSECandCESRarecurrentlyinvestigatingwhetherdarkpools
shouldeubjectotricteregulation.
Enhancecapitalandliquidityrequirements: The U.S. draft systemic risk
legislationproposestoraisecapitalandriskmanagementrequirementsforall
vi
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Financial Holding Companies. In the EU a comprehensive reform of the
CapitalRequirementDirectivesiscurrentlyunderreview.Bothapproaches
considerstrictercapitalrequirements toaddresstheexposuretosecuritized
products.

Thepaperarguesthatrulesinthecurre ntsecuritiesregulationsmaydifferonboth
sides of the Atlantic, but objectives and some of the outcomes are comparable.
Differencesreelatedo:

Thescopeoftradingvenues: MiFIDisnotcurrentlyappliedtodarkpools,
whileintheUnitedStates,darkpoolsareconsideredasATSandregisteras
brokerealers.Theyhavetomaketheirquotesavailabletothepublicabovea
certainradingolumehreshold.
EUregulatorshavemorediscretioninauthorizinginvestmentfirms and
interveningintheirmanagementsincetheycanjudgewhetherthemanagers
ofinvestmentfirmsorRegulatedMarketsaresufficientlyexperiencedand
reputable, while the U.S. regulator can only control their reputation and
competences.TheEUregulationsgoonestepfurtherinallowingsupervisors
tocontroltheintegrityofultimatecontrollersofRegulatedMarketsregardless
oftheirownership,whiletheU.S.rulesgenerallybasethenotionofcontrolon
ownership.
Organizationalrequirements are broader in scope for exchanges in the
UnitedStatesndfocusondisciplinarypowers,whichisexplainedbytheself
regulatoryroleofexchangesintheUnitedStatesversusamorelimitedrolein
theU.
CapitalrequirementsareriskasedintheEUandbasedontheconceptof
maintaininghighlyiquidorefapitalnhenitedtates.
Themitigationofconflictsofinterest isabroadandgeneralobligationfor
investmentfirmsinEuropewhileitisfocusedonmorespecificsituationsin
thenitedtates.
Investor protection rules in Europe are twoiered between retail and
professional investors (client categorization is binding), while the U.S.
regulatoryschemeprotectsallinvestors,withsomecarveutsforinstitutional
investors.
Bestexecution intheUnitedStatescoversanumberoffactors,withprice
beingtypicallythemostimportant;inEur opepriceisonefactoramongothers
to assess whether the client has obtained the best possible result for the
executionftsrade.
Data consolidation on equity trades: in the United States, quotes and
transaction data reported by national exchanges and associations are
consolidatedintoasinglesystemanddisseminatedtomarketparticipants,
whereas in Europe, quotes and trades are fragmented between multiple
tradingenuesndoonsolidationsequired.

However,theobjectives ofthesecuritiesregulationsaresimilar,andsomeoutcomes
areomparable:

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viii Executive Summary

Bothregulatorysystemsaimtomaintainfairandorderlymarkets,protect
investors,ndrovidericetransparency.
Equitysecuritiesaresubjecttomorescrutiny andtransparencyrequirements
thanbondsorderivatives.Inthetworegions,preandpostradetransparency
requirements apply to equities while there is no or limited trans
regimeorerivativesndonds.
Investor protection regimes are broad and offer better protection to
individualinvestors,whethertherulestoachievesuchprotectionarestrictly
tieredrot.
Competition has increased in Europe , but trading has become more
fragmentedandliquidityhasmovedfromexchanges,raisingtheconcernof
“fragmentedliquidity”thatled interaliatotheadoptionofRegNMSinthe
UnitedStates.Inbothregionsconsolidationbetweenexchangessteppedup
andteemshatn increasingharefquity tradingovedoarkools.
Thereareconcernsonbothsidesregardingthefragmentationofoversight .
The U.S. SEC does not oversee futures and government bonds; it shares
supervisory responsibility with the banking supervisors which oversee
commercialbanksdealingwithsecurities.InEurope,MiFIDisimplemented
by7ationalupervisorswhichayeadoifferent interpretations.

A discussion on the outcomes cannot really be achieved without looking at the
implementationofthesecuritiesregulations.Thus,thestudysuggestssomedirections
forutureesearch:

Assessenforcementonbothsides,attheSECandSROlevelintheUnited
States,ndtheevelf the7upervisorsnheU;
Deepentheknowledgeofdarkpoolsonbothsidesandexaminehowto
improveisclosure ndriceiscovery;
In Europe in particular, examine ways to achieve quotes and trades
consolidation.



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Introduction
his paper aims to compare the European Union (EU) and U.S. securitiesTregulations. In November 2007, the Market in Financial Instruments Directive
2004/39/EC(MiFID)cameintoforceintheEUandunleashedcompetitioninEuropean
securitiesmarkets.Thesameyearcameintoforce intheUnitedStatestheRegulation
NMS(RegNMS)whichwasdesignedtofostercompetitionamongindividualequities
markets and orders. This study compares MiFID with the corresponding U.S.
regulations, and primarily focuses on the regulatory and supervisory framework,
tradingvenues,andtheprovisionofinvestmentservices.Theimplementationofthe
rules,enforcement,andrighttoredressare beyondthescopeofthisstudy.Likewise,
theaperoesotntend oudgeheffectivenessf thewoegulatoryystems.
Inrecentmonths,theinternationalfinancialcrisishasrevealedgapsinsecurities
regulations. Main issues have focused on the imperfect oversight of large
interconnected institutions, the low transparency of OTC markets, especially
derivatives,andtheinsufficientliquidityandcapitalacrossfinancialinstitutions.As
regulators have announced plans to address those issues, a comparison of the
securitiesregulationsinEuropeandtheUnitedStateshelpstounderstandwherewe
areomingrom.
Thepaperfocusesonthe2004/39/ECMiFIDDirectiveand itstwoimplementing
legislationsinEurope;intheUnitedStates,itmostlyencompassesthe1934Securities
ExchangeAct,theFINRArulesandtheRegNMS.TheU.S.frameworkischaracterized
by a powerful supervisor and important powers assigned to selfegulatory
organizations.IntheEU,legislationismorerecentandunified andcharacterizedby
theabsenceofasupraationalsupervisor;selfegulatoryorganizationshavemore
limitedpowers.ThestudylooksattheregulatoryframeworksintheEUandUnited
States,thescopeandobjectivesofsecuritiesregulations,therulesimplementingthe
differentbjectives,ndrawsome risiselatedessons.


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