Contracts and competition in the regulation of European stock exchanges

AuthorDavid G. Mayes
Publication Date01 Jun 2003
Contracts and competition in the regulation
of European stock exchanges
David G. Mayes
Received (in revised form): 10th February, 2003
Bank of Finland, PO Box 160, Helsinki 00101, Finland; tel: +358 9 183 2569; fax: +358 9 183 2560;
David Mayes is Adviser to the Board at the
Bank of Finland and Professor of Econom-
ics at South Bank University. His publica-
tions include ‘Improving banking
supervision’ and ‘A more market based
approach to maintaining systemic stabi-
lity’. David was previously Chief Manager
and Chief Economist at the Reserve Bank
of New Zealand.
KEYWORDS: contract regulation, European
financial integration, stock markets, con-
tract regulation, regulatory competition
This paper explores the arguments for regula-
tory competition among stock markets in
Europe. It suggests that some of the pressure for
uniform regulation stems from a specific view
about the nature of the implicit contracts gov-
erning the relationships between regulators, list-
ing firms, investors, traders and society. By
making these contracts more explicit it shows
that there may be more extensive arguments for
regulatory competition. In deriving implications
it draws on an extensive study of the nature of
competition and efficiency of securities markets
over the period 1989–1999.
The European Economic Area (EEA) has
taken a major step forward in trying to
create an internal market for securities and
related financial products through the
implementation of the Lamfalussy
and the reinvigoration of the
Financial Services Action Plan (FSAP).
This drive to remove barriers between the
markets in the individual European coun-
tries and lay out the framework of
common rules to govern the joint market
should improve efficiency and reduce costs
for firms and investors alike.
Not surpris-
ingly, however, it does not address all the
problems of regulating securities markets
and may create some new problems of its
own. This paper addresses such problems,
in the area of contracts, that could be cru-
cial in influencing the competitive develop-
ment of European securities markets in the
coming years. If not tackled, between them
they could lead to excess search for
common rules and the creation of a less
competitive environment. The principal
issue is simply that the point of much of
the regulation is unclear and varies across
the EEA countries, because some of the
network of ‘contracts’ that exists in securi-
ties markets, between governments, inves-
tors, regulated firms, traders and society at
large is only implicit. The regulatory pro-
cess, in removing the barriers to the inter-
nal market, is proceeding rather more by
trying to harmonise what currently exists
explicitly, rather than asking the prior
questions of what the regulations in the
different markets are intended to achieve
and for whom. The answers vary, so a
unique approach cannot hope to address all
Page 121
Journal of Financial Regulation and Compliance Volume 11 Number 2
Journal of Financial Regulation
and Compliance, Vol. 11, No. 2,
2003, pp. 121–137
#Henry Stewart Publications,
needs equally.
The impact and appropri-
ateness of individual regulations are
affected by the wider context of legislation,
which is still primarily on a national basis,
as pointed out by Lamfalussy.
5, 6
By making these contracts more explicit,
market participants can opt for regulatory
environments that best meet their needs.
Choice among regulations and hence com-
petition among them may be an important
requirement for the rapid and efficient
development of European markets in a
period of major structural and technologi-
cal change. In particular, the implementa-
tion of the regulation can in effect itself
take the form of a contract between the
regulator and the regulated. Having a
single integrated European securities
market does not necessarily entail having a
single form of regulatory contract. As with
any network industry some features need
to be agreed across the whole system
the network to operate and the economies
of scale to be reaped but the opportunity
for variation in others can be essential for
the operation of effective competition.
At the same time as the regulatory
environment is changing, securities markets
themselves are developing rapidly, assisted
by rapid improvements in information
technology and the reduction in barriers
between markets.
Changes in Europe have
been lowering costs towards US levels and
reducing spreads but substantial differences
and ‘inefficiences’ remain. Overlaid by the
emergence of the euro, this sets the scene
for a very different structure of financial
markets from the traditional idea of predo-
minantly national players transacting in
their own market, regulated by the
national authorities in which the market is
sited. With open outcry in a physical mar-
Figure 1 Network of European stock and derivative exchanges
Source: Schmiedel, H. (2001) HWWA and Bank of Finland.
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Contracts and competition in the regulation of European stock exchanges

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