October 20, 2006
HP-145

Remarks by
Deputy Assistant Secretary for International Monetary and
Financial Policy Mark Sobel
before the European American Business Council

Washington, D.C. - It is a pleasure to be here today to discuss the U.S./EU Financial Market Regulatory Dialogue (FMRD) and to participate on this panel with close colleagues. Let me also thank the EABC for its continued support and interest in the Dialogue.

The U.S./EU financial market dialogue began some 4-1/2 years ago. At the time, on the heels of the euro's advent, the EU had launched its Financial Services Action Plan (FSAP), an intensive effort aimed at quickly putting in place 42 measures to create the framework for a unified European financial market. This worthy effort was creating spillover effects for U.S. financial institutions and the operation of global capital markets. Roughly at the same time, U.S. corporate scandals and the response to them gave rise to spillover effects in the European context. There was much to talk about.

In hindsight, though, I believe that even without these immediate spillover effects, a good and healthy transatlantic dialogue was needed and would have been launched.

• The United States and the EU are the world's two largest economic areas. Various measures suggest that the United States and EU account for about 2/3 of global capital flows. Increasingly, financial flows are becoming globalized. Businesses too are increasingly operating across the world. It is costly and inefficient for firms to have to meet differing regulations in umpteen countries, and a multiplicity of regulations can be a huge tax on consumer welfare. Not only is it important to avoid regulation that is burdensome, inconsistent, and weakens the transatlantic economic space, but if U.S./EU cooperation can foster regulation that promotes convergence around high quality standards and principles, that is an enormous public good for the international financial system.
• Efficient capital markets and sound corporate governance are basic foundations for growth. Certainly that is a lesson of the financial history of the United States. Often in past years, the U.S. has been the main engine for global growth and others have relied excessively on external demand. Europe's FSAP offers a huge opportunity to stimulate European growth - over one percent per annum in a decade's time according to some estimates - particularly if Europe can truly create an integrated financial market across its 25 member states.
• And let's not forget national interest. U.S. financial service providers are at the leading edge of the global financial system, and their activities provide enormous benefits and impart strength to our country's economic vibrance. U.S. policymakers want to see our financial firms face level playing fields in the international arena.

So, the Dialogue is more than just about managing spillovers. It's also about promoting global growth, fostering globalization and international convergence, putting in place more efficient regulation, and supporting the global activities of U.S. firms.

Our Dialogue is not a negotiation. The independence of regulators must be respected. Further, regulations can't be negotiated - in the United States, for instance, regulations must be submitted for comments and then these must be weighed and taken on board. Rather, through the Dialogue, we have sought to achieve a greater sense of shared understanding and responsibility and, when possible, to find practical solutions.

In the early years of the Dialogue, this was achieved on issues such as allowing US firms to continue their European operations in the presence of the EU's Financial Conglomerates Directive, reaching accommodations on the impact of Sarbanes-Oxley on Europe, helping promote greater transparency and consultation with market participants in European rule-making, establishing the principle that allowing internalization of stock trading was essential for the healthy development of EU securities trading, and extending to 2007 the period in which US firms could issue in the Euromarkets on the basis of financial statements using U.S. GAAP.

But enough of the past and our objectives. What is the Dialogue doing now? In the first instance, the U.S. and EU teams are focused on a specific set of issues.

My SEC colleague will undoubtedly tell you about accounting convergence and the "roadmap," which is a main focal point for the EABC. I defer to the SEC on this topic, and would only underscore the view that a postponement of the equivalence finding to 2009, which would thus allow U.S. issuers to continue to list in Euromarkets on the basis of US GAAP, is a matter which the United States sees as critical and is monitoring closely. Commissioner McCreevy, as well, has stressed the importance of such a postponement in February in his meetings with U.S. officials. We are awaiting formalization of the postponement in the immediate future.

The SEC is also moving forward on the deregistration issue.

The Dialogue has also provided a good vehicle for sharing information on plans and timelines for implementing Basle 2, recognizing that technical issues are dealt with in the Basle Committee's Accord Implementation Group. These discussions helped us understand the legal processes and timetable for European implementation of the Capital Requirements Directive, and for Europe to understand U.S. decisions regarding the scope of application of Basle 2 to U.S. banks. More recently, the Dialogue has provided a venue for bringing attention to "gap year" issues, given that the EU is slated to implement Basle 2 in 2008 and the U.S. in 2009.

Reinsurance issues also are a focus. The U.S. reinsurance market is dominated by foreign entities. U.S. insurance regulation is delegated by law to the states, and for an unlicensed non-U.S. reinsurer to operate in a state, it must post collateral of 100 percent of its obligations to assure regulators it can meet its obligations if it becomes insolvent. Several EU reinsurers argue that the cost of raising capital to meet collateral obligations is excessive. In the meantime, the EU is working on implementing a new Reinsurance Directive, which will end intra-EU collateral requirements by 2009. Many Europeans see this development as a precursor to abolishing or modifying U.S. collateral requirements. As you know, there is much discussion in the United States about the future structure of insurance regulation. Also, a Reinsurance Task Force of the National Association of Insurance Commissioners is developing alternatives to the current framework on reinsurance collateral and the NAIC and EU regulators are consulting closely.

Both the U.S. and the Commission have staunchly supported maintaining a strong and vibrant climate for transatlantic investment. We have commended the Internal Markets Commission for its efforts to promote cross-border M&A among European financial institutions; we have underscored that the Takeover Bids Directive should avoid applying "reciprocity" provisions to third countries; and we have stated that global - not national - champions better serve the world.

The Dialogue has also dealt with other topics. Views have been exchanged on hedge funds, credit rating agencies, cross-border stock exchange mergers, and dialogues with third countries. The U.S. is also closely watching the evolution of clearance and settlements systems in Europe.

The technical level discussions between the U.S. and European Commission have helped facilitate a further deepening of financial engagement. There are extensive discussions between senior officials in Washington and Brussels on these issues. U.S. regulators have established their own dialogues with European regulatory committees on banking, securities, and insurance, where more in-depth discussions are held. The EU policy-level member state Financial Services Committee has for the last two years invited Treasury, Fed and SEC officials to Brussels for discussions about the Dialogue and its agenda.

In conclusion, the U.S./EU financial market dialogue is fairly technical, low key and informal. But it has provided an effective vehicle for addressing many of the key global financial market policy issues of recent years, strengthening U.S. and European relationships on financial markets, and promoting cooperative engagement across the Atlantic.