FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you.

At the conclusion of the U.S.-EU Summit early last May, the White House and the European Commission issued a FACT SHEET describing a Positive Economic Agenda going forward, and the U.S.-EU financial markets dialogue was mentioned as one of a number of initiatives.  You may recall that the predominant theme of press reports at that juncture was that the U.S. and the EU were engaged in a transatlantic trade war and that there was little that was positive happening in the relationship.  The facts, however, portrayed a more balanced picture and it was in that light that Presidents Bush and Prodi decided to put forth the Positive Economic Agenda.

What is the dialogue all about?

The financial markets dialogue was launched in March 2002 to give U.S. and EU officials an opportunity to discuss a range of financial and regulatory issues of interest to both sides.  It is led by the U.S. Department of Treasury and the European Commission, with active participation of U.S. and EU member state financial services regulators.  A number of informal financial market dialogue meetings have been held in Brussels and in Washington, both at the policy level and at the technical level, and further discussions will take place in the weeks ahead.  

U.S. interests in the dialogue center on the EU’s efforts to develop a single European capital market by 2005, which the U.S. supports.  The Financial Services Action Plan is the center piece of this effort with measures aimed at the retail and wholesale markets as well as supervision. There are other important initiatives at the EU level that will help underpin a more integrated financial market.  For example, in response to increased concerns generated by corporate scandals in the US and Europe, activity at the EU level also encompasses issues such as corporate governance and auditing issues.  Another example is the new rule-making procedures.

 To ensure that measures can be modified to reflect changes in the dynamic world of finance, the European Commission has been given the authority to adopt implementing regulations.  In the securities areas the Commission is advised by the newly created Committee of European Securities Regulators (CESR) representing supervisors and the European Securities Committee representing policy officials.  European Finance Ministers have recently endorsed a similar approach for the banking and insurance area.  These provide a broad range of issues for discussion in the dialogue.  . 

As part of the dialogue, interested financial sector officials on both sides have been consulting with U.S. and EU government officials, financial regulators and relevant leaders in the Congress and in the European Parliament.  The purpose of these exchanges is to help make the process of integration of Europe’s capital markets as transparent as possible and more generally to ensure that the views and expertise of private sector players are taken into account.

Financial Services Action Plan

The EU’s Financial Services Action Plan (FSAP) is a collection of 42 measures designed to further integrate European capital markets.  As of the end of November 31 measures have been completed, demonstrating that the Plan has momentum, aided by the political backing of European Heads of State.

Well-managed, the FSAP offers a clear “win-win” opportunity for Europe, the United States, the world economy and U.S. financial institutions.  A recent study undertaken for the Commission suggested that the reduced financing costs associated with a more integrated European financial market could lift EU-wide GDP 1.1% by 2012, rising business investment, employment and per capita incomes.  The US clearly supports such an effort.

To gain such benefits elements of the plan need to be consistent with the reality of an open, global financial system – working “with the grain of the market.”  Efficient, innovative firms operating in the European market, both domestic and foreign, should be able to reap rewards through healthy competition.  This is the ideal. 

To secure agreement among member states, we have the sense that sometimes consensus is achieved that is inconsistent with existing market practices in some member states, which means that the process of integration is moving away from the market.  We have raised such concerns with respect to the Prospectuses Directive in which new rules would have been imposed that could have fragmented an already existing pan EU bond market. 

We also have urged the Commission to work with market participants and investors in an open, transparent manner.  Such an approach can help ensure that proposed legislation addresses legitimate issues and that the “answer is right,” that is consistent with the operation of highly sophisticated financial markets. 

After a false start with Prospectuses, the Commission undertook an extensive consultation process in putting together a draft proposed Investment Services Directive.  This Directive is the foundation for securities market rules. The Commission deservedly received good marks for its efforts – both on process and substance.  However, recent text modifications appeared to step back from the goal of working with the grain of the market, which was being achieved through the transparent consultation process. 

Under the FSAP, the Commission will be assuming an increasingly important role in adopting regulations to implement the plan.  Therefore, it should take extra care to issue the best draft technically possible and ensure that the draft regulations reflect market realities and will solidly and seamlessly anchor a unified European financial market in the global capital market.  We discuss these issues and others in an informal, two-way U.S.-EU financial markets dialogue.

Managing “Spillover” Effects

The dialogue serves as an important venue to raise issues that arise on both sides of the Atlantic.  In particular, it can help manage “spillover” effects that regulatory action in one jurisdiction may have in another.  Such spillovers are likely to be increasingly the case in today’s more tightly connected global capital markets.  European Commission officials have raised concerns about the effect of the Sarbanes-Oxley Act provisions on EU firms since the Act makes no distinction between domestic and foreign private issuers and auditing firms.  If foreign issuers and auditing firms are subject to robust measures in their home markets, then double regulation imposes an unnecessary burden and cost.

Going in the other direction, one element of the FSAP, the Financial Conglomerates Directive, raises issues with U.S. investment banks.   Under the directive, U.S.-based investment banks operating in Europe would be subject to supervision at the holding company level.  In the United States, however, investment banks are supervised by the SEC at the broker-dealer level – not at the holding company level.  Therefore, absent a finding of “equivalent” oversight by EU authorities, U.S.-based investment banks operating in Europe may face higher compliance and operating costs. 

We are using the informal financial markets dialogue to work on such cases of regulatory “spillover” and to guard against others that could arise. We believe we can successfully manage such issues because both sides share the same objectives: sound financial market supervision and regulation, and efficient capital markets that generate real benefits to firms and investors on both sides of the Atlantic.

Conclusion

While conflicts are inevitable given our varied experiences and attitudes toward financial regulation and oversight, the financial markets dialogue has been a successful forum for openly airing concerns on both sides.  Both sides share the same objectives: sound financial market supervision and regulation, and efficient capital markets that generate real benefits to firms and investors on both sides of the Atlantic. 

 I know that President Bush and Secretary O’Neill have been impressed by the depth and professionalism of the talks thus far, and we are committed to continuing our discussions in the weeks and months ahead and to assist our regulators in developing “win-win” solutions to issues at hand that will benefit both sides.  Such efforts make the dialogue a positive exercise in cooperation and distinguish it from a negotiation of trade issues, which is normally a zero-sum game.

Thank you.