FROM THE OFFICE OF PUBLIC AFFAIRS

January 25, 2005
JS-2217

Remarks By United States Treasury Assistant Secretary Quarles at the
Third Annual European Financial Services Conference
Brussels, Belgium
January 25, 2005

 Introduction

I am delighted to participate in this Third Annual European Financial Services Conference on the "The New Policy Agenda for Financial Services."  The agenda refers to the Commission's post-Financial Service Action Plan activities.  But there are other reasons to discuss new agendas at this time.  One is that it is the first 100 days of the new Commission. There is a relatively new European Parliament.  Another is that it is the first week of the second term of the U.S. Administration and President Bush will soon be visiting Brussels.  And even this late in January, it is never too late to make a New Year's resolution.

US-EU Economic and Financial Cooperation

US-European economic cooperation runs deep.  The United States and the European Union have a special responsibility to promote economic growth and act as a model for global economic cooperation.  Although it has been said many times, it is no less true:  there is more that brings the US and EU together than pulls us apart.  That doesn't sell newspapers; but it is a sound basis for working together.  I think we have done well in recent years.  I expect cooperation to intensify.  Let me give you some examples.

One of the best contributions the US and EU can offer the world is to put in place sound policies for economic growth.  The United States continues to grow solidly.  We are working with EU members through the G-7 Agenda for Growth Initiative to help better understand the imperative of structural reforms to boost productivity and employment in our countries.  European Commission President Barroso's pledge to place a premium on growth and jobs is extremely encouraging   He has hit the mark by suggesting that a renewed Lisbon strategy should focus on a more dynamic market place and the improved functioning of labor markets with greater attention to skills and training.  

Of course, we work with our European friends in the G-7 on other global issues as well – how to best promote development in the low-income countries; how to address the debt problems of the Heavily Indebted Poor Countries; how to respond to financial crises through the IMF. 

Treasury has participated in recent months in each of the outreach sessions with US stakeholders in the transatlantic relationship as a follow-up to last year's US-EU summit.  We have met with a wide range of business leaders spanning many sectors from clicks to bricks, and learned from them how important Europe's market is to their well-being.

We are working closely with our EU colleagues on combating terrorist financing.  Last September, we created an informal dialogue on combating terrorist financing.  We have had a good working relationship with the EU in this field, although we have pressed for improvements in the EU designation process.  The informal, ad hoc dialogue will facilitate the sharing of information, experiences and best practices, support implementation of the Financial Action Task Force Special Recommendations, especially on cash couriers and non-profit organizations, and explore options for joint technical assistance in priority countries.  We will continue to pursue counter terrorist financing issues with all European Member States and with them through other relevant organizations, such as the United Nations Security Council, the Financial Action Task Force, the Group of Seven and the International Financial Institutions.

We are also collaborating on financial services negotiations in the WTO as part of the larger talks called the Doha Development Agenda.  Together we have called for a "floor" level of liberalization to be complemented by disciplines on regulatory transparency.  WTO members are to table their offers by May.  To date, few countries have done so and almost none have offered to cut significantly market access barriers on financial services.  

Research by the World Bank has shown that countries with open financial markets experience higher economic growth.  I am grateful that the private sector Financial Leaders Group -- that includes US and European participation -- will hold a seminar early next month to highlight successful experiences of countries that have liberalized their financial services sectors.

Last but not least, the informal US-EU Financial Markets Regulatory Dialogue that began three years ago is another testimonial to how our strong commonality of interests brings us together.  The dialogue addresses issues of immediate importance and those we anticipate arising in the medium term; and it manages "spillover" effects that actions taken in one jurisdiction may have on another.  The U.S. Treasury, the lead in the United States Administration for the dialogue, is joined by the SEC and the Federal Reserve Board in our meetings with the European Commission.  The dialogue works informally, quietly and professionally.  The stakes are too large to operate any other way. 

The Securities Industry Association underscored the large stakes involved in its written submission for the stakeholder outreach.  The two-way flow of trade, portfolio and direct investment between our two regions exceeds $1 trillion annually. 

U.S. companies raised more than $171 billion in EU capital markets in 2003. 53% of US investors' foreign equity holdings are EU shares.  And in 2003 EU investors acquired $225 billion of US stocks and bonds.  These numbers are impressive.

US-EU Informal Financial Markets Regulatory Dialogue

The informal Financial Markets Regulatory Dialogue promotes economic growth as well as economic cooperation.  The assessment of the Lisbon strategy by former Dutch Prime Minister Kok was that "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."  Robust EU financial markets are good for economic growth not only in the EU, but also in the US and the world.

With the legislative phase of the Financial Services Action Plan completed, and with many of the initial transatlantic financial tensions having been addressed, it is only natural that the Dialogue will evolve.  In my mind, the forthcoming agenda will be dominated by:  problem solving; implementation of existing FASP measures; a forward looking agenda; and deepening cooperation.

Problem Solving

Admittedly, the dialogue has been at times reactive.  In the first two plus years of the Dialogue, both sides needed to respond quickly to events as they arose.  Hence, participants focused on ways to address "spillover effects" of complex issues. The Financial Conglomerates Directive and Sarbanes-Oxley are the two best examples. Participants recognized that each side shared similar objectives of promoting dynamic and sound global capital markets, even if we went about our business differently.  Through frequent discussion and taking each other's views into account, we created a process and engendered mutual trust.

The Financial Conglomerates Directive was one of the first FSAP measures to take root.  Despite our close tracking of this directive and on-going discussions, it required nurturing to stay on track.  The US side needed to explain how it conducts comprehensive consolidated supervision of US financial institutions to the EU.  The SEC formalized its structure of consolidated supervision of US investment houses.  Results to date look good.  The European Financial Conglomerates Committee has verified that US supervision is broadly equivalent with that in the directive, an assessment that national supervisors have respected. 

From the EU side, US implementation of Sarbanes-Oxley legislation has reflected many of our discussions and accommodated many EU concerns.  Most recently, the Public Company Accounting Oversight Board has indicated that it is prepared to rely on oversight of relevant firms by foreign supervisors in appropriate circumstances.  The PCAOB has already begun to intensify its contacts with member state auditing authorities to explore details about implementation.

While we are striving to anticipate looming issues rather than react as they arise, it would be naïve to think we can be successful at every turn.  A good example is our recent discussion of de-registration of securities in the United States.  European companies  argue that disclosure requirements for listings in the US, created decades ago before the evolution of global capital markets, prevent firms that now wish to leave the US capital market from doing so.  Partly in light of US-EU discussions on this matter, SEC staff is now examining a number of possible solutions. 

Implementation

I want to commend the Commission, Council and Parliament for completing the FSAP – basically retooling much of the EU's framework rules for securities and banking legislation.  That is good news.

While FSAP measures have been promulgated, they also need to be implemented – that means transposition into national law and implementation by the supervisory structures in EU countries.  But if 25 different supervisors implement the same measure 25 different ways, then obviously Europe will not reap the fruits of creating a single, dynamic, and integrated capital market, nor will the US and EU achieve a transatlantic capital market.

So the other news is that the practicalities of implementation will prove every bit as challenging as the work already completed.  These practicalities will arise in many contexts.  Let me give you a few examples.

Most obvious, the 25 supervisors need to implement, apply and enforce the FSAP measures in a consistent manner.  How can this be achieved?  In Europe these tasks will fall to three new committees.  The Committee of European Securities Regulators (CESR) and the Committee of European Banking Supervisors (CEBS) have made a quick start.  No doubt the Committee of European Insurance and Occupational Pension Supervisors (CIEOPS) will follow once new insurance legislation is adopted.

We believe that these three committees will play a vital role in determining whether the promise of the FSAP is achieved.  It is natural that as they carry out their work on supervisory convergence within the EU that a dialogue commence between them and their US counterparts. The SEC and CESR have established a formal dialogue.  The NAIC and CEIOPs are in the process of so doing.  CEBs officials are in Washington for a round of consultations today.

We have all heard that the devil lies in the details.  We are now watching implementation of the Market in Financial Instruments Directive (MiFID).  The final legislation, however, reflected a general compromise, leaving important interpretations and details to be nailed down later.  The delicate balance between and spirit of compromises reached on that legislation should be respected in the implementation process. 

Moreover, firms need to be given adequate time to put in place new systems so that compliance with the legislation can be effective on day-one.  This will help ensure robust competition among investment firms and exchanges that can benefit investors and enhance market efficiency.    

Implementation also presents an unavoidable reality that can encourage improvements in our respective markets.  As noted, the Financial Conglomerates Directive engendered measures taken by US supervisory authorities to make clear that financial entities are supervised on a consolidated basis.  Enhanced auditing and corporate governance rules in the US have been paralleled by changes in the EU.  As we share the objectives of sound, stable, and efficiently operating capital markets, we learn from each other, while respecting the uniqueness of each of our markets.  

Forward Looking Agenda

The dialogue also continues to look ahead.  Identifying issues today that are important for building a more vibrant transatlantic capital market tomorrow can enhance international cooperation and global growth.

Implementation of Basle II in the US and EU has been taken up at all Dialogue sessions.  Through these discussions, each side has gained a much better appreciation for the other's approach and timing toward Basle implementation.  While the Basle Accord Implementation Group has many details yet to resolve, it is important to bear in mind that the basic rationale for such an international agreement is to promote fair competition among major financial institutions.  In this respect, the EU's capital adequacy directive – CAD III – should reflect the provisions emerging from Basle, including those being developed on trading books.  

Clearing and settlement, mutual funds, and insurance – both reinsurance as well as the Solvency II project to strengthen capital adequacy standards -- are upcoming topics on which the dialogue already has exchanged views. 

Convergence of international accounting standards and the implications for listings is a critical forward agenda issue.  As you know, the FASB and IASB are now working on a process to converge accounting standards.  At the end of the day, the objective is that the same accounting question yields a similar accounting answer, whether in the United States or Europe.  

For years, US firms have listed in the Euromarkets on the basis of statements based on US GAAP.  In contrast, foreign firms listing in US markets needed to submit financial statements using US GAAP or accounts reconciled to GAAP.  As of 2005, all EU listed firms in Europe must use accounts prepared under International Financial Reporting Standards. Europe has already decided that until 2007, US firms listing on European exchanges may continue to use statements based on US GAAP. 

Many Europeans have understandably expressed interest in their firms being able to list on US markets using accounts prepared in IFRS.   To do so, it will be important for US authorities to have reviewed statements prepared on the basis of IFRS, thereby gaining a better understanding of them and whether they yield similar accounting answers.  Also, it will be important for US authorities to see that Europe is applying, implementing and enforcing accounting standards in a consistent manner.   SEC staff have indicated that they are ready to do their part as quickly as possible ensure that this standard is met. 

Some in Europe have suggested that after 2007 Europe should no longer accept statements for foreign issuers that are prepared on the basis of US GAAP for meeting the requirements of the Prospectus and Transparency Directives.   I think such an approach would be a mistake.  A broad capital market is essential to promote economic growth.  This means preserving the depth and liquidity of the Euromarkets. 

In the meantime, CESR is advising the Commission whether US GAAP accounts should be considered equivalent for use in meeting the requirements of the Prospectus and Transparency Directives.  In our view, the answer is a clear "yes."  Closing off the existing market for US issuers with accounts prepared under US GAAP would be contrary to the EU's own economic interests.  Individual member state supervisors have recognized that such accounts provide investors with adequate information.  This has not changed, even as we all hope for the convergence of accounting standards I mentioned earlier.  

Another area that we look forward to discussing with our colleagues is the potential for cross-border retail banking throughout the EU.  Surely this is another area that holds significant promise for reducing transaction costs and bringing benefits to consumers. 

 Deepening Cooperation

Implementation, problem solving and discussing issues arising in the medium term will entail more work for the Dialogue.  To understand the technical implications of implementation that can affect policy decisions or the ramifications of new issues arising in the medium term means that the dialogue will need to be more inclusive while retaining its informal nature. 

We will be continuing to reach out to the academic community, private sector, member state governments and legislatures.  As the EU supervisory committees develop the EU jurisprudence from their joint experiences in implementing the EU directives, their topics of discussion will expand with their US counterparts.  The dialogue will need to be infused with the substance of such supervisory dialogues. 

Conclusion

The informal Financial Markets Regulatory Dialogue thus far has been a success.  But in dynamic markets, there must be constant re-assessment and retooling of the old to keep up with the new.  What is "new" for the Dialogue is: 1) challenges arising on both sides of the Atlantic from implementation; 2) more opportunities for transatlantic and international cooperation; 3) fresh topics to be addressed; and 4) outreach to a wider array of views.

My New Year's resolution is to keep the dialogue fresh, to help it evolve with the changing times and issues.  I invite you to work with me to keep it fresh. 

Thank you for your attention.