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Speech by Michel Prada
Chairman, Commission des Opérations de Bourse

The Challenge of Global Regulatory Interconnectedness

Mr. Chairman, Ladies and Gentlemen,

It is indeed a great pleasure as well as a great honour for me to accept your invitation and to address you after such distinguished speakers this afternoon. I would like to express my thanks to the organisers and especially to André Lussi as Chairman of the Edmund Israel Foundation and Albert Bressand as Managing Director of Promethée for making this event possible.

Although it is not the first time I address the issue of the regulatory challenges posed to securities regulators by globalisation, I realised, when preparing this conference, how deeply the subject has changed since the first time I studied it some 5 years ago, when joining the community of regulators and more precisely the International Organisation of Securities Commissions.

Therefore, having considered the recent developments we have been contemplating, it appeared to me that I should focus my presentation on three main ideas.

The first one is that the regulators of the world have done remarkably well in undertaking a process of harmonisation of their objectives and principles and co-ordination of their activities.

The second one is that new challenges are developing even more rapidly since a couple of years in both fields of globalisation and technical innovation.

The third one is that regulators should consequently intensify their efforts and speed up the pace of their cooperation.

I. While banking regulators have long been accustomed to working together on a more and more integrated basis, cooperation between securities regulators developed much later, in the mid eighties, with the taking off of both liberalisation of markets and economies and globalisation of activities.

• The International organisation of securities regulators was created in 1974. From the very beginning, it was organised as a global organisation opened to emerging markets as well as developed ones, and functioning on the basis of consensus. Besides its ordinary members, the securities commissions or the relevant bodies in the different countries, it was initially opened to associate and affiliate members, whereby it took into consideration the diversity of the regulatory systems among its members and the necessity to organise a close relationship between the statutory regulators and the industry.
• Five major items were identified as a permanent matrix to analyse regulatory issues and five working groups were organised in its Technical Committee as well as in its Emerging Markets Committee. These groups are:
   
  - Working Party No. 1 on Multinational Offerings and Disclosure,
   
  - Working Party No. 2 on the Regulation of Secondary Markets,
   
  - Working Party No. 3 on the Regulation of Market Intermediaries,
   
  - Working Party No. 4 on Enforcement and the Exchange of Information,
   
  - Working Party No. 5 on Investment Management.
• Where necessary, the organisation would settle temporary task forces to address specific issues (like the Internet or, more recently, the demutualization of Exchanges or the investor protection in the New Economy).
• When looking back to the work done during the past years, one must admit that IOSCO has achieved a huge amount of work and of remarkable quality.

It would of course be burdensome to describe the almost twenty resolutions and over one hundred reports issued by the relevant bodies.

Let me identify some of the main achievements, in different types of fields.

One of the most important, and maybe the less visible, is the building of a network of regulators progressively linked by a common culture, a common language, a common understanding. This network does exist formally, not only due to the Organisation itself, which has no regulatory responsibilities, but due to a number of MOUs, by which the regulators have committed themselves to a close cooperation, namely in the field of exchange of information, technical assistance and, more often than never, enforcement.

A second example is the adoption of a common set of objectives and principles which the whole membership endorsed in 1998. These principles are in fact both comprehensive and quite specific so that their implementation is not a formal exercise but a quite demanding process which the Organisation has actually decided to monitor, possibly with the assistance of IFIs.

A third example, in the field of technicalities, is the resolution recently adopted in Sidney with regard to the use of International Accounting Standards for cross border listings. Together with the reorganisation of the IASC, this decision, prepared by nearly ten years of intensive work to review some 30 odd IASC standards (referred to as the IASC core standards), is a very important step towards an improved unified system in the field of accounting, which is obviously one of the key elements of a global market economy.

Last but not least, I should mention the reports and resolutions issued by IOSCO in close cooperation which its fellow organisations in the field of banking and insurance supervision. Some of these papers are the outcome of a bilateral work, such as the ones undertaken in the field of capital requirements or clearing and settlement ; others have been achieved through a collective approach, mainly under the auspices of the Joint Forum for Conglomerates (now renamed simply as the Joint Forum to reflect its larger scope of activity).

II. While the regulators have undoubtedly made significant progress on the way towards harmonisation and cooperation, markets have recently and even more rapidly speeded up the momentum of their revolution.

Up to the very end of the 20th century, regulators could reasonably consider that a huge majority of the activity took place at the national level, and that exchanges and intermediaries could be supervised according to national requirements. In fact, in many countries, the Exchanges themselves appeared to be monopolistic, with a special status due to their public duties and responsibilities. Cross border activity, although it was developing, remained marginal when compared to domestic activity.

The recent developments of the electronic revolution, and of the Internet, together with the globalisation of firms and strategies are creating a totally new environment.

• Mergers and alliances are thriving on a cross border basis, raising the issue of the differences between corporate and market rules internationally.
• Distance selling is soaring with the new opportunities offered by e-commerce and the Internet.
• The traditional exchanges are in the process of demutualisation ; some of them are going public ; many of them, considering themselves as for-profit entities, implement industrial strategies of alliances, mergers, diversification on a cross border basis.
• ATSs and ECNs have become a reality, building on the inefficiencies of the established Exchanges (in the U.S.), on the fragmentation of the market (in Europe) or on the identification of some "niches" where they considered that some profits could be made.

The leading regulators in the world are of course facing new and difficult challenges as a consequence of this ongoing process of restructuring of the Market.

It must be underlined that their common approach of this phenomenon is a rather positive one: because they are defenders of the free market, they recognise the positive aspects of this revolution, namely the reduction of costs, the improvement of the offer of services to the clients, enhanced competition between market participants. Nevertheless, one must recognise the legitimacy of their concerns and the need to answer their questions:

• How should we solve the issues of territorial competence between different regulators?
• How should we deal with significant differences between national legal or regulatory requirements?
• How can we organise, where necessary, a day to day cooperation in the field of enforcement?

From this last point of view, I would like to underline the crucial importance of an issue which, up to recently, was considered as significant but not vital and which, to my opinion, has become strategic. I am speaking of the offshore centres, or rather, of these centres which, willingly or not, constitute huge loopholes in the regulatory network.

III. It is therefore my opinion that the building of a global regulatory system for securities is on the agenda for the very near future.

This is not a very original conclusion and it is true that the Asian and Russian crisis in 1997-1998 on the one hand, and the revolution of the new economy on the other hand have made the governments of the G7 aware of this necessity.

The creation of the Financial Stability Forum was a first answer to this challenge. The F.S.F. provides a place where the relevant bodies can exchange their views and information, dynamise their undertakings, co-ordinate their actions and mobilise their energies to implement the principles of a sound regulatory system.

And I personally consider of utmost importance, for example, the work done by the F.S.F. with regard to the offshore centres issue : indeed neither from the point of view of financial stability nor from the point of view of market integrity is it possible to accept the present situation.

At the regional level, the recent and significant steps taken by the European Commission when it launched its action plan on Financial Services is another example of an initiative that should contribute to the implementation of a more efficient regulatory system for financial markets.

In fact, the European initiative addresses very practical issues. And it is true that within the European Economic Area and even more within the Euro Zone, the good functioning of financial markets does require a clear and detailed regulatory framework. Participants in the market deserve a level playing field, as well as an efficient protection of investors and a workable legal environment. This, as you know, is a matter of priority for the French Presidency and you may have been informed of the proposal recently made by Laurent Fabius to ask a group of wise men to enlighten the decisions to be taken in that field.

For the time being, I should underline the role of FESCO (the Forum of European Securities Commissions), a grouping of the 17 European regulators created in Paris in 1997. FESCO was created on a voluntary basis with the objective of enhancing the cooperation between its members.

It has already achieved some significant progress:

• a multilateral MOU has organised a network of surveillance departments - the so-called "FESCOPOL"
• several reports have been adopted after they have been submitted to a consultation process. These reports provide, for example, a common definition of the "regulated markets" or of the "professional and retail investors". FESCO has made proposals to the DG XV of the European Commission, which attends its meetings, thus building a bridge between the governmental authority and the regulators.

Considering the evolution at the European level, would it be realistic, or is it but utopia, to consider that securities regulators should give a new start to their work and try to build more practical and detailed common principles on a world wide basis?

I can very well understand the philosophical, cultural, political and technical obstacles which may hamper such an effort. On the contrary, when considering the speed with which world-wide standards are developing in the industrial field, I wonder whether we regulators could not be more ambitious in our effort towards harmonisation of principles and standardisation in the securities field.

The example of the accounting standards should encourage us. Another encouraging tendency is the movement towards an international understanding of the principles of corporate governance. I could also mention the excellent work done within IOSCO in the field of market conduct by managers of collective investment schemes.

And I can see two ranges of issues where harmonisation, if not led by us, will be imposed by the market itself : the first one is corporate finance on one hand, and more precisely the rules applied to take-overs, mergers and acquisitions, where the players are becoming global, speaking both of companies and of investment firms which advise them.

The second one is the rules of trading on exchanges, since, here again, alliances and mergers will lead to integration and harmonisation probably according to the dominating order driven system.

Coming to my conclusion, I would like to identify a risk, to express a preference and to make a wish.

The risk relates to the difficulty of resisting the natural tendency of international fora to remain abstract, because of the diversify of cultures and systems, of the complexity of harmonisation, and of the necessary, but often deadening, effects of diplomatic procedures. Globalisation and electronisation impose on us a duty of efficiency and practicality.

The preference relates to an issue I have not addressed today but which is quite central to our debate. Globalisation of the financial regulation inevitably leads to examining the architecture of regulatory systems and to consider, among others, the basic difference between prudential regulation and market regulation.

Many countries and, last but not least, the U.K., are opting for an integrated system and a unified regulator. And they have very good reasons for doing so.

On the other hand, many countries are rather in favour of the so-called twin peaks system, according to our Australian colleagues' formula. I must admit my preference for the latter, where a unified prudential supervisor co-operates with a market regulator that focuses on the microeconomics of the market and the investors protection, like in France, in Germany, in Latin countries, not to speak of the U.S.

Finally, my wish relates to the inspiration that guides regulators and their common endeavours. For many people, although they won't say so aloud, regulation is a practical way to discipline the perverse effects of the dynamic of greed and fear that, they think, drives the markets. For others, harmonisation between regulators is basically required to prevent the perverse effects of competitive deregulation.

I would like to think that regulation and cooperation between regulators have a more noble ambition, to serve the Common Good, which is not exclusive of making deals.

 
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