The UK’s Financial Services Authority has issued a statement outlining what foreign ownership of a UK-based stock exchange may mean for regulation.

With Nasdaq buying up 25% of the London Stock Exchange plc, the NYSE seeking to buy Euronext, and cross-border consolidation an ongoing issue, the FSA set out its views on the regulatory angle. For example, it notes that Sarbanes-Oxley would not apply to LSE listings.

Callum McCarthy, chairman of the FSA, said that the FSA will always seek to be neutral concerning the nationality of the management or ownership of the entities it regulates. “We recognize the benefits that this policy has brought to the UK in assisting in it becoming one of the most international capital markets in Europe and worldwide,” he said.

“Against this background, we maintain the same approach in respect of the LSE or any other UK Recognized Investment Exchange: as long as it remains a UK exchange the FSA will continue to require that it meets its regulatory obligations as set by us under the Financial Services and Markets Act,” he added. These rules require sufficient financial resources, appropriate governance arrangements, and robust trading technology and strong internal risk management systems and controls.

“We note that the Nasdaq Stock Market Inc., in its public announcement of 10 March 2006, stated that following any acquisition the LSE would continue to be a RIE regulated by the FSA and that it was committed to preserving an FSA regulated Main Market and AIM. While Nasdaq has withdrawn its indicative offer, it has subsequently acquired 25.1% of the issued share capital of the LSE and has stated its desire to work constructively with the LSE as its major shareholder. If a bid for the LSE should progress, we would expect the bidder to make clear its intentions in respect of maintenance of the UK RIE. We note that no bid may be forthcoming and that any bid may or may not be accepted by shareholders. This is a matter for the management and shareholders concerned,” McCarthy noted.

“The possibility of ownership of the LSE by a US entity has raised questions about whether, and to what extent, US law and regulation might impinge on the operation of the exchange and its markets and the companies listed on them. We would expect any bidder to make clear whether its proposals might lead to such a possibility. Any such implications would need to be considered by all stakeholders,” he said.

“In respect of the LSE, neither the FSA nor the Securities and Exchange Commission consider that US ownership of the LSE, in and of itself, would result in US regulations, including Sarbanes-Oxley, applying to companies listed or quoted on its markets or member firms of the LSE. As is currently the case, some companies on the exchange’s markets may have – or choose to seek – registration with the SEC,” McCarthy explained.

He noted that, over time, a combined group, although continuing to operate separate subsidiary exchanges, may seek to harmonize aspects of both markets in respect of its trading platform, rules, membership arrangements and listings of companies.

“Certain aspects of integration, such as the development of a common trading platform technology, would be relatively straightforward from a regulatory standpoint. However, harmonization of listing and membership would present greater regulatory issues between jurisdictions,” he said. “Further integration steps could lead to the creation of a single market, covering all the securities of both exchanges with access by common members serving investors in both jurisdictions. This would require compliance with the rules of both jurisdictions unless the differing regulatory frameworks were to be aligned, including consideration of whether standards could be deemed equivalent and whether legislative change is required.

Harmonization of trading rules would need to be consistent with US and UK standards, including those required by the Markets in Financial Instruments Directive – to be effective by November 2007, he said.

McCarthy noted that the FSA will continue to explore the regulatory implications of any such proposals, in conjunction with other regulatory authorities such as the SEC, the Commodities and Futures Trading Commission and the Euronext Regulatory College.