Wall street is desperate to climb aboard the Asian tiger. And a chief beneficiary of its efforts to gain greater access to Asia’s booming capital markets could be Canada’s securities industry. If the U.S. must open its own markets to facilitate a global trade deal, Canadian firms could be the big winners.

Global investment banks based in the U.S. are salivating over the potential they see in developing countries’ capital markets. Yet Western firms face numerous barriers to entry, which they are eager to dismantle as quickly as possible.

Against this backdrop, a quartet of industry trade associations is touting the idea of using the World Trade Organization to liberalize access to capital markets in the developing world. These associations have published three papers making their case and have circulated the studies to WTO members in hopes of putting capital markets services on the agenda for the upcoming round of trade negotiations, slated for December in Hong Kong.

While U.S. dealers focus on improving their access to mega-markets such as China and India, along with other nations in Southeast Asia, any move to liberalize could actually represent a great leap forward for the Canadian industry. While a handful of large Canadian firms may benefit from access to the same developing markets the U.S. giants covet, the bigger prize is the all-important U.S. market, which could be become easier to enter, as well.

Barriers among the institutional markets of most of the countries in the developed world
are rather modest, with the main exception being the U.S., says Ian Russell, senior vice president of industry relations and representation at the Investment Dealers Association of Canada in Toronto. Foreign firms wanting to enter U.S. markets must comply with a variety of registration requirements and rules. By comparison, in Canada, foreign firms can register as international dealers and trade with few restrictions.

To do business in the U.S. institutional market, Russell says, “You have to go through the full panoply of registration, proficiency standards — all of the regulatory requirements — as a broker and as a salesperson.” Firms do it because the alternative is not playing in the world’s largest and most liquid capital market, but it’s expensive. There are some modest exemptions, but they involve costly arrangements as well.
If such barriers were eased, Canadian firms would find it easier — and cheaper — to
operate in the U.S., Russell says.
Canada has little to offer the U.S. in return for greater access, however. But desire in

the U.S. to gain easier access to Asian markets could provide the opening Canadian firms need. Russell says that’s why the IDA is supporting other industry trade associations in bringing the capital markets issue to the WTO.

The IDA has joined with the Securities Industry Association, the International Capital
Market Association (both based in the U.S.) and the International Banks and Securities Association of Australia in publishing the papers for the Doha round of trade talks. Essentially, the papers argue the merits of freer trade in financial services — chiefly that it would promote economic growth and contribute to the stability of the world financial system by improving capital allocation and risk-management opportunities. The papers also specifically argue the merits of freer trade in the context of the WTO’s current negotiations, which are aimed at supporting development. The papers also propose a schedule laying out how various liberalization measures could be adopted.


“Development and expansion of the financial sector can serve as both the wind in the sails of a nation’s economic growth and provide the even keel of greater financial stability,” SIA president Marc Lackritz said in announcing the initiative. “Countries that have embraced capital-market liberalization grow faster, diversify risk better, improve capital allocation and reduce exposure to foreign currency-denominated debt. That makes financial services reform a win/win for both the nations that undertake it and for international trade.”

The U.S. securities industry has admitted it is not as open as much of the rest of the world, but it may have to be if it wants the same treatment in developing markets. “For this to go forward and be successful,” Russell says, “it means all countries would have
to do it, including the U.S.”

The papers call for all participants in the upcoming WTO round to work together to
reduce barriers — a stance that Russell says puts a lot of pressure on the U.S. to lower its own restrictions. He notes that the SIA and the global firms have been putting pressure on the U.S. Treasury to do just that.

@page_break@“This means if the Treasury buys into this concept, it would force the [Securities and Exchange Commission] to play ball, as well,” Russell says. “If this is successful, it would force the Americans to lower their barriers, and that would be the biggest benefit of all for our industry.” This possibility is one of the main reasons why the IDA decided to support the effort. “We’ve never had reciprocity; basically this [initiative] drives reciprocity.”

It appears that U.S. authorities are buying into the concept. On Oct. 18 and 19, the SIA and Tsinghua University held a conference in Beijing at which U.S. Treasury Secretary John Snow and SEC chairman Christopher Cox were keynote speakers. Snow called for greater access to China’s capital markets for foreign firms, while Cox talked about the importance of high regulatory standards in inspiring investor confidence and attracting capital.

The Beijing conference also coincided with a meeting of the China-U.S. Joint Economic Committee, at which both countries reiterated their support for the successful conclusion of the WTO negotiations. In a joint statement, they indicated that both sides had agreed to seek agreements in key areas, including financial services negotiations. The Chinese delegation included representatives from its Ministry of Finance, along with securities, banking and insurance regulators. The SEC, Treasury and the Federal Reserve Board, among others, represented the U.S.

To highlight just who is driving the agenda, the SIA conference was sponsored by some of the most high-profile firms in the U.S. — Citigroup, Credit Suisse First Boston, Goldman Sachs Group Inc., Lehman Brothers Inc., Merrill Lynch & Co. and JP Morgan. A number of these firms have reportedly been sniffing around in the Chinese securities industry, looking for acquisition opportunities.

With the U.S. industry so clearly behind trade liberalization, that would appear to remove an obvious source of resistance to the U.S. opening its markets, too. In fact, they are now the ones pushing their government for it.

For Canadian firms, a more open U.S. institutional market would offer the promise of dealing with U.S. institutions directly from Canada in terms of the distribution of research, the ability to trade and the offering of other services. There may also be some benefit in securing greater access to Asian markets as well. Russell says Canadian firms would be able to penetrate the institutional markets in China and Southeast Asia to sell Canadian dollar-denominated debt and equities, which is also appealing, given high commodity prices, the stronger C$ and the current market focus on Canadian assets.

For the IDA, the beauty of the effort is that it’s the U.S. firms that are driving it. And there’s plenty at stake in the success of the talks for U.S. brokers. “The [U.S.] industry is really anxious to penetrate these markets,” says Russell. “These are growing and dynamic capital markets, and the dealers want to get in on the ground floor. They are very serious about this; they spent a lot of money developing the three consultation papers, and they’ve had a lot of consultation globally. So, they’ve invested a lot.”

Canadian firms can only cheer them on. “There’s no downside to this,” Russell notes. “If this is unsuccessful, we’re supporting something we believe is right and appropriate. But it could pay huge dividends if it is successful.” IE