Regulation in an international financial market place

Abstract

Regulation of financial markets aims to correct particular market failures, and issues of harmonisation of financial regulation arise when interaction between regulatory regimes changes their effectiveness in addressing those market failures. Regulatory interactions are important in securities markets because much securities trading involves cross-border flows, can be carried out in a variety of centres (for example, half the turnover in equities in London is in foreign stocks) or involves participants who are active in several centres. Advances in technology and increased cross-border flows mean that issues of regulatory co-ordination are increasing in importance. In Europe, the passport directives for securities firms and banks (the draft Investment Services Directive and the Second Banking Co-ordination Directive) provide a framework which will reduce impediments to an open securities market in the EC. These directives will allow a firm to supply financial services throughout the Community on the back of home country authorisation. It will be up to the firm how it chooses to exercise its rights — by branching or by the provision of services cross-border. Increased inter-relationships between securities markets give rise to three questions: which countries should harmonise regulations in which sectors? Should harmonisation be achieved by negotiation and/or regulatory competition? and what should be the regulations and structure of the harmonised regime?

The views expressed in Ihis paper are those of the authors, and are not necessarily those of the International Monetary Fund or the Bank of England.