1. WITH REGARD TO THE ISSUERS
A. INTERNATIONALIZATION OF FINANCIAL NEEDS
- the issuers are attracted by markets other than that of country of origin:
- expand access to capital
- obtain capital at lower cost
- diversify shareholder base
- different approaches to evaluating the company
- business access to new markets
B. SIMPLIFICATION OF CROSS-BORDER LISTINGS AND IPOS WITH THE ADOPTION OF TWO DIRECTIVES (WHICH WERE AMENDED ON SEVERAL OCCASIONS) PROVIDING FOR THE MUTUAL RECOGNITION OF PROSPECTUSES
COUNCIL DIRECTIVE 80/390/EEC of March 17, 1980 (as amended by directive 87/345/EEC of June 22, 1987 and Directive 90/211/EEC of April 23, 1990) of coordinating the requirements for the drawing up, scrutiny and distribution of the listing particulars to be published for the admission of securities to official stock exchange:
In order to benefit of the directive:
- the issuer must apply simultaneously or within a short interval for admission to listing of the same securities on two or more stock exchanges of different member states;
- the prospectus must be submitted to and approved by the home authority;
- the host authority must then recognize this prospectus; it may only require specific market information (including tax information) and translation of the prospectus;
- directive 94/18 EC of May 30, 1994 amending directive 80/390 EEC provides for new partial or complete exemptions to the obligation to publish listing particulars:
- securities which have already been listed in another member state for more than three years and for which a new listing application is made (some additional information must be published in the host state);
- securities which have already been traded for at least two years on a secondary market in the state where the application for admission to official listing is made;
COUNCIL DIRECTIVE 89/298 of April 17, 1987 coordinating the requirements for the drawing up, scrutiny and distribution of the prospectus to be published when transferable securities are offered to the public:
- mutual recognition is only mandatory for a public offer prospectus that has been approved by the home authority in accordance with Directive 80/390;
- when the prospectus includes less detailed information than required by Directive 80/390 and where an application for admission to listing is not made, the Directive 89/298 does not provide for mandatory recognition.
In 1995 the UK adopted new rules referred to as "Securities regulations 1995" which incorporated into UK law the provisions of the Council Directive 89/298 of April 17, 1987:
- contain provisions for the mutual recognition of a prospectus used for public offers in other member states, even if the issuer is incorporated outside the European economic area (EU + Norway + Iceland + Liechtenstein)
- contain important new exemptions which cover most private placements in the UK.
Europe as fortress?
The directives permit the member states to limit mutual recognition to listing particulars of issuers having their registered office within the EEA.
In France, the COB limits the mutual recognition to prospectuses of issuers having their registered office within the EEA.
2. WITH REGARD TO THE INTERMEDIARIES
Council directive 93/22 EEC of May 10, 1993 on investment services in the securities sector, which adds to the council directive 93/6 EEC of March 15, 1993 on the capital adequacy of investment firms and credit institutions
- authorizes an investment firm in any member state to carry out its activities throughout the EEA on the basis of a single authorization (European passport) issued by the home member state: home country control principle.
- harmonization of the conditions governing authorization and activities.
Concerning the authorization
- the investment firm must have its registered office and its head office in one member state;
- the investment firm must provide to its home regulatory authority the names and holdings of shareholders;
- the investment firm must be managed by at least two experienced persons;
- the investment firm must provide a description of anticipated investments;
- in addition, the council directive provides for minimum shareholders' equity requirements depending on the type of activity;
- an authorization or a refusal must be given by the home regulatory authority within six months of the request to the investment firm.
Concerning the activities
- compliance with the authorization requirements;
- compliance with capital adequacy rules;
- compliance with capital management rules laid down by the home member state.
- compliance with regulations concerning public policy and financial activities which the host member may have established
- organize cooperation between the authorities of the host member state and those of the home member state with regard to compliance by the investment firm with the rules of the host member state.
3. WITH REGARD TO THE REGULATORY AUTHORITIES
A. For the mutual recognition of prospectuses, cooperation between the regulatory authorities of the member states is provided:
- in order to carry out their respective duties;
- in order to exchange information whenever necessary.
B. For the supervision of the capital adequacy of investment firms and the authorization and supervision of investment firms in the securities sector.
C. Examples of bilateral cooperation:
- French COB and German Bundesaufsichtsamt fur den Wertpapierhandel : exchange of information
- Belgian regulator: Commission de la Bourse de Bruxelles has decided to acquire the french continuous trading system, known as the NSC (Nouveau Systeme de Cotation)
4. WITH REGARD TO THE MARKETS
A. Unilateral opening to foreigners of a domestic market
Several examples:
- in order to facilitate the internationalization of the U.S. Domestic market, the U.S. Securities and exchange commission adopted new various rules know as regulation "s", rule 144 a and new rule 434
- French stock brokers opened their equity capital: today, a foreign interest is registered in more than 1/3 of french stockbrokers
- in Stockholm and Amsterdam stock exchanges, membership is open to intermediaries from other EU member states; in addition, foreign intermediaries have direct access to the market and need not create an affiliate
B. Cooperation between existing markets
Various examples:
- Paris Bourse and London Stock Exchange Agreement of July 27, 1994 which provides for a mutual recognition of Paris Bourse and London Stock Exchange
- DTB/MATIF/Agreement
This agreement provides for gradual cooperation between the two markets:
- first step: members of the MATIF are given access to the electronic quotation system of certain German interest rate contracts;
- second step: members of the DTB are given access to the negotiation of two french contracts which should be transferred on to the German electronic quotation system;
- third step: a standard clearing system and a single electronic quotation system could be set up.
- Switzerland, Spain and the Netherlands have announced their interest in joining this project.
- Agreement between BELFOX and MATIF
- The LIFFE has entered into various bilateral agreements with other regulated futures markets in order to trade the same contract in several locations, the clearing procedures used in one market recognized by other markets (in particular, agreement between LIFFE and MATIF to enable them to offer their products in their respective country).
- Nordquote agreement between four Scandinavian stock exchanges which provides for a data exchange system
- Installation of automated screen trading in France within the GLOBEX System. The COB limits the offering and sale to french residents of commodities contracts traded on the Chicago Mercantile Exchange (CME) to those made by members of the CME registered with the commodity futures trading commission (mutual recognition agreement executed in 1990).
C. Creation of a European stock exchange?
Various projects:
a) EUROLIST
- Project of the federation of European stock exchanges
- Pan-European listing for securities of the leading European companies (forecast: about 250 companies)
- Purpose : listing on at least five official markets other than the domestic market within the European union
- Requirements to be met by the issuer:
- minimum equity market capitalization: ECU 1 billion
- minimum annual trading volume: ECU 250 million
- international trading of the securities
- Adoption of directive 94/18/EC of May 30, 1994, previously mentioned, which provides for partial or complete exemptions from the obligation to publish listing particulars, facilitates the Eurolist project
b) EASDAQ
- Project of the European securities dealers association based on the U.S. Nasdaq model
- European stock exchange: single quotation and negotiation system
- Stock market for young and fast-growing high technology companies
- The market would be managed by the EASDAQ, a Belgian limited liability company, incorporated in early 1995
c) New "internationally oriented" domestic markets
- Creation of a specific market for trading in non domestic securities: SEAQ international in London
- London Stock Exchange launched its new alternative investment market (AIM) for small and growing companies on June 19, 1995
- Paris Bourse unveiled the details of the "Nouveau Marche" on September 1995. Trading on this new market which aims at providing financing to small and high growth companies would begin in early 1996
- Frankfurt, Milan and Brussels stock exchanges are engaged in similar projects
D. Offshore markets
- The combined use of computers and telecom networks has enabled specialized firms (market information, market order collecting etc.) To develop and integrate multiple functions and thus create non regulated markets.
- 95% of worldwide institutional trading involves the largest one hundred institutional investors, all of which are members of at least one of the seven international institutional investor networks.
- Euromarket is the most developed of these offshore markets.
- In the U.S., 6 to 8% by volume of securities transactions are carried out in proprietary trading systems.
5. WITH REGARD TO THE INVESTORS
- Cross-border investment flows in securities doubled between 1975 and 1980. In 1994, they amounted to $ 150 billion, and an increase is expected in the coming years;
- In France, the participation of non residents in market capitalization increased from 16% in 1988 to 30% in 1994
- Foreign investors involved in approximately 50% of the daily trading volume in France
a. Solicitation
- No proposal currently exists for the coordination and harmonization of rules governing securities solicitation within the European Union except in directive 85/611/EEC of 20, 1985 on mutual funds
- European union actually deals with a large range of situations from a very strict regulation in France to a lack of specific regulation in Germany:
- in France, specific regulations governing securities solicitation are provided by the law of March 28, 1885 and law of January 3, 1972
- in Germany, securities solicitation is regulated as such
- in Luxembourg, the law of July 16, 1987 regulates offerings and solicitation in connection with any public offering of securities
- in UK, the 1986 financial services act deals with cold calling and unsolicited calls
- The international organization of securities commission is currently working on the requirements to be contained in any securities solicitation regulations to prevent improper investor solicitations (such as high-pressure sales in speculative securities)
b. Indemnification
- No minimum protection for depositories within EU
- Basle committee working on a global approach to regulating the liquidation of the international banks
- Directive on investment services does not require member states to provide for an indemnification system in order to protect investors
- Proposal of directive 93/321/11 of October 22, 1993 provides for a minimum guarantee of ECU 20,000 per investor
c. Insider trading
- Strict regulation of insider trading is a way to protect investors
- Current trend : stricter rules even in countries such as Germany, Japan or Spain where no regulation of insider trading existed until recently
- Directive 89/592/EEC of November 13, 1989 coordinates regulations on insider dealing
6. INTERNATIONALIZATION OF SERVICES NECESSARY FOR SECURITIES TRADING
A. INTERNATIONAL CLEARING AND DELIVERY/SETTLEMENT SYSTEMS
- Certain domestic delivery/settlement systems as inter settle in Zurich, AKV in Germany and Saturne and Relit in France tend to be internationally oriented
- Two main international clearing and delivery/settlement systems:
- Cedel (Luxembourg)
- Euroclear (Brussels)
which offer four main services:
- clearing and delivery/settlement for transactions in securities on international markets
- custody
- management of cash accounts
- securities loans and advances
B. GLOBAL CUSTODIANS
- Global custodian activity has been developed together with the internationalization of the securities market
- Global custodian is liable for the custody of the securities of its clients on a worldwide basis, either directly or through branches or affiliates as well as through local correspondents (sub-custodians)
- Providing a high quality of custody services is one means to develop a domestic market.
The contents of this article are intended as a general guide. Specialist advice should be sought for your specific circumstances.
For further information contact please contact Daniel Hurstel, Aline Cardin, Herve Letreguilly on +33 1 44 71 17 17, or enter a text search 'Shearman and Sterling' and 'Business Monitor'.
