Dp 05 Non paperRegulatory Dialogue - DG Markt

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Non-paper for ECOFIN council of 07 June 2006

Current state of play of the informal Financial Markets Regulatory Dialogue (FMRD)

The EU-US Financial Markets Regulatory Dialogue (FMRD) continues to deliver tangible benefits to market participants on both sides of the Atlantic by fostering mutual understanding of EU and US regulatory approaches and defusing potential conflicts upstream. The regular interaction between the players and the informal nature of the dialogue means that real progress is being achieved. Regular meetings have been held between the European Commission and the U.S. administration (the Treasury Department) and U.S. regulators (the Securities and Exchange Commission (SEC), the Federal Reserve Board and other US banking regulators, the National Association of Insurance Commissioners (NAIC) and others), complemented by a wide range of on-going contacts at political and technical levels.

Discussions in the FMRD have covered a large number of topics from the securities, accounting, auditing, corporate governance, asset management, banking, financial conglomerates and insurance fields. The Commission is highly transparent on the issues being addressed in the FMRD. The Commission provides a status report on the progress in the Dialogue for every meeting of the Financial Services Committee, to meetings of the "Lamfalussy" committees, to meetings of the European Parliament"s ECON committee and their staff, and holds a regular debrief for the financial services industry.

The main issues being addressed in the Dialogue are currently: accounting standards, the implementation of Basel II, collateralisation of reinsurance, and deregistration. Tangible progress has been achieved on these issues:

On accounting, the SEC has confirmed again its strong commitment to eliminate the reconciliation requirement to US GAAP for European firms by 2009 at the latest, clarified the interim steps to get there and agreed on the need to closely cooperate with European institutions. The European Commission supports the SEC"s roadmap towards abolishing accounting reconciliation requirements. It has made a proposal that would prolong the current status of U.S. GAAP and other third country accounting standards in the EU by 2 years and thereby align the EU and U.S. timetables on this issue. The ESC is expected to take a decision in July. Both sides agree on the need for continued progress on the technical convergence of IFRS and U.S. GAAP and are in close contact with the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) to accelerate technical work. Abolishing accounting reconciliation requirements will greatly reduce costs for transatlantic listed companies and contribute to a more open transatlantic capital market.

The US banking regulators announced in September 2005 that US implementation of Basel II would be delayed by one year to January 2009, and recently issued their draft Notice of Proposed Rulemaking to this effect.

The US delay leads to a "gap" year in 2008, when EU banks will need to comply with the Capital Requirements Directive, and therefore with Basel II, and US banks will not (there are similar but less critical issues in 2007). This raises issues for EU banks with operations in the US, and for US banks with operations in the EU. Talks are ongoing between EU and U.S. regulators and the industry on how to deal harmoniously with differences in the timing and other practicalities of the implementation of Basel II.

US state laws allow US insurers to take solvency credit in their balance sheets for the reinsurance they purchase from authorised US reinsurers. By contrast, credit is only allowed for reinsurance purchased from EU reinsurers if these deposit collateral with the US insurer or maintain a non-working trust fund in the US. Following the adoption of the EU Reinsurance Directive, the US National Association of Insurance Commissioners (NAIC) has published a White Paper analysing its reinsurance collateral rules and has decided to mandate its Reinsurance Task Force to develop alternatives to the current U.S. collateral rules by December 2006. In the mandate given to the Reinsurance Task Force, explicit mention was made of the need to consult with international regulators on this. The European Commission welcomed this commitment, and is fully engaged in the dialogue to find a mutually acceptable solution that removes US collateral requirements for EU reinsurers.

In December 2005, the SEC published a proposal for new rules on deregistration of foreign firms from U.S. stock markets. The European Commission welcomed the fact that the SEC had delivered on its promise to propose new rules in 2005 but felt that the proposed solution did not go far enough to enable the majority of EU issuers to deregister. With the support of the ESC, securities regulators and EU issuers, the European Commission has sent detailed comments on the proposal to the SEC in order for the new rules to be workable for EU industry. The SEC is expected to come forward with a final rule by the end of 2006.

Outside the framework of the FMRD, the issue of foreign takeovers is one which has been raised at various levels in discussions with our US partners. A number of recent high-profile cases in the EU and the US have highlighted the dangers that open markets face on both sides of the Atlantic. In the EU, the Commission has made it very clear that it will pursue these cases energetically to ensure that Treaty freedoms are not violated. In the US, in the wake of i.a. the Dubai Ports World issue, there have been discussions in the US Congress to tighten rules and procedures on foreign investment. Together with Member States, the Commission has been lobbying to preserve the free flow of capital across the Atlantic. The EU"s arguments seem to be gaining ground, although there is still considerable political uncertainty on this issue.