Major U.S. derivatives players, including JPMorgan, Goldman Sachs and Merrill Lynch, fear they may be rushed into picking an unsuitable regulator as they scramble to meet an imminent deadline for selecting which regulator will oversee their securities businesses in Europe. Under a European directive--expected to be published this Friday--non-E.U. issuers are required to select one regulator to oversee retail securities issued in any of the member states. Failure to select a regulator on the day the directive is published will result in the E.U. making the selection. The Prospectus Directive will come into force in 2005 and will cover securities such as equity-linked notes.
"In the Brave New World [ of one-stop regulation] this is good news for issuers of securities in Europe, but in the short-term it is very unnerving," said Tim Hailes, v.p. and assistant general counsel at JPMorgan in London. "If we get it wrong, we are in big trouble."
Under the current arrangements, sophisticated issuers such as the major U.S. banks can switch between their preferred regulators on a deal-by-deal basis. Of these, Luxembourg and the U.K. are favored by many because both use English as their lingua franca and have the best understanding of the structured products industry, according to bankers. Once the new rules come into play, issuers will no longer be able to shop around among the various national regulators and fear that a choice they make now could turn out to be unsuitable in the long-term. "It's a shot in the dark," Hailes noted. Pauline Ashall, partner at Linklaters in London, said, "This is incredibly unsatisfactory that the issuers are being put in this dilemma now."
In addition, less sophisticated issuers may be unaware that, if they fail to actively make a choice, the regulator that oversees the next security they issue on or after the publication of the directive will automatically become their regulator thereafter.
This is a momentous decision and firms have to make it without all the facts because the E.U. will not release information pertinent to the selection until after the deadline, Hailes continued.
France, Greece and Portugal are seen as the least suitable regulators, according to bankers. Greece and Portugal are considered to have unsophisticated regulators when it comes to structured products, and those in France reportedly take a hostile view of U.S. issuers.
Goldman Sachs is said to have picked the U.K. as its base because of its activities in the U.K. warrants market and its relationship with the Financial Services Authority. Merrill Lynch has four entities that issue these types of security. Two of them will take Luxembourg and the firm has not decided about the other two yet, according to an official.
