Globalism and outfoxing the regulators
One of the consequences of building multinational firms is the ability to steer around the regulatory agencies and rules of specific countries. As we've shown, the ability to fudge internal transactions in such a way as to make the best tax and liability sense is a major reason for the proliferation of subsidiaries across the world. If nothing else, the complications of the organization make it harder for any national or EU regulatory group to follow the money trail. And what might be illegal in one country might be perfectly innocent in another.
That's even more the case with financial exchanges. As electronic trading becomes more and more possible, financial institutions can exist anywhere. And, as the recent NYSE-Euronext deal (and the possible LSE-NASDAQ deal) shows, the existence of a multinational exchange leads to all kinds of problems for the regulators. Which regulations will the new exchange have to follow, the US's or the EU's. And with unwelcome restrictions like the Sarbanes-Oxley corporate accounting rules. The question is to what extent the laws of one country can have an impact on a company that has no operations in that country but is merely sold through an exchange that has ties to both countries.
Another upcoming problem is with commodity exchanges. As a Financial Times article ("Regulatory impact of market consolidation", 2/18/06) points out, on-American exchanges are now starting to compete seriously with those in the US.
With the advent of electronic exchanges, the physical location of trading can be anywhere. This is the issue raised by the case of Intercontinental Exchange, whose London-based trading platform is offering the US benchmark oil contract, thereby threatening the business of the New York Mercantile Exchange and regulation by the US Commodity Futures Trading Commission.
As the ties between corporations and nations get looser, national governments are scrambling to find ways to monitor and regulate business practices in some effective way. Moreover, European regulators are bristling at the thought that American's can think that they can regulate exchanges and companies that are critical to their national economies.
It may well be that, given the liquidity of money and the openness of broadband compositions, that regulating world exchanges may be as impossible as regulating offshore Internet gambling. That is likelier to turn the exchanges into unregulated casinos, much to the dismay of all investors worldwide.
