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Monday, Sept. 28, 2009

NYSE Euronext chief sounds alarm against overregulation

Staff writer

When the major economies map out their postcrisis financial reforms, they should avoid overregulating the financial services industry in the United States and focus instead on smarter application of existing regulations, the chief executive officer of NYSE Euronext said in Tokyo recently.

News photo
Duncan Niederauer

Noting the worst of the crisis "is clearly behind us" a year after the Lehman Brothers shock of September 2008, Duncan Niederauer said the focus of regulatory reforms should be simple — protecting investors, encouraging transparency, and harmonizing the overlapping and sometimes confusing regulatory approaches taken by different government agencies.

NYSE Euronext, a holding company that runs seven stock exchanges including New York, Paris and Amsterdam, "is generally supportive" of what the U.S. administration of President Barack Obama has spoken about regarding financial reforms and expects Congress to take action within the coming months, Niederauer said at a seminar organized by Keizai Koho Center on Sept. 17.

The U.S. financial industry "needs to be doing a much better job of restoring trust" with investors following the crisis, Niederauer said, acknowledging the "relative ineffectiveness" of the U.S. regulatory infrastructure.

There are too many gaps where products are regulated neither by the Securities and Exchange Commission nor the Commodity Futures Trading Commission, confusing overlaps where it's unclear which agency has the oversight responsibility, he said, adding there was "no effective systemic risk management in this morass of regulation."

In moving forward with the reforms, the world "does not need a host of overregulatory frameworks and complicated new regulatory structures," he said. "We need to understand the things that just plagued us, and we need to keep it simple."

The U.S. government has a "history of overreacting . . . and swinging the pendulum too far the other way," Niederauer said. "We have to be very specific about where the problems were, and where they weren't."

He urged the U.S. authorities to "avoid the temptation just to have sweeping regulation that ends up affecting parts of the market that were not guilty of any wrongdoing and in fact proved to be . . . quite useful and well-functioning in and around the crisis."

"Instead of spending an extra two or three years debating on a whole set of new regulations, let's more intelligently apply regulations under market umbrellas that we know work quite effectively," he said.

Niederauer also said he believes the Federal Reserve is "best-positioned" to serve as the "systemic risk regulator and overseer" of the U.S. financial industry. Creating a council of senior officials who would collectively oversee risk in the market could result in "distributing and diffusing" the responsibility and ultimately leaving "everyone and no one responsible."

In just about a year since the crisis began, the global economy has "made progress faster than most of us would have thought," with Fed Chairman Ben Bernanke declaring the U.S. recession "very likely" over, Niederauer noted.

Stock markets have rallied around the world, and even though there have been very few IPOs so far this year, the markets have seen "a tremendous amount of secondary issuance" by large numbers of companies, he said. And the equity markets have continued to rise for the last six months despite all that new supply, he added.

However, a "mild economic recovery with modest GDP growth that only exists because of a federal stimulus package" is not going to be sustainable, Niederauer warned. That which will make for sustainable growth will be measures to create jobs and restore confidence in the financial system, he said.

The U.S. apparently learned from Japan's experience with the collapse of the late 1980s bubble economy and acted "much more quickly and decisively to force the banks to recognize the situation they are in . . . and articulate how much capital had to be raised," he said. But the toxic assets are "not going to heal overnight," and the U.S. needs an accounting framework that "makes it easy for the banks to dispose of" those assets, he said.

Even though signs of a global recovery are emerging, Niederauer said the world needs to get used to slower growth.

"If we think this is going to be a V-shaped recovery, where in a year or two we'll be back to the kind of growth we got used to for the last two decades in most of the world, I do not believe that will be the case . . . And I think the world's economies will be better off if we had slower but effectively managed growth," he said.

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