The UK's financial regulator, the Financial Services Authority, has warned that a takeover of the London Stock Exchange by a US-based exchange could eventually leave oversight and regulation of the UK market in the hands of US regulators.
    In a carefully worded statement aimed at encouraging discussion among the LSE's stakeholders, Sir Callum McCarthy, the FSA chairman, said that while there was no imminent threat from such a tie-up, a new entity formed from such a merger "could, at the extreme, involve the LSE no longer being subject to UK regulation as a recognised investment exchange".
    If such a move were to occur, he said, it could have "significant implications for various aspects of the wider regulatory regime". In particular, if it operated from the US, it could require that member firms and companies issuing shares would need to register with the Securities and Exchange Commission and be subject to its oversight.
    Sir Callum noted that Nasdaq had made and withdrawn an offer to buy the LSE and remained its biggest shareholder with a 25.1 per cent stake.
    He said neither the FSA nor the SEC believed that, in its simplest form, an acquisition of the LSE by Nasdaq would resuit in US regulations, including the Sarbanes-Oxley rules, applying to UK companies. But if the tie-up meant a fuller merger, questions might arise, not least about the future of the UK's regime of shareholder protection.
    Sir Callum said the same concerns applied to Liffe, the UK-based subsidiary of Euronext, which the New York Stock Exchange is to acquire. In the US, Liffe's equivalent regulator is the Commodities and Futures Trading Commission. Sir Callum said the FSA was working with its counterparts in the European Collège of Regulators - which oversees Euronext - to consider issues raised by the acquisition.
    Although it is possible for any non-domestic acquirer of a UK exchange simply to operate it as a separate UK-based subsidiary, analysts say the real benefit to the buyer is to cut the operating costs of both. Profits are maximised by eliminating duplicate technology and operations and moving the headquarters and technology to a single location. "This [statement] limits the extent to which you can get the potential of revenue synergies and cost savings from consolidation," said Mamoun Tazi, exchanges analyst at Man Securities. "The benefits could be limited by the type of regulatory framework you implement."
    Sir Callum's statement could have implications for the price paid for the LSE. Nasdaq, which proposed and later withdrew an offer to acquire the LSE, has indicated it has no plans to bid although it is expected to revive its offer.