The European Union is on a fast track to implement a new transparency obligation directive that would require the more than 600 U.S. securities firms trading on EU exchanges to adapt to new guidelines from the International Accounting Standards Board. IAS 39 is scheduled for implementation next year.

According to the Securities Industry Association (SIA), the directive would require non-EU issuers of securities listed on EU exchanges to produce financial statements and reports prepared under IAS - unless their own domestic law provides "equivalent" standards. It poses a problem not only for U.S.-based issuers but also for South American and Asian-Pacific players.

"They are down to short strokes and, at this point, I think they just want to get it done," said one market source. "The rush to get this done by 2005 might sacrifice finding a common ground that works best for all."

As it reads now, the proposed directive, due to be finalized by this spring, does not grandfather existing listed debt issues. "We have already seen some [progress toward] accounting equivalence, as the U.S. is in the middle of a process of accounting convergence," the source said. "But it is still an open question as to whether U.S. [Generally Accepted Accounting Principles] for new securities will be found equivalent to IAS within the deadline established by the directive. The directive seems a lot less forgiving with grandfathering."

Still, some industry players are confident that the EU will have enough incentive to work out the present problems. On the one hand, many Continental European countries already accept U.S. GAAP standards, which puts some pressure on the EU to recognize U.S. GAAP as equivalent to IAS regulations. But more importantly, the two-way flows of trade, portfolio and direct investment between Europe and the U.S. amount to more than $1 trillion annually. "If the directive gets it wrong, these issuers will move elsewhere and force trading back to exchanges or away from Europe altogether," said the source.

A second directive on pre-trade transparency provisions of proposed investment services has also been highlighted by the SIA, which warned that it would fail to adequately address an investors' need for liquidity and variety of tailored types of trading. "Pre-trade transparency provisions of the proposed directive could actually diminish investor choice by forcing trading back onto exchanges or, even, away from Europe altogether," said the SIA in a press statement. "Based on our experience, discriminating against one market or trading method over another stifles innovation and results in less investor choice."

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