Regulators urge investors to guard against euphoria

The world's leading securities regulators put financial markets on notice yesterday, warning them not to allow euphoria over the "new economy" to cloud their judgment.

At the end of a high-level conference on regulation of global markets, the International Organisation of Securities Commissions (IOSCO), said the euphoria might have caused "market professionals to lose their perspective and to compromise the judgments they normally provide to the market place and investors".

IOSCO said its concerns included the processes governing initial public offerings issues such as price manipulation by IPO sponsors and valuation of high-tech companies, including accounting and financial reporting. Valuations were being made using new models, such as burn rates based on expected cash flow, with less emphasis being given to conventional benchmarks such as reported earnings.

Regulators needed to work to ensure there was consistency between the way companies presented the information being used in the new models.

On consolidation among exchanges, Mr Arthur Levitt, the SEC chairman, told the conference, being held in Sydney, he was concerned at the effect on competition. On the proposed merger of the London and Frankfurt stock exchanges, he said: "If we fast forward to two years from now, is it likely that we will see this merger with the same measure of sunlight and optimism with which the proponents speak today?"

While noting, in a carefully worded speech, the huge potential cost savings from forging common trading platforms, he said: "As centrality tends towards monopoly it also tends to become inured from innovation and the other benefits that come from competition." At the same time, however, he said Asian and European exchanges were better positioned to deal with competition from electronic communications networks than US markets, partly because of the changes they had or were making to their governance and ownership structures. This had made them more resilient and better able to adapt to change.

Mr Levitt, the SEC's longest-serving chairman, said the recent volatility in world markets was not a concern in itself because markets had generally been "very successful in embracing capacity changes".

The key difficulty in the US was "people believing they are a lot richer than they really are".