The London Stock Exchange would be saved from overseas regulation in the event of a sale to a foreign buyer, by new legislation, it emerged today.

Ed Balls, the Economic Secretary to the Treasury, said the government would introduce new legislation to ensure the stock exchange operator would not be bound by stricter overseas regulations if the group is sold.

His comments come amid fears that a sale to Nasdaq, which has built up a 25 per cent stake in the LSE and is seen as the most likely buyer, could in time force UK companies to adhere to US regulations.

The introduction of Sarbanes-Oxley legislation in the US has increased the regulatory burden on companies listed there and encouraged many smaller companies to seek listings outside the United States. London's Alternative Investment Market has been a prime beneficiary of that move to find an alternative to US-based stock exchanges.

Mr Balls, speaking to business leaders in Hong Kong, said the government was neutral on the nationality of any future owner of the LSE. However he said the government did not want any change in ownership to impact the light touch regulation in force in the UK.

Any new regulation would give the Financial Services Authority greater powers to assert its authority over companies listed on the London exchange.

He said: "The issue was that if you had a foreign owner and that owner’s home regulator starts exporting its rules to London, then the FSA would be able to not let that happen."

"This legislation will confer a new and specific power on the FSA to veto rule changes proposed by the exchanges that would be disproportionate in their impact on the pivotal economic role that exchanges play in the UK and EU."

Mr Balls said new legislation, if needed, would "outlaw the imposition of any rules that might endager the light touch, risk-based regulatory regime that underpins London's success".

He added that no part of the planned legislation would have consequences for the nationality of the ownership of UK-based exchanges: "It will neither make overseas ownership easier nor more difficult".

Mr Balls was speaking during a two-day trip to Hong Kong to promote the interests of the City of London.

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