The news that the Financial Services Authority led by Callum McCarthy is to face scrutiny by the National Audit Office is causing frustration in some quarters of the City of London.

Leaving aside a number of recent decisions, which have placed the FSA on the back foot, McCarthy believes he needs City backing in his attempt to keep regulation of London’s major markets, like the London Stock Exchange, within London’s own rules.

He believes the notion of regulation of an exchange, whether Liffe or the LSE, transferring to where the assets are owned will fail on “legal, practical and political grounds”.

Alex Brummer in the Daily Mail writes: “The idea, for instance, of the Liffe market being regulated from Paris where Prime Minister Dominique de Villepin believes it his job to reorganize the board of Airbus maker EADS — is ludicrous.”

Sir Callum McCarthy joined the FSA in September 2003 from the Office of Gas and Electricity Markets where he was Chairman and Chief Executive. He had previously held senior positions in Barclays Bank, BZW and Kleinwort Benson, as well Department for Trade and Industry.

Callum McCarthy, Chairman of the Financial Services Authority, believes the London Stock Exchange will be safe from onerous Sarbanes-Oxley regulation even if it is bought by Nasdaq. In the longer term, however, he could give no such assurances.

The scenario configured is that the American exchange will eventually build on its 25pc stake in the LSE and take it over. It will though maintain it as a British-based entity under FSA rules.

The danger is that at some stage, Nasdaq will see fit to create a larger pool of liquidity and bring the LSE into the U.S. fold. Unhappily, that will not only affect the LSE itself, but any company listed on the exchange.

To complicate matters, with the NYSE looking a shoo-in to take Euronext, whatever President Chirac might say, it is likely that Brussels will forge a deal with Washington at some stage to regularize transatlantic rules. In those circumstances, could an independent LSE remain outside the restrictions imposed on the rest of Europe?

McCarthy admitted that attempts to “harmonize” market rules could mean London passing from FSA regulation to that of the SEC in the U.S. He has had “workmanlike” discussions with his opposite number at the SEC and concluded: “As long as the LSE remains a UK exchange, the FSA will require that it meets its regulatory obligations”. However, “Harmonization of listing and membership would present greater regulatory issues between jurisdictions.”

This issue is clearly worrying many listed British companies, some of which have approached the FSA. Isn’t it time the Treasury ring-fenced the LSE as a vital cornerstone of London’s continued existence as a major world financial centre?