New York and London’s financial markets have spent many decades building up their reputations as bastions of corporate governance, financial accountability and investor protection.  Will these hard-earned reputations survive intact should the Saudi Aramco Initial Public Offering (IPO) go ahead?

The reported IPO of Saudi Aramco on either the London Stock Exchange (LSE) or New York Stock Exchange (NYSE) is shaping up to be both the largest and most controversial public transaction in history.

As New York and London do battle to offer a home to the Saudi State oil company, believed to be valued at an eye-popping $2 trillion (that is trillion!), there is more at stake for the parties concerned than mere bragging rights. The successful exchange could very well have a poisoned chalice on its hands. They must each ask themselves, is it worth it?

In order to facilitate this monster deal, one of these  revered stock exchanges would have to water-down significantly its listing rules to accommodate the oil giant. Stock exchange rules in London, for example, normally require companies to have at least 25% of its shares available to the public (free float), as well as tough corporate governance tests and accounting practices complying with the highest international standards. The reason for this is that companies with Premium Listings and those seeking eligibility to the revered FTSE 100 club, or the S&P 500 in New York, automatically enter into the portfolios of index tracker funds and other investment funds that contain a spread of high quality public market investments. In other words, pension funds, retirement funds and other investment portfolios affecting millions of ordinary Britons or Americans will automatically hold Saudi Aramco shares. The rules are therefore in place for good reason, to protect us all from holding shares inadvertently in companies that don’t meet the required standards. The rules are similar, if more stringent, in New York.

Once the red line is crossed and Aramco is allowed to breakthe rules, how long before other companies also try to gain entry without meeting the necessary criteria? It is already hard enough guaranteeing minority shareholder rights when the odds are stacked against the smaller investors. The London and New York stock exchanges are rightly seen today the world-over as by far the best places to invest in capital markets. How the Aramco situation is communicated by the chosen exchange could very well define its future.

Softening the rules may enable London or New York to win the battle for Aramco’s shares. However, there is a very real risk that if the public communication is handled poorly, and too many concessions are made for the sake of short term profit, it will be a pyrrhic victory. One that could do a huge amount of damage to the victorious exchange’s long term credibility.