Australia House of Representatives, Main Committee, 1997,Official Hansard, November 27, p. 11541 (as quoted in IOSCO, 2001 at p. 3).
Elliott, Jennifer, 2000, “Demutualization of Exchanges in Canada”, paper presented at an IOSCO Seminar Training Program held in Montreal, October 2000 (Madrid: International Organization of Securities Commissions).
International Organization of Securities Commissions (IOSCO), Technical Committee, 2001, “Issues Paper on Exchange Demutualization” (Madrid: International Organization of Securities Commissions).
Karmel, Roberta, 2000, “Demutualization: Implications for the Regulation and Governance of Securities Exchanges”, remarks to the 20th Annual Conference of IOSCO, Sydney Australia.
Lee, Ruben, 1998, What is an Exchange? The Automation, Management and Regulation of Financial Markets (Oxford and New York: Oxford University Press).
Macey, Jonathan R., and Maureen O’Hara, 1999, “Globalization, Exchange Governance, and the Future of Exchanges”, Brookings-Wharton Papers on Financial Services, Brookings Institute, Washington, D.C.
Steil, Benn, 2002, “Changes in the Ownership and Governance of Securities Exchanges: Causes and Consequences”, Brookings-Wharton Papers on Financial Services, (draft: December 2001), Brookings Institute, Washington, D.C.
Thavaramara, Tipsuda, 2000, “Demutualisation Case Study: Thailand”, paper presented at an IOSCO Seminar Training Program held in Montreal, October 2000 (Madrid: Organization of Securities Commissions).
The author wishes to thank Peter Dattels in the International Capital Markets Department at the IMF for his support in developing this paper and his many reviews of the drafts. The author also thanks Susan Greenglass and Randee Pavalow of the Ontario Securities Commission, Toronto, and Lennart Torstensson of Finansinspektionen, Stockholm, for their excellent comments on an earlier draft. The opinions expressed in the paper are strictly personal and should not be taken as indicative of any official position.
“Exchange”, for the purposes of this paper, means an equity, options or futures exchange that comes under the supervision of the securities regulatory authority.
45 percent of respondents were demutualized, 16 percent had gained member approved to demutualize and 39 percent had formulated proposals being considered by the membership. Note that most of these exchanges would not be considered fully-demutualized under the definition given by this paper and that this statistic better reflects the intentions of exchanges than the current reality (Steil, 2002).
Under American securities law, Nasdaq is a quotation and reporting system rather than an exchange. For the purposes of this discussion, there is no need to distinguish between the two. Nasdaq has an application for exchange status pending at the U.S. Securities Exchange Commission.
In many countries, exchanges are not considered self-regulatory organizations—which are thought of as stand-alone organizations like the National Association of Securities Dealers in the United States. Despite this, most, if not all, exchanges carry out some regulatory functions including market surveillance, regulation of trading conduct (preventing abusive market practices), regulation of sales and business conduct (dealing with the relationship between broker and client) and risk management and capital adequacy regulation. In addition, many exchanges take a role in regulation of listed companies through enforcement of listing standards and listing agreements.
This was the case for traditional floor-based exchanges. Exchanges that did not begin as floor- based (such as Nasdaq) do not have seats but have had a mutual organization where membership entitles the owner to access trading on the market and to vote.
Membership thus conferred a considerable advantage where the exchange traded desirable securities—a non-member could not trade in the securities directly and needed to rely on a member to purchase or sell the exchange’s securities.
Listings have taken on a different meaning in a competitive environment—listed companies once aspired to reach an exchange’s listing standard and relied on it to create value, now exchanges must attract the listed company—now an exchange needs a listed company more than the company needs the exchange (Macey and O’Hara, 1999).
A study of the early years of stock exchange development in the U.S. showed that originally exchanges served only the local area. Even large companies such as AT&T were almost exclusively owned by shareholders in the surrounding region until competition (driven by technology) caused consolidation among markets with the NYSE emerging as the dominant marketplace (Arnold, 1999).
This definition is an amalgam of the definitions used by the Forum of European Securities Commissions (FESCO, now the Committee of European Securities Regulators or CESR), the U.S. Securities Exchange Commission (SEC) and the Ontario Securities Commission.
Under the traditional model, exchanges had a monopoly in trading in the securities of a listed company—members were prohibited from trading those securities anywhere else. As noted, this was first eroded by interlisting, under which members are usually only required to trade on the exchange that will give the client the best price (the best execution rule). ATS have had a limited but growing success in challenging this monopoly—most ATS offer trading in unlisted securities (often corporate or government debt instruments). ATS that have successfully offered trading in listed securities are usually members of the exchange (for example, market makers on Nasdaq) and the liquidity offered on the ATS interacts with that on the host exchange. The exchanges have responded to the threat ATS’s pose to their monopoly with attempts to tighten up execution rules so that liquidity is directed to the exchanges. ATS can also compete by attracting its own listings—essentially acting as an exchange—for example, virt-X in the UK and Europe originated as an ATS (Tradepoint) and has now become a full-fledged exchange.
The IOSCO Objectives and Principles of Securities Regulation (1998) require regulators to have licensing and supervisory authority over the exchange in most cases. Although some jurisdictions the regulator does not have licensing authority, the regulator may have a role in approving the demutualization through its role as supervisor.
Many regulators do rely exclusively on exchanges to carry out regulation of public companies—all public companies are required to list and the exchanges are required to review and approve disclosure documents and compliance with disclosure requirements.
Securities regulators will also carry out fit and proper assessments of owners, directors and officers of the exchange as they would for any market participant.