The Technical Committee of the International Organization of Securities Commissions, which is chaired by OSC chairman David Brown, has just published an Issues Paper that looks at the regulatory concerns arising from stock exchange demutualizations that have
taken place in different jurisdictions.

“At its heart, the issue is whether the commercial pressures of a for-profit entity will undermine the commitment of resources and capabilities of the exchange to effectively fulfill its regulatory and public interest responsibilities to an appropriate standard,” the committee states in the paper.

“There is no universal right regulatory path to follow. However, given the importance of an exchange in the financial and economic system of a country and the additional complexities posed where an exchange becomes a for-profit entity actively competing for business, these issues will continue to demand regulatory attention.”

Among the issues it highlights are self-regulatory organization conflicts. “The conflicts inherent in an exchange regulating its competitors, while not new, become more apparent where the exchange is also a for-profit enterprise. If the exchange is the only provider of a particular required service, this monopoly position gives it greater ability to influence the
actions of its competitors. Moving to a for-profit enterprise may allow the exchange to enter into new businesses, thereby increasing the opportunities for conflicts between its regulatory role and those as a competitor in the marketplace.”

Self-listing however is a completely new conflict presented by demutualization. “If the exchange self-lists, can it function effectively as its own regulator? This is an even more fundamental conflict than those inherent in a self-regulatory organization. Does self-listing worsen the possible conflicts with overseeing competing entities or business associates that are also listed on the exchange?”

“Although conflicts of interest may never be completely eliminated in a self-regulatory environment regardless of the form the exchange may take, whether for-profit or not-for-profit, the challenge is to create an environment in which conflicts are recognized, minimized and managed effectively.”

The paper notes that there are also concerns surrounding exchanges as public goods. “In determining whether any special requirements should apply to a demutualized exchange, regulators need to consider the whole of the existing regulatory and market framework, including any statutory obligations, general corporate governance regime, and public transparency and accountability requirements. The needs of an exchange as a commercial entity entitled to organize its affairs like all other businesses, free of unnecessary encumberment, should also be taken into account.”