The London Stock Exchange

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1 The London Stock Exchange 15 CHAPTER 2 The London Stock Exchange 2.1 What is the London Stock Exchange? The market place The Main Market AIM Dealing on the markets Investors in the markets Regulation of the Stock Exchange The role of the Stock Exchange in the flotation process Admission and Disclosure Standards Future developments WHAT IS THE LONDON STOCK EXCHANGE? London Stock Exchange plc (the Stock Exchange) is a listed company. It has four principal areas of business: (a) (b) (c) (d) a market place for trading in company securities; a provider of trading platforms on which brokers can buy and sell securities; a supplier of market information to the financial community, and a market place for trading in equity derivatives. The focus of this book is on the Stock Exchange s role as a market place for trading in a specific type of company securities shares. The Stock Exchange is at the centre of one of the world s three main financial centres London, New York and Tokyo with over 2,400 companies listed on it worth an estimated 4,000 billion, and is the most international stock market in the world, with companies from over 80 countries and territories, from the USA and China to Malawi, Bangladesh, Papua New Guinea and the Marshall Islands, listed on it. It also has one of the world s largest pools (and Europe s largest pool) of capital, with an estimated 2,500 billion available from UK-based sources, such as pension and insurance funds. 2.2 THE MARKET PLACE The Stock Exchange has two markets for shares, the Main Market and the Alternative Investment Market (AIM). Both markets serve two main functions. First, they enable companies to raise funds by issuing new shares to the public. This is referred to as the primary market for shares. Secondly, they allow those issued shares to be traded (bought and sold) by the public. This is referred to as the secondary market for shares. The Main Market has both a primary and secondary market, therefore, as does AIM. 2.3 THE MAIN MARKET The Main Market is the Stock Exchange s principal market for listed companies and is what the layman will think of as the stock market. This is the market on which the shares of many household-name companies, such as Vodafone, BP, HSBC and Marks & Spencer (as well as a host of lesser-known companies), are listed. Within the Main Market, there are specific groupings for certain sectors: techmark for innovative technology companies; landmark

2 16 Public Companies and Equity Finance 2.4 AIM for UK regional companies. There is also a High Growth Segment (HGS), established in 2013 for companies which may grow in size very quickly, such as internet-based companies. Note, however, that companies on the HGS, although part of the Main Market, do not have to join the Official List. They are therefore treated differently from listed companies. There are currently about 1,300 companies listed on the Main Market, which includes not only UK companies but also approximately 420 overseas companies. The 100 largest companies make up the FTSE 100, which is used as a measure for judging the market value of these Main Market companies at any one given time. It is this FTSE 100 value which is used in the press to describe the current market, for example when a newspaper headline states, The FTSE 100 has dropped below 5,000. The 100 largest companies are selected every three months. The AIM is the Stock Exchange s Alternative Investment Market. It is a global market for smaller and growing companies. The AIM is a separate market from the Main Market, and while some companies may choose to move from AIM onto the Main Market at some point (such as Sportingbet plc, the online betting company in May 2010), there is no obligation to do so. In fact, lately, the trend has been for Main Market companies to move to AIM (such as Pinewood Shepperton plc in June 2012), where the regulatory burden can be lower than on the Main Market, or to leave it altogether to avoid the regulatory burden and costs. There are currently approximately 1,100 companies listed on AIM (such as Mulberry, Glasgow Rangers FC, Prezzo and Majestic Wine), which includes over 350 overseas companies. The AIM has been a rapidly expanding market, but over the last couple of years the number of new admissions has slumped as a result of the global recession. As stated at 1.3 above, the focus of this book is on companies which are listed on the Main Market. However, Chapter 24 provides a brief overview of the regulation of AIM companies, compares AIM with the Main Market, and considers the advantages and disadvantages of joining AIM. 2.5 DEALING ON THE MARKETS Dealing (ie, buying and selling shares) is not an area in which a corporate lawyer typically will have much involvement. The focus of the lawyer s role is to help to bring a client company to the market successfully, and then ensure that the company is advised of the regulatory regime it must follow in order to maintain its listing. However, the corporate lawyer s clients may well have an in-depth knowledge of dealing and the markets, and those clients may be unsettled if the lawyer helping to bring the company to market has no comprehension of how that market works. The following, therefore, is intended to provide some basic information on the mechanics of dealing. There are two elements to buying and selling shares. The first is usually referred to as trading, and this is the process by which a seller is matched with a buyer. The second element is settlement, which is the process of paying the purchase price and transferring the shares Member firms Member firms carry out most of the trading on the Stock Exchange s markets. They are investment firms (banks, stockbrokers and fund managers) which trade either on behalf of clients, or on behalf of their firms. Examples of current member firms are Barclays Bank plc, Citigroup Global Markets, Crédit Suisse Securities, Deutsche Bank AG, Goldman Sachs International, Merrill Lynch International and UBS.

3 The London Stock Exchange Mechanics of trading The Stock Exchange has fully automated trading systems. This means that any pictures you may see of people shouting and waving on a trading floor are either very out-of-date (this was discontinued in London in 1986 after the Big Bang ), or show one of the stock exchanges abroad (eg NYSE) which retains that system. The Stock Exchange has devised various electronic systems for trading shares. These apply regardless of whether the shares are held in paper form (with a share certificate) or electronically (via CREST, see ). For the large Main Market-listed companies, including those on the FTSE 100 index, and for the most highly traded AIM-quoted companies, there is the Stock Exchange Electronic Trading Service (SETS), which is known as the order book. This electronic system matches buy and sell orders for the same shares and executes the trade automatically. A further system, SETSqx, supports the trading of shares in companies with turnover which is insufficient for the SETS system (such as the least liquid Main Market companies and most AIM companies). Finally, there is the Stock Exchange Automated Quotations (SEAQ) system for AIM securities not traded on SETS or SETSqx. With this system certain member firms act as competing market makers in relation to certain shares. They will set the buy and sell prices for these shares, using current news about the company, the market sector and the strength of demand for shares as a guide. Member firms acting as brokers will then buy and sell the shares when they think the price set by the market makers is right. On average, over half a million trades a day in shares are executed on the Stock Exchange s markets Settlement Once a share has been traded on the market, it needs to be transferred from the seller to the buyer, and the consideration monies need to be transferred from the buyer to the seller. This process is known as settlement. There is a risk during the time between the trade being struck and settlement being made that the transaction will fail (for example, if one of the parties is declared bankrupt). The settlement system discussed in covers shares held in uncertificated form only, as these represent the vast majority of shares traded on the Stock Exchange CREST CREST was introduced in 1996 and is a paperless (that is, the shares are held in electronic form and no share certificates exist, ie they are uncertificated) share settlement system through which trades on the Stock Exchange s markets can be settled. The system has legal backing under the Uncertificated Securities Regulations 2001 (SI 2001/3755). Euroclear UK and Ireland Limited operates this system. As the system is electronic and paperless, settlement can be made swiftly (within two business days of any trade), so the risk period between trade and settlement is reduced. Approximately 85% of the UK share market s value is voluntarily traded through CREST. There are various options for a shareholder wishing to hold shares through CREST. CREST member A CREST member must be linked up to CREST by computer network, so typically it is the member firms of the Stock Exchange (see above) who have this type of membership. CREST members hold shares as nominees for individual clients (institutional or private investors), so the name of the CREST member, rather than the client, will be entered into the company s register of members as legal owner. The client will be the beneficial owner of the shares.

4 18 Public Companies and Equity Finance Each CREST member has an identification number for itself ( participant ID ) and at least one other identification number for specific accounts it holds, such as an account for shares beneficially held on behalf of a specific institution ( member account ID ). CREST sponsored member This type of membership is designed to attract private investors (institutions and individuals). The benefit to the private investor is that its name will appear on the company s register of members (in contrast to the position if it holds shares through a CREST member, where the CREST member s name will feature on the register). Sponsored members who are individuals are known as personal members to distinguish them from sponsored members which are corporate bodies. However, one drawback is that the CREST personal member does not have the required computer link-up to CREST. A CREST sponsor, who will be a CREST member, will provide this for the sponsored member, and will charge for the service. Nominee shareholder Other investors who are not CREST members or sponsored members, who hold their shares in electronic form, will hold them as nominees. This means that the shareholder will be the beneficial owner of their shares rather than the legal owner, and the name of the nominee (usually a CREST member) will appear on the share register. The corporate lawyer and CREST In practice, the impact of CREST for the corporate lawyer is not dramatic. For example it may involve ensuring that some standard wording is drafted into certain documents, such as how CREST shareholders can accept an offer and receive consideration (in a takeover) or take up shares (when raising equity finance), or being aware of CREST shareholders when considering the mechanics of an AGM. Some standard wording is available on the Euroclear website. The lawyer should be aware that Stamp Duty Reserve Tax is collected on paperless share transactions such as the transfer of shares within CREST. CREST itself, however, is responsible for collecting this tax. 2.6 INVESTORS IN THE MARKETS Members of the public Members of the public have significant involvement with the Stock Exchange. They can invest directly in shares listed on the Main Market or on AIM, either in the primary market (by subscribing for new shares issued by a company on flotation) or in the secondary market (by buying or selling shares which are already in issue). They can also invest indirectly (because, for example, their pensions, other savings schemes or employment incentive schemes are tied up in the Stock Exchange s markets). Obviously, the aim of the member of the public who invests is to realise a healthy profit on the sale of the investment but, as has been seen all too clearly in the current recession, what is intended and what is achieved can be very different Institutional investors Institutional investors (also known as institutional shareholders), such as pension funds and investment funds, have sizeable funds available for investment. The amount they have available to invest means that institutional investors have considerable influence over the companies in which they invest. By way of example, BT plc has approximately 5,970 institutional investors who own around 90.03% of its issued share capital. One hundred and ninety-eight of them hold over 5 million shares each. By contrast, the remaining 928,090 shareholders (mainly members of the public) own 9.97%. The main institutional investors have formed their own representative bodies called Investment Protection Committees (IPCs). Well known IPCs include the Investment

5 The London Stock Exchange 19 Association (formerly the IMA) and the National Association of Pension Funds (NAPF). The IPCs issue guidelines as to how members should exercise their shareholder vote. While these guidelines do not have the force of law, listed companies do generally treat them as binding, such is the influence of the institutional shareholders. Chapter 14 looks at some of these guidelines in more detail. Chapter 8 also considers the role of institutional investors in relation to corporate governance. 2.7 REGULATION OF THE STOCK EXCHANGE Section 19 of the FSMA 2000 prohibits any person from carrying on any regulated activity in the UK unless that person is either authorised or exempt. This is known as the general prohibition (see 9.4). The Financial Conduct Authority (FCA) has granted a recognition order to the Stock Exchange under s 290 of the FSMA This means that the Stock Exchange is a recognised investment exchange and, therefore, under s 285(2) of the 2000 Act, is exempt from the general prohibition. To remain a recognised investment exchange, the Stock Exchange must continue to satisfy various requirements drafted pursuant to s 286 of the FSMA 2000, including the Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001 (SI 2001/ 995), as amended, and the rules in the specialist sourcebook, Recognised Investment Exchanges, which form part of the FCA Handbook of Rules and Guidance. These requirements include that the Stock Exchange must: (a) (b) (c) (d) ensure that business conducted by means of its facilities is conducted in an orderly manner and so as to afford proper protection to investors; make arrangements for the provision of pre-trade and post-trade information about share trading; make clear and transparent rules concerning the admission of securities to trading on its financial markets; and be able to promote and maintain high standards of integrity and fair dealing in the carrying on of regulated activities by persons using facilities provided by the Stock Exchange. 2.8 THE ROLE OF THE STOCK EXCHANGE IN THE FLOTATION PROCESS The Stock Exchange shares responsibility with the FCA for regulating IPOs. The FCA has responsibility for the official listing of securities in the UK. Chapter 3 considers this role more closely. The Stock Exchange has responsibility for admitting shares to trading on its markets. Any company seeking to be a listed company (as defined in 1.3 above) must seek to have its shares: (a) (b) admitted to listing on the Official List (for which it must liaise with the FCA); and admitted to trading on the Main Market (for which it must liaise with the Stock Exchange). Chapter 5 considers this process in more detail. 2.9 ADMISSION AND DISCLOSURE STANDARDS The Stock Exchange has its own set of rules for companies joining the Main Market (they do not apply to companies joining AIM). These rules are called the Admission and Disclosure Standards, and they set out the requirements for companies seeking admission to trading, as well as the continuing obligations for companies already admitted to trading. They apply to both companies incorporated in the UK and overseas. The Admission and Disclosure Standards are available on the Stock Exchange s website.

6 20 Public Companies and Equity Finance 2.10 FUTURE DEVELOPMENTS Trading Under ss 783 to 790 of the CA 2006, there is the power for BIS to make regulations to enable shares to be owned or transferred without written documentation. At the time of writing, no such regulations exist. Replacing paper share certificates and stock transfer forms with an electronic system is known as dematerialisation. The EU is currently in the process of agreeing a new regulation, the CSD (Central Securities Depositories) Regulation. This will standardise the procedure for the settlement of securities in the EU (see above for what settlement entails). As part of this new Regulation all shares in listed companies would have to be dematerialised and their shareholders would no longer be able to hold shares in paper form. The European Commission is aiming to have the CSD Regulation come into force by Current proposals suggest the Regulation will include a final deadline for dematerialisation of 2025.

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