Changes in the Ownership structure of Stock Exchanges: from demutualisation to self-listing.

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1 Abstract Changes in the Ownership structure of Stock Exchanges: from demutualisation to self-listing. G. Chesini Historically most exchanges were not-for-profit organizations owned by their members. Over the past few years, there has been a trend among exchanges to consider alternative governance structures to these traditional mutual or cooperative models. In most cases, the exchanges have been transformed into for-profit shareholder-owned enterprises. In particular, the most important European stock exchanges, following their demutualisation, have recently become public companies listed on their own exchanges. These changes were induced by an increase in competition among exchanges, due to technological progress and to deregulation (EU Directive 93/22/CEE). However these changes raise a number of questions and concerns regarding, for example, the increase of conflicts of interest among the regulators, the shareholders and the principal customers of the exchange. Keywords: Stock Exchange, de-mutualisation, self-listing, conflicts of interest, regulation. Introduction Following the enforcement of the Directive 93/22/CEE on investment services in the securities field 1, the technological development, which has reduced distances between markets, and the increasing competition, the Stock Exchanges 2 have leaned towards corporate structures alternative to the traditional mutual or co-operative models. They have changed into autonomous legal entities, usually public limited companies, with all managerial instruments necessary to compete in highly dynamic markets, just like any other economic subject. The process, commonly called demutualisation, involves the separation of shareholding from operators' membership and, in some cases and after a while, it also involves listing of the securities belonging to the companies managing the markets, often on the same circuits they manage and regulate. To explain the ongoing change, it should be considered that getting adjusted to the most advanced technologies involves considerable investments and the increased competition between Stock Exchanges and between these and the electronic trading systems 3 requires Stock Exchanges to become more efficient in every activity they perform, including their decision-making process. This requires considerable financial 1 See Directive 93/22/EEC, may 11, 1993 Investment Services Directive. 2 With the words Stock Exchange we tend to identify many different aspects of the same object; for example sometimes we mean equity market; after the Directive 93/22/EEC we mean a regulated market with precise characteristics; finally following demutualisation process, Stock Exchanges are regulated and managed as normal enterprises; in this work when we deal with Stock Exchange we mean the company managing regulated markets. 3 For electronic trading systems we refer to Alternative Trading System (ATS); see ANOLLI M., Elementi di economia del mercato mobiliare, Il Mulino, Bologna, 2001, p. 145 e p

2 means and resorting to the market, by listing one's own securities, may represent the most appropriate solution since it usually leads to improved Stock Exchange's image as well as to the right evaluation of the company. As a consequence, it could contribute to facilitate mergers and alliances between Stock Exchanges 4. After all, the processes of demutualisation and listing, even though they represent an answer to the challenges posed by regulatory evolution and increased competition, are characterised by some intrinsic positive values: they urge Stock Exchanges to create value for their own shareholders through constant improvement of their structures with the goal to offer to operators a wide range of more efficient services. 1. Factors Leading to Changes in Stock Exchanges' Ownership Structure The Stock Exchanges, and especially European ones, over the years have been operating in a poorly competitive environment. National authorities' pursuing of protectionist policies as well as operators' preferences have contributed to create natural monopolies for domestic securities trading. Because of certain factors which increased the level of competition in the sector, the scenario changed completely in the nineties and urged concrete changes also with regard to the ownership structure of Stock Exchanges themselves. The main factors leading to this greater competitiveness between Stock Exchanges could be considered: technological development, which facilitates mutual relations between Stock Exchanges and between operators; homogenised regulations, which reduce "national barriers" between markets and Stock Exchanges; finally, increased equity investments driven also by investors' greater financial awareness and culture. Such factors urge Stock Exchanges to look for more efficient market structures, able to increase trading volumes, by pursuing - whenever possible - economies of scale and economic diversification. Besides strengthening the structures and rationing the production chains nation-wide, competition fosters greater communication between Stock Exchanges which, from mere competitors, may become allies or partners in building up more efficient market models. Following the pattern shown in Table 1, the major features of what contributed to increase competition between international securities markets are outlined in order to understand the forces urging Stock Exchanges to modify their ownership structure. a) Technological development The technological development of information processing and transmission has partially eroded the Stock Exchanges' traditional operative environment, thus fostering competition between securities markets. In fact, technological progress tends to reduce the production and distribution costs of the trading services that are traditionally offered by Stock Exchange; it makes markets compatible with one another and better integrated, both by removing operative differences, if adopting the same electronic 4 See IOSCO, Issues Paper on Exchange Demutualisation, Report of the Technical Committee of the International Organization of Securities Commissions, June

3 trading systems, 5 and by reducing frontiers between markets and investors; the latter can in fact operate on foreign markets as easily as they would on their domestic market. Table 1 - Factors leading to changes in Stock Exchanges' ownership structure Factors leading to change: a) technological evolution b) homogenisation of regulations c) growing securities investments increased competition between Stock Exchanges strategies: d) pursuing efficiency of services offered by Stock Exchanges e) Stock Exchanges' consolidation process The strategies call for changes in the ownership structure of Stock Exchanges Technology not only leads to competition between markets, but, thanks to the new compatibility between the different trading circuits, it also widens the markets and sets up the bases for new alliances between Stock Exchanges 6. In general, through closer and closer relationships between Stock Exchanges, communication intensifies and may represent, at the same time, an opportunity or a threat for the individual markets. In terms of opportunity, in a less and less protectionist regulatory environment, markets can form alliances thanks to which considerable critical masses can be reached so that network externalities 7 can originate. 5 See FABOZZI F., MODIGLIANI F., Mercati finanziari, Il Mulino, Prentice Hall International, Bologna, 1995, pp See ALEMANNI B., La concorrenza nella exchange industry, in Nuove frontiere dei mercati finanziari e della securities industry, Newfin, collana Banca e Mercati n.25, Bancaria Editrice, Roma, 2001, p The search for increased market liquidity drives the markets toward compatibility and increased coordination. Compatibility increases demand for transactions, but can also increase competition as the services offered by the compatible networks become more similar in dimensions that are of importance to traders. Thus, compatibility is not immediately desirable to a network, which has to balance the benefit of increased demand with the drawback of increased competition ; see ECONOMIDES N., Network 3

4 The threat is instead represented by the new competitors who can play with the networks' technological compatibility and take away shares from traditional Stock Exchanges, as it has been the case, over recent years, with the Alternative Trading Systems (ATS), that are automated trading systems alternative to traditional circuits 8. Financial innovation driven by technological developments has lead to the creation of these structures - definable as "quasi-stock exchanges" - that are specialised in trading securities that are listed in other Stock Exchanges 9 and, with different modalities, perform services similar to those offered by the regulated markets, though they are sometimes regulated in a different way 10. Alternative Trading Systems (ATS) have the same economic function as Stock Exchanges, that is, they most effectively bring into contact buyers and sellers of securities. The competitive disadvantage for Stock Exchanges results from the fact that the European regulation considers the ATS as intermediaries/operators and attributes to them no responsibility when, instead, they operate as markets 11. b) Homogenisation of Regulations Having approved the Directive 93/22/CEE - currently called Investment Services Directive (ISD) - which defines the regulated markets, the European Commission has created the right conditions for a single market of the European securities industry. The Directive defines as regulated market the securities market with the following features 12 : it is included in the list of regulated markets; it operates regularly; it is characterised by regulations issued and approved by the competent Authorities which define the conditions for market activity, the norms to have access to the market and, if applicable, the rules regulating admission to listing; it requires that listed companies and intermediaries meet the requirements of transparency and of information to the public. What is noteworthy within the scope of this analysis is that the Directive in question, besides granting mutual recognition and home-country control to all investment firms, has urged each regulated market to offer remote access to intermediaries of the other Economics with Application to Finance, in Financial Markets, Institutions & Instruments, vol.2, n.5, December 1993, pp These ATS include a variety of trading approaches. For example, systems such as Instinet, Island and Tradebook, allow market participants to convey firm orders at specific prices to other market participants and then execute those orders in these systems. Alternatively, crossing networks, such as those operated by Instinet and POSIT, allow investors to enter orders to execute against corresponding orders at prevailing market prices ; see MACEY J.R., O HARA M., Regulating Exchanges and Alternative Trading Systems: a law and economics perspective, in CONSOB, Quaderni di finanza, n.27, may 1998, p See BANFI A. (a cura di), I mercati e gli strumenti finanziari, UTET, Torino, 1998, p On May 23, 1996, the Securities and Exchange Commission issued a major Concept Release concerning the regulation of alternative trading systems that could lead to a fundamental restructuring of the securities markets in the United States, and have significant implications for the competitiveness of America s capital markets. In particular, certain conceptions of market structure described in this release could affect significantly the ability of U.S. firms to innovate in the field of financial services ; see MACEY J.R., O HARA M., Regulating Exchanges and Alternative Trading Systems: a law and economics perspective, op. cit., p See ARCUCCI F., Il futuro mercato dei capitali in Europa fra Borse ufficiali e ATS, in Banche e Banchieri, n.1, 2001, p See European Union Directive 93/22/EEC, may 11, 1993 Investment Services Directive, art.1, 13. 4

5 countries 13. With regard to Stock Exchange operators, the Directive actually defines that every authorised intermediary must be allowed to become member of the markets as well as to have operational access to the regulated markets of the other countries; operators can then perform trading abroad, if convenient, without any national barrier. After defining the regulated markets within the European Union, on the way towards harmonisation, - as requested by the European Council of Cardiff in June on 20 th January 1999 the European Commission approved a document on how product and capital markets of the Community should function 14. This document shows how Europe is mostly relying on the financial service sector to foster economic growth, improve productivity and create new jobs; in addition, the document identifies a strong fragmentation of securities markets which needs to be overcome 15 through standardisation of the existing regulations in the several national markets. The abovementioned Directive has in fact led to the creation of uniform basic conditions, though, later on, the need for a uniform regulation, which could facilitate the consolidation processes already underway in the sector, became manifest. Despite the desire to create a single market of goods and services operating in a monetary union system, the Treaty of Maastricht 16 proved to be incomplete in terms of financial market integration since no article thereof mentions it explicitly. In such respect, recently the pressing question emerged on whether it would be more advisable to pass a new European Treaty, to emend the existing one or to make individual national supervisory Authorities co-operate with the Community bodies in order to speed up the process of regulatory integration of the securities markets See CESARINI F., Il processo di evoluzione delle borse in Italia e in Europa: tra presente e futuro, in Bancaria, n.2, 1998, p See EUROPEAN COMMISSION, Economic Reform: Report on the functioning of Community product and capital markets. Presented by the Commission in response to the conclusions of the Cardiff European Council, January 20, As part of the Council s response to the Commission s Framework for Action, efforts are needed to encourage the emergence of an integrated platform which will permit EU-wide trading of securities on the basis of a single-listing (if the full benefits of the single currency are to be reaped). While market forces are driving change, there is a role for co-ordinated action at EU level to deal with technical bottlenecks and remaining legal obstacles. Closet collaboration among supervisory agencies, already underway, will be increasingly important. The Commission will develop a clear statement of priority actions to complete a single financial market in full collaboration with the Financial Services Policy Group ( ) ; see EUROPEAN COMMISSION, Economic Reform: Report on the functioning of Community product and capital markets. Presented by the Commission in response to the conclusions of the Cardiff European Council, January 20, 1999, p On November 1, 1993 the European Union (EU) officially came into existence. This development was a result of the treaty signed by the member states of the European Community (EC) in Maastricht on February 7, The Maastricht Treaty establish a European Union whose aims included the promotion of economic and social progress through the creation of an area without internal frontiers and through economic and monetary union ultimately including a single currency. Other aims were the development of a common foreign and securities policy. Soon after the EU came into existence, the European Economic Area was also created (January 1, 1994) ; see SCOTT-QUINN B., EC Securities Markets Regulations, in Steil B. (Editor), Financial Market Regulation, Wiley, New York, 1995, p. 162; for a detailed analysis of the Treaty of Maastricht, as modified by the Treaty of Amsterdam (October 2, 1997), see EUROPEAN UNION, Selected instruments taken from the Treaties, Book I, Volume 1, Luxemburg, 1999, pp See SPAVENTA L., Annual meeting with financial markets, Speech of the chairman of CONSOB, April 5, 2001, pp

6 In May 1999, the European Commission, with a Communication, identified the essential goals to create a single market of financial services, suggesting the necessary regulatory measures and the related timing for enforcement 18. Such Communication, called Financial Services Action Plan 19 (FSAP), was worked out following the discussions within the Financial Services Policy Group (FSPG) - chaired by the Commission itself and consisting of Finance Minister representatives of the EU Member States and of the European Central Bank. In July 2000, when the aggregation of the main European Stock Exchanges seemed to be imminent in the project called ix 20, a Committee of Wise Men was set up with the task to study the regulatory systems that are most adequate to the new scenario of alliances and mergers between Stock Exchanges coming into sight in Europe. On 15 th February 2001, the Committee of Wise Men published the final report on the regulation of the European securities market 21 which followed a preliminary report 22 presented on 20 th November The report makes precise and innovative recommendations both to the European Union institutions and to the European securities industry as a whole. The document consists of two parts; in the first one, it is highlighted that there are more than forty regulatory structures in Europe, all of them having different powers and competencies; besides, the present regulatory system seems to be too slow and rigid to successfully meet financial market's requirements 23 ; in this respect, the necessary actions are identified in order to build up an integrated financial market within the European Union and the deadlines each individual EU Country must meet are specified. In the second part of the report, the Committee of Wise Men advise against the use of the traditional regulatory procedure under the European Parliament's control, and urges, instead, to formulate proposals to be rapidly introduced into the regulation already in force with no need to change it. In this respect, a new regulatory procedure is outlined on four levels in order to more effectively govern the securities industry in Europe. In order to implement the new regulatory procedure, the Committee of Wise Men suggested to set up two committees, both established in June : a regulatory committee called European Securities Committee (ESC) and a committee with advisory functions called European Securities Regulators Committee (ESRC). 18 See EUROPEAN COMMISSION, Communication of the Commission, Financial Services: Implementing the framework for financial markets: Action Plan, May 11, 1999, COM(1999) See CONSOB, Annual Report 1999, Roma, 2000, p L international Exchange (ix) was a project contemplating the aggregation between Deutsche Boerse and the London Stock Exchange; for a detailed analysis see REF.IRS, Borsa Rapporto Ref.irs sul mercato azionario, Il Sole 24 ore, Milano, 2001, pp See THE COMMITTEE OF WISE MEN, Final Report of the Committee of wise men on regulation of European securities markets, Brussels, 15 February See THE COMMITTEE OF WISE MEN, Initial Report of the Committee of wise men on the regulation of European Securities Markets, Brussels, 9 November See BANCA D ITALIA, Annual Report 2000, May 31, 2001, p Following the recommendations of the Committee of Wise Men on the Regulation of European Securities Markets, the European Commission created a European Securities Committee (ESC) and a Committee of European Securities Regulators (CESR). The two advisory Committees will play a crucial role in assisting the European Commission in implementing the Financial Services Action Plan (FSAP) and speeding up the legislative process ; see JEANNEAU S., Structural and regulatory developments, in BIS Quarterly Review, September 2001, p

7 Finally, it is worth stressing that, with regard to the stock exchange industry, the above-mentioned Directive 93/22/CEE - issued prior to ATS appearance - includes the principle that market participants should be divided into investors, brokers or dealers and into Stock Exchanges, each having a well-defined role and a specific discipline. In general, Stock Exchanges should guarantee a high degree of transaction transparency and no restriction to membership; in return, they can transfer their orders within the European Union overcoming national frontiers as well as place, with no restriction, their terminals in the Stock Exchanges of other Member States. The ATS do not have this latter advantage, they are subject to less disclosure obligations, but they have to negotiate with the supervisory bodies of each Member State 25 any relationship with subjects of other countries. Defining a level playing field is as important in the stock exchange industry as it is in the other financial sectors. The harmonisation of regulations in the European equities markets requires that subjects performing the same activity be regulated in the same way 26, and that the plurality of regulatory and control systems, on an European market which is no longer operatively segmented, be reduced if not eliminated. c) Increase in Securities Investments The enforcement by the Member States of the Directive 93/22/CEE and the creation of the Economic and Monetary Union (EMU) have contributed to "globalise" financial markets in Europe 27. On the one hand, the above-mentioned Directive, which aims at liberalising market access by creating a single market of financial services, has contributed to increase the number of foreign transactions as a result of changed investment choices made by the investors whose focus is sector-related rather than geographic. On the other hand, the EMU has contributed to further integrate the European financial market 28, considering that the Euro introduction has offered to investors greater investment possibilities due both to disappeared exchange risks and to the resulting increased diversification across sectors and regions 29. Expressing prices in Euros involves immediate comparability of the conditions applied by the different intermediaries and markets in terms of fees and of service costs 30. As a result, retail as well as wholesale investors show greater interest in the European securities market which involves increased demand for Stock Exchange services See CONSOB, Annual Report 2000, Roma, March 31, 2001, p See FESCO, The Regulation of Alternative Trading Systems in Europe. A paper for the EU Commission, September See TAGI G., Manuale di Borsa, Isedi, Utet, Torino, 2001, p See BARBIERI R., RONDELLI L., VACIAGO G., I mercati finanziari in Euro e l operatività delle banche italiane, in Quaderni dell Associazione per lo Sviluppo degli Studi di Banca e Borsa, n.161, 1998, p For investors the high degree of integration means that the Euro area has become a more attractive place for investment. However, higher integration also implies that there are fewer opportunities to diversify portfolios within the Euro area, thus providing incentives to focus more on diversifying across sectors or across regions ; see FRATZSCHER M., Financial market integration in Europe: on the effects of EMU on stock markets, European Central Bank, working paper series n. 48, march 2001, p See BORSA ITALIANA, La Borsa e l euro, Milano, dicembre, 1998, p See BANCA D ITALIA, Annual Report 2000, Roma, 2001, pp

8 As refers to retail investors, greater propensity for securities investment is observed as well as an increased tendency towards a do-it-yourself attitude as a consequence of a changed macroeconomic scenario - including reduced interest rates in Europe - and of greater diffusion of financial information 32. Thanks to the technological development and to the rapid spread of the Internet, investors have new possibilities to diversify their portfolio, to have more direct and immediate access to trading activities and to widen and customise the information set available. With regard to institutional investors, instead, they turn out to be managing a large portion of families' wealth consisting of listed shares. In particular, equity mutual funds have managed a large portion of such investments, also thanks to the proliferation of pension funds which invest more and more in mutual funds 33. d) Pursuing Efficiency of the Services Offered by Stock Exchanges Stock Exchanges are characterised by some constitutive and qualifying elements whose major ones could be summarised as follows 34 : a legal subject that is owner and responsible for market management; a physical and logistic market structure operators can refer to; specific requirements to admit companies or securities to listing; standardised sale contracts on the base of predefined contents and forms; "certified" intermediaries operators can refer to for their transactions; standardised trading procedures; supervisory bodies controlling the regularity of market functioning and the compliance with market regulation. In functional terms, the Stock Exchange grants to market participants the possibility to issue and trade securities, which is the core around which capital markets develop and the primary mechanism to form securities price; as a consequence, one of the main goal is to continue to create and increase transaction volumes. The strategy of a Stock Exchange which does not rely on public subsidies nor has natural barriers, is first of all related to how services are offered, considering that the structure of stock market costs is usually fixed regardless of traded volumes, whereas incomes are usually related to volumes 35. The main services offered by Stock Exchanges consist in enabling listing and trading of securities as well as providing financial information; said services are acquiring more and more specific features 36. In terms of listing services, the Stock Exchange must grant to issuing firms the possibility to widen the channels for capital collection on profitable terms by improving 32 See PREDA S., La tecnologia e la Borsa, in Bancaria, n.7-8, 2000, p See REF.IRS, Borsa Rapporto ref.irs sul mercato azionario, Milano, 2001, p. 96 e p See FORESTIERI G., MOTTURA P., Il sistema finanziario, Egea, Milano, 2000, p See CYBO OTTONE A., Strategia e struttura dei mercati organizzati di valori mobiliari, in Ferrarini G., Marchetti P. (a cura di), La riforma dei mercati finanziari, Edibank, Roma, 1998, p It is difficult to define competition among the exchanges because it is difficult to understand clearly what is the industry and what is the relevant market. On the other hand, an exchange can be seen as a large corporation that competes with other firms and is forced to produce the best price-qualityquantity combination feasible. (..) an exchange profits by increasing the volume of transactions that depend on the quality and the good reputation of the exchange and thus, the exchanges faces the same incentives to produce quality products (i.e., transaction services) as other business ; see DI NOIA C., The Stock-Exchange Industry: Network Effects, Implicit Mergers, and Corporate Governance, in Quaderni di Finanza, CONSOB, n. 33, marzo 1999, p. 19 e p

9 their visibility and reputation. Listing represents a remarkable source of income, though, over recent years, the rivalry between stock markets to attract major issuers has lead to a reduction of listing fees. Furthermore, when carrying out listing activities, Stock Exchanges must accurately define the conditions to admit companies' securities in order to attract as many issuers that deserve to have their entrepreneurial initiatives financed; in this respect, the most common strategy consists in fragmenting the markets, or rather, in creating specific circuits that are able to meet the special requirements of homogenous categories of companies, issuers and investors. With regard, instead, to trading services, the evolution of communication means in connection with technological development makes access costs less and less significant and the "production process" is characterised by the possibility to achieve considerable economies of scale. As a consequence, justifying differences in trading fees due to technical factors becomes more and more difficult and, in general, European stock exchanges are leaning towards greater functional and tariff homogeneity 37. The levelling of trading costs for final investors is also the result of the above mentioned stock exchange competition with ATSs. As previously said, the latter only perform trading activities and, thanks to the technological progress of European markets, they can operate on the stock markets simultaneously and offer to their customers trading services at homogenous prices. Considering this, Stock Exchanges should offer to investors efficient trading systems, or rather, guarantee minimised trading costs and a proper level of price discovery 38. Competition calls for greater and greater exchange flows to be pursued by reducing transaction costs and using technologies that can effectively attract more and more informed and demanding operators. In addition to that, it should also be pointed out that operators do not consider only trading costs 39 but they also require low fees for the overall service, that is trading and post-trading. So, even if post-trading, i.e. clearing and settlement services, may be completely independent of stock exchange structures, the overall service offered to the customer should be characterised by low costs and high quality; this increases pressure towards consolidation and co-operation between the main clearing and settlement service suppliers and urges Stock Exchanges to make a vertical integration thus guaranteeing that such structures charge non-discriminatory and transparent prices for their services. e) The Process of Stock Exchanges' Consolidation In order to cope with increasing competition, Stock Exchanges, besides improving their own offer of services, may decide to set up relationships with other companies managing the markets; in particular, there are basically three types of possible 37 See IRS, Borsa Rapporto Irs sul mercato azionario, Il Sole 24 ore, Milano, 2000, p See WELLS S., Price Discovery and the Competitiveness of Trading Systems. A report to the FIBV Annual Meeting, Brisbane - 3 October 2000, September For a detailed analysis of the theoretical aspects of transaction costs see PETRELLA G., La microstruttura di un mercato di titoli sottili, in Quaderni di ricerca del Dipartimento di Scienze dell Economia e della Gestione aziendale, n.4, Università Cattolica del Sacro Cuore, Milano, 2000, pp

10 relationships 40 : 1) absence of co-operative relations; 2) alliances between companies that manage the market with the purpose to set up networks; 3) aggregations between Stock Exchanges which can be either implicit, if intending to offer remote access to traders with reciprocity 41, or explicit, if involving the setting up of a new company for market management. The former type of relations - open competition 42 - was more of a winning option in the past, as limited technological development led to great geographic segmentation of individual Stock Exchange activities. At present, that model seems to be outdated since the available technology makes it impossible for a Stock Exchange to get adjusted to environmental changes without being influenced by the other financial markets. Nevertheless, should a Stock Exchange decide to follow such strategy, it gains advantage from a certain degree of operational flexibility - i.e., ability of Stock Exchanges to get adjusted to environmental changes - since there is no need to coordinate the activity with other Stock Exchanges. The corporate governance of the subject in question is independent of other Stock Exchanges and, through aggressive competition, aims at gaining greater and greater market shares. In the network, instead, the several participating Stock Exchanges recognise a "common interest" which motivates and urges them to set up co-operative relationships 43. The trust resulting from such co-operative relations between the parties is important and, in general, involves shared rules and values. Despite being independent of the other market-companies belonging to the network, the corporate governance of each Stock Exchange needs to be co-ordinated with the baselines of the co-operative relations it belongs to. The relationships between Stock Exchanges belonging to the network usually start with a medium/long-term perspective, though they run the risk to be only temporary if, over time, they are not consolidated by actual achievement of the goals set with the cooperation agreement. Finally, the third type of co-operation involves an aggregation project of Stock Exchanges which may consist in exchanging property shares in order to consolidate a long-lasting relation. In this latter case, competition between Stock Exchanges disappears and the exchange of shares, according to the relative value attributed to each Stock Exchange, usually represents the legal base of the relationships between the markets. The shares conversion ratio regulates, in fact, how ownership is configured as well as how the decision-making power is expressed within the economic entity resulting from the 40 See LUCARELLI C., Gli accordi internazionali fra mercati, in Nuove frontiere dei mercati finanziari e della securities industry, Newfin, collana Banca e Mercati n.25, Bancaria Editrice, Roma, An implicit merger between two exchanges consists of an agreement such that the set of securities, originally listed in one exchange, is listed by the other exchange and remote access is offered to the traders of each exchange, with reciprocity and without further requirements ; see DI NOIA C, The Stock- Exchange Industry: Network Effects, Implicit Mergers, and Corporate Governance, op. cit., p See CHESINI G., Concorrenza e integrazione tra i mercati finanziari regolamentati nell Unione Europea, in Savio G. (a cura di), Dalla Comunità Economica Europea verso l Unione Europea: problemi e prospettive per il futuro, vol. 5, CEDAM, Padova, 2000, p The essential relationship between the components of a network is complementarity. (...) Further, to realize the benefits of complementarity, the components require compatibility and coordination. (..) In a financial network, besides the technical aspects of compatibility, there is a need for coordination in time and place ; see ECONOMIDES N., Network Economics with Application to Finance, op. cit., p

11 aggregation. The new company should then create a new management to be perceived by the whole structure as a reference point in defining strategies and solving internal conflicts 44. The corporate governance unitarity of aggregated Stock Exchanges increases the ability to get adjusted to external changes; in particular, such single management structure grants greater promptness to react to opportunities or threats coming from the external environment so that homogenous and effective management measures can be taken. Within the consolidation process which has been taking place over recent years, the relational model of the network type has so far shown greater chances of implementation 45, because, it not only prevents a Stock Exchange from predominating over another, but it also proves to be more flexible and so able to overcome obstacles resulting from poorly harmonised regulations and from debates originating when an individual Stock Exchange needs to be valued for the shareholders. 2. Demutualisation of Companies Managing Regulated Markets The juridical nature of Stock Exchanges affects and is affected by the transformation process so far analysed, however, it shows considerable differences between the countries considering the basic features of the financials systems. Traditionally, Stock Exchanges in the Anglo-Saxon countries (United States, United Kingdom and Australia) are legal entities with private ownership whose members may be intermediaries, listed companies and other subjects interested in the activities of a Stock Exchange 46. Though public powers exert some degree of control, it is the Stock Exchange, through its own management bodies, that decides how demand and offer of undertakings' venture capital should meet 47. Stock Exchanges in Continental Europe, instead, have traditionally been public entities 48 and have often operated in monopolistic conditions 49 ; urged both by community regulations and by competition, recently they have manifested the need to lean towards privatistic models 50. In particular, as shown in Table 2, in the second half of the nineties, following the evolutionary forces described above, some European Stock Exchanges have analysed their own ownership structure which was mostly characterised by a not-for-profit organisation owned by their own members. The debate, internal and external to European Stock Exchanges, resulted in the need to change into public limited companies through privatisation, when the markets were state-owned, and demutualisation, when they were owned by members See LUCARELLI C., Gli accordi internazionali fra mercati, op. cit., p See IRS, Rapporto irs sul mercato azionario 1999, Il Sole 24 ore, Milano, 1999, p See ARCUCCI F., Il futuro mercato dei capitali in Europa fra Borse ufficiali e ATS, op. cit., p This differentiation remind the well known classification between bank-based and market based; financial systems; see NARDOZZI G., Il mercato azionario: quale modello per l economia italiana?, in Ente Einaudi, Oltre la crisi. Le prospettive di sviluppo dell economia italiana e il contributo del sistema finanziario, Il Mulino, Bologna, As far as the italian case is concerned, see PADOA-SCHIOPPA T., La piazza finanziaria italiana: la sfida della privatizzazione, in Banca d Italia, Bollettino Economico, n.28, febbraio See FERRARINI G., La regolamentazione europea delle Borse: nuove prospettive, in Banca Impresa Società, n.3, See FORESTIERI G., MOTTURA P., Il sistema finanziario, op. cit., p See ALEMANNI B., La concorrenza nella exchange industry, op. cit., p

12 Table 2 - Main operations of privatisation/demutualisation Stockholm Stock Exchange (1993) Simex (1999) Helsinki Stock Exchange (1995) Hong Kong Stock Exchange (1999) Copenhagen Stock Exchange (1996) ParisBourse (2000) Amsterdam Exchange (1997) Toronto Stock Exchange (2000) Italian Stock Exchange (1997) PCX Equities (2000) Australian Stock Exchange (1998) London Stock Exchange (2000) Iceland Stock Exchange (1999) Oslo Exchanges (2001) Stock Exchange of Singapore (1999) Nasdaq ( first phase 2000; second 2001) Athens Stock Exchange (1999) Source: Our formulation taken from the IRS Institute, Borsa IRS Report on equity market, "Il sole 24 ore", Milan, 2000, p The motivations urging Stock Exchanges towards demutualisation are basically three: 1) the need to obtain financing from different sources; 2) the need to diversify and enlarge the number of shareholders; 3) the advisability of separating the owner's function from that of market user by including a share of "external" ownership in the "internal" ownership structure made up of members. What characterises Stock Exchanges owned by members is that owners, decisionmakers and direct users of trading services are usually the same subjects, i.e. the member companies. Decisions are made considering that one member counts one vote; ownership rights aren't usually freely negotiable and cease upon termination of the membership condition. Furthermore, such mutual companies are usually able to collect capital only from their own members 52. Vice versa, most Stock Exchanges organised as public limited companies require three different subjects, i.e. owners/shareholders, decision-makers and customers. The shareholders influence the decision-making process through the Board of Directors to be elected and renewed by shareholders themselves; shareholders' voting rights are usually proportional to their economic interests in the company, i.e. the rule according to which one share corresponds to one vote applies and, finally, the public limited companies may collect capital from several sources and in different ways. In this latter case, the nature of the principal-agent relationship, between ownership and management, becomes important. In fact, the increasing complexity and importance of Stock Exchange services was followed by a decrease in the role directly played by the ownership and, as a consequence, by an increased management's power 53. With regard to ownership, it is generally observed that it is divided among intermediaries, issuers, investors, management and public authorities. The role and interests of financial intermediaries are very important because they are, often at the same time, shareholders/members, users of trading services and, finally, competitors. The predominance of a group of interest over another may significantly affect the position acquired by the Stock Exchange in the ongoing competition. 52 See CYBO OTTONE A., Strategia e struttura dei mercati organizzati di valori mobiliari, op. cit., pp See IRS, Borsa Rapporto IRS sul mercato azionario, op. cit., p

13 Following the transformation into public limited companies, Stock Exchanges, in addition to the characteristics previously mentioned, may take several forms, each involving different problems for the corporate governance of the same. Some Stock Exchanges, once demutualised, became public companies with their own securities listed on the trading circuits managed by the same; other Stock Exchanges were privatised but they remained private companies; some others are companies controlled by holding companies with listed securities 54. It is worth mentioning that when shares are listed on a market managed by the Stock Exchange, they can be purchased by any investor, whereas it was more often observed that companies managing privatised/demutualised Stock Exchanges, due to strategic reasons, decide not to list immediately Stock Exchange securities, thus restricting property of the shares to specific and well-known groups of holders. This latter solution safeguards, in fact, Stock Exchanges both from undesired shareholders and from potential hostile takeovers. A recently published study 55 has highlighted the differences identified in the balance sheet values of the companies managing the markets with regard to their legal status. The study shows that "demutualised" Stock Exchanges have become for-profit entities and, just like any other enterprise, they have to make profits to distribute dividends to shareholders and to remunerate capital. An analysis of Stock Exchanges' return on capital shows that the stock exchange industry yields good rates of return. In the sample in question, Stock Exchanges have registered an average rate of return of 22 percent on 1999 capital, as compared to 21 percent in 1998 and 16,5 in The Stock Exchanges with the highest profits are "demutualised" ones with an average of 45 percent return in 1999, which is definitely higher than the 37,4 percent obtained in 1998 and 17,7 in On the contrary, the least profitable Stock Exchanges are those registered as associations/co-operatives, with a 9,6 percent return on capital in 1999, that is a decrease compared to a 16,6 percent in The high yield of "demutualised" Stock Exchanges shows how successful their commercial strategy is; at the same time, the analysis of returns on capital confirms that the legal status is consistent with the business goals set by each Stock Exchange. What so far observed about Stock Exchanges, would not differ a lot from what could be said of other entrepreneurial activities, except for the fact that a fair and efficient financial market is a public good and a well-managed Stock Exchange represents a key element of the capital market. The State is in fact a Stock Exchange stakeholder due to the public value of the securities market. An effective and efficient stock market facilitates wealth transfer between units in surplus and those in deficit and allows for an appropriate economic development to the advantage, not only of direct negotiators, but of the whole community. In such conditions, a regulatory and supervisory action of competent authorities is usually justified 56. Since securities markets performing well represent a public good, the companies managing the markets - now with a private nature - have to endeavour to meet the needs of every actual or potential subject "interested in the market": intermediaries, issuers 54 See IOSCO, Issues Paper on Exchange Demutualisation, op. cit., p See INTERNATIONAL FEDERATION OF STOCK EXCHANGES (FIBV), Cost and Revenue Survey, 1999, Paris, See IRS, Borsa Rapporto IRS sul mercato azionario, op. cit., p

14 and investors, Italian and foreign operators 57. This requires Stock Exchange's activities to be regulated in order to protect the public interest, as well as to apply proper rules of corporate governance. Privatisation and demutualisation of the companies managing the markets, together with self-regulation, have paved the way to possible conflicts between the individual interests of the intermediaries participating in the capital of the management company and the interests of the company itself, which should converge with public good that is to say a transparent, liquid and efficient market offering opportunities of valuable investments 58. With regard to conflicts of interest, as already mentioned, they are likely to occur since the companies managing the markets are organisations established by shareholderintermediaries who can regulate the markets to their own advantage and not necessarily in compliance with the public interest 59. It is reasonable to think that, in the event of divergences between Stock Exchange shareholders and non-shareholder intermediaries, the company managing the market is induced to "defend" its own shareholders even to the disadvantage of general interest 60. In such situation, a conflict arises from the Stock Exchange's double function: market management and supervision over proper market functioning 61. In order to prevent this, it is believed that ownership of the companies managing the markets should be little concentrated, highly differentiated in its components and, possibly, take advantage of qualified foreign intermediaries in order to foster competition as well as increase national markets' transparency and importance 62. Since corporate governance of the companies managing the markets is directly influenced by regulation 63, an analysis both of public regulations of companies managing the markets and of self-regulation of the companies themselves becomes important since this latter regulation is sometimes more representative of the economic interests of their own shareholders. The main factors affecting Stock Exchanges' corporate governance could be representation on the Board of Directors of the company managing the markets and the possible conflicts of interests arising within the Board itself See PADOA-SCHIOPPA T., L'Eurosim trasforma il sistema finanziario, in Bancamatica, n.10, 1997, p For a more detailed analysis see FERRARINI G., Autoregolamentazione e governo delle Borse: modelli a confronto, in CONSOB. Quaderni di finanza, n.23, dicembre See TAGI G., Borse valori tra alleanze e sinergie, in Banche e Banchieri, n.3, 2000, p (..) while self-regulation can be a useful supplement to government regulation in disciplining members for fraud and dishonest commercial activities since in such cases the interests of almost all of the members (of an exchange) are likely to be coincident with the public interest, the same coincidence of interest is not likely to exist with respect to situations involving economic conflicts between members or with non-members ; see LEE R., What is an exchange? The Automation, Management and Regulation of Financial Markets, Oxford University Press, New York, 1998, p See ISTITUTO PER LA RICERCA SOCIALE (IRS), Rapporto sul mercato azionario 1998, Il Sole 24ore, Milano, 1998, p See AUTORITA GARANTE DELLA CONCORRENZA E DEL MERCATO, BANCA D ITALIA, Indagine conoscitiva sui servizi di finanza aziendale, Supplemento n.1 al Bollettino settimanale, N. 39, 1997, p See LEE R., What is an exchange? The Automation, Management and Regulation of Financial Markets, op. cit., pp See CHESINI G., La regolamentazione e l organizzazione dei mercati regolamentati di strumenti finanziari, CEDAM, Padova, 1999, p

15 With regard to representation on the Board of Directors, the management company should try to obtain wide representativeness of all groups of interest; besides, a portion, though limited, of Board members should consist of non-shareholders of the management company 65 ; fair representation should be then guaranteed when selecting the Directors of the management company's main functions; in particular, some of the appointed Directors should represent issuers and investors as well as subjects that are non-shareholders of the company managing the markets 66. Finally, with regard to conflicts of interest, they need to be recognised, minimised and effectively managed by means of rigorous regulations providing for complete transparency of decision-making processes. 3 - Motivations Urging Stock Exchanges to Apply for Listing of their Securities Advantages and Disadvantages of Listing Following the failed project of aggregation between the Deutsce Börse and the London Stock Exchange - definitely concluded in September the main European market management companies started to consider other possible aggregation solutions which could include also Stock Exchanges not jet involved in any consolidation process. As previously mentioned, one of the strategies recently implemented by "demutualised" Stock Exchanges concerns the listing of shares on ones' own negotiation circuits 67. In general, it is up to market management companies to decide to list one's own securities and this in connection with specific needs, such as, among the most important ones, the possibility to get enough resources to grow autonomously, or to negotiate alliances with other Stock Exchanges from a stronger position or, with regard to public offerings for exchange, the possibility to use one's own securities to take-over a competitor. What is most important in self-listing, is fairness and impartiality of the Stock Exchange when asked to regulate itself as a listed company. The Stock Exchange which self-regulates itself as a listed company may end up in conflicts of interests that are even greater than those examined with demutualisation, since it could be induced to "bend" rules to its own advantage. The degree of conflicts of interest may differ according to how Stock Exchange securities are admitted to regulated markets and to the discretionary power granted to the Stock Exchange in regulating companies applying for listing. Market regulations or non-discriminatory behaviours - commonly adopted when listing companies' securities - might be ineffective when the Stock Exchange is allowed 65 For example, an exchange is first required to guarantee that various interest groups are each given meaningful representation on its governing board. In interpreting this rule, the Commodity Futures Trading Commission (CFTC) has allowed much leeway to each exchange to establish a board composition that the exchange believes is most appropriate to its market. ( ) The second statutory constraint imposed on exchanges is that they must ensure that no less than 20% of the regular voting members of their boards are <nonmembers> ; see LEE R., What is an exchange? The Automation, Management and Regulation of Financial Markets, op. cit., p See BORSA ITALIANA, Codice di Autodisciplina, Milano, ottobre See IOSCO, Issues Paper on Exchange Demutualisation, op. cit., p

16 to regulate its own listing. In general, potential conflicts of interest are reduced when the securities of one Stock Exchange are admitted to trading through an admission procedure which is co-ordinated by another Stock Exchange or by another supervisory authority. For this reason, when market management companies decide to list their own securities, the task to examine and approve the listing project - though for other companies it's their own concern - is usually transferred to other subjects in order to prevent conflicts of interest. Once securities are admitted to Stock Exchange trading, however, other conflicts of interest may arise which need to be properly identified in order to arrange procedures that guarantee Stock Exchange's fulfilment of its obligations - not only as market management company but also as listed company - and that negotiations are managed and supervised so to comply with the public interest and not with Stock Exchange's specific interests. With trading, the Stock Exchange may cause conflicts of interest against other listed companies which, due to their activities, could end up in competition with the Stock Exchange itself; just consider, for instance, a company managing an Alternative Trading System (ATS) and listed on the same circuit of the company managing the stock markets 68. In such event, there is a double deterrent to unfair or discriminatory behaviours of Stock Exchanges operating in conflict of interest: 1) if the issuer, for instance the above-mentioned company managing the ATS, perceives any possible unfair behaviour of the Stock Exchange, it can ask to have its securities listed on another regulated market; 2) the Stock Exchange's reputation is important: any unfair behaviour - if identified and made public - would involve greater disadvantages than the advantages the Stock Exchange is trying to obtain. If said conflicts of interest are settled, listing involves considerable benefits for the Stock Exchange, in terms of image, as well as for the investors and the financial market. In particular, the Stock Exchange gets greater "visibility" and liquidity of its own securities which encourages others to apply for listing on the same trading circuits; investors get better transparency on prices and profit from higher liquidity; finally, also the financial market takes advantage from Stock Exchange's better reputation, greater transparency and higher liquidity. All things considered, besides an increased risk of conflicts of interest - more likely to occur in the securities admission phase, in trading management and, last but not least, in any case of hostile take-over - listing involves also advantages for Stock Exchanges as well as costs which are worth analysing. Among the main advantages inducing Stock Exchanges to apply for listing of their securities, the following could be summarised 69 : Greater funding, when necessary, through direct access to the market in order to carry out: - programmes of investment in new technologies, such as investments in new trading platforms that, once implemented, lead to cost saving; - better co-operation or aggregation relationships with other Stock Exchanges within the framework of the undergoing consolidation process between management companies; 68 See IOSCO, Issues Paper on Exchange Demutualisation, op. cit., p For a detailed analysis of the pros & cons of going public, see ONADO M., Mercati e Intermediari Finanziari. Economia e regolamentazione, Il Mulino, Bologna, 2000, pp

17 Correct assessment of the Stock Exchange's market value in order to deal with other competitors on the base of sure values thus accelerating the aggregation process with the other markets; Permanent interest in implementing strategies able to increase the Stock Exchange value for shareholders; Better visibility and reputation; if market management companies, like any other enterprise, are well-managed, they get "costless" publicity on specialised press; Reduced agency costs as regards the relationship between shareholders and managers who understand the take-over risk as a kind of market discipline. The listing process involves, however, also some possible negative effects for the Stock Exchange, also with regard to the costs of the process itself, which include, among the others: Fees paid to consultants, overhead costs related to admission to trading circuits in addition to the costs involved in greater transparency, being the listed company subject to greater publicity and disclosure obligations; Difficult definition of the "value for the shareholder" when considering an intermediary or an issuer who holds shares of the company-market in which it operates, or is even listed in. In such event, in fact, not only the economic value of those shares needs to be assessed, but also the benefits in terms of efficiency and functionality for the subject who operates in the same Stock Exchange it is shareholder of 70 ; The greater "purchasability" on the market of the Stock Exchange itself which can become object of hostile take-overs: when listed, the property tends to spread and, as a consequence, the control over the company becomes purchasable, i.e. it can be gained on the financial market in several ways, including the public offering which is the most common one; Difficult strategic medium/long-term investments without providing proper justification to shareholders; these latter, in fact, realising increased costs without any related earnings increase, would consider selling their shares convenient thus reducing the share price of the Stock Exchange itself. In general, Stock Exchanges, before deciding to list their securities, commission studies in order to ascertain that costs and problems involved in listing are duly offset by expected benefits. It is not by chance that most Stock Exchanges took at least one year to go from demutualisation to self-listing Some Cases of Listing of Companies Managing Regulated Markets Recently, European Stock Exchanges have often resorted to listing - usually on the same main list they manage - and this, as previously said, raises not negligible issues in terms of ownership structure of the same market management companies and in terms of the most suitable corporate governance. Furthermore, it also puts questions on the appeal that an equity investment of this kind can have for operators/savers. The process of self-listing in Europe has already involved the three largest Stock Exchanges in terms of capitalisation and number of listed companies, i.e. the London 70 See LUCARELLI C., Gli accordi internazionali fra mercati, op. cit., p

18 Stock Exchange (LSE), the Deutsche Börse and Euronext - as well as the Bank of Stockholm which is controlled by one of the most technologically advanced partners at international level, the OM Gruppen. This phenomenon becomes even more important considering that also the Helsinki Stock Exchange, that of Oslo and, recently, the Italian Stock Exchange have done projects to assess the real chances of success of listing their securities on their own trading circuits. In particular, with regard to the Helsinki Stock Exchange, the Board of Directors received in December 2000 the report which was especially commissioned to verify if they were qualified for self-listing. The report shows no legal obstacle to be admitted on the circuits managed by the Stock Exchange itself. As a consequence, upon completion of all following analyses on feasibility and specific listing modalities, the Board of Directors can apply for admission to listing. At present, ownership of the shares of the group to which the Helsinki Stock Exchange belongs - the Hex Group - is not freely transferable 71 ; in order to prevent the owners from coming into conflict with the interests - private and public - of the group, a subject, or a group of companies, intending to purchase at least five percent of the Group's shares, or related voting rights, must inform the supervisory authority - the Financial Supervision - about its intention within the given times; said authority can object to such share purchase if believed to jeopardise the activity of the group. With regard to the Oslo Stock Exchange, the share offer was closed on 22 nd May 2001 with an increased number of shareholders and underwritings 3,2 times higher than the number of shares offered 72. Self-listing is scheduled for the next months; it was not carried out immediately after demutualisation in order to organise the operation carefully enough and to verify any response of the market. For the time being, the shares are negotiable in a private circuit managed by the Association of Norwegian Stockbroking Companies. Finally, as far as Italy is concerned, the privatisation process was completed at the end of 1997 with the creation of the Borsa Italiana s.p.a 73. Since 1998, the Borsa Italiana has been operating as market management company; one of its competencies involves securities' admission to the Stock Exchange, activity which, pursuant to Stock Exchange regulations, must follow non-discriminatory modalities in compliance with generally defined procedures. On 19 th June 2001, the President of the Borsa Italiana summoned the Board of Directors to examine the project of listing the company-market. The project includes - like any other enterprise intending to be listed in the new STAR segment - a public offering in order to guarantee a float of thirty-five percent of stock capital, by the end of The listing would imply greater disclosure and milder control by the main intermediaries, whose individual ownership share is, however, already subject to a maximum limit of 7,5 percent. Furthermore, the listing of Borsa Italiana, involving the 71 See HELSINKI EXCHANGES GROUP (HEX), Annual Report 2000, Helsinki, Approximately 250 investors had applied to purchase shares when the offer closed at hrs on Monday 21 May, in addition to approximately 70 employees. The offer comprised a total of shares representing the entire share capital of Oslo Bors Holding ASA. Prior to the offer period the share price was expected to be between NOK 75 and NOK 95 ; see OSLO EXCHANGES, Oslo Exchanges share offer heavily oversubscribed, press release, 22 May For a detailed analysis of the privatisation process, see CHESINI G., La regolamentazione e l organizzazione dei mercati degli strumenti finanziari, op. cit., pp

19 entrance in the shareholders group of subjects other than Italian intermediaries, should benefit the company's corporate governance thanks to greater diversification of the ownership structure. The admission to listing, which was autonomously carried out by Borsa Italiana in compliance with the procedure adopted for the other companies - evokes however, once again, the above-mentioned risk of conflicts of interest; in this respect, the CONSOB (Italian Commission for Companies and Stock Exchange), the Italian stock exchange supervisory authority, has undertaken to express its opinion on the formal fairness of the listing process proposed by Borsa Italiana. In order to offer an overview of the listing processes having taken place over recent years, with no pretence at completeness, the main features of the listing process of the following market management companies will be outlined: the Australian Stock Exchange (ASX), which was the "forerunner", and, with regard to Europe, the OM Stockholm Borse AB, the Deutsche Börse, the Euronext and, finally, the London Stock Exchange (LSE). i) Australian Stock Exchange (ASX) On 19 th October 1996, the members of the Australian Stock Exchange (ASX) approved the transformation of the ASX from mutual company into a public limited company, thus separating the possibility to trade on the markets managed by the company from the ownership of the company itself 74. Even after demutualisation, the ASX continued to regulate stock markets, yet having to periodically report on its supervisory activities. The most remarkable change in the ASX activity occurred when it applied for listing on its own trading circuit in October In that instance, the Australian Securities and Investments Commission (ASIC) - the Australian supervisory authority - was empowered by law to regulate the ASX's listing in order to prevent any conflicts of interest. As a consequence, the ASX was not entitled to autonomously control the compliance with listing regulations nor to supervise the trading of its own securities. Following a Memorandum of Understanding between ASIC and ASX, an agreement was reached on the division of tasks which mainly concerned: listing procedures, requirements to apply for listing, commissions, supervisions, trading and clearing procedures and the information for the market. Despite a division of tasks between the Stock Exchange and the supervisory authority, after listing was completed, cases of conflicts of interest occurred anyway between the ASX itself and the companies listed on the same trading circuit In November 1997 the Federal Government enacted amendments to the Corporations Law which allow ASX to convert from a mutual company, limited by guarantee, to a public limited company. (The Corporations Law Amendment (ASX) Act). The legislation in response to a request from ASX, following a vote of the stockbroker members of ASX in The change from a mutual structure to a for-profit structure will mean that ownership can reflect the broad range of key shareholders in ASX and will allow ASX to better respond to domestic and internationally competition. The role of ASX in supervising the compliance of stockbrokers with ASX Business Rules and the compliance of listed companies with the Listing Rules will not be affected by the change ; see CENTRE FOR CORPORATE LAW AND SECURITIES REGULATION, Recent ASX developments, in Corporate Law Electronic Bulletin, n.5, January See IOSCO, Issues Paper on Exchange Demutualisation, op. cit., p

20 It should be observed that, according to Australian Law, no subject can hold more than fifteen percent of ASX shares; in fact, failing a "fit and proper" requirement for Stock Exchange shareholders, the law provides for a limit to shareholding. In November 2000, with enforcement of the Financial Services Reform Bill, the Australian Government granted to ASIC greater supervisory power over Stock Exchanges 76 and clearing houses under the obligation to report to the Government how such supervising function is carried out. In return, ASX established a controlled company, called ASX Supervisory Review Pty Limited, endowed with a Board of Directors consisting of a majority of independent directors having the task to supervise ASX's activity. ii) The OM Stockholmsborsen AB OM Stockholmsborsen AB was the first market management company in Europe to apply for listing. As it is known, with the resources collected through listing, it dared to try an hostile take-over bid of the London Stock Exchange in the Summer In order to understand the present role of OM Stockholmsborsen AB, it is necessary to think back to 1992, as the Securities Exchange and Operations Act was approved in Sweden. This Act, by allowing competition between Swedish Stock Exchanges and the other regulated markets, put an end to the Stockholm Stock Exchange's monopoly. The same law empowered the Swedish Finansinsspektionen (SFI) to grant authorisation to manage a Stock Exchange and to perform other stock-market operations. Both the Stockholm Stock Exchange 77 and the OM 78 became authorised Stock Exchanges as the Act was enforced in In the same year, the Stockholm Stock Exchange was demutualised; shares were allotted to listed issuers and to Stock Exchange members and they haven't been freely negotiable for one year. As shares became transferable, no restriction to their possession was imposed. Since 1994, OM has been continuously increasing its shares of the Stockholm Stock Exchange, so that by the end of 1997 all Swedish Stock Exchange shares were acquired by OM; therefore, the merger between Stockholm Stock Exchange and OM became possible 80. The Stock Exchange resulting from such merger was renamed OM Stockholmsborsen AB and it is still today completely controlled by OM. The company corporate governance was rearranged: for instance, whereas the Board of Directors of the Stockholm Stock Exchange consisted of twenty-two members, 76 Australia currently has three operational stock exchanges; the Australian Stock Exchange (ASX), the Stock Exchange of Newcastle Limited (NSX) and BSX Limited (located in Bendingo). Both ASX and NSX are specifically recognised in the current law and NSX has recently undertaken a process to reactivate the exchange following a period of lengthy dormancy. BSX Limited has recently been approved as a stock exchange under the law ; AUSTRALIAN TREASURY, Inquiry into the framework for the market supervision of Australia s Stock Exchanges, February The Stockholm Stock Exchange was born in 1863; it was recognised as public organization under regular inspections in 1919 and it has become an electronic trading systems in OM was created in 1985 as an investment company which mainly was dealing stock options and making clearing functions. 79 See IOSCO, Discussion paper on Stock Exchange Demutualisation, December 2000, pp See CHESINI G., La regolamentazione e l organizzazione dei mercati degli strumenti finanziari, op. cit., p