Exchange Consolidation and Models of International Securities Regulation

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INTRODUCTION

In recent years, globalization and a growing demand for capital have increased competition within the capital markets for the business of issuers and investors. (1) This has led stock and derivatives exchanges to change their business models from mutual business entities, run for the benefit of their members, to demutualized corporations, run for the benefit of shareholders. (2) Consequently, as for-profit corporations, exchanges have looked to position themselves more competitively in an internationalized securities market. Part of such positioning has included increasing exchange alliances and acquisitions on a global scale. This is highlighted by the recent merger between the New York Stock Exchange (NYSE) and Euronext (the new entity to be known as NYSE-Euronext). With financial markets now spilling across national borders, demutualized exchanges see opportunities for growth and expansion by consolidating internationally.

However, these changes have put securities regulators in the position of trying to stay ahead of the curve, as exchanges--often seen as once historic landmarks of national pride--push the limits on cross-border consolidations. Traditionally, "[f]inancial exchanges come with a lot of political, cultural, and emotional baggage." (3) Yet, the current activity of exchanges is challenging traditional models of securities regulation. This note highlights the role demutualized exchanges are playing in the convergence of international securities regulation and evaluates the extent to which exchange consolidation fits within one traditional theoretical framework applied to international securities regulation. In practice, cross-border exchange consolidation is largely shaping the path regulators are taking with respect to cross-border securities regulation. However, securities regulation will always remain bound by national borders in certain important respects.

Part I of this article will provide some background to exchange demutualization and explain the driving factors behind an increased competition among capital markets. Part II will introduce the traditional theoretical models of international securities regulation. It will focus on the idea of international "convergence" of regulatory standards and set forth examples of convergence (or the lack thereof) within, and between, the United States and the European Union. Part III will analyze how exchanges have recently influenced international regulatory coordination as illustrated by the merger between NYSE and Euronext.

I. DEMUTUALIZATION AND COMPETITION FOR CAPITAL MARKETS

A. Brief History of Exchange Demutualization The first stock exchange demutualized in 1993. (4) Prior to this, exchanges were run as mutual businesses. Mutual businesses consist of private members rather than shareholders and are run by managers for the benefit of members, not for public profit/ In demutualizing, exchanges take on the form of a "public corporation--the most efficient organizational form for large enterprises." (6) In doing so, exchanges seek the benefits of responding to competition, basing decision-making on shareholder value, pursuing new business strategies, unlocking members' equity values, and facilitating business partnerships] Since 1993, over twenty-one stock exchanges have demutualized. (8) This trend is not limited to stock exchanges; derivatives exchanges have also demutualized. (9) By 2006, several major exchanges worldwide had demutualized or changed their business structure to allow for shareholders. These exchanges include, among others, Euronext (itself the result of a consolidation of five exchanges in England, Belgium, France, the Netherlands, and Portugal), (10) NYSE, Chicago Mercantile Exchange, Chicago Board of Trade, London Stock Exchange, Tokyo Stock Exchange, Deutsche Boerse, Australian Stock Exchange, and Hong Kong Stock Exchange. (11)

B. Factors Driving Exchange Demutualization and Competition

Exchange demutualization, among other things, facilitates increasing competition within the "exchange business;" in other words, the business of providing a market where issuers can raise capital and investors can buy and sell securities. …