Latin American Capital Markets

270 ROBERTA S. KARMELcapital markets; the Philippines Stock Exchange is in the process of demutualizing andthe Kuala Lumpur Exchange is planning to do so in the future.As evident in the increasing trend toward demutualization, many exchangeshave opted for this structure primarily for strategic reasons. Until recently, trading atmost exchanges was floor based, with a limited number of members having access tothe floor Today, exchange trading is electronic, with some notable exceptions. Thishift from floor-based to electronic trading is part of the demutualization story becauseliquidity no longer exists in a physical location, and it is no longer in the best interestsof an exchange to be dominated by floor members. Rather, an electronic exchangemay wish to put its terminals and screens in as many locations as possible.Thmost obvious consequence of demutualization is a change in an exchange's governancestructure. The need to change governance in response to technological andcompetitive pressures is an important driver of demutualization.Another change accompanying demutualization is regulatory readjustmenTTtraditional aspect of stock exchanges is self-regulation. When an exchange becomesa for-profit, shareholder-owned corporation, in the context of competitive markets,questions are raised as to whether all of the previous regulatory responsibilities remainappropriately in a self-regulatory framework or whether some responsibilitiesshould be shifted to government regulators.Therefore, demutualization has promptedreform, or at least reexamination, of securities regulation, although the circumstancesof demutualization and regulatory reform are not the same in all countries.The objective of this chapter is to present the story behind demutualizationand examine the key factors driving this trend.The chapter demonstrates that thereare significant public policy, governance, regulatory, and strategic ramifications for exchangesand jurisdictions that opt to demutualize. Furthermore, the chapter identifiesthe relevance for emerging economies, the regulatory implications of this trend, anpossible responses within an overall regulatory framework Although demutualizationis not a panacea for emerging economies trying to jumpstart their capital marketsttis a policy alternative that is relevant given the confluence of pertinent factors.OverviewThe International Organization of Securities Commissions (IOSCO 2000) points outthat a key regulatory issue is whether for-profit exchanges, which compete with otherexchanges and electronic networks, will undermine the commitment of resources andcapabilities that a stock exchange needs to effectively fulfill its regulatory and publicCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub