Latin American Capital Markets

DEMUTUALIZATION OF EXCHANGES 275as such, but operated as a not-for-profit mutual organization regulated by the chamberof commerce. It had no right to build up capital, and the fees it charged membersand issuers could not exceed its costs (Ryden 1997). Members could trade seats,which could not be purchased or sold. Although the exchange was a legal monopoly,trading volume was low due to a turnover tax, which sent the primary market in manyissues to London.Then, in the late 1980s and 1990s, the political climate changed, andthe turnover tax and currency control were repealed.This led to a decision to privatizethe exchange and modernize trading.The Australian Stock Exchange also was demutualized in response to technologicalchange and international competition. A member of the exchange developedan electronic crossing system, and another organization started a bulletin boarttype of trading network for unlisted securities (Humphry 1995). In addition to developingnew trading platforms and mechanisms, the exchange determined that it hadto be more responsive to the needs of market users, particularly investors and issuers,and to that end it was no longer appropriate for individual stockbrokers to controlthe exchange.In 1987, when the Australian exchanges combined, 627 out of 693 memberswere natural persons, that is, individuals (Donnan 1999). In 1993, the Australian StockExchange proposed that individual membership be abolished and that membershipbe confined to corporations, but this proposal failed. 6 Therefore,the exchange formedthe Governance Task Force of board members and senior exchange management anda panel of stockbrokers from each state. The exchange commissioned an independentconsultant to prepare a report—the Hogan, Stokes Report—on the future ofexchange corporate governance (Hogan, Stokes Pty Limited 1996). Although theAustralian Stock Exchange was not a legal mutual society, it was a company limited byguarantee with no shares and thus had the essential feature of mutual, collective ownership.Theexchange was prohibited from paying profits or income to members, andthe surplus was applied toward promoting the objects of the exchange (Donnan1999). Members had a guarantee liability of at least $ 1,000 in the event of a windingup, in addition to the exchange's power to impose levies and fees.To the extent that competition or regulation did not control market power,mutual governance had the potential to give stockbroker members of the exchangecontrol of the price, quality, and range of services it produced (Hogan, Stokes Pty Lim-6 Although individuals were offered $25,000 to surrender membership, and a resolution to change to corporatemembership achieved the support of 69 percent of the members, the resolution failed because 75 percent of thevote was required.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub