Latin American Capital Markets

DEMUTUALIZATION OF EXCHANGES 277would diminish the ability of exchanges to engage in effective self-regulation. A potentiallyserious conflict is the regulation of an ATS market by an exchange that functionsas a self-regulatory organization (SRO).These conflicts could become manifestin discrimination through sanctions imposed in disciplinary proceedings, unfairness innot being permitted to participate in particular activities, or discrimination with respectto fees charged.In the United States, stock exchanges engage in self-regulation in four areas:listed company governance and disclosure; surveillance and discipline of their marketsand specialists, floor brokers, and market makers; member firm financial and operationalcompliance; and fair and equitable treatment of customers. Commodities' exchangesare not engaged in issuer corporate governance regulation, but they regulatetheir markets and members. Both the NYSE and NASD run arbitration facilities fordisputes between members and disputes between members and customers, but customerreparations proceedings against commodities intermediaries can be prosecutedbefore the Commodity Futures Trading Commission (CFTC). In other countries,exchanges also act as SROs and conduct some or all of these functions inconjunction with public oversight. In many countries, exchanges have been responsiblefor enforcing public disclosure by listed issuers.NYSE listing requirements go back to the nineteenth century and stem froma concern about the quality of the securities sold on the exchange. These requirementswere intended to facilitate an efficient, continuous auction market by settingminimum numerical standards for capitalization, number of shares, and shareholders,by establishing disclosure requirements, and by specifying certain shareholder protectionor corporate governance mechanisms (Michael 1992). The NYSE developedthese requirements because it recognized that standards were good for its businessand could give the exchange a competitive advantage. When NASDAQ was organized as an electronic market, it also established listing qualifications in order to preserveand improve the quality of and public confidence in its market. 9If the NYSE and NASDAQ become public companies, it will perhaps beanomalous for them to negotiate listing agreements with themselves and then supervisecontinuing compliance with such agreements. For this reason, when the Stockholttand Australian stock exchanges went public, government regulators were assigned thtask of overseeing disclosure by the exchange to shareholders. 10 On the other hand,exchanges will continue to have a motivation to market themselves as lists of quality9 See NASD Rules 4300,4310, NASD Manual (CCH), pp. 5271-79.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub10 In the United States, however, the Securities and Exchange Commission already has this authority.