Latin American Capital Markets

DEMUTUALIZATION OF EXCHANGES 291to give up its floor, change its governance and regulatory oversight, and affiliate withtwo other European exchanges, one larger; one smaller. The Amsterdam experiencemay be of particular relevance to some Latin American exchanges, which may be toosmall to remain national champions, especially when confronted with competitionfrom U.S. exchanges.ConclusionTo date, there is not a body of evidence from which to argue that demutualization ofan exchange will increase the number of issuers choosing to list there or improve theexchange's liquidity. Nevertheless, an examination of the process of demutualizationdemonstrates that it can be a prod for securities law reform, regulatory change, andcorporate governance reform of the exchange. In particular; demutualization can beused as a vehicle for achieving greater transparency, accountability, and responsibilityat the exchange, three of the four core governance standards necessary to attract privatecapital. 51 The fourth standard, fairness to shareholders, should be an objective ofthe demutualized exchange, regardless of whether it chooses to go public. If the leadingexchange in a country sets an example of good governance, it is in a better positionto encourage good governance in its listed companies.Stock exchange demutualization also gives government securities regulatorsthe opportunity to examine the balance between government regulation and selfregulationand to make adjustments to the legal regime for securities law disclosureand trading as may be necessary and appropriate. This may result in an increase ingovernment regulatory authority, but it may also lead to devolution of authority tothe private sector in the form of improved self-regulation or other accountabilitymechanisms. One observer has argued that much self-regulation is wholly consistentwith profit-maximizing behavior (Steil 2002). Yet, since the fundamental purpose ofsecurities regulation is to protect investors, there is a limit as to how effective a regulatora for-profit organization can be.It should be stressed that, although demutualization is a response to many ofthe technological, economic, and political forces to which exchanges are subject intoday's world, it is first and primarily a change in the exchange's governance. It generallyis part of a process of transforming an exchange from a member-controlled organization,governed by committees seeking consensus, to an organization led by pro-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub51 Holly j. Gregory, "The Globalization of Corporate Governance," Director's Monthly, August 2001, p. 9.