Self-Regulation in
Securities Markets
John Carson – World Bank Consultant
MD, Compliax Consulting Inc.
IOMA / IOCA Conference
Mumbai, India
May 2011
Paper commissioned by:
IFC/World Bank Securities Markets Group
COMPLIAX
Reliance on SROs – Models
GOVERNMENT
MODEL
• Public authority
performs most or all
regulatory functions.
Exchanges have
very limited role.
Trend towards
this model
LIMITED
EXCHANGE SRO
MODEL
STRONG
EXCHANGE SRO
MODEL
• Exchange
performs front-line
regulatory functions
for its market
• Exchange as SRO
performs extensive
regulatory functions
• Member dealer
SRO performs
extensive regulatory
functions
Trend away from
this model
Only developed in
a few countries
Most prevalent
model
INDEPENDENT
SRO MODEL
• UK
• US (NYSE)
• US (CME)
• US (FINRA, NFA)
• France
• Hong Kong (HKEx)
• India (BSE, NSE)
• Canada (IIROC)
• Emerging model in EU
• Singapore (SGX)
• Brazil (BSM)
• Japan (JSDA)
• Sweden (OMX)
• Japan (TSE)
• Korea (KOFIA)
• Australia (ASX)
• Malaysia (BM)
COMPLIAX
2
Key International Trends
1. Value of self-regulation has increasingly been questioned
2. Reduced reliance on SROs (esp. in Europe)
3. Exchange SROs’ roles cut back due to conflicts
•
Independent SRO units if Exchange retains important role
4. Self-regulation is stronger and more credible in many countries
that rely on it.
5. Move to more independent governance and away from Member
control
6. SROs must be responsive to broader stakeholder interests
7. Stronger oversight and direction from statutory regulators
COMPLIAX
3
Exchange SROs’ Reduced Roles
1. Reduces conflicts of interest in self-regulation.
2. Positions Exchanges to focus on product and market
development, and competitiveness.
•
•
•
Business focus
Reduced costs
Participants and issuers are mainly treated as customers
3. Fosters competition among marketplaces.
4. Public regulators are often more effective regulators.
•
Much broader jurisdiction and power
5. Public regulators may impose higher and more
consistent standards of regulation.
COMPLIAX
4
Managing SRO Conflicts of Interest
1. Separate governing body to oversee regulatory operations
2. Separate organizational structures for regulatory and business
operations
3. Firewalls to separate regulatory operations from business or
advocacy operations
4. Separate and secure premises for SRO operations
5. Contract out all or part of the SRO’s regulatory responsibilities
6. Establish policies and procedures on managing conflicts of
interest.
COMPLIAX
5
Main Lessons for Emerging Markets
1. SRO frameworks might be a valuable addition to an effective
regulatory framework.
2. But there is no single “right” approach.
•
Each market’s approach is based on its size, complexity and existing
institutions – and public policy.
3. The traditional “closed club” SRO is no longer valid.
4. Demutualization does not preclude an Exchange’s SRO role,
but requires a new framework and reassessment of functions.
5. The Independent SRO model has many advantages – but also
presents big challenges (building a new organization, costs,
regulatory capture).
COMPLIAX
6