Demutualization of Stock Exchanges

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DEMUTUALIZATION OF STOCK EXCHANGES
PROBLEMS, SOLUTIONS AND CASE STUDIES

Edited by

SHAMSHAD AKHTAR
Director, Governance, Finance and Trade Division, East and Central Asia Department, Asian Development Bank

© Asian Development Bank 2002 All rights reserved.

The views expressed in this book are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors or the governments they represent. The Asian Development Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequences for their use. Use of the term “country” does not imply any judgment by the authors or the Asian Development Bank as to the legal or other status of any territorial entity.

ISBN 971-561-475-2 Publication Stock No. 100602 Published and printed by the Asian Development Bank P Box 789, 0980 Manila, Philippines .O.

CONTENTS

Foreword Principal Authors Abbreviations

xiii xv xxi

PART I : ISSUES INVOLVED IN STOCK EXCHANGE DEMUTUALIZATION
1 Demutualization of Asian Stock Exchanges— Critical Issues and Challenges by Shamshad Akhtar 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 Introduction Demutualization: Its Definition, Size and Significance Motivation and Driving Factors for Demutualization From Mutuality to Demutualization of Exchange Benefits of Demutualization of Exchanges Regulatory Oversight: Challenges and Responses for Demutualized Exchange Financial Viability of Demutualized Exchange Conclusion 3 3 4 5 8 12 19 25 29

2
2.1 2.2 2.3 2.4 2.5 2.6

Background Information on Demutualization
by Pamela S. Hughes Introduction What Demutualization Means The Reasons to Demutualize The Models An Update Since Demutualization Conclusion 33 33 33 36 40 43 47

Demutualization of Stock Exchanges—Problems, Solutions and Case Studies

APPENDIX

1 : The Models

48

3

Motivations, Mechanics and Models for Exchange Demutualizations in the United States by Roberta S. Karmel 3.1 3.2 3.3 3.4 Overview Reasons for Demutualization How Demutualization is Accomplished Post-Demutualization Models 59 59 61 65 70

4

The Structure of a Demutualized Exchange— The Critical Issues by David Holthouse 4.1 4.2 4.3 4.4 4.5 4.6 4.7 Introduction Ownership Corporate Governance Access Rights Risk Management Financial Management Conclusion 73 73 73 77 80 81 82 83

5

Demutualization of Exchanges— The Conflicts of Interest (Hong Kong) by William Pearson 5.1 5.2 5.3 5.4 5.5 5.6 5.7 Structure of Exchanges Regulatory Role and Self-Regulation Public Policy Objectives of Stock Market Regulation Why Should Demutualization Require a Reassessment of SRO Functions? What Responses are Being Developed to Deal with These Problems? Conclusion Hong Kong’s Framework: Listing of HKEx and the Framework for Dealing with Conflicts of Interest 85 85 88 91 92 95 99 100

iv

Contents

APPENDIX

1 : Hong Kong Exchanges and Clearing Limited: Reinforcing Hong Kong’s Position as a Global Financial Centre—A Policy Paper 2 : Memorandum of Understanding for the Listing of HKEx on SEHK 3 : Section 13 of the Exchanges and Clearing Houses (Merger) Ordinance 4 : Chapter 38 of the Rules Governing the Listing of Securities on the Stock Exchanges of Hong Kong Limited 5 : Procedures to Deal with Conflicts of Interest

105 114 131

APPENDIX APPENDIX APPENDIX

133 138

APPENDIX

6

Demutualization of Exchanges—The Conflicts of Interest (An Australian Perspective) by David Holthouse 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 Introduction Background to Conflicts An Exchange’s Listing Regulation of Other Listings Supervision of Intermediaries Profit Motive versus Supervisory Function Public Interest versus the Exchange’s Commercial Interest New Business Lines Conclusion 145 145 146 148 149 149 150 152 153 154

7

Demutualization of Exchanges—The Conflicts of Interest (The Australian Regulator’s Experience) by Claire Grose 7.1 7.2 7.3 Introduction...
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