IOSCO Examines Evolution of Exchanges; Proposes Additional "Good Practices"
Commentary by Glen Barrentine
In a Consultation Report, the International Organization of Securities Commissions ("IOSCO") examined the impact to supervised exchanges from recent shifts toward "demutualization," outsourcing and the diversification of activities such as data services and technology provision.
According to the Report, the transformation of exchanges from mutual ownership to for-profit entities, known as demutualization, has contributed to increased competition, technological advancements and the emergence of new types of trading venues. IOSCO stated that most exchanges now also engage in other diverse activities such as data services and technology provision.
IOSCO reviewed the regulatory requirements and supervisory arrangements currently in place across IOSCO jurisdictions. Considering its "Principles on Secondary Markets," IOSCO proposed "good practice" recommendations for regulators:
On Organization of Exchanges and Exchange Groups
- IOSCO recommended that regulators assess the organizational structure of the exchanges in order to ensure decision-making autonomy and independence regarding the discharge of an exchange's regulatory obligations. This includes ensuring that market integrity practices and controls are maintained at the level of the individual exchange, subject to domestic legal and regulatory requirements and regulatory discretion, even if the exchange is part of an Exchange Group.
- IOSCO recommended that regulators assess whether there are any potential conflicts of interest that may arise due to exchanges being part of an Exchange Group and in managing its commercial interest and regulatory obligations.
On Supervision of Exchanges and other Trading Venues within Exchange Groups
- IOSCO recommended that regulators assess whether exchanges under their supervision establish effective arrangements for market operations, including conflicts of interest management, corporate and operational governance and promote transparency of trading. (IOSCO noted that, regardless of the nature, size or complexity of the trading venue, it is important that regulators consider monitoring whether supervised exchanges have in place processes to deal with the evolution of their corporate structure and the potential conflicts of interest arising from it.)
On Supervision of Multinational Exchange Groups
- IOSCO recommended that regulators make use of mechanisms such as ad hoc cooperation, MOUs, supervisory colleges and regulatory networks to facilitate and support supervision and supervisory cooperation.
- IOSCO recommended that regulators monitor developments in the structure and ownership of the exchanges and Multinational Exchange Groups, to ensure that they continue to have the ability to supervise exchanges and trading venues that operate in their jurisdictions.
IOSCO is seeking feedback on the trends, risks and regulatory challenges set out in the report, along with the proposed best practices.
Responses are due by July 3, 2024.
Commentary
Over the last several decades, exchanges, globally, have moved from a non-profit entity member owned structure, to a for-profit structure owned by public or private investors. In the report, IOSCO describes this evolution together with the accompanying expansion by exchanges of business lines, the increasing tendency of exchanges to operate across geographic boundaries and changes in secondary, non-exchange, markets that have arisen alongside these changes. IOSCO then considers the impact of these changes from a regulatory perspective, including potential risks and challenges and outlines good practices that regulators may consider in the supervision of exchanges under these current conditions.