IOSCO Recommends "Good Practices" for Regulating Exchanges
Commentary by Glen Barrentine
The International Organization of Securities Commissions ("IOSCO") recommended six non-binding "good practices" for regulators to "ensure that exchanges are properly run."
In its Final Report titled "Evolution in the Operation, Governance and Business Models of Exchanges: Regulatory Implications and Good Practice," IOSCO considered the implications of the shift from mutual ownership to for-profit entities (or "demutualization"). IOSCO said the shift introduced increased competition, technological advancements and the diversification of exchange activities into areas such as data services and technology provision.
In the Report, IOSCO reviewed the "regulatory requirements and supervisory arrangements currently in place across IOSCO jurisdictions" and "existing IOSCO Principles on secondary markets." IOSCO proposed the following good practices for regulators:
On Organization (for Exchanges and Exchange Groups)
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Ensure Autonomy and Independence. IOSCO recommended regulators assess whether exchanges maintain decision-making autonomy and independence in fulfilling regulatory obligations, including market integrity practices and controls, even when operating within an Exchange Group.
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Strengthen Compliance Expertise. IOSCO recommended regulators evaluate whether exchanges, particularly those within Exchange Groups, have the necessary arrangements, policies and expertise to independently meet their regulatory obligations.
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Address Conflicts of Interest. IOSCO recommended regulators identify and mitigate potential conflicts of interest that 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)
- Enhance Governance and Transparency. IOSCO recommended regulators ensure exchanges establish effective governance arrangements for market operations, conflict management and trading transparency. Monitoring processes should account for structural changes and potential conflicts of interest within Exchange Groups.
On the Supervision of Multinational Exchange Groups
- Facilitate Cross-Border Supervision. IOSCO recommended regulators use mechanisms such as ad hoc cooperation, MOUs, supervisory colleges and regulatory networks to strengthen cross-border supervisory frameworks and collaboration.
Monitor Structural Developments. IOSCO recommended regulators continuously monitor changes in the structure and ownership of Multinational Exchange Groups to ensure effective supervision of exchanges and trading venues within their jurisdictions.
Commentary
IOSCO's recommended "good practices" are rather basic and lack the detail and specifics of, for example, Regulation SCI ("Regulation Systems Compliance and Integrity")(17 CFR 242.1000 - 1007). As a result, these recommendations are likely to have little, if any, impact on how US regulators think about exchange regulation.
In the Report, IOSCO provides a good overview of the evolution of exchanges over the last two-plus decades, as well as an interesting discussion of the risks and challenges posed by these changes to the regulatory functions and responsibilities of the exchanges. Of interest to many readers will be the "Feedback Statement" included in the Report. In it, IOSCO summarizes the responses of seven industry associations, three regulatory authorities and ten trading venues to IOSCO's recommendations. Not surprisingly, many commenters noted the unequal regulatory playing field for exchanges as compared to non-exchange marketplaces. They argue, though somewhat self-servingly, in favor of a principles based regulatory approach rather than prescriptive rules.