The Lisbon Stock Exchange Legal Framework

Darwinian Natural Selection and Polity: The Lisbon Stock Exchange Legal Framework The world is currently experiencing events for which history provides no guidance: most countries have concentrated Stock Exchange trades in one single domestic city and a few countries have gone even further by allowing their national exchanges to integrate newly created cross-border groups of Stock and Derivative Exchanges. The study of world Stock Exchanges shows that they have adopted a wide range of practices, structures, rules, and regulations, changing over time and sometimes exhibiting great differences, but tend- ing toward some convergence over time.1 Of course, all markets always respond to the needs of the people living in its neighbourhood, and the current vision of a Stock Exchange is again the response of issuers, intermediaries, and investors, to the particular demands of trading. However, Portugal seems to be a singular case of response due to two special charac- teristics of its own history: on the one hand, the pressures stemming from the Discoveries in the endeavor of the fifteenth century dictated the centralization of a market in Lisbon, where commodities, financing, and insurance, could be traded in order to cope with the needs of those Discoveries; on the other hand, domestic and geopolitical aspects of the following centuries disturbed the smooth development of such centralized markets in Portu- gal. Since then, the role of the Portuguese trade and financial services in the global network of financial operations has been reflected in the special legal rules and settings that framed the Lisbon Bourse. In any event, at the end of the twentieth century, and against all odds, Portugal was able to recuperate the domestic capital market, and the success was so intense that a number of foreign countries have come to study this unexpected “miracle”. The following sections reveal how shareholder protection, market transparency, and economic ef- ficiency were pursued in a Darwinian natural selection process for best practices, and illu- 1 strate how important prevailing politics are in stimulating or cancelling legal and organiza- tional improvements. The paper summarizes that historical evolution, and, in particular, highlights the events that most contributed to the demise of the domestic Exchange and the recovery of the Lisbon Stock Market. Earliest Juridical Aspects and Regulations in the Lisbon Stock Exchange Examining Exchanges’ juridical features throughout Portugal’s history is of interest. There is much evidence that during the 15th century, at the peak of the Portuguese Discov- eries, a rudimentary form of centralized market existed in Lisbon, precisely as a response to two main problems: mobilizing the large amounts of money necessary to finance the fleets and the successive voyages; and dealing with the premium of the insurance contracts to cover the associated risks.2 It must be admitted that this was not a very organized market, and all transactions were conducted on the open air in a corner of a major downtown street, Rua Nova, which is described in most archival documents as the longest and the noblest in the city. It served many professional establishments, which made it vibrant, and also connected the many nar- row and twisting medieval streets to the royal palace. The presence of foreign merchants living in Lisbon or attending its seaport explains why this rather informal market offered trading in commodities, as well as in exchange letters, and foreign currencies. Milanese, Genoans, and Florentines performed an important role in this kind of financial business in Lisbon. 3 Additionally, the traffic of commodities, in particular those brought from re- cently discovered overseas regions, required funds for investment. At this stage one cannot yet speak of a specialized market, but of a business center, a centralized market for freight, trade, insurance, and negotiation, where credit and risk had to be rewarded. 2 From the docks near the royal palace, fleets left for the Mediterranean, France, Flan- ders, and Britain, and more and more regularly for the Atlantic islands and Africa. In the 1500s they were also sailed to India, following da Gama’s voyage, which opened the Cape sea route to that destination in 1498, and to the New World, crossing the Atlantic, thanks to Columbus’ and Cabral’s voyages.4 Trading in all these segments was then under the sur- veillance of the local municipal authorities, with the operations on exchange letters following Crown regulations.5 The Lisbon Bourse also developed the professional expertise for managing contracts, and the presence of brokers is documented in archival sources on municipal regulations from the fourteenth century for urban provisioning businesses, and for maritime businesses thereafter.6 In fact, the law of 23 August 1342 compiled the rules for the exercise of the brokerage profession, and defined tabular data for the value of the listing fees and intermediation commissions. This legal framework represents the earliest known attempt to control transaction costs, and provisions for market transparency. By the end of the fifteenth century, a royal law of 15 February 1492 reduced the number of brokers from 25 to 12, in order to promote the implementation of a policy of professional privileges, which should be a monopoly of the royal decision, in order to reward the king’s 12 most trusted aristocrats, for relevant services provided to the Crown.7 This reveals that the profession was up-scale and profitable. The regulation also means that the profession was honorable in a society based on clear social cleavages resulting from the differentiation between common laborers and the highest strata, which comprised respect- able merchants and traders. Financial business was not considered an unsavory way of life for the Portuguese nobility.8 The warrior/merchant was a very elegant gentleman, coupling military activities in Portugal or overseas with benefits and profits, a noble condition of life. 3 All the revenues from listing fees and commissions on financial businesses in that market were pooled together (in a purse) and shared equally among all brokers, according to a 1458 resolution of the municipal Senate.9 As some brokers were more agile than others in dealing and negotiating the operations, two years later, some of them complained to the king, but the equal division of the revenues prevailed, and a new law of 15 July 1473 con- secrated that principle and even forbade competition among them.10 These facts illustrate that the government saw the existence of the Bourse, and the services it provided to trade and long-distance markets, as a public good whose dominant role was to fuel the implementation of a geopolitical project for the nation. The original 1485 Regulations (Regi- mento de 1485) also required that all operations be recorded in a single ledger as a corporation, by a clerk so that the equal division among the brokers of the profits collected by the receiver, could be honest, in spite of recognizing that some of them had a larger portfolio of clients and operations.11 This means that a division of labor within the corporation created specialized tasks among the brokers. Penalties collected for disrespectful behavior were also registered in the book, as well as some common costs of the corporation (such as the funeral expenditures upon the death of a broker). The elevated esteem of the profession was clearly expressed in the law of 11 November 1491, in which it was stipulated that brokers should take a leading position in the rank-structured file of Lisbon’s annual Corpus Christi procession, which wandered from the cathedral throughout the main streets of the capital city.12 The importance of market trust and confidence was a decisive feature, but it did not prevent the authorization for sub-establishment of the brokerage privilege, which was con- secrated in the royal law of 20 August 1500. This meant that the brokerage function be- longed to a restricted number of nobles, who could delegate the practice of his function to a specialized clerk under his responsibility, as clearly registered in the regulation book for 4 the profession (Livro do Regimento dos Corretores): there are four cases of individual brokers, whose names are followed by another name.13 This regulation reveals that the profession required technical abilities that only trained people could provide, was very honorable from a social perspective, in high demand for the high revenues it could provide to the enti- tled person, and very conspicuous with the political authorities in order to provide financial help to them, both at the central and local (municipal) governmental level. To implement market transparency and maximize rewards for the regulatory authority, in 1500 it became routine for the municipal Senate to award those broker positions to the highest bidder, thereby discontinuing the monopoly aristocratic condition for applicants, because the condition of trader and merchant could also lead to a personal nobility entitlement to attain the merchant/warrior status.14 It also happened that political authorities inspected the business of exchange letters to apply penalties for usury behavior, but overlooked those penalties against the opportunity of obtaining loans for the king and the government. For example, in January 1443 the government bought armaments in Bruges with the credit granted by local merchants and paid by letters of exchange issued by Lisbon traders and merchants, who lent to the central state.15 Then, brokers could deal in maritime transportation, insurance, freight, credit, exchange letters and currency exchanges, international trade, and lending to government. Domestic public debt (short-run floating debt and long-run redeemable public debt) also became a financial business in the Lisbon stock market, because the Crown developed entrepreneurial merchant (retail) activity in the Cape route shipping.

Load more