FOCUS No 207 | May 2010 The monthly newsletter of regulated exchanges, with key market figures Regulating the way forward A retrospective on the MiFID revised: a proposal Sifting the chaff April 2010 key unfixing of rates and by Pierre-Cyrille adapted from market figures related deregulation Hautcoeur, Angelo Riva, Executive Magazine by Roberta S. Karmel Paul Lagneau-Ymonet Member exchanges The WFE is the association of 52 regulated exchanges around the world, which develops and promotes standards in markets. Its membership includes: Amman Stock Exchange Johannesburg Stock Exchange Athens Exchange Korea Exchange Australian Securities Exchange London Stock Exchange Group Bermuda Stock Exchange Malta Stock Exchange BM&FBOVESPA Moscow Interbank Currency Exchange BME Spanish Exchanges NASDAQ OMX Group Bolsa de Comercio de Buenos Aires National Stock Exchange of India Bolsa de Comercio de Santiago New Zealand Exchange. Bolsa de Valores de Colombia NYSE Euronext Bolsa de Valores de Lima Osaka Securities Exchange Bolsa Mexicana de Valores Oslo Børs Bombay Stock Exchange Philippine Stock Exchange Bourse de Luxembourg Saudi Stock Exchange (Tadawul) Bursa Malaysia Shanghai Stock Exchange Chicago Board Options Exchange Shenzhen Stock Exchange CME Group Singapore Exchange Colombo Stock Exchange SIX Swiss Exchange Cyprus Stock Exchange Stock Exchange of Mauritius Deutsche Börse Stock Exchange of Tehran The Egyptian Exchange Stock Exchange of Thailand Hong Kong Exchanges and Clearing Taiwan Stock Exchange Indonesia Stock Exchange Tel-Aviv Stock Exchange IntercontinentalExchange TMX Group International Securities Exchange Tokyo Stock Exchange Group Irish Stock Exchange Warsaw Stock Exchange Istanbul Stock Exchange Wiener Börse Every effort has been made to ensure that the information in this document is accurate at the time of printing, but the Secretariat cannot accept any responsibility for errors or omissions. WFE commissions articles on capital markets policy and practices for publication in its monthly review, “Focus,” and for website posting. The views of the authors do not necessarily reflect those of this Federation or its member exchanges. For reproduction or citation, please contact the Secretariat. Focus | May 2010 1 Contents 3 A retrospective on the unfixing of rates and related deregulation by Roberta S. Karmel 5 MiFID revised: a proposal by Pierre-Cyrille Hautcoeur, Angelo Riva, Paul Lagneau-Ymonet 7 Sifting the chaff adapted from Executive Magazine 9 Federation news 9 WFE publishes its 2009 Annual Report and Statistics 10 WFE enhances its statistics 11 News (A-Z) 11 Corporate news 11 Consolidation news 11 Financial results 12 Indices 12 Inter-market links 12 IT 13 New products 14 New services 15 Post trade 15 Regulation 15 Other 16 Key market figures 48 Calendar of events 2 Focus | May 2010 Regulating the way forward Exchanges will be taking a new road forward, along with the rest of In this issue, Professor Roberta Karmel was invited to reflect on how the world’s financial system. Public authorities are indicating that deregulation in the 1970s led to a series of knock-on changes in the changes in direction will be coming; all the signs are there, except for market model, and ended up going around the world. As an actor at anything as explicit as this exit sign shown on this issue’s cover page. that time, she shares her recollections of the public policy concerns Reviews of various kinds are being conducted in many jurisdictions, aired when the market model got adjusted. legislation prepared, and rule revisions drafted. We can almost see the intangible road signs; it is clear that we will be changing Meanwhile, today in the European Union the MiFID is formally direction, but the rest is not yet in focus. For this, WFE’s Focus might under review, on the schedule set before the financial crisis struck. offer some help. Professors Hautcoeur, Riva and Lagneau-Ymonet offer their insights as to what this major structural change has accomplished for the This issue appears some weeks ahead of the IOSCO Annual European capital markets, and what might be done to adjust public Conference in Montreal. Hopefully, the road map ahead might be policy as the EU also heads off on a new road. filled in somewhat there. International coordination for global capital markets is indispensable. In addition to formal regulation and legislation, exchanges’ own business standards matter greatly. They are often set higher than Before that Montreal meeting, exchange managers are asking many those required by the public authorities. “Executive Magazine” in questions about the regulatory environment in which they conduct Beirut ran a feature on how the Egyptian Exchange set far higher business. They note foremost that the regulated exchange model public listing standards a decade ago, encouraged those corporations worked; business has operated very near normal for the past three unable to meet those requirements to delist, and in the end EGX years. Orders were executed, cleared and settled; certainty for our and the country were rewarded with a far larger, more liquid public clients was assured. So the leaders of this industry would expect market. that the business model ought to be reinforced by those policy- makers contemplating change; exchanges have been a rare, reliable component of the financial system. This quality must be noticed and enhanced. Focus | May 2010 3 A retrospective on the unfixing of rates and related deregulation 1986 “Big Bang” mandating negotiated commissions and ending Roberta S. Karmel the separation of brokers and jobbers. Fixed minimum commissions Centennial Professor of Law eventually ended in other trading venues as well, although Japan did Brooklyn Law School not deregulate exchange commission rates until after the Japanese “Big Bang” announced in 1997. Deregulated commission rates not only changed the organizational structure of securities firms, but also of stock exchanges. Beginning in 1993, stock exchanges demutualized in many countries and became public corporations. Furthermore, stock exchange floors Traditional stock exchanges were membership organizations where disappeared and electronic communications networks or alternative stock exchange members dealt with one another on a preferential trading systems (ATS) formed to compete with regulated exchanges. price basis. Fixed minimum commissions were the glue that held the New York Stock Exchange (NYSE) and other exchanges These changes were precipitated both by developments in the together, while members of the National Association of Securities trading markets, especially the growth of institutional trading and Dealers (NASD) dealt with one another at an inside trading price. technological innovations, and a political preference for competition Commission price regulation similarly was the norm in Canada, over regulation. In addition, to compete internationally, once the Australia, London, Japan, and elsewhere. In addition, NYSE rules United States unfixed commissions, other jurisdictions had little required members to bring all of their orders to the NYSE floor for choice but to follow suit. The philosophical impetus for a changed execution, prohibited access to the exchange by non-members, and view of the role of economic regulation can be traced back to required member firms to be engaged primarily in the securities Alfred Kahn, and such deregulation was initiated in industries other business. NYSE member firms could not incorporate or become than the securities industry. Yet, considerable new regulation of public companies. the trading markets accompanied deregulation of the securities industry in the United States in the form of national market system In the late 1960s, however, the fixed minimum commission regulation, and in Europe in the form of European Union (EU) structure came under pressure in the United States due to the directives and regulations. In the United States, the SEC focused on institutionalization of the public securities markets. Although the making transaction costs as cheap as possible, but at the same time, NYSE resisted the deregulation of commission rates, various rebate limiting the extent of market fragmentation. The Europeans focused practices developed that put pressure on the fixed commission on dismantling of protectionism and on the creation of a European structure and eventually assured its demise. In the mid-1970s, securities market as part of the internal market program. the NYSE finally abolished fixed minimum commission rates. Further deregulation flowed from negotiated commission rates. Although the unfixing of commission rates and related deregulation The Securities and Exchange Commission (SEC) dismantled the of the trading markets were successful in bringing down the costs prohibitions against off-board trading. Brokerage firms incorporated of execution, the substitution of a trading culture for an investing and many became public Corporations in the years that followed. culture is troubling to many. Public investors wonder whether In time, these public corporations became financial services securities intermediaries have been looking after their own interests conglomerates. In the 1990s, a spread fixing scandal ultimately to the detriment of retail investors. forced the NASD to abandon the one-eighth trading spread convention, and the SEC subsequently mandated trading in decimals This chapter will describe the unfixing of commission rates and rather than fractions. related deregulation of the trading markets in the