Demutualization of Stock Exchanges

DEMUTUALIZATION OF note give-and-takeS PROBLEMS, SOLUTIONS AND CASE STUDIES modify by SHAMSHAD AKHTAR music music director, G e very lieunance, finance and conduct plane section, eastern intimately and profound Asia De manment, Asiatic instruction posit Asiatic victimisation believe 2002 only secures reserved. The examines expressed in this control argon those of the authors and do non necessarily ponder the views and policies of the Asiatic victimisation bank, or its posting of G everywherenors or the political sympathiess they rede. The Asiatic Development Bank does non guarantee the accuracy of the entropy included in this publication and accepts no near for any consequences for their use of goods and function.Use of the term land does not imply any idea by the authors or the Asiatic Development Bank as to the intelligent or separate status of any territorial reserve entity. ISBN 971-561-475-2 popularation channel No. 100602 publish and printed by the Asiatic Development Bank P Box 789, 0980 metropolis of the Philippines, Philippines . O. CONTENTS preface Principal Authors Abbreviations thirteen xv xxi PART I ISSUES INVOLVED IN STOCK put back DEMUTUALIZATION 1 De correlativeization of Asian bloodline flip-flops precise Issues and Challenges by Shamshad Akhtar 1. 1 1. 2 1. 3 1. 4 1. 5 1. 6 1. 7 1. admittance De sh atomic add together 18dization Its Definition, coat and Signifi lavce Motivation and Driving Factors for Demutualization Fread-only memory mutuality to Demutualization of deepen Benefits of Demutualization of switchs restrictive supervising Challenges and Responses for Demutualized give-and-take pecuniary Viability of Demutualized alter coating 3 3 4 5 8 12 19 25 29 2 2. 1 2. 2 2. 3 2. 4 2. 5 2. 6 telescope Information on Demutualization by Pamela S. Hughes founding What Demutualization Means The Reasons to Demutualize The Models An Update Since Demutualization result 33 33 33 36 40 43 47Demutualization of line of descent changesProblems, Solutions and matter Studies appendix 1 The Models 48 3 Motivations, mechanism and Models for commute 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 complex body part of a Demutualized convince The small Issues by David Holthouse 4. 1 4. 2 4. 3 4. 4 4. 5 4. 6 4. 7 grounding resultpower integ yardd government memory doorway Rights Risk coun administering financial Management Conclusion 73 73 73 77 80 81 82 83 Demutualization of deputises The Conflicts of pursual (Hong Kong) by William Pearson 5. 1 5. 2 5. 3 5. 4 5. 5 5. 6 5. 7 anatomical social system of convinces restrictive part and Self-ordination commonplace form _or_ system of government Objectives of comport grocery store Regulation Why Should Demutualization contain a Reassessment of S RO mappings? What Responses ar universe Developed to Deal with These Problems? Conclusion Hong Kongs Framework itemisation of HKEx and the Framework for effect with Conflicts of adventures 85 85 88 91 92 95 99 100 iv table of contents accompaniment Hong Kong tacks and modify exceptional Reinforcing Hong Kongs arrange as a globular monetary CentreA Policy opus 2 register of Understanding for the tilt of HKEx on SEHK 3 Section 13 of the tacks and illumination Houses ( nuclear fusion) Ordinance 4 Chapter 38 of the Rules Governing the Listing of Securities on the nervous strain switchs of Hong Kong extra 5 Procedures to Deal with Conflicts of Interest 105 114 131 appendage APPENDIX APPENDIX 133 138 APPENDIX 6 Demutualization of changesThe Conflicts of Interest (An Australian Perspective) by David Holthouse 6. 6. 2 6. 3 6. 4 6. 5 6. 6 6. 7 6. 8 6. 9 creative activity minimise to Conflicts An changes Listing Regulation of diametric Listings Supervision o f Intermediaries Profit Motive versus supervisory Function ordinary Interest versus the deputizes Commercial Interest fresh note Lines Conclusion cxlv 145 146 148 149 149 150 152 153 154 7 Demutualization of change oversThe Conflicts of Interest (The Australian Regulators deliver) by Claire G travel 7. 1 7. 2 7. 3 intro Self-Listing different Conflicts 157 157 157 160 vDemutualization of demarcation murdersProblems, Solutions and Case Studies 8 8. 1 8. 2 8. 3 Regulation of a Demutualized interchange (Canada) by Pamela S. Hughes penetration map of an qualify Self-Regulation and organization Oversight SRO Conflicts of Interest Supervision of Listings Self-Listing Managing Conflicts of Interest prudent Regulation Sh atomic number 18h senescenters managers and ships suffercelledicers Memoranda of Understanding Conclusion 163 163 165 165 169 171 171 172 172 173 genius hundred s admit upty-five 175 176 8. 4. 8. 5 8. 6 8. 7 8. 8 8. 9 8. 10 8. 11 8. 12 9 9. 1 9. 2 9. 3 9. 4Regulation of a Demutualized deputise ( jacket of detonator of keen of capital of capital of capital of Singapore) by lee side Boon Ngiap Background regulative Issues Arising from Demutualization The Regulatory Relationship between the M unitytary dictum of Singapore and sway commutation of Singapore Conclusion 177 177 178 179 183 10 Regulation of a Demutualized Derivatives diversify (United States) by Natalie A. Markman 185 185 186 190 192 195 land A parvenue Framework commute Oversight Regulatory Issues Raised by Demutualization Conclusion 10. 1 10. 2 10. 3 10. 4 10. 5 vi confine APPENDIX APPENDIX APPENDIX Designated bring d suffer securities diligences for Regulated US Derivatives counterchanges 2 Registered Derivatives exertion carrying out Facilities 3 The CFTC Market supervision Program 196 202 205 11 Regulation of Demutualized supplants (Australia) by Claire G ruddiness 213 213 214 214 215 215 217 Legislative Framework Australian Securit ies and dropment guidances (ASIC) Powers Supervision by Market Operators Memoranda of Understanding (MOUs) Changes collectable to Demutualization New put together 11. 1 11. 2 11. 3 11. 4 11. 5 11. 6 PART II DEMUTUALIZATION CASE STUDIES 2 Australian subscriber line commutingThe vicissitude to a Demutualized put back ASXs father by David Holthouse 12. 1 12. 2 12. 3 12. 4 12. 5 12. 6 12. 7 12. 8 12. 9 Introduction Background to Australian roue mass meetings Demutualization Obtaining Member Approval Mechanism use for Conversion Changes to the senss impartiality The Demutualization Process Memorandum of Understanding (MOU) with ASIC Demutualization and Listing show upcomes Subsequent supervisory Development ASX supervisory Review Pty modified 221 221 222 223 224 225 226 228 229 230 ii Demutualization of super acid come out flipsProblems, Solutions and Case Studies 12. 10 Changes in ASXs Focus and enactmentivities 12. 11 Conclusion 231 233 13 Hong Kong alternates and Clearing throttle Demutualization, Merger and Listing The Hong Kong flip-flops Experience by police forcerence Fok 235 235 236 238 239 242 246 Introduction Pre-Merger Period Two Exchanges and 3 Clearing Houses Merger and Proposal Reasons For the Merger Market emend Conclusion 13. 1 13. 2 13. 3 13. 4 13. 5 13. 6 14Hong Kong Securities and Futures delegation The Conversion to a Demutualized Exchange The Hong Kong Regulators Experience by William Pearson 247 247 250 255 258 258 The Need for Reform The Reform Process Rationalized Market Regulation Implementing Legislation Exchanges and Clearing Houses (Merger) Ordinance Key Issues Arising from Hong Kongs Experience with Demutualization 1 Summary of the Exchanges and Clearing Houses (Merger) Ordinance 14. 1 14. 2 14. 3 14. 4 14. 5 APPENDIX 261 15Singapore course ExchangeDemutualization and Listing of the Singapore Exchange express by Alan Shaw 265 265 Introduction 15. 1 viii Contents 15. 2 15. 3 15. 4 15. 5 15. 6 15. 7 15. 8 15. 9 Drivers for Change The rule for Demutualization and Merger Impact of Demutualization The Merger locomote The Process of Demutualization The Singapore Exchanges initial Public Offer The grammatical construction of Singapore Exchange The Governance of Singapore Exchange Listing and Conflict of Interest 265 267 269 270 271 272 274 276 279 281 5. 10 Conclusion APPENDIX 1 Procedures to Deal with Conflicts of Interest 16 Toronto bourgeon ExchangeFrom Toronto broth Exchange to TSE Inc. Torontos Experience with Demutualization by Timothy Baikie 283 283 283 286 291 292 296 298 298 Introduction An Overview of the Toronto melodic line Exchange (TSE) The Development of vulgar Exchanges Consolidation, Globalization and New Competition The Demutualization last Market Regulation by a Demutualized Exchange Next Steps Conclusion 16. 1 16. 2 16. 16. 4 16. 5 16. 6 16. 7 16. 8 17 Demutualization of the Philippine blood Exchange by Maria Larrie Alinsunurin 299 299 300 300 301 304 307 Introd uction Ownership Structure of the extend Exchange Upon Demutualization traffic Rights corporal Governance backing of the Exchange statutory Regulatory Role 17. 1 17. 2 17. 3 17. 4 17. 5 17. 6 ix Demutualization of rip ExchangesProblems, Solutions and Case Studies PART III coordinate OF MUTUAL EXCHANGES 18 The Colombo comport Exchange (Sri Lanka) y Rajeeva Bandaranaike 18. 1 18. 2 18. 3 18. 4 18. 5 18. 6 18. 7 18. 8 18. 9 Ownership Structure Listing selective information Corporate Governance Business of the Exchange The Vision, agency and Corporate Strategy job Rights Regulatory Framework Self-Regulation Statutory Regulatory Role 313 313 314 314 315 316 317 317 317 319 320 321 321 18. 10 Investor Protection 18. 11 sustenance of the Colombo impart Exchange 18. 12 decline Exchange Seeks to Demutualize 19 The Kuala Lumpur declivity Exchange (Malaysia) y Securities way (Malaysia) 323 323 323 324 324 325 326 327 329 329 Introduction Ownership Structure of the KLSE Listing d ata Corporate Governance Business of the Exchange commerce Rights Risk Management and Supervisory Issues Statutory Regulatory Role Stock Exchange Seeking to Demutualize 19. 1 19. 2 19. 3 19. 4 19. 5 19. 6 19. 7 19. 8 19. 9 x Contents 20 The Shanghai and Shenzen Exchanges Business work, Governance Structure, and Regulatory Function ( hatfuls Republic of China) by Feng Wei 331 331 332 333 335 337 Overview Business Operation Governance Structure Regulatory Function Outlook on Demutualization 0. 1 20. 2 20. 3 20. 4 20. 5 21 The Taiwan Stock Exchange (Taipei,China) by Wanpo (Mina) Wang 341 341 342 342 343 344 344 347 347 Ownership Structure of Taiwan Stock Exchange locoweed Listing Data Corporate Governance Business of the Exchange Trading Rights Risk Management Statutory Regulatory Role Stock Exchange Seeking to Demutualize 21. 1 21. 2 21. 3 21. 4 21. 5 21. 6 21. 7 21. 8 22 Current organisational and Regulatory Structure of The Stock Exchange (Thailand) by Klao Sanasen 349 349 352 Th ai cracking Market Structure The Stock Exchange of Thailand 2. 1 22. 2 xi Contents tune-up Demutualization of a line of work alternate is whole passage by which a non-profit fraction- makeed mutual organization is transformed into a forprofit shargo straightner corporation. Exchanges nigh the world kick in been demutualizing because of trans matter competition and technological challenges to traditional modes of art securities. The change of a trite-taking deputise from a particle-owned organization to a for-profit shargonholder corporation triggers a itemise of caputs virtually regulatory heedlessness.When a demutualized switch is distinguished on its own venire, some regulatory oversight brings to be transferred to a government regulator. In many countries, demutualization of the major depicted object roue commute has been accompanied by world-wide securities regulatory reform. This book grew fall out of a conference on Demutualization of Stock Exc hanges held in Manila on 13-14 high-flown 2001 organized beneath the APEC Financial Regulators schooling Initiative sponsored by the Asian Development Bank.The conference wayed on create greater understanding of demutualization by reasoning the universal problems it engenders and how these might be solved, developing common themes and lessons from result studies and to a fault seeing how different countries retain evolved different approaches to demutualization. This book is carve up into collar parts. Part I, consisting of Chapters 1-11, discuss sundry(a) dimensions and issues involved in the process of furthermostm animal veer demutualization.Chapters 1-3 give a extensive overview of the reasons for demutualization, the critical issues and challenges, the closing-making process relating to demutualization and the possible sticks stress exchanges whitethorn cull, including that of a confidentially owned for-profit corporation and that of a publicly held part y listed on the exchanges own climb on. Chapter 4 fit outs onwards the critical issues an exchange and its regulator must confront in connection with the demutualization process from the vantage charge of a particular jurisdictionAustralia.Chapters 5-7 discuss the conflicts of post increase by an exchanges demutualization and accordingly Chapters 8-11 set forth how regulators in Canada, Singapore, the United States and Australia attempted to megabucks with some of these conflicts by means of regularization. Part II of this book is a series of case studies. Chapters 12-17 discuss the demutualization experience in Australia, Hong Kong, Singapore, xiii Demutualization of Stock ExchangesProblems, Solutions and Case Studies Toronto and the Philippines.Part III of this book delivers information cosy to jurisdictions that lease not demutualized their exchanges. Chapters 18-22 discuss the Colombo, Kuala Lumpur, Shanghai and Shenzen, Taiwan and Thailand exchanges. Chapters 1-16 were submitted as do semenent by professionals who presented papers at the conference. Chapters 17-22 were submitted by participants in the conference who were not presenters. This conference was coordinated by the pay and Industry element ( eastern United States) of ADB under the boilersuit guidance and supervision of Ms.Shamshad Akhtar, manager, Governance, pay and Trade, atomic number 99 and Central Asia Department. supernumerary thanks be callable to the various contri howeverors as wellspring as the organizers. The book has been edited by Ms. Akhtar. Ms. Roberta Karmel, prof of fair play at Brooklyn in effect(p) civilize, was engaged to integrate the conference materials and provide editorial advice. R. Jane Lee, a student at Brooklyn sub judiceity School expected the digest of this book. Mr. Lyle Raquipiso coordinated the publication of this book and Ms. Nancy Bustamante provided administrative support. Geert H.P van der Linden . B. Director prevalent East a nd Central Asia Department Asian Development Bank xiv Contents PRINCIPAL AUTHORS SHAMSHAD AKHTAR is Director, Governance, finance and Trade region of the Asian Development Banks (ADBs) East and Central Asia Department. She oversees ADBs fiscal grocery operations in the Peoples Republic of China, Mongolia and the Central Asian Republics, including SME, microfinance and refreshing(prenominal)(a) rural securities industry fiscal intermediation validation and private celestial sphere assessment work and mete out loosening and facilitation.Concurrent to holding other portfolio from 1998-2001, she was head of ADB secretariat for Asia Pacific frugal Cooperation, orchestrateing the form _or_ system of government dialogue and preparation of all papers/ documents for this forum, involving interactions with Finance minister of religions and Central Bank Governors and their Deputies. forwards link ADB in 1990, she worked as economist in the World Bank in the 1980s, and prior t o that, in Pakistans cooking Agency. She obtained a B. A. in economic science and M. Sc. in Economics from Islamabad, an M. A. n Development Economics from University of Sussex in the United Kingdom (UK), and a Ph. D. in Economics also from UK. She had her post-doctoral family as a Fulbright scholar and was visit fellow at the Department of Economics, Harvard University in 1987. Ms. Akhtar has presented numerous papers on economics and finance in inter issueist conferences. herds grass BAIKIE is Director, Global Market Initiatives at the Toronto Stock Exchange and is responsible for analyzing grocery store mental synthesis issues from a broad, strategicalal standpoint, including the trade model for the Global Equity Market ( endocarp).Previously, he was extra counseling, Market Regulation and Director of the Regulatory and Market Policy Division of the Exchange, which is responsible for policy and rule development for the equities and derivatives commercialize. He has spoken at numerous conferences on commercialize economy, mart organise and corporal governance issues and was a ingredient of the Advisory Board for the 1999 Canadian Corporate/Securities Law Moot Court Competition. He received a B. A. from York University (Glendon College), an LL. B. and a B. C. L. from McGill University and an LL. M. rom the University of Illinois at Urbana-Champaign. He was called to the Ontario Bar in 1987. LAWRENCE FOK is the Deputy Chief operational Officer of Hong Kong Exchanges and Clearing express mail and the Chief administrator of the Stock Exchange. Mr. Fok joined the Stock Exchange in February 1992 and was xv Demutualization of Stock ExchangesProblems, Solutions and Case Studies positive decision maker Director of the Listing Division in February 1997 and Senior Executive Director of its Regulatory Affairs chemical group in November 1998. Mr. Fok has over 19 age of experience in financial go and securities regulatory work.Before joining th e Stock Exchange he worked for the Securities and Futures deputation, the Office of the Commissioner for Securities and Commodities Trading of the Hong Kong Government and other private organisations in aras of bodied finance advisory work, securities dealing, venture capital investment, mainland China trade and investment solicitude. CLAIRE GROSE is Special Counsel, Regulatory Policy Branch at the Australian Securities and enthronisations Commission (ASIC). For deuce old age prior to July 2001, she held the opinion of ASICs Director, interior(a) Markets Unit.Before joining ASIC in January 1999, Ms. Grose was a senior(a) attendant in the bailiwick Australian law tighten Freehill Hillingdale &038 Page, specialising in corporations and securities law. She has much than than 20 years experience as a corporate lawyer and contend a major part in developing changes to the Corporations Law in Australia in her role as a phallus of the Corporations Law Simplification Task ha ul from October 1993 to border district 1997. DAVID HOLTHOUSE is matter Manager, inter contentist Affairs, at the Australian Stock Exchange (ASX), which he joined in February 1996.His responsibilities include fostering links with governments, line of descentes and market participants to keep in line that ASX has a role in shaping the regional capital market environment, coordinating ASXs international activities to turn back strategic fit, identifying cross-border itemization opportunities where ASX sewer add nurse, and providing an powerful communications communications protocol service on be one-half(prenominal) of the Exchange. He has been a element of the workings flush of the East Asian and Oceanian Stock Exchanges union (EAOSEF) since 1997 and is presently the Federations Working Committee Chairman.A key activity of the Committee during this extent has been the facilitation of cross-border barter. He was formerly a vocation naval officer, retiring as a Rea r Admiral in 1993. He is a particle of the political science bodies of a number of professional and charitable organisations, and a Graduate of the Australian fetch of familiarity Directors. He is a Chartered professed(prenominal) Engineer, and a Fellow of some(prenominal) the Institute of Engineers Australia and the Institute of Marine Engineers (UK). He was appoint as an Officer in the assign of Australia in 1991. xviPrincipal Authors PAMELA S. HUGHES is a securities law partner at Blake, Cassels &038 Graydon LLP in Toronto. Her practice focuses on international corporate finance and mergers and acquisitions transactions and advice regarding capital market regulatory reform. Ms. Hughes is a member of the team of lawyers from Blake, Cassels &038 Graydon involved in the ongoing Ontario Securities Commission (OSC) Policy Reformulation nominate which commenced in 1995. precedent to February 1, 1995, Ms. Hughes was Director of the Capital Markets/ worldwide Markets Branch of the OSC.Ms. Hughes has also taught international securities regulation in the LL. M. programme at Osgoode Hall and the LL. B. programme at the University of Toronto, and was a contri entirelying editor to North Ameri female genitals Corporate Lawyer. Ms. Hughes updated the chapter on Philippines securities law in multinational Securities Regulation Pacific Rim, Volumes I and II (New York Oceana) released in 2000. In 2000, Ms. Hughes was put forward by the federal Department of Finance to the financial work roster for repugn resolution under the North Ameri bunghole Free Trade Agreement.ROBERTA S. KARMEL is a Professor of Law and Co-Director of the optic for the Study of foreign Business Law at Brooklyn Law School and Of Counsel to the law degraded of Kelley Drye &038 Warren LLP In addition, she is a . director of the Kemper Insurance Companies. She was a Commissioner of the Securities and Exchange Commission from 1977-80, and a public director of the New York Stock Exchange, Inc. from 1983-89. She received a B. A. cum laude from Radcliffe College in 1959 and an LL. B. cum laude from New York University School of Law in 1962.Professor Karmel is the author of over 30 articles in levelheaded journals, and writes a regular column on securities regulation for the New York Law Journal. Her book authorise Regulation by Prosecution The Securities and Exchange Commission vs. Corporate America was published by Simon and Schuster in 1982. LEE donation NGIAP heads the securities regulatory policy die in Monetary Authority of Singapore (MAS). His part is responsible for regulatory framework development, policy coordination and market analysis of the securities, futures and asset management industries in Singapore.Prior to taking up his responsibility in the Securities and Futures Department, Mr. Lee was the Representative in the MAS office in London, responsible for spearheading the onward motion of Singapore as an attractive place for UK and European financi al institutions to invest and set up operations. Mr. Lee joined MAS in 1986 and worked in several departments before joining the Markets and Investment Department, where he rose to receive a Senior Assistant Director in the Monetary Management Division. seventeen Demutualization of Stock ExchangesProblems, Solutions and Case StudiesThere his responsibilities included the expect of Singapores exchange rate and monetary policies, and management and evaluation of the unconnected exchange exposures of public sector entities. He holds an honours degree in cultivated Engineering from the home(a) University of Singapore and is a Chartered Financial Analyst. NATALIE A. MARKMAN is Counsel to Commissioner doubting Thomas J. Erickson of the US goodness Futures Trading Commission. She provides legal counsel and analyzes such policy issues as those created by derivatives market deregulation, electronic avocation, and exchange demutualization.Ms. Markman look intos and evaluates all docum ents submitted by staff for Commission approval, including exchange designations, contract and rule approvals, rulemakings, opinions, and enforcement actions. Previously, she served as Special Counsel in the Commissions Office of International Affairs, as an Attorney-Advisor in the Office of the Chief Counsel of the Commissions Division of Trading and Markets, and as an Attorney-Advisor to Commission Administrative Law Judge George H. Painter. Ms.Markman also was a educational activity Fellow for the Foundations of Ameri mess Law and wakeless Education program at the Georgetown University Law Center, where she received her J. D. degree in 1993. WILLIAM PEARSON is Director in the Corporate Finance Division of the Securities and Futures Commission (SFC) in Hong Kong. He is responsible for assisting in formulating policies for the effectual regulation of listed companies and the securities markets. mundane work involves monitoring and regulating corporate activities of publicly lis ted companies, overseeing the Stock Exchange in its lean related functions, nd favourable reception broadenings of get bys and debentures to the public by non-listed companies. Mr. Pearson joined the SFC as a Senior Manager in the Corporate Finance Division in 1998. Prior to that he spent niner years as a lawyer with Norton Rose, a London law firm, practicing in the argonas of corporate finance and M&038A. He graduated as a lawyer from Kings College, London in 1987. ALAN JOSEPH SHAW is Executive Vice-President of the Singapore Exchange Limited, transport of Risk Management and Regulation.Previously, from 1991-2000, he was issue Manager, Supervision of the Australian Stock Exchange Limited, Melbourne. He was educated at the University of Melbourne, from which he received a Bachelor of Laws in 1979, a Graduate Diploma of Public Policy in 1988, and a contain of Arts in Public Policy in 1994. From 1980-91, he served as a Principal xviii Principal Authors intelligent Officer fo r the National Companies and Securities Commission, as a Judges Associate, and as a Barrister. He has authored a number of articles on troupe law. xix Abbreviations ABBREVIATIONSAmex APEC Archipelago Archipelago Exchange ASIC ASTC ASX ATS BOT CATS CBA CBI CBOT CCASS CDNX CDS CFE CFTC CGE CME CMP central nervous system CSE CSRC DTF EBOT ECM ECN Australian Securities and Investments Commission Australian elimination and Transfer Corporation Pty Ltd Australian Stock Exchange alternative barter system Bank of Thailand computer help merchandise system Colombo Brokers tie-in Canadian- found interlisted issuer Chicago Board of Trade Central Clearing and Settlement System Canadian Venture Exchange Central bank deposit System communication front-end system Commodity Futures Trading Commission Committee on the Governance of the Exchanges Chicago Mer natestile Exchange Capital Market Masterplan Continuous pull in Settlement Colombo Stock Exchange China Securities Regulatory Commission d erivatives transaction execution facility exempt be on of trade exempt commercial market electronic communications network American Stock Exchange Asia Pacific Economic Cooperation Archipelago Holdings, LLC Archipelago Exchange, LLC xxi Demutualization of Stock ExchangesProblems, Solutions and Case Studies ETF ETP FCM FIBV GEM HIBOR HKCC HKEC HKEx HKFE HKFECC HKSCC IDA IISL IMM IOM IOSCO initial offering KLSE KULBER LFX LSE MAS MCD MDEX ME MESDAQ MkSE MMCD MOF MOU MSE xchange traded fund legality commerce permit futures commission merchant International Federation of Stock Exchanges Growth and emergent Market Hong Kong Interbank Offered Rate HKFE Clearing companion Hong Kong Exchanges and Clearing Hong Kong Exchanges and Clearing Limited Hong Kong Futures Exchange Limited HKFE Clearing Corporation Limited Hong Kong Securities Clearing social club Investment Dealers intimacy India Index Services &038 Products Limited International Monetary Market Index and plectron Market I nternational Organization of Securities Commissions Initial Public Offer Kuala Lumpur Stock Exchange KLSE-Bernama Real-Time Information Services Labuan International Financial Exchange London Stock Exchange Plc Monetary Authority of Singapore Malaysian Central fileory Malaysia Derivatives Exchange Montreal Exchange Malaysian Exchange of Securities relations and automatize Quotation Bhd Makati Stock Exchange Mark to Market Collateral Deposit Ministry of Finance memorandum of understanding Manila Stock Exchange xxii Abbreviations MSRS NASD NASDAQ NASDR NSE big scorecard OECD OM OSC OTC PCX PCX PCX Holdings PCXE PSE REC RIIAM SAFE SC SCA SCANS SCCP nominate SCH SEA SEC SEHK SEL SEOCH SES SET Malaysian Share Registration Services National railroad tie of Securities Dealers, Inc. NASDAQ Stock Market, Inc. NASD Regulation, Inc. National Stock Exchange of India New York Stock Exchange Organisation for Economic Co-operation and Development OM Gruppen AB Ontario Securities Commission o ver-the-counter Pacific Exchange PCX Equities, Inc. PCX Holdings, Inc.PCX Equities, Inc. Philippine Stock Exchange, Inc. recognized exchange controller Research Institute of Investment Analysts Malaysia South Asian Federation of Exchanges Securities Commission Securities Commission work on 1993 Securities Clearing Automated Network Services Sdn Bhd Securities Clearing Corporation of the Philippines System on Computerised Order Routing and Execution Securities Clearing House Securities and Exchange Act of 1992 Securities and Exchange Commission The Stock Exchange of Hong Kong Limited Taiwanese Securities and Exchange Law SEHK Options Clearing House Limited Stock Exchange of Singapore Stock Exchange of Thailand xxiiiDemutualization of Stock ExchangesProblems, Solutions and Case Studies SFA SFC SFE SGX SGX-ST SIA SIIS SIMEX SIPF SME SRC SRO STAMP TBDC TSD TSE TSE RS TSE TSEC TSI Securities and Futures Act Securities and Future Commission SFE Corporation Limited (formally k without del ayn as Sydney Futures Exchange Limited) Singapore Exchange Limited Singapore Exchange Securities Trading Ltd Securities Industry Act 1983 Special Isolated Immediate Settlement Singapore International Monetary Exchange Limited Securities Investors Protection Fund Small culture medium Enterprise Board Securities Regulation scratch Self-regulatory organization standard message protocol Thai Bond Dealing Center Thailand Securities Depository Co. , Ltd.The Toronto Stock Exchange TSE regulatory serve Tokyo Stock Exchange Taiwan Stock Exchange Corporation Thailand Securities Institute xxiv PART I Issues conglomerate in Stock Exchange Demutualization Demutualization of Asian Stock Exchanges searing Issues and Challenges 1 Demutualization of Asian Stock Exchanges Critical Issues and Challenges Shamshad Akhtar 1 1. 1 Introduction Stock exchanges provide a host of services to list companies. These include (i) liquidity, (ii) execution of services, (iii) signaling function for listed compa nies, (iv) monitoring of profession to prevent use of goods and services and insider traffic, (v) standard rules to reduce transaction be, and (vi) glade of buy and order transactions.Traditionally, caudex exchanges run as a indian lodge of agents offered these services as monopoly operators serving grand-mouthedly under a mutual governance expression. The members of the club enjoyed rights of self-will, decision-making (one member, one taker turnout), and concern. Value resurrectment of the exchange was achieved by restricting annoy. Stock exchanges are now increasingly changing their barter model and restructuring themselves across the world due to the simultaneous convergence of a number of powerful developments. The almost notable of these has been the (i) fast advancement and innovation 1 Director, Governance, Finance and Trade, East and Central Asia Department, Asian Development Bank. 3 Part I Issues baffling in Stock Exchange Demutualization n applied s cience that has facilitated alternative employment systems (ATS) including electronic communication networks (ECNs) and (ii) maturement market competition and integration as well as orbiculateization induced partly by cross-border listing and portfolio flows, etc. Together these developments energize eroded the significance of physical national inventorying exchanges and their craft floors. Consequently, across the clump stock exchanges are now rethinking their championship strategy and model in order to find ways of how trump out to survive. In the process, exchanges sport evolved towards peeled corporate, legal and business models to military strengthen governance and face the competition.This process of transformation from members associations into for-profit corporations is referred to as demutualization. There is a great ask to dis manger lessons from the chop-chop evolving experience with demutualization and synthesize both the normative and positive aspects of this exciting and relatively brisk structure so that developing countries can take advantage of it. This paper, in that respectfore, aims to provide master(a) perspectives and dimensions of demutualization secondaryd on a review of literature and experience. In the process it explains (i) What is demutualization and how fundamental has it been? (ii) What factors nurse been driving the demutualization of exchanges? iii) What will power, legal and strategic approaches are organism adopted in the process of demutualization? (iv) What are the principal benefits of demutualization? (v) What regulatory challenges and responses does a demutualized exchange face? (vi) contract the demutualized exchanges been financially workable? 1. 2 Demutualization Its Definition, surface and Significance Demutualization, in the strictest moxie, refers to the change in legal status of the exchange from a mutual association with one vote per member (and possibly consensus-based decision making ), into a fraternity hold by plough portions, with one vote per share (with majority-based decision making).Demutualization makes sense if it induces a change in the exchanges objective from managing the interests of a disagreeable 4 Demutualization of Asian Stock ExchangesCritical Issues and Challenges member-based organization with a central focus on providing services for the benefit earlier of the members/brokers and keeping costs and investments exceptional to pay agreed by members, into a phoner set up with the objective of maximising the value of the equity shares by centering on generating winnings from servicing the demands of their customers (brokers and investors) in a agonistical manner. The number of exchanges that prolong privatized or listed has been increasing since the Stockholm Stock Exchange demutualized in 1993.In 1999, 11 stock exchanges had been privatized or listed and this number rose to 21 by early 2002, with several other exchanges either consi dering demutualization or already having declared their intent to do so. Of the World Federation of Stock Exchanges-formerly the International Federation of Stock Exchanges (FIBV)-member exchanges, around 52% of stock market capitalization is accounted for by demutualized exchanges. In Asia, demutualized stock exchanges including the Tokyo Stock Exchange now account for 76 % of the regions market capitalization (Figures 1. 1 and 1. 2). Figure 1. 1. Market capitalization FIBV Stock Exchanges (2001) Figure 1. 2. Market capitalisation Stock Exchanges in Asia (2001) Demutualized 52% non demutualized 48% Demutualized 76% Not demutualized 24% Source International Federation of Stock Exchanges (FIBV) Source International Federation of Stock Exchanges (FIBV) 1. 3 Motivation and Driving Factors for Demutualization Today, exchanges are no longer the fix primary and secondary market makers or the sole service providers of trade execution, signaling or other activities. This is largely becau se of the widespread proliferation of ATS and ECNs that stick been supported by technological variation and establishment of high capacity hardware, software packages and Internet facilities. ATS/ECNs bring forth imparted efficient and rough-and-ready matching 5Part I Issues Involved in Stock Exchange Demutualization of the buy and sell orders of customers at lower transaction costs, age offering damage transparency, trader namelessness and extended job hours. Large global brokers are able to price-match within their own order-stock and only report the net position as a trade to the exchange ( thitherfrom avoiding transaction costs). Given the competitive edge, the market share of the ECNs has grown. In 2002, ECNs suck in accounted for 45% of NASDAQ shares traded (compared to 25. 5% in 1999) although they only accounted for about 5% of the listed shares traded. Of the several ECNs, Island ECN alone accounted for 32% of the ECNs market share.Instinet makes up some other 29%, ArcaEx 27. 2% (formed by dint of the merger of Archipelago and REDIBook), Bloomberg Tradebook 6. 3% and Brut ECN 5. 3%. The rest is accounted by other networks. 2 Having attracted authentic trading, ECNs are also entering into strategic alliances or tie ups with other exchanges or are offering services such as quotes and listing shares to further raise revenues. The growing competitive pressure has also triggered a wave of restructuring and mergers and alliances among securities markets to maximize economies of scale, accessibility and market reach, temporary hookup providing global trade facilities by dint of around the clock trading.For instance (i) Euronext was completed by the merger of former national exchanges in France, the Netherlands, Belgium and Portugal and the integrated equity trading markets of the northern-European countries of Sweden, Finland, Denmark and Norway (ii) in the derivatives markets, a/c/e, the trading platform of Eurex and Chicago Board of Tra de (CBOT), and Globex (Chicago Mercantile Exchange, Liffe, Singapore and others), swallow already formed global alliances with participants from all condemnation zones, thus creating 24 hour trading markets and (iii) NASDAQ has developed global alliances/interconnections to attract more(prenominal) liquidity for the United States and regional securities markets. NASDAQ has organise agreements with Europe, Japan, Hong Kong and Canada and is positioned for similar arrangements with China, Latin America and lay East. In Asia, several exchanges generate trading links and dual-listing agreements with the United States-based NASDAQ. 2 Global Finance Staff Research. 2002. National Association of Securities Dealers (NASD). JP Morgan, H. 6 Demutualization of Asian Stock ExchangesCritical Issues and Challenges The market integration has encouraged a process of disintermediation.With the emergence of pertly structures, there is no need for formal floors of stock exchanges or financial market intermediaries and participants, as they do not add value (to match the cost) to trading of securities. Exchanges with low market capitalization and weak trading volumes have had to particularly re-examine their operations and organizations with the view to increasing their competitive offering and price mix to minimize further deviance of trading volumes. Summarizing the e merge issues, a youthful World Bank study3 concluded that healthy slides of internationalization and migration of order flow are putting pressures on stock exchanges around the world. For some exchanges, already more than half of trading and listing has migrated offshore Migration makes it herculean for countries to sustain a full-fledged local anesthetic anaesthetic stock exchange.As trading volumes further decrease, financing the fixed overhead of maintaining market oversight, modify and settlement systems, and generating enough business for local investment banks, accounting system firms, and other support services will become even harder, especially for smaller emerging markets. The trend towards increased migration will thus make it more difficult for small exchanges to survive. page 18 In order to survive in this environment, exchanges need to diversify and move towards commercially point business practices with greater focus on improving susceptibility, accessibility and ease of use of their systems. Since exchanges have higher overhead costs (as compared toECNs) due to (among other things) cost of construct and facilities, they need to strive harder to achieve favourableness and economies of scale, patch offering competitive services and fees compatible to those being provided by the ECNs. These considerations have driven exchanges to consider alliances and consolidation. By merging two exchanges, the exchange can reproduce the volume at the resembling overhead cost (provided cost cutting synergies are to the full explored). It can thus offer to the investo rs and brokers more listed securities for trading on the same platform. There are forecasts available that portend that by 2010, there will be fewer than five major stock exchanges and, perhaps two or three of these will be entirely electronic marketswhich have not yet been established. 4 3 4 Claessens, Stijn, et. l. 2002. Explaining the Migration of Stocks from Exchanges in rising Economies to International Centers. World Bank Working Paper No. 2816. Young, Patrick. 1999. Capital Market Revolution The Future of Markets in an Online World. Harlow Financial Times. 7 Part I Issues Involved in Stock Exchange Demutualization 1. 4 From Mutuality to Demutualization of Exchange The transformation of exchanges from mutual to demutualized structure involves two key sports (i) a change in the monomania structure, and (ii) a change in legal as well as organizational form. twain need to be accompanied by adequate safeguards to ensure appropriate governance.Depending on the nature of owners hip and legal forms adopted, the demutualized exchangegiven their corporate model and facing growing competitive pressureslends itself to focusing on evolving strategic positioning which, depending on a number of conditions, could involve greater market consolidation, vertical integration and product diversification. 1. 4. 1 Ownership Structure The transformation from the mutual member-based to demutualized exchange involves issues of transferability of ownership from members to nonmembers. There are various ways that dilution of rank can be achieved. Sequentially, it involves conversion of subsisting member seats by monetizing these and assigning a certain value per seat.Once the valuation is done, the members can opt to convert their rank and file to share ownership or to sell off their interest to nonmembers. In most cases of demutualization of exchange, members have opted to retain their share ownership. A listing of equity shares in the exchange facilitates the unlocking of the members equity and buy out of the interest of the traders, while leading to the monetization of the value of the members seats. An entity with freely movable shares, rather than membership rights, can form equity-swap-based strategic alliances or mergers with other exchanges, home(prenominal)ally or in other countries or time zones. Such alliances are stronger and offer greater credibility than native cooperation agreements.To avoid stock exchanges operating in special or limited interests, securities regulators ofttimes place restriction on ownership by one holder or a group of holders to non-controlling stakes of 5-10%. Limits on ownership stakes could affect emf take-over by other exchanges. Such take-overs could have merit in terms of efficiency and economies of scale of the market especially where more efficient participants film inefficient ones. Recognizing the synergies of take-overs, most demutualized exchanges have comestible in place to get other 8 Demutualiza tion of Asian Stock ExchangesCritical Issues and Challenges exchanges, or technology partners, the possibility of acquiring or swapping strategic stakes.The reluctance to relinquish control to strategic partners or owners remains however one reason why non-equity, swapbased cooperative alliances have been more prolific in the exchange industry. 5 Indeed, several hostile take-over attempts (including OM Gruppens moves to acquire the London Stock Exchange in 2000, and the bidding war for Sydney Futures Exchange by Australian Stock Exchange and Computershare in 1999) have failed due to the voting strength still exerted by the brokers ( duck 1. 1). 1. 4. 2 ratified and fellowship Structure Most stock exchanges are registered as private limited companies with a salaried-up capital base, while others operate as member associations or cooperative arrangements.At the end of 2000, FIBV statistics indicates that 90% of its member exchanges, accounting for 60% of market capitalization, were private limited companies. Almost 46% of these were legal association exchanges with inside ownership. Around 25% (accounting for 21% of market capitalization) of the exchanges had been privatized, 13% (accounting for 8% of market capitalization) were registered as listed companies6 and the remaining 17% had other types of statuswith some being state-owned or semi-public entities (such as the Shenzhen and Shanghai Stock Exchanges (SZSE and SHSE). As evident in remand 1. 2, in Asia, with the exception of SZSE and SHSE, most of the exchanges are legal entities registered as private limited companies.So far, five exchanges in Asia have been in full demutualized, with three of these listed on their own exchange, and another two have announced plans to demutualize in 2003. The legal structure for the demutualized exchange is based on considerations similar to that for any profit-making company including decisions on number of shareholders (partnership vs. corporation), voting procedu res, demarcation of liability (liability limited to equity invested vs. control stick and several liability for all debts), accounting and reporting requisites (based on taxation laws and on partners/shareholders access to information of the company) and distribution of dividends (re-investment 5 6Interestingly, this is similar to another rapidly globalizing industry with national quasimonopolistic companiesthe airline industryin which global cooperation alliances have experimentn very important for customer retention. Notably half (of six) of the exchanges that have listed themselves are in Asia. 9 Part I Issues Involved in Stock Exchange Demutualization control board 1. 1. Asian Stock Exchanges Shareholding Structure SHAREHOLDING LIMIT Australian Stock Exchange (ASX) Initially utmost shareholding limit was 5%, but the Financial Services Reform Act brocaded this to 15% in borderland 2002. higher(prenominal) shareholding can be allowed if it is in national interest subject to approval of the Minister for Financial Services and Regulation.Singapore Exchange Limited (SGX) Maximum shareholding limit is 5% and can be higher if approved by the Monetary Authority of Singapore (MAS). In 2001, MAS announced that, with its approval, strategic investors and fund managers who invest pools of consumer funds could acquire up to 10% of share-holding. SHAREHOLDING STRUCTURE As of June 2001, issued and compensable-up capital of ASX amounted to A$106,282,000. After listing, ASXs shareholders rose from 606 to 16,313. Besides individual investors, the large domestic and international fund managers subscribed to ASX equity including Chase Manhattan Nominees Ltd. whose holding is 6. 9%, National Nominees Ltd. 3. 5%, delineateed by AMP spirit Ltd. (2. %), Westpac Custodian Nominees Pty. Ltd. (2. 11%) and Citicorp Nominees Pty. Ltd. (2. 07%). The top 20 shareholders account for 27. 3% of issued capital. SGX has trustworthy share capital of S$1,000,000,00. As of tremendou s 2001, its issued and paid-up capital stood at S$10,000,000. The top shareholders include SEL Holdings Pte. Ltd with 25% of conglomeration shares (but owing to the restrictions in the exercise of votes abandoned to shares, SEL is not regarded as a substantial shareholder), Raffles Nominee Pte. Ltd. (12. 9%), followed by DBS Nominees Pte. Ltd. (9. 9%), Overseas-Chinese Bank Nominees Ltd. (5. 3%) and HSBC Singapore Ltd. and Citibank Singapore (each over 4. %), and others with significant stake in the range of 0. 60-2%. The top 20 shareholders account for 77. 8% of essence shares. Out of the shares issued to SEL, the Company made an Initial Public Offer (IPO) and a private placement. The IPO raised S$470 million. Consequently, the issued and to the full paid share capital of SGX increased from S$61,670 as at 30 June 2000 to S$10 million as at 16 November 2000. HKEx has veritable share capital of HK$2,000,000,000. As of December 2001, issued and fully paid capital amount to HK$1,0 40,664,846. As of March 2002, the two Central Clearing and Settlement System (CCASS) Participants held 28. 8%, and 12. 1% of HKExs issued share capital.SFC minded(p) approval to these two entities as minority controllers of HKEx on the basis that the shares are held in custody for their clients. Hong Kong Exchanges and Clearing Limited (HKEx) Maximum shareholding limit is 5%. The Securities and Futures Commission (SFC), in consultation with the Finance Secretary, whitethorn give approval to a person to hold more than 5% where it can be demonstrated to be in the interest of the public or the investing public. Philippine Stock Exchange (PSE) The Securities Regulation Code imposes a 5% maximum shareholding limit for individuals and individual companies and 20% for industry or business groups. The demutualized PSE has an authorized capital stock of P36. million, with subscribed and fully paid-up capital base of P9. 2 million symbolizeing a portion of the members total division of P28 6. 6 million as of 31 December 2000. Each of the 184 member-brokers was given(p) 50,000 common shares of the new PSE at a par value of P1. 00 per share. The remaining members contribution of P277. 4 million will be booked under additional paid-in surplus. Prior to demutualization, TSE had a capital of Y11,500 million. After demutualization, TSE raised it to Y22,874 million by issuing 2,300,000 shares for contact allotment to its members. The total number of authorized shares after demutualization is 9,200,000. TSE now has 114 shareholders.Tokyo Stock Exchange (TSE) Under the Securities and Exchange Law, there is a 5% maximum shareholding limit. Source Stock Exchanges. latest one-year Reports 10 Demutualization of Asian Stock ExchangesCritical Issues and Challenges Table 1. 2. Asian Stock Exchanges wakeless and Corporate Structure STOCK EXCHANGE TSE LEGAL take form TSE was demutualized on 1 November 2001 wakeless location Company SGX was demutualized in December 1999 effectu al Status Company (for profit). Singapore Exchange Securities Trading Limited (SGX-ST), the stock exchange, is a wholly-owned subsidiary of SGX. HKEx was demutualized in March 2000 Legal Status Company (for profit) with the Stock Exchange of Hong Kong Limited (SEHK) set up as a wholly- owned subsidiary of HKEx.ASX was demutualized on 13 October 1998 Legal Status Company (for profit) LISTING STATUS Not listed (plans to list in FY2005) SGX On 23 November 2000, the Company was admitted for listing of SGX-ST. SGX became a public-listed company with 1,000,000,000 prevalent shares outstanding. HKEx Listed ASX ASX was listed on its own exchange on 14 October 1998. When ASX shares were quoted on 14 October 1998, they unlikable at A$4. 25 sub-sequently they rose as high as A$16 by 16 March 1999. By the end of 1999, they traded at a range of A$10 to A$11, valuing the company at between A$1 billion and A$1. 1 billion. Not Listed PSE PSE was demutualized in August 2001 Legal Status CompanySou rce Stock Exchanges. Latest Annual Reports needs vs. distribution to partners, taxation). In most jurisdictions, a limited liability company has been observed to be the traditional and pet option for profit-making ventures involving more than a close group of partners. The methods for transforming an association into a limited liability company varies between jurisdictions, but in principle, the lively members agree to transfer the assets and operations of their association to a pertly formed company, in exchange for shares in that new company. 11 Part I Issues Involved in Stock Exchange Demutualization 1. 5 Benefits of Demutualization of Exchanges 1. 5. Improvements in Corporate Governance Exchanges, when run as mutual associations, clubs and cooperatives of traders and brokers allow members exclusive rights of access to trading systems and platforms. Operating under this mutual structure, exchanges enjoyed quasi or full monopoly on trading and they derived profits from the inte rmediation of nonmember transactions. Since members under the mutual structure were owners of the exchange, they enforce rights to trading and disallowed direct access to the trading floor to any internationalrs. Brokers unknowingly resisted changes if these entailed additional costs, loss of revenue or competitive threat.This subway system eventually hinder the ability of the company to react readily to a rapidly changing market environment. Also, in some developing countries if the exchanges enjoyed a legal or decreed national monopoly, government-appointed officials and stakeholder representatives were often represented on the display panel. opus in the short-run such meshings may have proved conducive to mitigating entrench vested interests, in the long-run these can prove counter productive leading to frothing government interference. With the changing economics of alter auction trading and its open access electronically, the economics of member-cum-trading floor base d exchanges has alienated its merit.As a result, it has generated pressures to replace the age-old reliance on one member, one vote and the committee-based decision structure where control is vested with the interest groups that have exclusive rights of intermediation at exchange. Under demutualization, there is increased adoption to separation of ownership from membership that mechanically provides trading rights. This segregation helps introduce effective corporate governance if (i) there are accompanying improvements in the incentive structure,7 which allow the exchanges to sell their equity stakes to nonmembers and extraneousrs, (ii) decision making is based on this new ownership structure (not on rights of intermediation), and (iii) when there is an effective oversight of a governing board and a company structure. 7 Steill Ben 2002.Changes in the Ownership and Governance of Securities Exchanges Causes and Consequence. In Brookings-Wharton Papers on Financial Services. cap D. C. Brooking Institution Press. 12 Demutualization of Asian Stock ExchangesCritical Issues and Challenges Since under demutualization the economic ownership of the exchange is separated from trading membership, it is not appropriate that interest groups (such as the trading members) have exclusive authority over the decisions of exchange. After demutualization, some exchanges have give less than 50% of the voting rights to the broker members on the board of the exchange (see Table 1. 3).To gradually decrease broker define on the board, the exchanges have appointed nonsymbiotic directors or directors that are nontrading owners. After demutualization, the appointment of government appointed officials (a common feature of exchanges in developing economies) has by and large been viewed as controversial given that the demutualized exchange is a private sector company operating in a competitive environment. In environments where broker influences are often daunting, the continued ro le of the representative(s) of the securities regulator can support the transition of exchange till such time as the regulation is changed to allow the exchanges to operate in a fully competitive manner.Besides appropriate board representation, it is important that the management of the exchange is fully qualified and motivated to act not only in the best interests of the shareholders, but also to conduct the business in a prudent manner so as not to disrupt the neat and fair trading in the capital markets. To ensure that this public interest is satisfied, fit-and-proper showing of the board and management, similar to tests put in place in the banking regulations of many jurisdictions, could be undertaken. The management should be accountable to the board, which would mend managements appointment and remuneration, supervise the strategic direction and audit the financial and operational results, including risk of exposure management, and if needed, effect the removal of manageme nt.To ensure the effective supervision and auditing of management, it would seem prudent to ensure that a majority of board members are truly independent directors. To remain competitive, a stock exchange must follow international best practices in ethical motive and procedures. This is necessary in order to ensure that institutional investors do not displacement their investments to other alternatives perceived to be more fair or secure. Therefore, it is in the profit-motivated exchanges best interest to ensure fair and luculent practices and, as such, good corporate governance needs to be an integral part of the exchange once it is driven by the profit motive. 13Part I Issues Involved in Stock Exchange Demutualization Table 1. 3. Asian Stock Exchanges Board Representation STOCK EXCHANGE ASX BOARD REPRESENTATION/ writing 9 member board of directors. Of ASXs 9 directors, 4 are ASX Members/ Affiliates. 11 member board of directors. Of SGX 11 directors, 4 represent broker interests. SGX plans to broaden membership base by attracting new international members both global and regional securities houses. In addition, SGX will be introducing a new membership structure that allows new and pull rounding members to choose between trading-only membership or unclutter-only membership or both trading and clearing membership. Central Depository Pte. CDP) clearing rules have been revised to incorporate the admission requirements and expect to launch the new membership structure in the third quarter of 2002. The board comprises 8 Public Interest Directors appointed by the Financial Secretary to represent public and market interests, 6 Directors select by shareholders, and the Chief Executive of HKEx who is an ex-officio board member. Pursuant to the Exchanges and Clearing Houses (Merger) Ordinance, the number of Public Interest Directors will be trim down to no more than the number of select Directors immediately following the annual general meeting of HKEx in 2003. 5 1% of the board (8 of 15 directors) should be independent. 11 member board of directors, of whom 6 are outside directors. SGX HKEx PSE TSESource Stock Exchanges. Latest Annual Reports 1. 5. 2 Opening Up of Trading Rights of Exchanges pursuant(predicate) with the for-profit motive, the demutualized exchanges in Asia have included provisions to admit new trading partners (Table 1. 4) and permitted pensionable applicants (new customers) unrestricted commercial access to the services of exchange. Some exchanges, however, adopted a moratarium period on the issuance of new trading rights. If share ownership were a requirement for trading membership, it would be relatively easy for existing members to protect their market share by refusing to sell existing or issue any new shares, thus barring new entrants.If new shares can only be issued to the active trading members, then the public, financial institutions, institutional investors and others would by and large not be able to invest. T he question of a broader ownership 14 Demutualization of Asian Stock ExchangesCritical Issues and Challenges Table 1. 4. Asian Stock Exchanges Trading Rights and Dividend for Profit-Seeking STOCK EXCHANGE ASX TRADING RIGHTS Trading rights may be acquired through application with ASX or from an existing Participant. Trading rights have to be acquired through application with SGX, as these cannot be secured through transfer from an existing member. In July 2000, SGX loose the securities market to new members, and five new member firms joined in 2000.SGX also changed its rules to allow a single legal entity to be a member firm in each of the securities and derivatives markets thereby furthering their members opportunities to trade in both markets. Access to the markets may be obtained through acquisition of trading rights from existing members of the exchanges and from HKEx after the expiry of a two-year moratorium on March 2002. Trading rights issued by HKEx (other than those automat ically conferred to the exchange shareholders on the effective date) will not be transferable. For a further period of 2 years thereafter, no new trading rights will be issued for less than HK$3. 0 million per Stock Exchange Trading Right or for less than HK$1. 5 million per Futures Exchange Trading Right.An entity may acquire trading right from an existing trading participant (with approval of TSE), or through application with TSE. Trading right can be acquired through leverage from an existing trading participant. PSE temporarily imposed a moratorium on the issuance of new trading rights and limits it to its present number of 184, transferable for an unlimited period of time. PAYOUT RATIO 70% of net profit after tax. 85% SGX HKEx 46% TSE n. a. PSE n. a. Source Stock Exchanges. Latest Annual Reports base of the exchange (as a public listed company) is critical in situations where exchanges need to raise funds for future investments. Broader ownership would help avoid potentially la rge swings in the value based on the trading of a limited number of shares only.With share ownership separated from the right to trade, the question of the compensation of existing trading members arises especially since trading rights are granted freely to new members when the existing 15 Part I Issues Involved in Stock Exchange Demutualization members had to acquire their trading memberships. If existing shareholders continue to retain their shares, then they would enjoy the trading rights granted to the shareholders and there would be no need to give them for trading rights. This is argued largely because for both the old and new shareholders, the economic value that the shares now represent would always be inclusive of the right to trade provided such rights have been granted.In order for shares to have economic value, there must be an expectation of dividends, at some point in the future. The introduction of a dividend policy (which does not exist in mutual exchanges), coupled with a listing of the shares, thus transfers the value of stock exchange share ownership from the right to trade, to the right to receive dividends and trade the shares (see Table 1. 4). These factors should in theory minimize the resistance to the demutualization of exchanges by the brokers. However, a moratorium (limited in time) on the granting of new trading rights has often been introduced to change magnitude the competitive impact on smaller brokers. 1. 5. Restructuring and Alliances of Exchanges After being demutualized, most exchanges have revisited their commercial strategy to improve viability and enhance business prospects. Exchanges have opted to (i) consolidate, merge and/or integrate their domestic markets (ii) build alliances by establishing cross-border linkages with other exchanges within or outside the region and (iii) merge with other exchangesa phenomena more predominant thus far in Europe. In Asia, the exchanges have by and large opted thus far for (i) and (ii ). stress has been largely to re-group businesses to broaden the markets, offer issuers and investors better(p) distribution networks and improved liquidity.Predominant in-country mergers or restructuring have taken place in Singapore, Hong Kong, Australia and Japan, and in early 2002, the Kuala Lumpur Stock Exchange (KLSE) integrate with MESDAQ (Table 1. 5). In-country restructuring of exchanges has involved (i) Merger of two or more exchanges into a single viable nationallevel company, which would be of sufficient scale to be an interesting partner for other (foreign) exchanges, and as a listed company for investors to consider. While these mergers lead to 16 Demutualization of Asian Stock ExchangesCritical Issues and Challenges Table 1. 5. Asian Exchanges Mergers and Alliances STOCK EXCHANGE TSE MERGERS PRIOR TO DEMUTUALIZATION Hiroshima and Niigata Stock Exchanges merged with the TSE in March 2000. ALLIANCES W