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Study Puts Case For Common Stock Exchange Regulation

by Leroy Baker, for, New York

26 September 2007

Against the current backdrop of consolidation of the world's major stock exchanges, the CFA Institute Centre for Financial Market Integrity has published a study which challenges the current system of self-regulation of securities markets and argues for a common global regulatory framework for these markets.

The white paper, “Self-Regulation in Today’s Securities Markets: Outdated System or Work in Progress?” maintains that over the past decade, securities markets worldwide have encountered more rapid changes to structure, market participants and oversight than at any other time in their history. These changes have challenged several of the underlying premises of self-regulation, both in the US and as practiced elsewhere in the world, the study observed.

“We recognize that a self-regulatory approach can create clear efficiencies,” observed Linda Rittenhouse, senior policy analyst of the CFA Institute Centre. “Our long-held support for self-regulation, however, is tempered when investor protections appear to be compromised. This paper examines whether and how self-regulation can work given the current landscape, and contributes to the dialogue as standard-setters around the world debate the merits of competing systems of market oversight.”

The CFA Institute Centre paper suggests that there is a growing need for added investor awareness and system improvements, due to developments that have affected the landscape of the global securities markets, including the demutualization of securities exchanges, the rise of global and cross-market trading strategies, the growing variety of products currently traded that challenge the traditional regulatory structures, and the consolidation of security exchange membership in some markets, which introduces the potential for conflicts of interest.

“Significant changes have occurred in the global marketplace over the past 10 years that have resulted in an unquestionable need for refinement, especially given the growing number of cross border exchange consolidations,” announced Rittenhouse. “In our view, the lack of integration among current systems of self-regulation in use around the globe can lead to confusion and often provide insufficient consistency across markets in terms of both investor protection and appropriate levels of transparency and information for investors."

The CFA Institute Centre is advocating for a more global oversight framework of securities markets focused on efficiency and investor protection, and has issued recommendations for change in the following key areas:

  • Where self-regulation is practiced, establish an independent body to oversee the regulation of the securities market that is separate and distinct from exchange/market operations;
  • Eliminate dual or wasteful oversight conducted by multiple regulatory offices, which add costs and duplication. For example, create one regional or national entity with regulatory authority over all broker dealers;
  • Recognize a common framework for regulation, especially in keeping with International Organization of Securities Commissions principles; and
  • Recognize an existing or new global organization that would rate each market in terms of compliance with this common framework.

“The financial markets around the world have evolved dramatically,” suggested Kurt Schacht, CFA, managing director for the CFA Institute Centre. “These developments signal a strong need to review, refine, and consider alternatives for the US and global securities market regulatory systems that may better serve the changing marketplace. We recognize this process will take years, but the consideration of various structuring options should begin.”

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