Changes in the Ownership and Governance of Securities Exchanges: Causes and Consequences

Over the past five years we have witnessed substantial changes in the ownership and governance structures of securities exchanges, particularly in Europe. Recent surveys indicate that a substantial majority of the world’s exchanges would like to “demutualize” in the coming years. The concept of demutualization remains a hazy one, however, along multiple dimensions: the factors that distinguish a demutualized from a mutualized exchange, the factors that motivate demutualization, and the implications of demutualization for the way in which exchanges are regulated. In seeking to clarify the meaning of demutualization, we hope as well to clarify the sources of conflict between the role of an exchange as a commercial enterprise acting in the interests of its owners and its role as a quasi-regulatory body. Government regulators around the world have expressed concern about the effect of exchange ownership and governance reforms on the ability of exchanges to meet the self-regulatory obligations devolved to them. Mutuality and self-regulation in the public interest are typically seen as going hand-in-hand. As we discuss in some detail, it is this misapprehension that lies at the heart of many concerns directed at demutualization. Regulatory failures are inevitable any time self-regulatory obligations imposed on an exchange conflict with the commercial interests of the exchange’s owners. Such commercial interests are no less powerful for a mutualized exchange than for a demutualized one.