Exchange competition and governance
The Mint has two articles on exchange competition and governance which quote me extensively. I made the following statements:
Competition is always good, but in the exchange space one must also ensure that this doesn’t go in a totally different direction, where the competition is on who’s the least governed exchange.
Where one trades is driven by liquidity more than anything else. People want the ability to trade and will chase liquidity. An exchange with a near-monopoly in a particular contract can raise margins and transaction charges significantly without losing much market share.
Even with a low ownership stake, one entity can control an exchange. And with an ownership cap, the threat of takeover is diminished, giving the entity in control a free run.
In other jurisdictions, the regulatory role of exchanges have been separated to non-profit entities to avoid conflict of interest. Such options could be considered in India.
Listing would improve accountability and lead to better disclosures. Besides, inspections and enforcements by the regulator could be strengthened.
My position is that competition is always good and the regulators should endeavour to get as much competition as possible and design a regulatory framework to deal with the consequences of competition. I believe that the “fit and proper” requirement that regulators consider while licensing regulated entities leads to unwarranted complacency. Regulators must assume that their regulatees are unfit and improper and frame regulations on this assumption. If this leads to a harsher regulatory regime than would prevail otherwise, so be it.
When I talked about listing, I had not read about the collapse of CLICO/CIB. With $24 billion of assets and 60 subsidiaries, operating in several fields, and spread over 20 countries – in the Caribbean, Central and North America and Europe, CLICO was one of the leading financial conglomerates in the Caribbean region before it failed. A couple of days ago, I read the speech of the Governor of the Central Bank of Trinidad and Tobago about the episode where he says:
For all its tremendous growth over the last several years, CLICO has remained a private company which has shielded the company from the kind of scrutiny (through, for example the submission of quarterly accounts) to which public companies are exposed.
I am veering round to the view that all systemically important financial intermediaries – banks, insurance companies, mutual funds, exchanges, operators of settlement and payment systems and so on – should be listed.
Posted at 4:09 pm IST on Sat, 21 Mar 2009 permanent link
Categories: corporate governance, exchanges
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