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The Future of Self-Regulation in Securities Markets. Clemente L. del Valle Lead Capital Markets Specialist April 30 th 2010. Agenda. Main Objective and Scope International Regulation Models International Trends Conflicts of Interest Reforming SRO Systems Lessons for the EMC. 2.

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the future of self regulation in securities markets

The Future of Self-Regulation in Securities Markets

Clemente L. del Valle

Lead Capital Markets Specialist

April 30th 2010

  • Main Objective and Scope
  • International Regulation Models
  • International Trends
    • Conflicts of Interest
  • Reforming SRO Systems
  • Lessons for the EMC


main objective and scope
Main Objective and Scope

Presentation based on a ongoing research being lead by the SMG (and John Carson main consultant) to develop a policy framework for use in advising the World Bank’s clients on employing self-regulation in capital markets.

Towards this objective, the paper

  • Analyzes major experiences in developed and developing countries with respect to employing self-regulation
  • Focuses on issues such as level of reliance on SROs, division of responsibilities with regulator, managing the COI, governance and government oversight
  • Indentifies dominant trends and extracts key lessons for the developing world


reliance on sros models
Reliance on SROs – Models





  • Exchange performs front-line regulatory functions for its market
  • SRO that is purely a regulator, not a market operator, performs extensive regulatory functions
  • Public authority performs most or all regulatory functions. Exchanges have very limited role
  • Exchange as SRO performs extensive regulatory functions

Trend towards this model

Most prevalent model

Trend away from this model

Only developed in a few countries

  • UK
  • France
  • Emerging model in EU
  • US (NYSE)
  • Hong Kong (HKE)
  • Singapore (SGX)
  • Sweden (OMX)
  • Dubai (DIFX)
  • US (CME)
  • Brazil (BSM)
  • Japan (TSE)
  • Malaysia (BM)
  • Australia (ASX)
  • Canada (IIROC)
  • Japan (JSDA)
  • Colombia (AMV)


corporate governance of sros
Corporate Governance of SROs

Ownership &



of Board

Selection of





key international trends
Key International Trends
  • Value of self-regulation has increasingly been questioned
  • Reduced reliance on SROs (esp. in Europe)
  • Exchange SROs’ roles cut back due to conflicts
    • Independent SRO units in Exchange retain important role
  • Self-regulation is stronger and more credible in many countries that rely on it
  • Move to independent governance and away from Member control
  • SROs must be responsive to broader stakeholder interests
  • Stronger oversight and direction from statutory regulators


exchange sros reduced role
Exchange SROs’ Reduced Role

Why have Exchange SROs’ roles been cut back?

  • Reduces conflicts of interest in self-regulation
  • Positions exchanges to focus on product and market development, and competitiveness
    • Business focus
    • Reduced costs
    • Relationship with participants and issuers is mainly as customers
  • Public regulators are often more effective
    • Broader jurisdiction and power
  • Public regulators may impose higher and more consistent standards of regulation


managing sro conflicts of interest
Managing SRO Conflicts of Interest
  • Separate governing body to oversee regulatory operations
  • Separate organizational structures for regulatory and business operations
  • Firewalls to separate regulatory operations from business or advocacy operations
  • Separate and secure premises for SRO operations
  • Contract out all or part of the SRO’s regulatory responsibilities
  • Establish policies and procedures on managing conflicts of interest


sro oversight overview
SRO Oversight – Overview

MOU oversight process


oversight examinations of sros
Oversight Examinations of SROs



Preferred model

Regular inspections, tending to review all areas, or the same pre-identified areas, each time. Differentiation in scope is often limited for different areas reviewed.

Targeted inspections, focused on higher risk areas. The areas reviewed and scope of review often changes from one inspection cycle to the next.



Ad hoc inspections to address specific issues. Used in both models.


reforming sro systems policy issues
Reforming SRO Systems - Policy Issues
  • What are the imperatives for change?
    • Positioning capital markets to be competitive
    • Address exchanges’ conflicts of interest and core mandate
    • Need for greater supervision and compliance capacity
    • Unregulated sectors or products
  • Strategy for capital markets development
    • How should exchanges and markets be positioned?
  • Public policy on reliance on self-regulation
  • Capacity, resources and credibility of potential SROs
  • Legal framework
  • Stakeholders’ views and commitment


main lessons for the emc
Main Lessons for the EMC
  • SRO frameworks could be a valuable addition to an effective regulatory framework
  • However, there is no single “right” approach
  • Each market has to find its “right” solution based on its size, complexity and history
  • The traditional closed club approach is no longer valid
  • Demutualization does not preclude the exchange’s involvement but does require a new framework
  • The Independent SRO model has advantages but also big challenges (e.g., costs, regulatory capture)


main lessons for the emc ctd
Main Lessons for the EMC ctd.
  • The relationship between the SRO and the regulator has also changed
  • However, a strong regulator is a must for all models
  • Deciding what model to follow demands a serious strategic analysis (cost/benefit, political commitment)
  • The implementation of a new framework relying on SROs also presents risks that need to be managed
  • The recent crisis has highlighted the vulnerability of regulatory frameworks and the need for good governance and effective management of the COI
  • NO concluding answers and need for ongoing improvements



Thank you.