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Running the World's Markets

Running the World's Markets: The Governance of Financial Infrastructure

Ruben Lee
Copyright Date: 2011
Pages: 472
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  • Book Info
    Running the World's Markets
    Book Description:

    The efficiency, safety, and soundness of financial markets depend on the operation of core infrastructure--exchanges, central counter-parties, and central securities depositories. How these institutions are governed critically affects their performance. Yet, despite their importance, there is little certainty, still less a global consensus, about their governance.Running the World's Marketsexamines how markets are, and should be, run.

    Utilizing a wide variety of arguments and examples from throughout the world, Ruben Lee identifies and evaluates the similarities and differences between exchanges, central counter-parties, and central securities depositories. Drawing on knowledge and experience from various disciplines, including business, economics, finance, law, politics, and regulation, Lee employs a range of methodologies to tackle different goals. Conceptual analysis is used to examine theoretical issues, survey evidence to describe key aspects of how market infrastructure institutions are governed and regulated globally, and case studies to detail the particular situations and decisions at specific institutions. The combination of these approaches provides a unique and rich foundation for evaluating the complex issues raised.

    Lee analyzes efficient forms of governance, how regulatory powers should be allocated, and whether regulatory intervention in governance is desirable. He presents guidelines for identifying the optimal governance model for any market infrastructure institution within the context of its specific environment.

    Running the World's Marketsprovides a definitive and peerless reference for how to govern and regulate financial markets

    eISBN: 978-1-4008-3697-0
    Subjects: Business, Political Science, Finance

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-x)
  3. Foreword and Acknowledgments
    (pp. xi-xii)

    This book is the result of a project analyzing the governance of infrastructure institutions in the financial markets led by Ruben Lee. He initiated the project, formulated its goals, designed its structure, raised the sponsorship for the project, and commissioned and managed a large team of experts to contribute papers on specified topics for the project. Lee then wrote the book, incorporating those elements of the experts’ contributions into the text as he saw fit. The book is not an edited collection of essays written by the different contributors. Rather, Lee’s goal was to produce an authoritative, coherent, and well-argued...

  4. List of Acronyms
    (pp. xiii-xx)
  5. Introduction
    (pp. 1-6)

    The governance of infrastructure institutions in the financial markets has become a matter of significant commercial, regulatory, legislative, and even political concern. These institutions include exchanges (such as Istanbul Stock Exchange, NYSE Euronext, and Stock Exchange of Thailand), central counterparties (CCPs) (such as EuroCCP, Japan Securities Clearing Corporation, and LCH.Clearnet in the UK), and central securities depositories (CSDs) (such as The Canadian Depository for Securities, Indeval in Mexico, and Strate in South Africa). They play a fundamental role in ensuring the efficiency, safety, and soundness of financial markets globally, and more generally in furthering economic development. The manner in which...

  6. Part One: Background Information and Analysis

    • CHAPTER ONE Definitions
      (pp. 9-39)

      To many people it is clear what are the “infrastructure institutions” in financial markets. They are the exchanges, CCPs, and CSDs that provide the trading, clearing, settlement, and sometimes other, core functions for cash and derivative markets.¹ These institutions are indeed the focus of attention here. There are, however, also many reasons why the definitions of an infrastructure, an exchange, a CCP, and a CSD are all quite opaque. This is important, as the identification of a particular organization as one of these types of institutions can have significant commercial, regulatory, and policy consequences. This chapter aims to provide some...

    • CHAPTER TWO Market Power
      (pp. 40-82)

      A critical determinant of whether exchanges, CCPs, and CSDs should be considered infrastructure institutions is whether they have market power. This chapter explores whether they do. It is composed of five sections. Some introductory comments are presented first. The extent to which exchanges, CCPs, and CSDs may each have market power is discussed, respectively, in the next three sections. Conclusions are provided in the last section.

      The question of whether exchanges, CCPs, and CSDs have market power turns primarily on whether there is competition in the provision of trading, clearing, central register, and settlement services. The broad factors that lead...

  7. Part Two: Survey Evidence

    • CHAPTER THREE The Allocation of Regulatory Powers over Securities Markets
      (pp. 85-116)

      There is great diversity in the way in which jurisdictions allocate regulatory powers over their securities markets. Typically such authority is divided between central governments, independent regulatory agencies, market infrastructure institutions, and SROs. This chapter seeks to compare how different jurisdictions allocate regulatory powers over their securities markets. It is difficult to do this for various reasons: the manner in which regulatory powers are allocated to different institutions in any single jurisdiction is complicated; the nature of market infrastructure institutions and SROs varies widely across countries, with, for example, some jurisdictions requiring market infrastructure institutions to be SROs, and others...

    • CHAPTER FOUR Regulation and Governance of Market Infrastructure Institutions: Global Perspective
      (pp. 117-144)

      The development and stability of national financial markets have become two paramount goals in most countries’ strategies for sustainable economic growth, and the regulation and governance of market infrastructure institutions are now thought essential components of such strategies. This chapter examines a unique set of assessments of securities markets and their regulation, from countries around the world, in order to provide a global perspective on policymakers’ viewpoints about the regulation and governance of market infrastructure institutions.¹ The assessments were undertaken as part of an initiative called the Financial Sector Assessment Program (FSAP), implemented jointly by the International Monetary Fund (IMF)...

    • CHAPTER FIVE Governance of Market Infrastructure Institutions: A Snapshot
      (pp. 145-166)

      The aim of this chapter is to survey how infrastructure institutions in the equity markets around the world—namely exchanges, CCPs, and CSDs—were governed in 2006. As has been widely recognized, the governance of stock exchanges has been radically transformed over recent years.¹ Exchange demutualization began in 1993 when the Stockholm Stock Exchange demutualized.² Prior to this time, most stock exchanges had been nonprofit mutual organizations run by their members since their inception, or in some instances organizations controlled by the state. By December 2007, however, 76% of the WFE’s member exchanges that responded to a survey it conducted...

  8. Part Three: Case Studies

    • CHAPTER SIX Exchanges
      (pp. 169-200)

      A series of case studies illustrating how specific exchanges have actually been governed in particular contexts are presented in this chapter. The following institutions and contexts are described in turn: the proposed iX merger between Deutsche Börse and the LSE, and its subsequent collapse, in 2000; the “Penny Stocks Incident” at HKEx in 2002; the attempted takeover of the LSE by NASDAQ over the period 2006–8; Euronext’s purchase of LIFFE in 2001; the resignation of the chairman/CEO of the NYSE in 2003; and the purchase by the “Murakami Fund” of a major block of shares in the Osaka Securities...

      (pp. 201-244)

      A series of case studies illustrating how some specific CCPs and CSDs have been governed in particular contexts are presented in this chapter. The following institutions and contexts are described in turn: the relationship between The Canadian Depository for Securities’ owners, its users, and board directors from the company’s inception to 2008; the establishment of EuroCCP by DTCC over the period 2000–2002; the creation of Clearstream International by Deutsche Börse over the period 1999–2002; some aspects of how Euroclear was governed regarding its creation, ownership, and board structure up until 2006; and the creation of LCH.Clearnet and some...

  9. Part Four: Policy Analysis and Recommendations

    • CHAPTER EIGHT What Is the Most Efficient Governance Structure?
      (pp. 247-300)

      The choice of governance model a market infrastructure institution should adopt is often contentious. This chapter analyzes what is the optimal governance model for market infrastructure institutions using the broad goal of efficiency as the main yardstick to compare different models. Three fundamental elements of governance are examined: an organization’s ownership structure, its profit mandate, and its board composition. The analysis draws on the extensive and diverse literature on the governance of different types of organizations, and also on a wide range of context-specific experiences of individual market infrastructure institutions.¹

      The criterion of efficiency as the main benchmark by which...

    • CHAPTER NINE Who Should Regulate What?
      (pp. 301-338)

      The question of what regulatory authority over securities markets, if any, should be assigned to exchanges, CCPs, and CSDs has long been controversial.¹ This issue is explored here in the broader context of examining how regulatory powers should be allocated between government regulators, SROs, and other types of regulatory institutions.

      The discussion is limited in several ways. First, a full specification of how regulatory powers should be allocated in any single jurisdiction is not presented. Second, the discussion does not provide a history of regulation, either generally or in any specific jurisdiction.² Third, although setting and enforcing regulatory standards in...

    • CHAPTER TEN How Should Market Infrastructure Institution Governance Be Regulated?
      (pp. 339-362)

      The governance of market infrastructure institutions is now seen as a fundamental factor determining whether such organizations deliver the public interest, and as a result regulatory interest and intervention in their governance has been growing.¹ This chapter explores what regulatory intervention in the governance of market infrastructure institutions, if any, is optimal. Attention is focused on how such intervention can enhance the realization of the three core objectives of securities markets regulation identified by IOSCO, namely the protection of investors, ensuring that markets are fair, efficient, and transparent, and the reduction of systemic risk.

      The chapter is divided into five...

  10. Authorities
    (pp. 363-364)
  11. Cases and Decisions
    (pp. 365-366)
  12. Notes
    (pp. 367-394)
  13. References
    (pp. 395-432)
  14. List of Contributors
    (pp. 433-436)
  15. Index
    (pp. 437-450)