Conflict-of-interest inherent in bourses
By Judith Balea, abs-cbnNEWS.com | 10/29/2009 4:23 PM
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MANILA – The inherent dilemma of the Philippine Stock Exchange (PSE) to strike a balance between promoting investments and imposing strict regulation is something that is common to all stock exchanges, based on a study by the Organization of Economic Cooperation and Development (OECD).
The OECD study underlined that exchanges face potential conflicts of interest in “the maintenance of a proper balance between an exchange’s public interest obligations and its commercial interests, and the potential misuse of regulatory powers for commercial purposes.”
The OECD said “the incentives faced by exchanges to establish and maintain high regulatory standards might weaken as they weigh the risk of deterring listings altogether or losing them to competing market places. This risk may be exacerbated by the pressures that an exchange is subject to from its shareholders to give top priority to maximizing profitability.”
The separation of roles of stock exchanges has already been done in big markets. An example is the New York Stock Exchange (NYSE).
According to the OECD, following the demutualization and self-listing of the NYSE, NYSE Regulation, a non-profit entity was established to regulate securities firms and companies listed on the NYSE and NYSE Acra. NYSE and NYSE Acra are both controlled by the NYSE Euronext Inc. The CEO of NYSE Euronext does not have a seat on the board of NYSE Regulation, whose board of directors is comprised of majority of directors unaffiliated with any other NYSE board.
But unless the budget of the regulatory arm is independent and substantial in this kind of arrangement, the OECD warned that its ability to regulate and investigate may be insufficient.
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