lee - running the world’s markets; the governance of financial infrastructure (2011)

Running the World’s Markets This page intentionally left blank Running the World’s Markets T G  F I Ruben Lee       Copyright © 2011 by Ruben Lee Requests for permission to reproduce material from this work should be sent to Permissions, Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TW press.princeton.edu All Rights Reserved Library of Congress Cataloging-in-Publication Lee, Ruben. Running the world’s markets : the governance of nancial infrastructure / Ruben Lee. p. cm. ISBN: 978-0-691-13353-9 (hardcover : alk. paper) Includes bibliographical references and index. I. Denitions—II. Market power—III. The allocation of regulatory powers over securities markets—IV. Regulation and governance of market infrastructure institutions : global perspective—V. Governance of market infrastructure institutions : a snapshot—VI. Exchanges—VII. CCPs and CSDs—VIII. What is the most efcien governance structure?—IX. Who should regulate what?—X. How should market infrastructure institution governance be regulated? HG4551 .L343 2011 332.64 22—dc 2010025764 British Library Cataloging-in-Publication Data is available The views and opinions presented in this book are those of Ruben Lee, and should not be taken to represent the views and opinions of any other person or institution. In particular, the views and opinions presented here should not be taken to represent those of either the contributors to the book, the sponsors of the book, or Oxford Finance Group. While every effort has been made to ensure the accuracy of this book, no factual material or statements presented here are guaranteed correct. The book is for informational purposes only. Neither Oxford Finance Group nor Ruben Lee accepts any liability for any losses, costs, expenses, damages, or any other form of liability caused by any direct or indirect reliance on the information and opinions contained in this book. This book has been composed in Sabon Printed on acid-free paper. ∞ Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 To Swee-Kheng, Tian-Mei, and Tian-Long To Mom and Dad This page intentionally left blank Contents Foreword and Acknowledgments xi List of Acronyms xiii I 1 Nature of Governance 1 Concerns 2 Issues 3 Approach 3 Structure 4 P O: Background Information and Analysis 7 C O Denitions 9 Infrastructure 9 Exchanges, Central Counterparties, and Central Securities Depositories 21 Conclusions 36 C T Market Power 40 Preliminary Comments 40 Exchanges 45 CCPs 61 CSDs 71 Conclusions 81 P T: Survey Evidence 83 C T The Allocation of Regulatory Powers over Securities Markets 85 World Federation of Exchanges 85 International Council of Securities Associations 88 Infrastructure Institutions in Major Markets 90 Conclusions 114 viii  •  Contents C F Regulation and Governance of Market Infrastructure Institutions: Global Perspective 117 The Financial Sector Assessment Program and Securities Markets Assessments 117 Observations 125 Conclusions 141 C F Governance of Market Infrastructure Institutions: A Snapshot 145 Data 146 Analysis 151 Conclusions 164 P T: Case Studies 167 C S Exchanges 169 Deutsche Börse / London Stock Exchange: Proposed iX Merger 2000 170 Euronext: Purchase of LIFFE 2001 177 Hong Kong Exchanges and Clearing: The Penny Stocks Incident 2002 180 NASDAQ: Attempted Takeover of London Stock Exchange 2006–8 189 New York Stock Exchange: Resignation of Chairman-CEO 2003 194 Osaka Securities Exchange: “Murakami Fund” Purchase of Shares 2005 198 C S CCPs and CSDs 201 Canadian Depository for Securities: Ownership, Usage, and Board Representation to 2008 201 Depository Trust & Clearing Corporation: EuroCCP 2000–2002 207 Deutsche Börse: Creation of Clearstream International 1999–2002 213 Euroclear: Creation, Ownership, and Board Structure up to 2006 217 LCH.Clearnet: Creation and Difculties 2003–6 231 Contents  •  ix P F: Policy Analysis and Recommendations 245 C E What Is the Most Efcient Governance Structure? 247 Ownership and Mandate: Archetypal Models and Primary Goals 248 Ownership Model and Mandate: Critical Factors Affecting Efciency 253 The Board: Role and Composition 276 Concluding Discussion and General Propositions 293 C N Who Should Regulate What? 301 Complexity 301 Factors and Constraints Affecting Relative Merits of Different Allocation Structures 307 Concluding Discussion and General Propositions 334 C T How Should Market Infrastructure Institution Governance Be Regulated? 339 Preliminary Comments 339 Investor Protection 342 Efciency, Fairness, and Transparency 348 Systemic Risk Reduction 353 Concluding Discussion and General Propositions 357 Authorities 363 Cases and Decisions 365 Notes 367 References 395 List of Contributors 433 Index 437 [...]... 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. .. information for the project The author would like to express enormous gratitude to everybody who helped in the preparation of the book Given their number and the confidential nature of their help, it is not possible to thank them all by name To the sponsors who made the project possible, to the contributors for their text and comments, to the many interviewees for their time and insights, to the many people... Instead, the answers to these questions are specific to the contexts in which they are raised This argument contradicts the notion promoted in many other analyses of financial markets, that standardization, harmonization, and the creation of an international consensus are critical A key aim of the book is to provide insight into the governance of market infrastructure institutions for a wide range of situations... Notwithstanding the current high level of anxiety about market infrastructure institutions as a result of the present financial crisis, at some stage this apprehension may diminish as the severity of the crisis recedes Concern about market infrastructure governance will, however, remain for many other reasons There is controversy about what is the most efficient way of governing market infrastructure. .. Infrastructure Understanding how the term infrastructure has generally been employed and the key factors relevant for determining whether an institution is an infrastructure illuminates how the term may be used regarding institutions in financial markets, and the implications of doing so Meaning and Use of the Term An examination of a broad range of definitions and uses of the term infrastructure highlights... as being an infrastructure are noteworthy: 1.  There are close links between many of them For example, the presence of economies of scale is often associated both with a natural monopoly and with a network industry 2.  The presence of any one of the identified factors and attributes is not sufficient to determine that an institution is an infrastructure 3.  None of them are exclusive to infrastructure. .. Market practitioners now realize that the manner in which these institutions are governed may affect both the fees they pay and more generally the viability of their business models There are also concerns about whether the pursuit of private interests at market infrastructure institutions is leading to anticompetitive behavior, and conversely about whether the pursuit of public interests at such institutions... require a series of complex and broad analyses, and is not undertaken here.2 The chapter is composed of three sections In the first, the meaning and nature of what is an infrastructure is explored Some comments on the definitions and nature of exchanges, CCPs, and CSDs, and on the functions they deliver, are provided in the second section Brief conclusions are offered in the last section Infrastructure. .. adversely affecting efficiency There is mounting anxiety about the presence of conflicts of interests at market infrastructure institutions, and about whether governance mechanisms should be put in place to minimize the occurrence of such conflicts, or to facilitate the management of them when they do arise Concern about conflicts of interest has become particularly acute where market infrastructure institutions... be allocated to market infrastructure institutions? •  What regulatory intervention in the governance of market infrastructure institutions, if any, is desirable? Approach A central thesis presented here is that there is no single global answer either to the question of how market infrastructure institutions are gov- 4  •  Introduction erned, or to the question of how market infrastructure institutions . Cataloging-in-Publication Lee, Ruben. Running the world’s markets : the governance of nancial infrastructure / Ruben Lee. p. cm. ISBN: 97 8-0 -6 9 1-1 335 3-9 (hardcover : alk. paper) Includes. team of experts to contribute papers on specied topics for the project. Lee then wrote the book, incorporating those elements of the experts’ con- tributions into the text as he saw t. The. markets. The aim was to obtain a broad diversity of sponsors, both in terms of type and location, in order to ensure that the project would be independent of them. The sponsors in- clude the Autorité