Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

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.

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