04 April 2024

IOSCO: Evolution in the Operation, Governance and Business Models of Exchanges: Regulatory Implications and Good Practices

Executive summary
Exchanges are the lynchpins of the financial system; they are the organized marketplaces through which most equities (as well as many other financial instruments1) are traded. Consequently, how exchanges are organized and run is of critical interest to regulators – both with respect to how exchanges operate and the effect of the exchanges’ operations on the wider financial market. The transformation of exchanges from mutual ownership to for-profit entities, known as demutualization, has contributed to increased competition, technological advancements, and the emergence of new types of trading venues2. In addition to their traditional market functions, most exchanges now also engage in other diverse activities such as data services and technology provision.
The Report focuses on equity exchanges but may be of relevance to other types of trading venues and trading in other classes of financial instruments. In particular, this Report:
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describes and analyses the changes in the structure and organization of exchanges and, in particular, their business models and ownership structure;
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outlines the impact of these changes on market structure, emphasizing the shift from traditional models to more competitive, cross-border, and diversified operations, whereby exchanges have become part of larger corporate groups, leading to resource-sharing and process consolidation;
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discusses regulatory considerations and potential risks and challenges, exploring: (i) the organization of individual exchanges and Exchange Groups, noting the adoption of matrix structures and potential conflicts of interest; (ii) the supervision of Multinational Exchange Groups; and (iii) the potential challenges of supervising individual exchanges within Exchange Groups; and
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outlines good practices that regulators may consider in the supervision of exchanges, particularly when they provide multiple services and/or are part of an Exchange Group.
1 E.g., ETFs, bonds, derivatives.
2 For the purpose of this Report, the term “trading venue” is generally defined as exchanges or other multilateral trading facilities, including, for example, alternative trading systems (ATSs) and multilateral trading facilities (MTFs). We recognize, however, that the concept of a “trading venue” is evolving in several IOSCO member jurisdictions. For example, the concept may, at the discretion of individual members for their jurisdictions, also include swap execution facilities (SEFs) or the European “organized trading facilities” (OTFs). However, for this project, a “trading venue” does not include a single dealer system or a broker crossing facility.
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In particular, looking at the regulatory requirements and supervisory arrangements currently in place across IOSCO jurisdictions to help to ensure that exchanges are properly run, and considering the existing IOSCO Principles on secondary markets3, this Report proposes six good practices that regulators may consider.
They cover three specific areas, namely the: (1) Organization of Exchanges and Exchange Groups, (2) Supervision of Exchanges and other Trading Venues within Exchange Groups and (3) Supervision of Multinational Exchange Groups.
For each of these topics, the good practices are also complemented by a non-exhaustive list of the supervisory tools currently used in IOSCO jurisdictions to address the issues under discussion, which may serve as examples to other regulators in adapting the good practices in their respective jurisdictions. However, these “toolkits” are examples only and do not exhaust the way the proposed good practices can be implemented in each jurisdiction....

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