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Self-Regulatory Organizations Principles and Issues

Self-Regulatory Organizations Principles and Issues. Anjali Kumar World Bank. Self-Regulatory Organizations and IOSCO Principles (Sept. 98). IOSCO Principle 6:

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Self-Regulatory Organizations Principles and Issues

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  1. Self-Regulatory OrganizationsPrinciples and Issues Anjali Kumar World Bank

  2. Self-Regulatory Organizationsand IOSCO Principles (Sept. 98) • IOSCO Principle 6: Principle 6: “The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of their markets” • IOSCO Principle 7: Principle 7: “SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities” • Underlying premises: self interest (to attract capital and investors); competition (among intermediaries)

  3. Self-Regulatory OrganizationsRecognized benefits… Potentially valuable complement to regulator: • More depth and expertise on market operations / practices • Potentially greater adaptability and flexibility • Sometimes higher ethical standards than legal mandates • Greater willingness of members to comply voluntarily • Lower direct costs of regulation – cost savings

  4. Self-Regulatory Organizations…potential limitations • Conflicts of interest due to: • Conflicts between business and market development goals Examples - listing requirements • Dangers of collusive behavior – tendency to limit competition and protect members • Access to valuable information about market participants • Responsibility for both market segment regulation and member supervision – industry interest first and public interest next. • Avoid confrontations with members which affect business • Costs: may be especially important in emerging markets

  5. Self-Regulatory OrganizationsThe Regulator should require the SRO to… • Set standards and maintain ongoing scrutiny to ensure interests of public • Ensure adequate enforcement authority • Cooperate with regulator on investigations • Ensure fair treatment for all members and avoid uncompetitive rules • Maintain confidentiality • Regardless of degree of self regulation the regulator should retain oversight and authority for direct intervention

  6. Self-Regulatory OrganizationsPreconditions for Success Accepted preconditions: • Strong overall legal and regulatory framework including enforcement and conflict resolution Appropriate contractual relationship with members • Transparency, accountability, information sharing – public awareness Debatable preconditions: • Size – large but not too large? Externalities of bad behavior • Motivation - Willingness to pay? Industry financing

  7. Self-Regulatory OrganizationsHistorical Evolution in the USA • Frequently true that self-regulation existed before statutory regulation – major role in US and UK markets – but precedence is not as important as maturity and relative roles • NYSE already over 100 years old when SEC was established in 1934 • Consensus regarding need for oversight after market crash of 1929 - yet NYSE was allowed to maintain its own rules • Exchange Act provided that SRO should meet a number of standards (Sections 6(b) and 15A) • But SEC was given an important oversight role • A disciplined member of an SRO can appeal to the SEC • SEC can enforce rules if SRO is “unable or unwilling” • SEC can also bring enforcement actions against SRO itself

  8. Self-Regulatory OrganizationsApplicability to Emerging Markets • Limitations in competition can imply that SRO model cannot ensure fair and efficient markets • Long term benefits of compliance with rules may conflict with short term costs • Moral Hazard issues • Need for parallel development in framework of accounting etc to ensure transparency • Wide difference in approaches taken by various emerging markets

  9. Self-Regulatory OrganizationsInLatin America – themes to discuss • SROs in Latin America may have greater role compared to many emerging markets – eg East Asia • In some cases, formal recognition of SRO may be accompanied by limited role – sometimes due to for-profit nature eg of exchanges • Consequently, role may be substantially promotional or informational, and supportive to regulator • Secrecy provisions and limits to sharing of information • Extending the role implies an examination of market conditions – examine the extent to which preconditions are met – are we ready? • Examine also scope for formalizing the role of some trade associations into SROs

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