New exchange faces reduction in powers
The new exchange to be created through the merger of the stock and futures markets should have sharply reduced regulatory powers, according to a government report.
This is one of the key recommendations in the report to be discussed today with senior officials from the exchanges and government officials who make up the Co-ordinating Committee on Market Structure Reform.
Government plans call for radical changes to the function and structure of the merged exchange, which leaves it without a division to handle the regulation of brokers or listed companies.
According to a source close to the committee, the exchange will focus on the development of trading and technology.
This leaves the way open for the Securities and Futures Commission to expand its power to include the regulation of brokers and listed companies, which it at present shares with the two exchanges.
This change would mean that large numbers of people in the compliance and listing divisions of the exchanges would be transferred to the SFC. Details of this staff restructuring will be discussed after the new exchange is set up.
As proposed in the Budget in March, the exchanges will be demutualised and merged before a local listing in September next year.
The responsibilities for regulation that will remain in the hands of the exchange after the merger are principally confined to the vetting of applications for new listings.
'In the past, the stock exchange and the futures exchange had a conflict of interest. They are both owned by brokers, while at the same time they are also the regulators of brokers,' the source said.
'The reform aims to allow the exchange to focus on development of trading systems and new products to compete with other markets, leaving its regulatory function to the SFC.' The proposed changes are likely to widen the differences between the Government and brokers, who are demanding that the new exchange remain the front-line regulator for brokers and listed companies.
The new exchange will have five main divisions - cash market, derivatives markets, clearing, information services and information technology.
The information technology division will handle Internet trading services. These will allow investors to use the Internet to place orders on the exchange directly through the planned AMS3 trading system, which will be introduced next year.
Investors and brokers using the service will pay a fee to the exchange, generating for it a new income source.
The information technology division will be responsible for establishing and operating alliances with other electronic trading systems, such as Nasdaq.
It will be part of a new emphasis on technology development as part of a strategy to compete with overseas exchanges.