Reviewing New Zealand's Stock Exchange Regulation: Further Issues and Alternate Options

Abstract

In July 2008 the Capital Market Development Taskforce (“the Taskforce”) was established to take a holistic look at New Zealand’s capital markets and comment on areas for improvement, with the ultimate aim of fine tuning capital markets to ‘substantially increase’ their contribution to New Zealand’s economic growth. The upshot for stock exchanges was a regulatory regime largely unchanged from its predecessor in the Securities Markets Act 1988, but with a licensing regime prefixed to the ability of an exchange to operate in New Zealand. This essay considers New Zealand’s approach to regulating its stock exchanges. My focus rests on two main areas: first, the gateway question of what is regulated. Second, who does the regulating or, more appropriately, the apportionment of regulatory function as between exchanges and government. In addressing the first area, I expand on the nature of, and issues posed by, alternative trading systems or “ATS”. Whether small exchange-type ATS should be subject to the new regime was one of the main questions for reviewers. I consider the question in detail and consider the scope of the new regime as it currently stands in the Financial Markets Conduct Bill. The question of who regulates is a conceptual discussion aimed more at NZX than smaller exchanges or ATS. I begin with self-regulation generally before looking at how the previous regime of NZX market operation and regulation teamed with gentle oversight by the Financial Markets Authority (“FMA”, formerly the Securities Commission) worked and, in particular, whether there were any problems with this arrangement. Before doing so, I discuss regulation itself in greater detail. It was demutualization that gave rise to the conflicts of interest that drove an outsourcing of regulatory function from the exchanges to government. In analyzing these conflicts of interest, I pose another way of regulating – by public ownership of the exchange – to be considered as an alternative to the global self-regulatory (with government regulatory oversight) status quo. I conclude by placing the excursion into stock exchange regulation back into context with the broader economic role of exchanges. But first: some initial context. Understanding the structure of exchanges and how they are regulated now is best understood by understanding where they have come from. I briefly outline exchange evolution generally and in New Zealand particularly, before setting the scene that has led to reform.