Demutualization and Customer Protection at Self-Regulatory Financial Exchanges
U.S. Commodity Futures Trading Commission (CFTC)
Michel A. Robe
American University - Kogod School of Business
March 30, 2010
Journal of Futures Markets, Vol. 31, No. 2, pp. 126-164, February 2011.
In the past decade, many of the world’s largest financial exchanges have demutualized, i.e., converted from mutual, not-for-profit organizations to publicly-traded, for-profit firms. In most cases, these exchanges have substantial responsibilities with respect to enforcing various "trade practice" regulations that protect investors from dishonest agents. We examine how the incentives to enforce such rules change as an exchange demutualizes. In contrast to oft-stated concerns, we find that, in many circumstances, an exchange that maximizes shareholder (rather than member) income has a greater incentive to aggressively enforce these types of regulations.
Keywords: Demutualization, Ownership structure, Regulation of financial exchanges, Enforcement delegation, Trade practice Rules, Broker heterogeneity
JEL Classification: G28, D02, K23
Date posted: May 4, 2010 ; Last revised: January 19, 2011