Demutualization of Stock Exchanges: what could be done by CASE

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Demutualization of Stock Exchanges what could
be done by CASE?
In Alexandria from 1888 In Cairo from 1903
Workshop on North African Emerging Capital
Markets Cairo, 31 March 2004 Dr. Shahira Abdel
Shahid, CASE
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Outline

• Overall forces affecting Exchanges globally.
• CASE Goals Objectives.
• Expected Benefits of Demutualization of
  Exchanges.
• Main Challenges in Demutualization of Exchanges.
• Expected Benefits of CASE Corporatization.
• Main Challenges in CASE Corporatization.
• Conclusion.

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Overall forces affecting Exchanges globally

• Globalization, internationalization of markets,
  advancements in technology, de-regulation etc.
  have all increased competition among stock
  exchanges i.e. all are striving to attract
  investors good issuers.
• Most exchanges are moving towards the
  Demutualization Model. (Around 23 Exchanges by
  end of 2003- More are thinking about it).

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Overall forces affecting Exchanges globally-2

• Global economies (US-Europe-Japan) have performed
  well in 2003, which have impacted positively on
  their stock markets. Global economic outlook for
  2004 has strengthened global financial markets
  are supported with low long-term interest rates.
• The performance of emerging stock markets was
  spectacular in 2003, including Egypt, CASE 30
  Index, was up by 134 beginning of 2004.
• Corporate governance is on top of the agenda for
  issuers, as well as Exchanges, same as CASE.

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CASE Goals Objectives-1

• Become a self regulatory organization setting its
  rules regulations to react faster to market
  participants.
• Introduce new financial products to increase
  liquidity turnover of CASE.
• Provide investor protection by improving
  corporate governance disclosure of listed
  companies.
• Establish a Dispute Resolution System to resolve
  conflicts among members.

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CASE Goals Objectives-2

• Develop sophisticated risk management tools for
  the capital market. This includes capital
  adequacy ratios, margin trading rules,
  short-selling regulations, circuit breakers etc.
  The more the Exchange improves its risk
  management techniques, the more investors are
  protected transparency will increase.
• Become a more efficient Exchange by providing
  better quality services tailored to the needs of
  issuers and broker-members, which in turn would
  increase the revenues of the CASE.

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To Achieve CASE Goals Objectives.

• Substantial capital is required, which is not
  available at CASE and may not be provided by the
  Government, due to other announced priorities.
• It will be very difficult to achieve CASE goals,
  unless the required capital is available, which
  is not possible, unless CASE is privatized.
• The new governance structure would enable CASE as
  a business oriented entity to raise capital from
  shareholders, as a business corporation.

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• Risk facing CASE if not acting quickly1

A World Bank study in 2002 concluded that
Migration of order flow is putting pressure on
stock exchanges around the world. For some
exchanges, already more than half of trading and
listing have migrated offshore. Migration makes
it difficult for countries to sustain
full-fledged local stock exchanges. As trading
volumes further decrease, financing the fixed
overhead of maintaining market oversight,
clearing settlement systems, generating enough
business for local investment banks, accounting
firms other support services will become even
harder, especially for smaller emerging markets.

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Risk facing CASE if not acting quickly2
The trend towards increased migration will thus
make it more difficult for small exchanges to
survive. If CASE does not act quickly, there is
a great risk that blue chips listed on CASE will
migrate to other regional exchanges.
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Expected Benefits of Demutualization-1

• Demutualization allows the Exchange to raise
  capital to develop its business
• Demutualization allows for diversification of the
  Exchanges shareholder base so modifies its
  corporate governance
• Demutualization enables the separation of
  ownership rights from trading rights, thus many
  demutualized exchanges have opened access to
  their trading platforms to other participants,
  which increased their trading turnover

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Expected Benefits of Demutualization-2

• Demutualization has allowed exchanges to review
  their commercial strategy. Many achieved
  consolidation in their domestic markets by
  merging the derivatives cash segments or
  including trading, clearing settlement services
  under one roof, in order to create economies of
  scale.
• Demutualization is accompanied by the development
  of cross border exchange linkages international
  alliances among various Exchanges.

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Main Challenges in Demutualization

• A demutualized exchange aims to maximize profits
  dividends for its shareholders, is argued to
  have less incentive to take enforcement actions
  against its customers or users, who are a source
  of income.
• Self-Regulatory functions of a demutualized
  exchange.
• Ownership in the demutualized exchange.

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Counterarguments
A demutualized exchange cannot afford to risk its
reputation, customers market integrity given
their implication on business revenue streams.
A demutualized exchange will implement a
governance structure to lessen the conflicts of
interest. Demutualized exchanges separate
commercial activities of the Exchange from
regulatory functions. Also, Market Regulators
took over all powers functions of Exchanges
regarding their self-listing. Imposing a ceiling
on the ownership of any one entity in a
demutualized exchange e.g. five percent.
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Expected Benefits of Corporatizing CASE-1

• The BOD of CASE will be made up of shareholders
  or investors with no government representation.
• A World Bank Study in 2002 noted that while in
  the short-run government appointments, may be
  conducive to mitigate entrenched vested
  interests, in the long-run, they can prove
  counter-productive leading to unhealthy
  government interference.

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Expected Benefits of Corporatizing for CASE-2

• It will allow CASE to sell its equity stake to a
  mix of shareholders, decision making will be
  based on this new ownership structure (not on the
  rights of intermediation or government
  representation), which ensures an effective
  oversight of a governing Board.
• It will provide CASE with the necessary capital
  to introduce new products, recruit caliber staff,
  compete on the always expensive technology level,
  leverage the value of the Exchange as a brand
  name etc.

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Expected Benefits of Corporatizing CASE-3

• The new structure will ensure that the management
  of the Exchange is fully qualified motivated to
  act not only in the best interests of the
  shareholders, but also to conduct the business in
  a prudent manner so as not to disrupt the orderly
  fair trading in the Egyptian capital market.
• To remain competitive, the privatized CASE must
  follow international best practices in rules,
  ethics procedures.

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Main Challenges facing CASE Corporatization-1

• As witnessed in the early stages of the
  privatization program in Egypt in the 1990s, to
  ensure success, there must be full political
  backing support from the government. The same
  applies to CASE corporatization.
• Valuation of CASE shares.
• Regulatory powers of CASE after its
  corporatization.

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Main Challenges facing CASE Corporatization-2

• Ownership of CASE Choice of financial
  institutions that would be shareholders of CASE.
• Decision on the future services/products that
  would be provided by CASE- that add value to the
  Exchange achieves its objectives.
• These are but few challenges that need to be
  addressed prior to CASE corporatization.

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Conclusion

• CASE becomes a private company owned by
  shareholders.
• In order to achieve CASE goals remain
  competitive in the region, it must be privatized
  gradually.
• In the interim stage, the Exchange will be first
  corporatized fully owned by the government.
  Then, gradually the government starts selling its
  equity stake in CASE to financial institutions
  via a private placement.

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