Demutualization Of Stock Exchanges

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Demutualization of Stock Exchanges

Financial Markets and Institutions

IqbalKhawer AliZubair Aslam


What is Demutualization?

the process of converting exchanges from nonprofit, member-owned organizations to for-profit, investor-owned corporations.

Corporatization and IPO of the stock exchange.

Reasons for Demutualization:GlobalizationInformation Technology

Benefits of Demutualization

Rationalized Governance

Investor Participation


Resources of Capital Investment

Challenges for Demutualized Exchanges

Conflict of Interestb/w ownership and management

Ownership StructureTransfer of ownership from members to non-members

Regulatory Framework

Demutualization Process

Ownership StructureDilution of membership by valuation of member seats.

Legal and Company StructureSimilar to a profit-making corporation

Demutualization History

First demutualized SE : Stockholm Stock Exchange (SSE), 1993, Sweden

Followed by Helsinki Stock Exchange, 1995Copenhagen Exchange, 1996Amsterdam Exchange, 1997Australian Exchange, 1998Toronto, Hong Kong, London SE, 2000

60% of WFE members demutualized by 2005Current Demutualization : Nairobi SE, Kenya

Case: Hong Kong Stock Exchange (HKEx)

Pre Merger/Demutualization Period (1999)The Stock Exchange of Hong Kong Limited (SEHK)Hong Kong Futures Exchange Limited (HKFE)Hong Kong Securities Clearing Company Limited (HKSCC)HKFE Clearing Corporation Limited (HKFECC)SEHK Options Clearing House Limited (SEOCH)

Case: Hong Kong Stock Exchange (HKEx)

Post Merger/Demutualization Period (2000)

Case: Hong Kong Stock Exchange (HKEx)

Post Merger/Demutualization PeriodHighest Market PriceHK$ 18.95 > 4 times before demutualization

P/E Ratio (based on 1999 earnings)35.8 times before demutualization

Rate of Equity Listing Increased60 new companies listed852 listed companies (2002) > 693 (1999)64 China Incorporated, 10 Foreign

Demutualization in Pakistan

Initiated by Federal Govt.

SECPs Expert Committee on Demutualization and Integration/Transformation of Stock Exchanges

Demutualization without Integration

Three individual demutualized SEsKSE, LSE, ISE

The process will be completed by the end of current year.

Conclusion / Recommendation

KSE as individual demutualized SE.

LSE and ISE as integrated SE

Merger with CDC

Better Understanding to resolve Agency Problems

Thank You !