Market integrity is a cornerstone of fair and efficient markets, ensuring that participants enjoy equal access to markets, that price discovery and trading practices are fair, and that high standards of corporate governance are met. For this purpose, market integrity includes monitoring for market abuse and manipulative trading, fostering nondiscriminatory market access, price formation/transparency, strong disclosure standards, and investor protection. Stock exchanges play a pivotal role in supporting integrity: through overseeing listings, approving and supervising market participants, managing risk through settlement and custodian banks, reporting data, and enforcing rules as defined by regulators and by Stock exchanges themselves.
The 2007/8 global financial crisis prompted governments and regulators to develop and implement wide-ranging regulatory reforms. Throughout this period, Stock exchanges have demonstrated a high degree of resilience, reemphasizing their instrumental role in ensuring financial market effectiveness and systemic stability globally.
Regulators and Policymakers
In recent years, policymakers across the world have strengthened the regulatory framework with an emphasis on ensuring systemic stability and enhancing governance and good conduct in financial markets. Legislation has expanded the scope of instruments that must be transacted through stock exchanges, which are investing to meet this increased demand. The new regulatory demands span financial and non-financial risk management (including cyber risk): conduct of business, investor and data protection, prudential requirements, and fitness requirements for individual risk-takers and market participants.
The scope and complexity of these regulations has created an extraordinary challenge for stock exchanges, market participants, and regulators alike. Regulators broadly concur that ongoing dialogue between regulators, stock exchanges and market participants is desirable and that in some areas industry standards and codes of conduct may be preferable to a proliferation of legal rules.
The appropriate supervision and oversight of the entities who use financial markets to raise capital and whose securities are publicly traded is a critical element of market integrity. For example, setting minimum listings standards and ensuring appropriate disclosure of information is integral to the protection of investors. However, the changing profile of issuers (including small- and medium-sized enterprises (SMEs) as well as state-owned enterprises) and how Stock exchanges are responding to ensure the continued preservation of market integrity is becoming vital.
(i) Small- and Medium-Sized Enterprises
Allowing companies to access external finance enables funding of new investments, innovation, economic growth and job creation. To accelerate economic and productivity growth, policymakers are looking to exchanges to address some of the funding gap for SMEs. This gap is partly the result of the regulatory constraints placed on bank-based intermediation imposed in the wake of the 2007/8 crisis. Many exchanges have responded by launching dedicated SME offerings aimed at reducing fixed regulatory costs associated with listing, while still ensuring appropriate levels of investor protection. At the end of 2020, among 70 WFE member exchanges, there were about 40 SME platforms, with over 7,000 listed companies and a combined market capitalization of US$1.5 trillion.
(ii) State-Owned Enterprises (SOEs)
The rapid growth of economies with state-directed developmental models has increased the relative influence of state actors in the global economy. State actors are consequently becoming more prominent participants in financial markets. While the listing of public equity in SOEs is not a new phenomenon, it has become more common. The Fortune Global 500 index of the largest listed companies by revenues included more than 100 state-owned enterprises in 2020, compared to about 30 in 2000. As SOEs raise capital or simply list on markets, exchanges and regulators seek to maintain rigorous standards of investor protection, while accounting for the idiosyncrasies of these institutions (such as golden-share voting rights for state owners, state-appointed directors, or politically determined objectives). About 45 percent of Exchanges indicate that they have tailored listing requirements for state-owned enterprises in their jurisdictions.
Facilitating orderly investor participation in markets, while maintaining a level playing field, are key elements of ensuring market integrity. Stock exchanges serve a diverse set of investors with differing priorities and requirements for disclosure, market access, and investor protection. As investor expectations and composition change, stock exchanges have responded through, for example, investing in education of retail investors, adjusting disclosure requirements to take cognizance of evolving investor needs, ensuring the fair dissemination of regulated news, and the design of technology underlying matching engines and best execution solutions. Increasingly prominent institutional investors have their focus on market structure considerations, the trend towards greater demand for environmental, social and governance (ESG) disclosures, and the preservation of market integrity in the context of cross-border investment.
(i) Institutional Investors and Market Structure Issues
Over the past 50 years, at least in more developed markets, ownership of public equity has become increasingly concentrated in the hands of institutional investors. One study estimates that as at 2020, institutional investors owned around 75% of the outstanding shares of the top 1000 US companies by market capitalization, compared with 80% retail holding in the 1970s. In accordance with their increased prominence, these investors are becoming more vocal about a range of market structure related issues and demands of stock exchanges. Given their size and importance, Exchanges and regulators must consider their views while still accommodating sometimes competing demands from other investor groups and market intermediaries.
(ii) Foreign Investment and the Role of the Exchange
Cross-border investment is an engine of economic development and a substantial source of capital in frontier and emerging markets. Cross-border investment and market participation brings benefits to markets in terms of enhanced liquidity and the development of the local buy-side and investment community; however, it also poses new considerations for market integrity (such as cross-border supervision, currency convertibility in trade settlement, and equitable treatment of foreign investors). Many frontier and emerging market governments have adopted economic strategies to encourage such foreign investment and look to their local exchange as a key partner in such intermediation. Stock exchanges have, for their part, introduced mechanisms and adjustments to market structure to facilitate foreign investment and market participation.
Enhancements to Corporate Governance and Disclosure
Investors, such as sovereign wealth funds, public-sector pension funds, global asset managers, millennial retail investors, are pushing for enhanced disclosure of financially material ESG information. These include climate risks, compensation practices, diversity and inclusion, labor relations, responsible sourcing, and supply-chain management. Furthermore, investors are starting to demand that large corporates articulate their stances on the diverse challenges facing society. These investor demands are expanding the conception of integrity in public markets.
Because exchanges are often responsible for determining disclosure requirements and monitoring compliance, they tend to be at the forefront of building consensus and setting standards. Exchanges have taken the lead by requiring enhanced disclosure in their listings requirements or through issuing ESG-disclosure guidance for listed issuers. Between 2015 and 2020, over 30 exchanges published ESG disclosure guidance for their listed issuers. Exchanges also provide ESG-related training and information services for their listed issuers.