RESTRUCTURING THE STOCK EXCHANGES IN PAKISTAN: ECONOMIC AND REGULATORY POLICY ISSUES

Abstract

The ongoing global financial crisis has forced a paradigm shift in the thinking about the role of free-markets and public regulation which calls for a re-evaluation of the economic and development policies throughout the world. In this spirit, this paper reviews Pakistan’s approach towards stock exchange development through demutualization and consolidation of the country’s three stock exchanges. While demutualization can provide organizational flexibility and improve governance, it can also give rise to new and possibly more aggravating conflicts of interest issues and place challenging demands on the regulatory framework. Demutualization can also facilitate in the merger of the exchanges which can help to consolidate liquidity in one marketplace and improve economic efficiency. On the other hand, exchange consolidation could lead to monopolistic excesses and diminish regulatory effectiveness. In the aftermath of the financial crises, it would be prudent to preserve a competitive environment and bolster regulatory effectiveness to deal with the complexity and conflicts of interest arising out of the financial innovations. A third option of encouraging an implicit merger of the exchanges may be more attractive which may allow the markets to reap the benefits of the economies of scale and network externalities, while avoiding creation of a semi-monopolistic and too-big-to-fail institution.