Topic 4. Financial markets.

Securities markets

FINANCIAL SYSTEM AND MARKETS

TOPIC 4: FINANCIAL MARKETS. SECURITIES MARKETS

1. FINANCIAL MARKETS

CONCEPT: Financial market is a place where the trade of financial instruments is carried
out and their prices are determined. It can be also defined as a set of mechanisms or
procedures through which financial exchanges take place. For this exchange to be made
the existence of a particular physical space in which such exchanges are carried out is not
necessary.
In other words, financial markets are just like any market one usually sees every day,
where people buy and sell different types of goods and haggle over prices. Financial
markets can be informal, such as a flea market in your community, or highly organized,
such as the gold markets in London or Zurich. The only difference is that, in financial
markets, people buy and sell financial instruments such as stocks, bonds, and futures
contracts rather than pots and pans. Financial market transactions can involve huge dollar
amounts and can be incredibly risky. The dramatic changes in fortunes that occur from
time to time because of large price swings make financial markets newsworthy.

FUNCTIONS:

The main functions of the financial markets are:

a) Bringing together agents involved in financial transactions.
b) Serving as an appropriate mechanism of pricing financial instruments (especially
in trade markets: stock markets, auctions, etc.).
c) Providing liquidity to different financial instruments
d) Reducing the time and costs of financial intermediation.
The better these functions are accomplished, the greater the efficiency of a financial
market is.

CHARACTERISTICS: The financial market is more efficient, when it better satisfies its
functions. However, this effectiveness is directly related to the market proximity to the
ideal perfectly competitive markets.1
The main characteristics that unite financial markets are:

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A perfectly competitive market is a market where there is perfect mobility of factors, buyers and
sellers, who have full information about the supply, demand and other market conditions, all
agents can participate freely in such markets, and prices are set according to the supply and
demand equilibrating mechanism, without direct external interventions that distort the free

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market formation.
a) Scale of operation (amplitude). The higher the volume of financial instruments
exchanged in the market, the larger the market is.
b) Transparency. The more transparent a market is, the better and cheaper
information can be obtained by economic agents who participate in the market.
c) Freedom. It is determined by:
- The lack of constraints/barriers to access the market as a buyer or a seller,
- The lack of constraints to exchange financial assets of certain level, and
- The absence of intervention by the authorities or other monopolistic or
oligopolistic agents into the free formation of exchange prices of such assets.
d) Intensity (depth). The greater the number of purchase ("call") and sale ("put")
orders for each type of asset, the deeper (more intensive) the market is. The market
is also considered deep when a large part of the purchase and sales orders are
above and below the equilibrium price.
e) Flexibility. The greater the ease of reaction of economic agents to changes in asset
prices or other market conditions at the onset of this new environment, the more
flexible the market is.
The higher the degree to which these features are in place in the financial market, the
closer the market is to the perfectly competitive market.

CLASSIFICATION: The following descriptions of several categorizations of financial

markets illustrate the essential features of these markets.

1. According to the maturity of the securities traded in the market (considering the
term/maturity of the securities, loans, etc., but not the monetary compensation which
will normally be in cash or deposits).

1.1. Capital market – the market in which long-term debt (generally with original
maturity of one year or greater) and equity instruments are traded.
Fixed income securities (treasury bonds, mortgage-backed securities, etc.)
Equities
Medium and long-term loans

1.2. Money market. There are different opinions on this concept, but we will use the
approach of the Banco de España. It is a set of markets in which financial
instruments are traded that are characterized by their short-term maturity (usually
less than 18 months), high liquidity and low risk. This group includes, on the one
hand, cash assets markets (or money markets) that comprise the open market
operations of monetary authorities and the interbank market. And, on the other
hand, the rest of the money markets (or money markets in the strict sense), which

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is formed by the markets of short-term government securities, commercial paper,

and others instruments (such as bank notes, certificates of deposit).
Deposit market. It is a direct search market. It is also a retail market (some consider
that the money markets are always wholesale). These features imply that
sometimes deposit markets are not included in money markets. The Banco de
España effectively treats them separately. However, we will include them in the
general concept of money market.
Money market securities are usually more widely traded than longer-term
securities and so tend to be more liquid. In addition, short-term securities have
smaller fluctuations in prices than long-term securities, making them safer
investments. As a result, corporations and banks actively use the money market to
earn interest on surplus funds that they expect to have only temporarily. Capital
market securities, such as stocks and long-term bonds, are often held by financial
intermediaries such as insurance companies and pension funds, which have little
uncertainty about the amount of funds they will have available in the future.

2. According to the degree of freedom of market operation. Market freedom refers to

three aspects: prices, volume and type of transactions, and entry and exit of
economic agents to/from the market.
2.1. Free market has a high degree of freedom within a legal framework established by
the public authorities (e.g., interbank markets).
2.2. Regulated (intervened) market – the market whose operation is limited by rules
that constraint its degree of freedom. An example would be Crédito Oficial, but
its evolution and current transformations have eliminated many of related
restrictions.

3. According to the type of document used in the financial transaction.

3.1. Securities market (mercado de valores) – a market where securities are traded. This
include stock markets, markets of promissory notes, bills, etc.).
3.2. Credit market (mecado de crédito) – a market in which the financial transaction is
specified in terms of granting credit or a loan.
The key difference between securities market and credit market, thus, is that
securities market can be represented by a secondary market (see below), but loans
do not have secondary market. If a loan is securitized, the instrument is no longer
a loan, but a debt security.

4. According to the way the agreement on the terms/conditions of the financial

transaction is reached.
4.1. Direct search market - a market in which the contact between an economic agent
with surplus fund and an agent in need of funding, either directly or through a

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financial intermediary, is established. These markets lack conditions that allow

forming a unique price. For example, the banking system of deposit markets and
credit markets.
4.2. Commission agents market – an organised market in which the two parties get
into contact through a commission agent (broker) acting on another behalf. The
securities transactions conducted through trading brokers are an example of
financial transactions produced in this kind of markets.
4.3. Intermediaries market – an organised market in which the parties get in contact
through an intermediary (dealer) who act on his own name, thus takes itself a risk.
4.4. Auctions market – a centralised market whose working conditions ensure
obtaining a unique price, is characterized by high transparency and competition.
Open market operations and Treasury bills are examples of these kind ofmarkets.
Note: Brokers help bring buyers and sellers together, acting as “matchmakers”
and, if a sale takes place, they receive a commission for their services. Note that
brokers never own the securities they trade (buy or sell). In contrast, dealers “make
markets” for securities by carrying an inventory of securities from which they stand
ready to either buy or sell at quoted prices. Dealers make profits by trading from
their inventory and as a matchmaker.

5. According to the type of agents that are involved in the transaction.

5.1. Direct market – a market in which financial intermediaries do not participate, hence
the parties involved in the financial transaction are, respectively, entities with
surplus funds and entities with deficit funds. An example of such market is the
commercial paper market.
5.2. Intermediated market – a market in which the operation described in the previous
paragraph is divided into two parts: a) raising funds for a client through a bank or
another institution of financial nature; b) loan transactions granted by the bank to
a customer. An example is the deposit and credit markets.

6. According to the moment (timing) in which the exchange is performed.

6.1. Primary market - a market in which new issues of securities, such as a bond or a
stock, are sold to initial buyers by the entities (such as corporation or government
agency) borrowing the funds. In these markets, therefore, financial instruments are
created.
6.2. Secondary market – a market in which securities that have been previously issued
can be resold or traded. There is, therefore, an exchange of funding between
buyers and sellers, but no new installment of resources. Secondary markets are
like used-car markets; they let people exchange “used” or previously issued
financial claims for cash at will. Secondary markets provide liquidity for investors
who own primary claims. Securities can be sold only once in a primary market; all

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subsequent transactions take place in secondary markets. The New York Stock
Exchange (NYSE) is an example of a well-known secondary market.

7. According to way how (secondary) markets are organized.

7.1. Organised market – An organised market is one in which large amounts of
securities are simultaneously negotiated in one place, generally under specific set
of rules and regulations. For example, organized security exchanges provide a
physical meeting place and communication facilities for members to conduct their
transactions under a specific set of rules and regulations. Only members of the
exchange may use the facilities, and only securities listed on the exchange may be
traded. The NYSE is the largest securities exchange for stocks.
7.2. Non-organised (including over-the-counter, OTC) market – A “non-organised”
market is one that is not subject to strict regulation and in which assets are dealt
without a specific place for it. The OTC market differs from organized exchanges
because the market has no central trading place. Instead, investors can execute
OTC transactions by visiting or telephoning an OTC dealer or by using a
computer-based electronic trading system linked to the OTC dealer. That is, the
OTC market is a market, in which dealers at different locations who have an
inventory of securities stand ready to buy and sell securities “over the counter” to
anyone who comes to them and is willing to accept their prices. Because over-the-
counter dealers are in computer contact and know the prices set by one another,
the OTC market is very competitive and not very different from a market with an
organized exchange. The U.S. government bond market is set up as an over-the-
counter market, where forty or so dealers establish a “market” in these securities
by standing ready to buy and sell U.S. government bonds. Other OTC markets
include those that trade other types of financial instruments such as negotiable
certificates of deposit, federal funds, banker’s acceptances, and foreign exchange.

8. According to the degree of concentration.

8.1. Centralised market –These are major international financial centers, where there is
a strong concentration of economic and financial activities.
8.2. Non-centralised market – A non-centralised financial market is one in which the
range of services offered is rather modest and quite narrow.

2. SECURITIES MARKETS

Depending on the type of document exchanged in the market, a distinction can be made
between securities markets and credit markets. When members of an economy in need
of financing go to the markets for funds, they may obtain them all at once, by obtaining a
credit or a loan, or it may happen that all the money demanded is divided into small
parts or securities, which have identical characteristics. Each of these parts is
"represented" in a document (this is what we call a security) which is placed among
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those who are willing to lend their resources. This process takes place in the so-called
primary markets: this is where securities are born.

Marketable securities are "any property right, whatever its denomination, which, by virtue
of its specific legal configuration and transfer regime, is susceptible to generalised and
impersonal trading on a financial market". Thus, this generic concept includes,
principally: shares in companies and other securities equivalent to shares, bonds and
debentures or other forms of securitised debt, other securities giving the right to acquire
or sell such securities, money market instruments (such as treasury bills and commercial
paper), units and shares in mutual, investment and pension funds, as well as options,
futures, swaps and other derivative contracts relating to securities, currencies, interest
rates or yields, or to commodities, to climatic variables, transport costs or inflation rates
or other official economic statistics, etc.

These securities, in addition to being identical, are also transferable. In other words, the
original acquirer can sell them later on secondary markets. This sale process means that
the original purchaser does not have to wait for the agreed repayment period, but can
recover the funds in advance and is completely separated from the purchaser of the
securities. Likewise, the issuer of the securities is not affected by this process, and will
keep the financing received until the time originally agreed. Stock exchanges, where
shares issued by companies are listed, are an example of secondary markets.

From an institutional point of view, The “National Commission of Securities Market”

(CNMV, la Comisión Nacional de Mercado de Valores) is an institution under the Ministry
of Economy and Competitiveness of Spain. The basic function of the CNMV is to monitor
the functioning of securities markets in Spain, which include:

1. Ensuring transparency of the Spanish market

2. Ensuring the correct formation of prices of the financial instruments,
3. Protecting investors.
The CNMV promotes the disclosure of any information required to achieve these ends,
by any means at its disposal; for this purpose, it uses the latest advancement in computer
technology and constantly monitors the improvements provided by technological
progress. The CNMV is a public entity with full competence and capacity to exercise this
overseeing function. It also advises the Government on the market issues.

The CNMV exercises prudential supervision over the following entities in order to ensure
transaction security and the solvency of the system:
Collective Investment Schemes (instituciones de inversión colectiva), a category
which includes: investment companies (securities and real estate), investment funds
(securities and real estate), mutual funds, pension funds and their management
companies.
Broker-Dealers and Dealers, which are entities engaged primarily in the purchases
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and sales of securities.

Portfolio Management Companies (sociedades gestoras de cartera), i.e. entities
focusing primarily on managing individuals assets (principally securities).

In addition to these institutions, the securities markets themselves, namely the Spanish
stock markets, the AIAF (Asociación de Intermediarios de Activos Financieros, Spanish
Corporate Debt Market, http://www.aiaf.es/), the Annotated Public Debt Market (MDPA)
– which is co-regulated together with the Banco de España, and derivatives markets
under the MEFF holding are also regulated by the CNMV (see the chart below).

MEFF (http://www.meff.com) is the official Spanish futures and options market, where
these types of contracts on fixed-income assets and equities are traded. It began its
operation in November 1989 and its main activity is negotiations, settlements and
clearing of futures and options on bonds and stock indices like the IBEX-35, S&P Europe
350, and futures and options on shares. It is an official market and, therefore, it is fully
regulated, controlled and supervised by the relevant authorities (CNMV and Ministry of
Finance), performing both trading functions such as clearing and settlement, perfectly
integrated into the electronic market developed for this purpose.

There are also markets for futures and options on olive oil and gas allowances.

OPERATION / FUNCTIONING:

Primary market is one in which the placement of the primary assets of the issuer to the
investor takes place in exchange for the funds with which funding is obtained. Therefore,
a financial asset is subject to single trading on the primary market.
In contrast, in the secondary markets the purchasers of the securities buy them from their
owners and not from the issuer (i.e. from brokers and intermediary agents). In this market
there is no new funding and no transfer of resources into productive investment.

The secondary market performs several functions to support the primary market . A
company, when it decides to issue new financial assets, attends the secondary market,
which always indicates the price investors are willing to pay to purchase the
securities, in order to know the appropriate issue price and ensure their placement
among them. Therefore, this serves to establish a "reference price". It also provides
liquidity to investors owing the assets, which indirectly also provides liquidity to the
primary market through the divestment opportunity (i.e. sale of assets) offered. This is
critical for many securities, but especially for shares, assets that are not debt.

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Source: http://www.bolsamadrid.es/ing/Inversores/MercadoEsp.aspx

In a broad sense, the entities participating in the primary market are institutional agents
such as the CNMV, the securities agencies, securities societies, etc. The latter agents
involved in the primary market or in the issuing of securities are basically the following: on
the side of the supply of money or funds are the household sector and the financial
institutions; and on the money request (borrower) side are the non-financial corporations
sector, the public authorities and also the financial institutions.

The stock market is a capital market par excellence. As we noted, in the stock exchange
markets financial assets over the medium and long terms are negotiated. Fixed income
securities plus equities (stocks) are also traded. In Spain there are four stock markets
located in Madrid, Barcelona, Bilbao and Valencia. The most important of the four is the
Madrid Stock Exchange. A continuous market also exists which is an electronic system.

Nevertheless, in Spain stock markets are integrated in the institution called BME (Bolsas
y mercados españoles), meaning “Spanish Stock Markets and Markets”. BME is the
company that integrates all securities markets in Spain (https://www.bolsasymercados.es).
Bolsas y Mercados Españoles (BME) is the company that manages the main official
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secondary markets (regulated markets) in Spain, and other multilateral electronic trading
systems. BME is made up of, among others, the Madrid, Barcelona, Bilbao and Valencia
stock exchanges, the Options and Futures market MEFF, the Fixed Income Market AIAF,
and the business unit responsible for the registration, clearing and settlement of equity
and fixed income securities (IBERCLEAR).

Madrid Stock Exchange: Its functions include admission, supervision and management
of the official secondary market for equities, corporate securities, government bonds,
warrants and certificates.
Barcelona Stock Exchange.
Bilbao Stock Exchange.
Valencia Stock Exchange
Sociedad de Bolsas (Stock Markets Society). Each of the four Spanish stock markets
owns 25% of the Sociedad de Bolsas, and its aim is to manage and operate the
Spanish Stock Exchange Interconnection System (SIBE). SIBE is the technical trading
platform of the Spanish stock exchange market. Sociedad de Bolsas is the original
source of the information generated from SIBE and is in charge of its organization and
management.
MEFF AIAF SENAF Holding de Mercados Financieros, S.A. is an integrated holding
within the BMA that is formed of the following companies, whose securities it holds:
- MEFF Renta Fija (Mercado Español de Futuros Financieros, Sociedad Rectora de
Productos Financieros Derivados de Renta Fija, S. A): Entity engaged in the
administration of the mentioned market.
- MEFF Renta Variable (Mercado Español de Futuros Financieros, Sociedad Rectora de
Productos Financieros Derivados de Renta Variable). This corporation is dedicated to
the management of the equity derivatives market. It is also the counterpoint of the main
products: Futures on the Ibex 35, Ibex 35 Options, Mini Ibex 35 Futures, and stock
futures and stock options.
- AIAF Mercado de Renta Fija, S.A.: Sociedad Rectora del Mercado de Renta Fija
Privada: Market Operator Company of the Private Fixed-Income Market. It manages
and oversees both the primary market (listings) as well as the secondary market
(recruitment) of corporate debt.
- SENAF (Sistema Electrónico de Negociación de Activos Financieros, Agencia de
Valores, S. A.): It engages in the administration of the electronic trading market for
government debt, both spot and repo.
- MEFF Services and MEFF Euroservices: They are dedicated to the development and
operation of computer systems, recruitment and settlement of derivatives,
transmitting orders to European markets and dissemination of futures and options
market and the Instituto MEFF.
- IBERCLEAR. It is the central repository of Spanish securities in charge of the

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accounting registration and the clearing and settlement of securities admitted to

trading in the Spanish stock markets, in the Annotated Public Debt Market, in the
AIAF and Latibex. It uses two technical platforms SCLV (Servicio de Compensación y
Liquidación de Valores) and CADE (Central de Anotaciones del Mercado de Deuda
Pública), in which technological solutions that maintain a high level of automation in
the procedures used and a high degree of interconnection between the entities and
IBERCLEAR.
The integration of the three markets (MEFF, AIAF, SENAF) and the central repository
IBERCLEAR into MEFF AIAF SENAF Holding de Mercados Financieros, S.A. (or simply
Mercados Financieros) took place in 2001 in reaction to the requirements of globalization
of markets. This integration allows jointly using the human and technological resources
of these companies, reducing costs for each member markets, improves the quality of
service provided, and provides technical and computer integrated solutions.
Clearing and settlement are fundamental processes in financial markets. After the trade
is executed, the record is submitted to the clearing agency, which matches the buyer and
seller record and confirms that the counterparts agree to the terms. The agency reports
discrepancies to traders in case the reports do not match, who then try and resolve them.
After the clearing process is performed, through settlement, agencies fulfil the delivery
requirements of the securities object of a trade. The settlement agency receives cash
from buyers and securities from sellers and, at the end of the process, gives the securities
to the buyer and the cash to the seller. Agencies perform an important function in case
a trader is not trustworthy or creditworthy.

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3. THE REFORMS OF THE SECURITIES MARKETS IN SPAIN.

The Spanish financial system reform started in the seventies and had to necessarily reach
the stage of having securities markets, especially the stock exchanges. This implied, as a
critical prerequisite, the reform of legal rules, but this was not enough: the modernization
of the major stock markets around the World such as New York Stock Exchange, London
Stock Exchange, etc., also forced implementing some changes in technical processes
that required longer time, which explains the delay with which this reform has been
realized.
With this purpose a committee was established in 1978 to study the securities market,
which is the most recent initiative prior to the 1988 reform, whose proposals, however,
were not translated into the concrete decisions, at least, initially. Around this year some
modifications were being made in both directions, as mentioned in the previous
paragraph. For example,
- a second market was established,
- stock market operations with credit to the market were approved,
- important amendments to the stock markets Regulations (namely, Real Decreto of 13
July 1981 on bolsas de comercio) were adopted,
- a regulation on takeover bids (OPAS – oferta públicas de adquisición) was adopted,
- the modernisation of securities’ settlement system – one of the major problems of the
Spanish stock market at the time – was initiated,
- an annotated public debt market was designed and put into operation, and
- technical studies for the creation of continuous market were performed, whose
operation began in 1989.
But the fundamental change, which represented the creation of a new legal and technical
framework for securities markets, came about with the above-mentioned 1988 reform,
namely the Act 24/1988, of 28 Julyonthe Securities Market. The name of the regulation
already indicates that it affects the securities markets in general, and not only the stock
markets. However, much of its content and its further development has led to the
organisation and operation of the stock markets.
The main changes introduced by the 1988 Act, as indicated in the relevant preamble, are
the following:
Creation of the National Commission of Securities Market, the CNMV, as a supervising
and inspective entity of these markets.
Recognition of freedom to issue of securities without the need of prior approval.
Establishment of three categories of official secondary markets: the Stock Exchanges,
the Public Debt Market represented by book entries (Mercado de Dueda Pública
representada mediante anotaciones en cuenta), and other official secondary markets.

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Dissolution of the official public stockbrokers’ associations (colegios oficiealses de

agentes de cambio y bolsa), which are replaced by Brokers-dealers (sociedades de
valores) and Brokers (agencias de valores), who as members of the stock exchange
will be the only entities authorised to intermediate in the stock exchanges. At the
same time, the concept of public faith in securities trading was removed.
Organisation of the stock exchanges that are governed by the Stock Exchange
Management Companies (sociedades rectoras de las bolsas de valores) and whose
members are broker-dealers and brokers, and which replace the union boards (juntas
sindicales) of the different stock exchanges.
Creation of an electronic trading system or electronic interconnection system
(continuous market), which in fact had already begun its first steps.
Authorisation for deposit institutions and other intermediaries to be involved in
trading activities, but restricting trading securities in stock exchanges only to Broker-
dealers and Brokers.
Incorporation of minimum standards of conduct to prevent insider trading, to defend
the absolute priority of investors’ interests, and to ensure market transparency.
Extending the system of penalties, applicable to all persons and entities that are
related to the stock exchanges.
The application and development of the Act resulted in major changes in the securities
markets in terms of its
- organization (e.g. creating the CNMV and other agencies under the Act, creating also
the AIAF – organized market for fixed income, and derivatives markets),
- functioning (e.g. the development of the continuous market, which already greatly
exceeds the rest of the market), and
- regulations (e.g. new rules on the securities’ clearing and settlement system, norms
of conduct, stock exchange operations with credit to the market).

4. CHANGES IN THE ORGANISATION OF THE SPANISH STOCK EXCHANGES OVER

THE RECENT YEARS
The organised securities markets that exist in Spain today are those mentioned in
previous sections (the stock exchanges, the annotated public debt markets, the AIAF
market, and the futures and options markets). Some changes have been incorporated in
recent years as a result of actions taken by the governing bodies of these markets in order
to adopt them to the internationalisation of financial markets which has intensified
following the entry into the EMU. These changes are discussed in the following
paragraphs.
The adoption of the Euro and the internationalisation of markets was necessary to
produce an innovative effort by all stock exchanges, which was further developed and
supported by the CNMV. Among the actions having taken place, one of the most

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important was the signing of a protocol (on April 29, 1998) between the stock exchanges,
AIAF, SCLV (Servicio de Compensación y Liquidación de Valores) and the CNMV itself,
with the aim of developing the market for fixed income. In this document the signatories
decided to take measures, within their areas of competence, to generalise the
representation of securities by book entries and to establish a common system of clearing
and settlement of transactions in bonds on exchanges and in the AIAF. From that
moment onwards, steps were taken to enforce the agreements indicated and, in that
sense, the AIAF agreed through the Circular 2/1998 of 24 June that all the new issues to
be accepted in the market should be used as representation book entries; in its turn, the
SCLV defined through the Circular 2/1998 of 15 July rules applicable to the accounting
system of fixed income securities represented by book entries and the clearing and
settlement of transactions in those securities in the stock exchanges and the AIAF.
As regards the process of development of fixed income (e.g. bond) markets in Spain
within the new European context, in September 1999 a common platform for registration
was created, clearing and settlement for fixed income securities traded on stock
exchanges and the AIAF, which was covered by the protocol signed in 1998 by the stock
exchanges, the AIAF, the CNMV and the SCLV. With the creation of this unique platform
it was intended to standardise and simplify registration, clearing and settlement of
securities systems, which until then were different depending on the market in which the
instruments were negotiated and according to its way of representation. Subsequently,
there was an extension of the agreement in order to also incorporate the Central de
Anotaciones (book entries central office) of the Bank of Spain, which was positive from
the point of view of integration of all these processes for all the Spanish organised
markets.
After expanding the indicated agreement, a developer company (IBERCLEAR) was
created. It was commissioned to prepare all the necessary changes to the constitution of
a new society in charge of the unification of the management of all Spanish settlement
systems. One of the first measures taken by IBERCLEAR was to unify the settlement
systems of fixed income securities, using the technical platform of the Bank of Spain with
the purpose of registering and settlement the debt securities traded on the public debt
market, in the stock exchanges and the AIAF market.
IBERCLEAR was, therefore, the "embryo" (the core) of the current Depositario Central
de Valores (the securities central depository of Spain). This developer company,
consisting of the SCLV and the Bank of Spain, was created to promote precise legal,
technical and organisational techniques with the aim that the "systems company" would
be running quickly. Since the entry into force of the mentioned Act, IBERCLEAR is the
new central depository of securities at the national level and, therefore, the owner of the
securities settlement systems that were once managed by the Bank of Spain (CADE) and
the SCLV.
In addition to the process indicated, in 1999 the negotiation of public debt was amended
to merge the four networks of blind brokers screens in a single electronic trading

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platform, called SENAF (Sistema Electrónico de Negociación de Activos Financieros) to

which brokers have access. In addition, in October 2000, AIAF acquired the majority stake
in SENAF in order to arrive at a single trading system that brings together both Spanish
public debt and corporate debt markets.
Subsequently, in April 2001 a merger agreement was signed by the AIAF, SENAF and
MEFF, according to which it was decided to create a holding company that was the owner
of the three identified markets, seeking to combine in a unique group all negotiations
related to debt (public and private) and derivatives. The effective integration of the three
markets occurred on July 4, 2001. Parallel to this process, in June 2001 a protocol
between MEFF-AIAF-SENAF and the stock exchanges was signed with the aim of
integrating both Spanish securities markets and settlement centres. A holding company
was established in order to group patrimonially together all the signatories and to act as
a center integrator of all Spanish markets and as a key instrument in its international
projects.
Subsequently, through the Nineteenth Additional Provision of Law 24/2001 on Fiscal,
Administrative and Social Order Measures of December 27, 2001, the Securities Market
Act was amended to establish the necessary legal authorisation to create a holding
company that may directly or indirectly acquire the entire share capital of all or some of
the companies that administer securities registration, the clearing and settlement of
securities and secondary markets. This rule allowed, with an initial capital of 1.3 million
euros and 130 shareholders the establishing BME (Bolsas y mercados españoles) holding
company in February 15, 2002, integrating equity, fixed income, derivatives markets with
the clearing and settlement systems in Spain.
This new company assumed, among its responsibilities, the unity of action, decision and
strategic coordination of registration, clearing and settlement of securities and secondary
markets systems. To achieve this goal, it has developed operational, functional and
structural improvements needed to achieve higher levels of overall efficiency and their
external empowerment. It also enjoys a direct or indirect ownership of stocks and shares
of the companies that manage the secondary markets and the registration, clearing and
settlement of securities.
Once the new company was established, and while the relevant regulatory approvals
were not obtained for the society to acquire the ownership of the shares of the companies
involved in the agreement, a process was started that included the relative valuation of
the various companies involved and the fixing of the exchange ratio between their
corresponding shares and those of the holding company, and the subsequent expansion
of the capital by providing non-monetary actions of the various participating companies.
When this process was complete, the BME considered its listing in the stock exchange
as a way of highlighting the real value of the company, expanding its public relevance
and undergoing a more efficient management control. This IPO (initial public offering)
took place in June 2006.

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 Topic 4. Financial markets. Securities markets

5. THE NATIONAL SECURITIES EXCHANGE COMMISSION (CNMV)

The CNMV is the agency responsible for monitoring and inspecting the Spanish stock
markets and the activity of all the agents involved in them. It was created by the Act
24/1988 on the Securities Markets, which involved a thorough reform of this segment of
the Spanish financial system. Laws 37/1998 and 44/2002 have come to update the above,
establishing a regulatory framework adapted to the requirements of the European Union,
suitable for the development of Spanish securities markets in the European environment,
and incorporating new measures for investor protection.
The aim of the CNMV is to ensure the transparency of the Spanish securities markets, the
correct formation of prices on these markets and the protection of investors by promoting
disclosure of any information necessary in order to attain these ends. The CNMV receives
a large volume of information, much of which is contained in its official registers and is
public.
The action of the Commission is mainly projected onto the companies that issue or offer
securities to be publicly placed on the secondary securities markets, and on the firms
providing investment services and collective investment institutions. On the latter, as well
as the secondary markets, the CNMV exercises prudential supervision, which guarantees
the safety of the transactions and the solvency of the system.
Control functions of the CNMV
Ensure the transparency of markets.
Enforce compliance with the standards of conduct by all participants involved in the
securities markets.
As regards the control of transparency and rules of conduct on the part of those involved
in the operations, an important part of the CNMV’s functions is the control of the
operations in which the major shareholders, directors and officers of companies are
taking part, or the operations performed by companies using their own shares.

Make the necessary arrangements for the development and enforcement of adopted
rules in implementing the law.
Monitor the correct formation of prices.

An example of this is the supervision of public takeover bids (OPAS – oferta públicas de
adquisición) by verifying that the price is fair. In delisting offers, it is necessary to justify
the prices offered by mean of the relevant valuation reports.

Decide on suspension and exclusion from the listing.

The CNMV is authorised to take measures to control the market. These measures may
affect a single company. They can also affect the entire market. An example of a measure
affecting the whole market was the restriction of short selling (i.e. selling of a stock that

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 Topic 4. Financial markets. Securities markets

the seller does not own) in the financial sector, which was approved in August 2011 in
order to curb speculation that threatened the whole market.
Suspensions may be a preventive response to significant transactions such as accelerated
stock offers, sales of significant shareholdings, refinancing, bankruptcy situations, merger
by absorption, public takeovers and restructuring of the financial system.
Supervisory functions of the CNMV
Examine the requirements for Dealer-brokers or Brokers in order to become members
of the stock exchanges.
Broker-dealers or Brokers must meet certain capital requirements, technical means and
have the ability and honesty on the part of their managers. The CNMV is responsible for
controlling to accept these intermediaries and in case of significant changes in them.
These companies also have an obligation to join the Investment Guarantee Fund, which
protects the revenues made by customers in executing transactions.

Verify the requirements to issue and admit securities to trading.

Receive information on acquisitions and transfers of shares in listed companies.
The CNMV checks the information of the entities participating in the markets. In case of
securities issues or significant changes in capital, it performs a verification of whether
sufficient information on the operations is given and that these operations are performed
according to the criteria of transparency.

Protect investors and subjects involved in the transactions.

The CNMV includes a claims service that can be used if any operation does not meet
market standards. This service can punish the companies participating in the market.
Advisory functions of the CNMV
Advise administration officials on the securities market.
One of the functions of the CNMV is to advise the Government and the Ministry of
Finance on matters relating to the securities markets.
Promote the dissemination of market information.
In order to promote dissemination of market information, the CNMV defines criteria of
clarity in the information issued by listed entities. It also publishes periodic reports,
working papers (studies on various topics within the field of securities markets) and
investor guides (in which a particular aspect of the securities and trading is clearly and
graphically explained). This information is available in the Publications area of the website
of the Commission.

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 Topic 4. Financial markets. Securities markets

Source: https://www.cnmv.es/docportal/quees/organigrama/organigrama_e.pdf

The basic organisational structure of the CNMV is illustrated above. The CNMV is
managed by the CNMV Board that consists of:
A president (appointed by the Government) and a vice-president,
Secretary General of Treasury and Financial Policy,
Deputy Governor of the Banco de España, and
three advisors (appointed by the Ministry of Economy and Competitiveness of
persons knowledgeable of matters related to securities market).
The CNMV Board shall exercise the powers assigned by law and assigned to it by the
Government or the Ministry of Economy and Competitiveness. The organization also
includes Advisory Committee, Executive Committee and three Director Generals
(Institutions, Markets, and Legal Affairs). Its organisational structure, distribution of
powers among the different organs, the internal operating procedures and specific rules
applicable to its staff members are regulated by Resolution 1 of the CNMV approved in
July 10, 2003 which has been amended five times since then (2004, 2007, 2008, 2009
and 2010).
The functions of the Board are the following:
- To approve the Circular to which Article 15 of the Securities Markets Act refers. This

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 Topic 4. Financial markets. Securities markets

Article, in particular, states the following:

In order to fully exercise the powers conferred upon it by this Act, the National
Securities Market Commission may issue any provisions required to implement
and enforce the rules contained in the Royal Decrees approved by the
Government or in Orders issued by the Ministry of Economy and Finance,
provided that such statutory instruments expressly empower it to do so.

- To approve the Regulations of the internal regime of the CNMV.

- To approve the draft budget of the Commission.
- To constitute the Executive Committee.
- To appoint the officers of the CNMV, a proposed by the President.
- To approve the annual reports.
- To approve or propose any matters that legally relate to its activity.
The functions of the President are as follows:
- Legal representative of the Commission.
- Calls for the regular and special sessions of the Board and Executive Committee.
- Manages and coordinates the activities of all the governing bodies of the CNMV.
- Controls the expenses and authorizes payments from the Commission.
- Signs the contracts and agreements of the CNMV.
- Leads the entire Commission staff.
- Exercises the powers delegated to the president by the Board explicitly.
The Vice President is attributed the following functions:
- Replaces the President in case of absence or illness.
- Chairs the Advisory Committee of the CNMV.
- Is a member of the Executive Committee of the CNMV.
- Exercises the functions the President or the Board delegated to him.
The Executive Committee consists of the President, the Vice President and the three
directors.
The Secretary of the Board of the CNMV, with voice but not vote, shall:
- Prepare and study the issues which are to be submitted to the CMNV Board.
- Study, report and discuss the matter referred to him/her by the President.
- Coordinate the activities of the various governing bodies of the Commission.
- Approve, in the sphere of private law, capital acquisitions of the Commission and
dispose of their property.
- Solve the administrative authorizations which have been allocated by the Board
delegation and exercise such powers as the Board expressly delegated.

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 Topic 4. Financial markets. Securities markets

BIBLIOGRAPHY

ANALISTAS FINANCIEROS INTERNACIONALES (2008), Guía del Sistema Financiero

Español (5ª edición), Madrid, Ed. Analistas Financieros Internacionales. Chapter 3.

MARTÍN MARÍN, J. L. y TRUJILLO PONCE, A. (2004), Manual de Mercados financieros,

Madrid, Ed. Thomson. Chapters 1 and 4

MORAL BELLO, C. (2002), “La reforma del Sistema Financiero en el 2002”, ICADE, junio.

PAREJO, J. A. y OTROS (2007), Manual de Sistema Financiero Español (20ª edición),

Barcelona, Ed. Ariel. Chapters 1 and 2.

RODERO, A., DELGADO, M., LÓPEZ, M. C. (1994), Manual de Fuentes de Financiación,

Córdoba, Ed. ETEA. First chapter.
Legal documents: Spanish regulation of the financial markets:
http://www.cnmv.es/portal/legislacion/legislacion/Legislacion.aspx

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