FINANCE: SEC Hedges in Chicago Stock Exchange Sale Approval

Bottom line: A Chinese group’s plan to buy the Chicago Stock Exchange could get vetoed by the US securities regulator over concerns about the buyer’s inability to prevent the market from becoming a breeding ground for financial abuses.

SEC takes time on Chicago Stock Exchange sale review

Nearly a year and a half after it was first announced, the sale of the Chicago Stock Exchange to an obscure Chinese buyer is still awaiting approval, in what would be a relatively landmark deal in the finance space. I’ll admit I was a bit surprised to read that this particular deal was still pending, as I figured it was either dead or had closed by now.

The deal announced in February last year would see a group led by Chongqing Casin Enterprise Group purchase one of America’s oldest but also most irrelevant stock exchanges. Some politicians had voiced concerns about the deal for the usual reasons, namely the exchange could provide a foothold for China to wreak mischief in US financial markets. But CFIUS, the agency that reviews deals for national security concerns, previously approved the deal, leading all of us to believe it would get done.

Not so fast, we’re learning now, as apparently the securities regulator, the Securities and Exchange Commission (SEC), has yet to sign off on the deal, and has said it needs 60 more days for its review after missing a June 6 deadline. (English article) Casin has said it hopes to use the exchange, which accounts for a meager 0.5 percent of US stock transactions, as a specialty listing ground for Chinese companies.

On the surface that sounds fine, as the US could certainly use some more China-friendly stomping grounds for Chinese companies that want to attract global investors. The reality is that New York’s two main exchanges, the Nasdaq and the New York Stock Exchange, have hardly been friendly places for Chinese companies these last few years.

Some three dozen US-listed Chinese firms announced plans to privatize from New York in a wave that crested about two years ago, and two-thirds of those ultimately succeeded with their plans. Their big beef was that they were underappreciated by US investors, causing their shares to languish for years. By comparison, they reasoned, Chinese investors might appreciate them more and give them higher valuations.

So it would seem Casin’s argument is that it could convert the Chicago Stock Exchange into a boutique market for Chinese listed companies. That does indeed sound good in principle, since having all such companies concentrated in a single market would make life easier for US investors who want to make some China bets. As things stand now, Chinese companies listed in the US are scattered throughout the market and hardly easy to find, let alone compare with other peers.

Oversight Ability

The big problem lies in oversight. One of the big reasons Chinese companies became undervalued in the first place lies in another wave dating back around 6 years ago, when a series of accounting scandals rocked that group. At that time, the SEC picked up a metaphorical rock on the two New York exchanges and discovered a mess of small Chinese companies scurrying beneath, many of which had entered the market through backdoor listings and were using those listings to make mischief.

The SEC then embarked on a cleanup that resulted in many of those smaller companies getting kicked out of the market, and frightening away many investors in the process. Thus now I can imagine the SEC is saying to itself: “If the NYSE and Nasdaq couldn’t police themselves for these mischief-making companies, how will the inexperienced Casin and Chicago Stock Exchange be able to?”

The latest reports point out that the SEC’s reviews are designed to make sure that buyers can implement self-policing systems for their brokerage members, and I suspect that’s what the securities regulator is trying to determine now. Given all the shenanigans that happen on China’s stock exchanges and the previous scandal involving Chinese companies in New York, I suspect the SEC isn’t at all convinced that the Casin group can stop similar things from happening in Chicago. If that’s the case, it’s quite possible this deal could ultimately get vetoed by the regulator, in a twist that probably no one saw coming.

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