Securities regulators from North and South America, through the Council of Securities Regulators of the Americas ("COSRA"), have determined to draft principles that would be useful in developing and coordinating standards of market conduct for the securities markets that serve the investors of the Western Hemisphere. Generally, COSRA seeks to establish basic legal, regulatory and structural principles that may facilitate broadbased participation in the securities markets of its members, and may promote efficient and liquid markets while ensuring appropriate levels of investor protection.

One particular area that COSRA members consider critical for promoting liquidity, efficiency and investor protection is in the transparency of the securities markets. The principles set forth herein are intended to provide the basis for substantive proposals to assist in the development and enhancement of transparency of current market structures. Although the specific standards of securities market transparency may vary depending on the nature and stage of development of the individual market, certain principles of transparency have general application. These principles deal solely with transaction transparency and do not address issues of disclosure.

In adopting these principles, COSRA members affirm that transparency of markets, i.e., the real-time dissemination of transaction and quotation information, provides many important benefits for both investors and the market. Consequently, market regulators should, as far as their authority permits, employ these principles as they seek to assess and maximize the transparency of securities markets within their jurisdiction. These principles are intended to provide the basic blueprint for use by securities market regulatory authorities in developing legal and regulatory provisions to govern the operation of the marketplaces; to provide a common baseline for COSRA members; and to promote cross-border linkage of markets.

COSRA has developed a consensus among its members that these principles are the core principles necessary for efficient, liquid markets in which the interests of investor protection are paramount. Nevertheless, nothing in these principles is intended to prevent COSRA members from requiring greater levels of transparency. Indeed, it is hoped that these principles will stimulate further efforts to develop or enhance transparency accross the markets, and ultimately, to promote greater investor protection.

1 . DEFINITION OF "TRANSACTION TRANSPARENCY"

Transparency in the Securities markets may be defined as the degree to which information regarding quotations for securities, the prices of transactions, and the volume of those transactions is made publicly available.

Transparency in the securities markets may be divided into two discrete components: pre-trade and post-trade transparency. At its broadest level, pre-trade transparency could include information accurately indicating the size and price of prospective trading interest, such as firm quotations in representative size, and resting limit orders, both at the best firm bid and ask quotations and away from such quotations. Some markets, particularly these that have developed completely automated trading markets that display the entire contents of the limit order book for a particular security, permit "total" transparency. Other markets permit lower levels of transparency, such as limiting the display of quotations to only the inside prices (i.e. highest bid and lowest offer).

Post-trade transparency refers to the dissemination of trade price and volume of completed transactions from all markets trading that security.

As noted below, the level or degree of transparency in a market can range from the total transparency permitted by certain electronic markets to those markets that permit high levels of transparency but do not reach "total" transparency. Generally, the market's regulators need to assess the market's structure to determine the degree of transparency appropriate for a particular market. Nevertheless, as these principles indicate, a minimum degree of transparency is necessary to permit the investor to make an informed investment decision.

2. LEVELS OF TRANSPARENCY

An adequate level of transparency for continuous markets consists of the dissemination of (1) last sale reports (i.e., transaction prices and volumes); and (2) firm quotations at the best prices (i.e., the inside bid and ask prices) with size, i.e., full transparency.

Liquid markets should strive for full transparency, i.e., the dissemination of appropriate levels of information, both pre-trade and post-trade. It is critical to note that pre-trade transparency alone is not sufficient for adequate levels of investor protection. Even where firm quotes exist, a substantial number of price sensitive transactions may take place between or outside of the spread. Although quotes may help investors decide where and when to trade, transaction reports help investors determine whether the quotes are reliable, and help them assess the quality of the markets and transaction executions. Also, all market participants attempt to anticipate market trends. Without trade and volume information, there are few warnings of impending marked trends. Market participants cannot respond quickly to selling or buying surges because they do not see them happening.

As noted elsewhere in these Principles, market regulators may choose to require even greater transparency than the full transparency discussed in this Principle. Some markets, including certain fully automated exchanges permit "total" transparency, which includes dissemination of information that includes resting limit orders away from the inside prices. The standard of full transparency is a minimum that is not intended to restrain those markets and their regulators that believe that enhanced levels of transparency should be achieved.

3. PROMPT DISSEMINATION

The dissemination of transaction reports and quotations should be on a prompt, real-time basis (i.e., within a brief period after each discrete event occurs in the market place).

A market providing appropriate levels of transparency for a security should promptly disseminate both pre-trade and post-trade information. "Prompt dissemination usually implies "realtime," i.e., essentially immediate dissemination, but notions of promptness vary. On the Toronto Stock Exchange, for example, where orders are matched and executed through either an electronic order book or through the Exchange's Computer Assisted Trading System (CATS), trade and quotation information is disclosed immediately to all members upon being entered into either system. Orders are displayed on all screens as they are entered and, when an order is executed, the price at which the trade is executed is displayed on the continuous electronic ticker tape and on each member's remote screens.

Delayed transaction publication, e.g., reporting of transactions more than 90 seconds after the event, may harm investors and other market participants in that dealers or other investors that participated in the unreported trade have a superior informational advantage that cannot be counterbalanced. Regulators should ensure that the transaction reporting procedures for a market are not so designed as to permit professional intermediaries to benefit at the expense of unsuspecting customers.

4. TRANSPARENCY IN MULTIPLE MARKETS

Where a security trades in multiple markets, the same standard of transparency should be applied to the security in all markets. Quotations and transaction reports for such multiply traded securities should be consolidated into a single reporting mechanism.

In some instances, multiple markets for the same security may develop within the same country. For example, there can be competing auction market exchanges, or there could be competition between an exchange market operating under auction market principles and a dealer market. Regardless of the type of market, it is important that the standard of transparency for that security be the same to minimize any concerns of an unfair competitive advantage or "free-riding" off of the price-discovery that may arise because of a different transparency standard. For the same reasons, it is important that cross-border markets for the same security operate on harmonized principles of transparency.

Another benefit of transparency is its ability to counteract some of the consequences of a decentralized, or "fragmented", market structure. In particular, by facilitating open access to the price discovery process, transparency is able to counteract much of the pricing inefficiency caused by fragmentation, yet still permit competition between markets trading fungible securities. Pricing inefficiencies arise when fungible securities are being traded in markets with little or no transparency. When one market permits opaque trading, it prevents other market centers from considering those trades in assessing the overall supply and demand for those securities. Consequently, determinations as to the optimal price for those securities may be inaccurate.

It is important that transactions and quotations in the same security traded on multiple markets are consolidated into a single data stream and disseminated to market participants on a real-time basis. Regulators need to ensure that information processors that consolidate such information make that information available at a reasonable cost to any wishing to use it. Markets may recoup their expenses for disseminating such information through the imposition of reasonable fees for the supply of such information.

5. TRANSPARENCY AND INTERMARKET COMPETITION

While it is appropriate for markets to compete by offering increased transparency it is not appropriate to offer lesser degrees of transparency not justified by liquidity, fairness, and efficiency concerns.

Regulators assessing the competitiveness of markets operating within their jurisdiction must also consider fairness and efficiency in assessing the adequacy of the transparency of those markets. Considerations of competition should not outweigh valid regulatory concerns; levels of transparency ultimately must find their justification on fairness and efficiency grounds, not on purely competitive grounds.

Transparency needs for particular securities should be assessed on a global basis in order to avoid a flight to opacity. For example, where a foreign market seeks to offer less transparency than is available in the security's home market (assuming, as is usually the case for equities, that the home market is the primary market), this difference in transparency should be justified on the basis of fairness and efficiency, and not on competitive considerations. Ideally, application by regulators of a common framework of analysis will tend toward global harmonization of transparency requirements and practices for particular securities. As an alternative, if non-domestic securities trade in a foreign market, and the primary, homecountry market for those securities requires complete transparency for trading, then the transparency requirements for those securities trading in the foreign country market should be the equivalent of the home country's market.

6. REGULATORY ROLE OF TRANSPARENCY

Transparency is fundamentally a regulatory concern, as it is directly related to the fairness and efficiency of securities markets. Regulators (including self-regulators) therefore, should assess the adequacy of the transparency of the markets within their jurisdictions.

Transparency is increasingly important for today's securities markets. The fairness and efficiency of securities markets are directly related to their transparency. By providing protections for investors, transparency encourages greater participation in the securities markets, and thereby enhances the liquidity of those markets. This increase in liquidity, in turn, increases market efficiency. Conversely, by reducing the effects of market fragmentation and increasing the pricing efficiency of securities markets, transparency also promotes fairness of the markets. For these reasons, regulators have a responsibility to assess the adequacy of the transparency of the markets operating within their respective jurisdictions.

Further, traditional transparency mechanisms rely upon trade reporting by intermediaries, principally broker-dealers and banks. As the level of direct institution-to-institution, non-intermediated trading has increased, concern with the dilution of the effectiveness of these traditional transparency mechanisms has grown. Advances in telecommunications technology increase the feasibility of non-intermediated trading systems; growing institutional concern with the transaction costs associated with intermediated trading is causing increasing demand for such systems. Trade information is lost to the marketplace(s) when trading occurs without the participation of regulated intermediaries. Regulators and market professionals should monitor the impact of such trading on the markets and the transparency of those markets.