Cross-Market linkages examples for GCC markets

1. Cross-Market linkagesexamples for GCC markets

2. AGENDA • Introduction • Examples from other exchange linkages • Options for GCC countries • Next steps

3. Trading Technology • Specialists in Exchange Technology • Exchanges survey • Consultancy, not development • People are the challenge, not the technology! • Business analysis • Program and Project Management • IT Marketing and Research • Cross-market linkage expertise • Europe, Far East, US

4. Merging examples – need? • Global trading from 1990’s onwards • Poor performance of equity markets in early nineties • Asian currency crisis • Euro currency • Re-orientation of fund managers • By euro-wide sector • Euro funds • Portfolio trading • Automated fund management order routing • Complexity of cross-border settlement

5. Merging examples - Euronext • Members • France • Belgium • Netherlands • Lisbon • London LIFFE • Have two system for all markets • NSC – Cash stocks • LIFFE Connect - derivatives • BUT • Listing rules are different • Membership is different • Charges are different • Clearing platforms will not merge until 2008 • Depositories platforms will not merge until 2008 • TOO SLOW! – and only five of 22 European markets!

6. Merging examples - iX • German & UK markets • Proposed but LSE shareholders objected • Issues were not resolved • Systems had to be re-built for capacity • Tax laws were different • Listing requirements were different • Single entity gave Germany an unfair advantage

7. Xetra, SETS • XETRA • SETS

8. MIFF-Matif link • Alliance between Italy, France and Spain • Italians wanted to keep their customers! • Proposal was to • Back to back membership • Reciprocal membership • Orders split out in the middleware – Proxy servers • CCG made guarantees for it members on Matif and vice versa • But: • Broker interface was not same as for Italian markets • No volume – critical mass required

9. MIFF-Matif link

10. Federal: Singapore - ASX • Trading and settlement link • Reciprocal membership • Order routing between systems • Settlement between “portal dealers” • Good model but % of business poor! • Need critical mass

11. Norex • Alliance of Norway, Sweden, Iceland and Denmark • Now to include Finland + Baltic countries • All trade on single systems in Stockholm • Still have different Depositories! • Membership harmonised • Derivatives still different!

12. Models for the GCC

13. Structure • Aim “to allow investors and fund managers access to stocks, instruments to trade across all markets” • Principles: • Investor Protection • Ensure fair and proper markets • Ease of use • Access to information • Retail and professional • Liquidity • Minimising costs • TX cost as near as possible to local markets

14. Need for cross-border trading • Investor pool • All markets have limited stocks • Few liquid stocks • Risk of overheating • Polarisation of portfolios • Investment funds • Indexes • Other investment vehicles • Islamic notes • Derivatives • Danger that brokers will have deeper order books

15. Structure - Options • Merge • Exchanges join to become one • Example iX, Norex • Advantages • Economies of scale • Simplicity • Single set of regulations • Disadvantages • Sovereignty • Not able to cater for smaller market • Politics • No exit strategy

16. Structure - Options • Super international exchange • New exchange for international stocks • Virt-X, Jiway • Advantages • Economies of scale • Simplicity • Disadvantages • Politics • Settlement not solved • Split order book • More complex for brokers to connect to

17. Structure - Options • Federal alliances • Bridges between exchanges • Examples – Australia and Singapore, DTCC Canada, DTCC-CCG (Italy) • Advantages • Ease of use for brokers • Single order book • Disadvantages • Requires critical mass • No single regulation • Currency issues a problem • Baronial anarchy

18. Listing • Demand is only for liquid stocks! • Higher listing required • International • Domestic • Standards • Accounting/reporting • Dividend payments • Corporate announcements • Corporate actions • Voting rights • A:B shares? • Malaysia, Thailand - difficult

19. Proposed structure • Federal links, but with overseeing body • International Supervisory body – ISB • Standards for trading, market supervision, listing, regulation, settlement. • Exchanges have responsibility for their members

20. Proposed structure • Exchanges become broker on foreign exchange • Deposition & Ownership records handled nationally

21. Trading • Role of exchanges • Represent members on other exchanges • Congruence of rules • Simple orders • Standards • Exchanges guarantee to GCC • Must have single order book • Local exchange only • Possible lag in order messages • Trading hours?

22. Regulation • Listing Exchanges regulate their markets • Back-to-back regulators • Inspection • Discipline • Suspension • Standards and agreements • For international stocks • Common set of regulation • Fund management • Local regulation for pan GCC • Standards

23. Depository/Registry • Broker can be direct • Encourage competition • Ensure TX price low • Functionality for 49% rule • Two-tier • Simple complexity of brokers and individual’s membership • Exchanges become entities in countries depositories • Records of national holdings to be kept by depository • Available to listing depository

24. Payment • FX – 2 models • 1) Single currency – easy • 2) Multi-currency: • FX translation service • Outsourced • Spot execution • Commission charge • Rates broadcast via MDS • Back to back Bank Membership • Direct membership complex! • Central GCC bank? • Need to be CLS

25. Technology • Options • Lattice? • Cats cradle? • Hub and spoke?

26. Technology • Central order routing system • All orders are routed to listing exchange • Single order book • Minimal delay on order entry • Presentation the same at the exchange • Brokers do not need to change systems • Common Market Data platform • Optional, but needed by most markets

27. Technology • Market suspensions • Exchanges able to suspend foreign exchanges • As with a broker • Stock price fairness • Microscopic delay in price dissemination • Guarantee fairness • Central 49% rule check? • Local system modifications • Minimised for ease of use

28. Next steps • Establish framework for GCC control • Compare and contrast different markets • Listing • Trading • Regulation • Deposition/Registration • Draft set of standards for discussion and commentary • Empower GCC regulation • Propose technical solution

29. Summary • There is an urgent need for cross-border trading • The structure should be federal with governing body • The exchanges need to take on guarantees and responsibility for their members, and do the technology changes • Higher rules and regulations for trading and listing international stocks and listing • Exchanges take responsibility for ownership records of their members • Single currency is best • Hub model for technology + central MDS • Establish governing body first, allow membership as and when participating exchanges are ready

30. Cross-Market linkagesExamples for the GCC markets