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Cross-Market linkages examples for GCC markets. AGENDA. Introduction Examples from other exchange linkages Options for GCC countries Next steps. Trading Technology. Specialists in Exchange Technology Exchanges survey Consultancy, not development

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agenda
AGENDA
  • Introduction
  • Examples from other exchange linkages
  • Options for GCC countries
  • Next steps
trading technology
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
merging examples need
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
merging examples euronext
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!
merging examples ix
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
xetra sets
Xetra, SETS
  • XETRA
  • SETS
miff matif link
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
federal singapore asx
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
norex
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!
structure
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
need for cross border trading
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
structure options
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
structure options16
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
structure options17
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
listing
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
proposed structure
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
proposed structure20
Proposed structure
  • Exchanges become broker on foreign exchange
  • Deposition & Ownership records handled nationally
trading
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?
regulation
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
depository registry
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
payment
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
technology
Technology
  • Options
    • Lattice?
    • Cats cradle?
    • Hub and spoke?
technology26
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
technology27
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
next steps
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
summary
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