Cross-Market linkages examples for GCC markets

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Cross-Market linkagesexamples for GCC markets
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AGENDA

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

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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

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Merging examples need?

• Global trading from 1990s 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

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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!

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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

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Xetra, SETS

• XETRA
• SETS

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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

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MIFF-Matif link
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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

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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!

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Models for the GCC
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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

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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

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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

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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

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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

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Listing

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

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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

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Proposed structure

• Exchanges become broker on foreign exchange
• Deposition Ownership records handled nationally

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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?

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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

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Depository/Registry

• Broker can be direct
• Encourage competition
• Ensure TX price low
• Functionality for 49 rule

• Two-tier
• Simple complexity of brokers and individuals
  membership
• Exchanges become entities in countries
  depositories
• Records of national holdings to be kept by
  depository
• Available to listing depository

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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

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Technology

• Options
• Lattice?
• Cats cradle?
• Hub and spoke?

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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

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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

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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

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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

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Cross-Market linkagesExamples for the GCC markets