cross-market linkages examples for gcc markets

Cross-Market linkagesexamples for GCC

markets

© Catalyst Development Ltd 2002

AGENDA

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


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?

• 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

• 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!

Euronext

SBFMatif

Amsterdam

Lisbon

Brussells

LIFFE


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

LondonStock Exchange

Deutsche BorseGroup

iX


Xetra, SETS

Brokersystem

HP Alpha VMS

XETRAworkstations

MISS Servers

Leased linesResilient configuration

Communicationsservers

LSE Network(Worldcom)

Backupnetwork

HP Himalaya

SETS

LMIL

Sun servers

Gateways(Customer supplied)

Cicsorouters

Market AccessWorkstations

Customer's trading system

• XETRA

• SETS


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


MIFF-Matif link

TraderWorkstations

Broker Broker

MEFF

Matif

AFARIMIFMTOMTSMOTIDEMROU

CLEARINGSERVER

NewCo Messaging Bus

PROXYSERVER

DTB


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

Stockholm

Oslo Bors Copenhagen IcelandicStock Exchange

Brokers

Central Order Matching

System

Sweden

Brokers

Norway

Brokers

Denmark

Brokers

Iceland

• 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!

Models for the GCC


Structure

• Aim “to allow investors and fund managers access to stocks, instruments to trade across all markets”

• Principles:

• Investor ProtectionEnsure fair and proper markets

• Ease of useAccess to informationRetail and professionalLiquidity

• Minimising costsTX cost as near as possible to local markets


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

Total volume Tadawul 1 yearSaudi Electrc

Saudi Livestock

ArriyadhConstruction..

SABIC

SAPTCO

STC

Industrialization

Shipping

SASCO

Taiba


Structure - Options

• Merge Exchanges join to

become one Example iX, Norex

• Advantages Economies of scale Simplicity Single set of

regulations

stock exchange D

stock exchange C

stock exchange E

stock exchange A

stock exchange B

GCC stock exchange

• Disadvantages Sovereignty Not able to cater for

smaller market Politics No exit strategy


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

stock exchange D

stock exchange C

stock exchange E

stock exchange A

stock exchange B

stock exchange E

stock exchange D

stock exchange A

stock exchange B

GCC stock exchange

"C" countrybroker 123

"C" countrybroker 234

stock exchange C


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

stock exchange D

stock exchange C

stock exchange E

stock exchange A

stock exchange B

stock exchange D

stock exchange C

stock exchange E

stock exchange A

stock exchange B


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

• Federal links, but with overseeing body• International Supervisory body – ISB• Standards for trading, market supervision, listing,

regulation, settlement. • Exchanges have responsibility for their members

InternationSupervisory

Bodystock

exchange D

"C" countrybroker

"C" countrybroker

"D" countrybroker

stock exchange C

stock exchange E

stock exchange B

stock exchange A

"A" countrybroker

"A" countrybroker

"A" countrybroker

"A" countrybroker

"D" countrybroker


Proposed structure

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

stock exchange A

stock exchange D

"D" countrybroker

"D" countrybroker

Order 1: Broker 123

Buy orders Buy orders

"A" countrybroker 123




Order 2: Broker 456

Order 1: Broker 345

Order 3: Broker 234

Order 4: Broker 123

Order 2: Broker SE-D

Order 3: Broker 123

Order Book


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? stock exchange A

stock exchange C

stock exchange D

stock exchange B

stock exchange E


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

Domestic listings

International listings

stock exchange A

domestic regs.

domestic + Internationalstandards of

regulation


Depository/Registry

• 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

stock exchange A

stock exchange D





Broker 123 holdings 140,000

Broker 456: holdings 35,000

Private Investor holding: 16,000

Stock Exchange D holdings:120,000

XYZ stock

Stock Exchange D holdings:120,000

"D" countrybroker 901

"D" countrybroker 902

Broker 901 holdings 80,000

Broker 902: holdings 40,000

made up of:

• Broker can be direct Encourage

competition Ensure TX price low

• Functionality for 49% rule


Payment

• Back to back Bank Membership

• Direct membership complex!

• Central GCC bank? Need to be CLS

• FX – 2 models• 1) Single currency – easy• 2) Multi-currency:

FX translation service Outsourced Spot execution Commission charge Rates broadcast via MDS

"A" countrybroker

stock exchange B

stock exchange C

ISB hub

Bank

Designated FXbroker

Bank


Technology

• Options

Lattice?

Cats cradle?

Hub and spoke?

stock exchange A

"A" countrybroker

"A" countrybroker

"A" countrybroker

"A" countrybroker

stock exchange C

stock exchange D

"C" countrybroker

"C" countrybroker

"D" countrybroker

stock exchange B

stock exchange E

"D" countrybroker

stock exchange A

"A" countrybroker

"A" countrybroker

"A" countrybroker

"A" countrybroker

stock exchange C

stock exchange D

"C" countrybroker

"C" countrybroker

"D" countrybroker

stock exchange B

stock exchange E

"D" countrybroker

ISB Hub

stock exchange A

"A" countrybroker

"A" countrybroker

"A" countrybroker

"A" countrybroker

stock exchange C

stock exchange D

"C" countrybroker

"C" countrybroker

"D" countrybroker

stock exchange B

stock exchange E

"D" countrybroker


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

Exchange ATrading system

Exchange BTrading system

Exchange CTrading system

Exchange DTrading system

Exchange ETrading system

Brokertrading workplace

ISBHub


market datasystem (MDS)

MDS

national data

(optional)


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


ISBHub

Orders for foreign stocks

Orders for national stocks


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

• 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

Cross-Market linkagesExamples for the GCC

markets

cross-market linkages examples for gcc markets

Documents

gcc catalyst development

us catalyst development

european markets

fund managers access

miffmatif linkalliance

crossmarket linkagesexamples

different depositories

depositories platforms