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Cross-Market linkages examples for GCC markets
© Catalyst Development Ltd 2002 AGENDA Introduction Examples from other exchange linkages Options for GCC countries Next steps
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 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!
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 Xetra, SETS XETRA SETS
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 MIFF-Matif link
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 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!
Models for the GCC
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 Proposed structure Exchanges become broker on foreign exchange Deposition & Ownership records handled nationally
© Catalyst Development Ltd 2002 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?
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 Depository/Registry 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 Broker can be direct Encourage competition Ensure TX price low Functionality for 49% rule
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 Technology Options Lattice? Cats cradle? Hub and spoke?
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 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
© Catalyst Development Ltd 2002 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 linkages Examples for the GCC markets
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