1. 1 Strengthening Capital Markets in Smaller Economies through Regional Exchange Co-operation World Bank Seminar on Making Finance Work for Africa March 5th, 2007 Nairobi, Kenya Tyge Vorstrup Rasmussen TVRconsult

2. MFWfA March 2007 Nairobi WWW.TVRconsult.dk2 Tyge Vorstrup Rasmussen Back Ground l Economist Macro-econometric models Forecasting and policy advice EU and OECD committees and WPs Teaching at University and Business School l Financial sector experience Danish bankers association Danish brokers association Started the Danish derivative market President FUTOP Clearing Centre Managing Director, Copenhagen stock exchange President NOREX IOMA, each, IOCA, Fese etc. Various Danish committees l Consultant Nordic CSD project Nordic CCP evaluation Nordic-European co-operation projects (finance and commodity related) World bank and EU consultancies

3. MFWfA March 2007 Nairobi WWW.TVRconsult.dk3 US Europe International Experience (and Cultural Bias!) Nordic Area Denmark The World

4. MFWfA March 2007 Nairobi WWW.TVRconsult.dk4 Layout l Challenges for Xs & CSDs l Regional models l Transition problems l The NOREX experience

5. MFWfA March 2007 Nairobi WWW.TVRconsult.dk5 The European Drivers ISD + CAD + MiFID + Internal market initiatives EURO Market forces (incl.. Int. Banks) Technology

6. MFWfA March 2007 Nairobi WWW.TVRconsult.dk6 The Changing European Landscape Deutsche Börse Euronext (F,NL,B,P) London DBAG EUREX/DBAG Clearstream EUREX Euronext Clearnet EuroClear Liffe LSE LCH Crest The Rest of Europe ( I, E, CH, etc.) The Rest of the world (US!!) NOREX

7. MFWfA March 2007 Nairobi WWW.TVRconsult.dk7 Challenges for Xs, CSDs and CCPs in Smaller Countries l Improve markets and secure competitiveness l Risks of being marginalized and left out l Costly investments in new IT systems to keep up l Local investors are going international l The need to do international marketing l Attract international members and costumers l Local listed companies participate in international M&As l Investment banks/brokers (and custodians) are developing competing systems l New trading facilities etc.

8. MFWfA March 2007 Nairobi WWW.TVRconsult.dk8 SWOT for X in Small Economy l Strengths Part of national structure Local securities base Domestic investor base l Opportunities Attract foreign members Become the regional exchange Own national silo Participate in alliances Develop new markets Develop new services Seek cost reductions Sell to larger exchange l Weaknesses Highly dependent on a few big listings High fixed costs Too few international members l Threats M&as may imply de-listings Domestic investors diversify Neighbor exchange may become aggressive International exchange may try to skim the cream Next generation of systems could be costly Members may develop competing market

9. MFWfA March 2007 Nairobi WWW.TVRconsult.dk9 SWOT for CSD in Small Economy l Strengths Local, strong monopoly l Opportunities Back office BSP Borrow-lending International securities l Weaknesses Local costumers l Threats I-CSD to take flow as SWOT for exchanges,but

10. MFWfA March 2007 Nairobi WWW.TVRconsult.dk10 Strategies of Exchanges Vs. CSDs Domestic International Investors Issuers/securities Exchanges CSDs Regional alliance

11. MFWfA March 2007 Nairobi WWW.TVRconsult.dk11 Vertical Integration - The “Silo” (E.G. Germany) CCP CSD Stock Exc. Der. Exc.

12. MFWfA March 2007 Nairobi WWW.TVRconsult.dk12 Why Are National Xs/CSDs Still Necessary? l National pride l National wealth registered in CSD “must” be registered within nation l Legal restrictions l Lack of FSA/SEC co-operation l Contact to local stakeholders Authorities Listed companies Brokers/banks Investors l But look at other “network” industries: Airlines, Tele, Post, Electricity, Banks...

13. MFWfA March 2007 Nairobi WWW.TVRconsult.dk13 Layout l Challenges for Xs & CSDs l Regional models l Transition problems l The NOREX experience

14. MFWfA March 2007 Nairobi WWW.TVRconsult.dk14 What Is a Region? Regional capital market co-operation can be easier if: l Alike cultures l Language connectivity l Same legal tradition l Same level of technological evolution l Countries and authorities co-operate in other matters l High economic interaction l Much cross-border investment l Regional M&As l Regional banks have developed l International banks and investors see the countries as a region

15. MFWfA March 2007 Nairobi WWW.TVRconsult.dk15 Regional Co-operation Models l Co-operative bodies l Building an alliance l Dual listings l Joint IT systems l Common CCP l Merger of Xs and/or CSDs l A regional silo

16. MFWfA March 2007 Nairobi WWW.TVRconsult.dk16 Crucial Decisions l Do all have strong commitments? l Are members/customers on board? l Are SEC/CMA on board? l Dual listings vs. cross memberships? l Accept Common Rulebook? l Accept Joint IT systems? l Do CSDs have connectivity? l CCP solution to connect CSDs? l Alliance or Merger? l International connectivity?

17. MFWfA March 2007 Nairobi WWW.TVRconsult.dk17 A Best Simple Solution? CCP CSDaCSDb XaXb I-X ICSD Brokers Clearing members Custodians OTC Joint IT etc.

18. MFWfA March 2007 Nairobi WWW.TVRconsult.dk18 A Possible Legal Structure (Phase 1) CCP CSDaCSDb Xa Xb IT Center International services Joint Holding Company ?

19. MFWfA March 2007 Nairobi WWW.TVRconsult.dk19 A Possible Legal Structure (Phase 2) - the Regional Silo CCP CSDaCSDb Xa Xb IT Center International services Holding Company ?

20. MFWfA March 2007 Nairobi WWW.TVRconsult.dk20 Joint IT (ATS/CSD) in Regional Co-operation l Central N market solution for the costs of 1 system Initial cost Maintenance New versions l Member-access to n markets via same system and line l Transition costs for existing members l Perhaps a gradual process - not a big bang l ASP/BSP relationships in alliance l Regional balance l Timing l Standardization

21. MFWfA March 2007 Nairobi WWW.TVRconsult.dk21 Example of Possible Divided IT Structure CCP CSD Services IT Center a b EE X CSD X Comm Services

22. MFWfA March 2007 Nairobi WWW.TVRconsult.dk22 New Roles for CCPs l Traditional role : Counterparty for organized derivative markets Clearing with margining with gross/net netting l New trend: counterparty for spot markets to facilitate anonymous trading with guaranteed settlement on net basis l New financial products: swaps, repos etc l New business areas: borrow lending facilities l New commodity markets: energy l New opportunity: cross-border facilitator l New user demands: consolidation

23. MFWfA March 2007 Nairobi WWW.TVRconsult.dk23 CCP As Cross Border Facilitator CCPCSDa (I)CSD SellerBuyer DvP FoP-link (simple) Seller CSDa (I)CSD Buyer DvP-link (costly) DvP Settle cross-border at domestic costs

24. MFWfA March 2007 Nairobi WWW.TVRconsult.dk24 The CCP As Connectivity Provider CCP CSDaCSDb XaXb I-X ICSD Brokers Clearing members Custodians OTC

25. MFWfA March 2007 Nairobi WWW.TVRconsult.dk25 Layout l Challenges for Xs & CSDs l Regional models l Transition problems l The NOREX experience

26. MFWfA March 2007 Nairobi WWW.TVRconsult.dk26 Transition Problems l Building trust Agreeing on goals and how Sharing costs vs. Sharing incomes What is still local and what is joint (e.g. Sale of info.) Personal interests l Approval and support from authorities l Agreeing on systems l Transition costs “Central” Members etc. l Agreeing on joint rulebook l Conflicts with member interests Foreign trading members - new directions of international flows Foreign CSD members - challenge to big local custodian banks

27. MFWfA March 2007 Nairobi WWW.TVRconsult.dk27 Implications for Authorities and Supervisors l Make the economy open Capital controls Investment restrictions Foreign intermediaries and investors l Understanding the implications l International attitude needed l Adjustment of laws l Harmonizing regulation l Regional “passport” for banks and brokers l MOU on information sharing etc. l A regional supervisor?

28. MFWfA March 2007 Nairobi WWW.TVRconsult.dk28 Alternative Regional Outcomes l Regional rivalry l Loss of material to international exchange l Regional bank(s) will build strong regional OTC markets l Regional bank(s) will build strong regional custody facility

29. MFWfA March 2007 Nairobi WWW.TVRconsult.dk29 Layout l Challenges for Xs & CSDs l Regional models l Transition problems l The NOREX experience

30. MFWfA March 2007 Nairobi WWW.TVRconsult.dk30 What was NOREX? l A Nordic exchange alliance: Started by Denmark and Sweden Later joined by Norway, Finland and Iceland Now also encompassing Estonia, Latvia and Lithuania

31. MFWfA March 2007 Nairobi WWW.TVRconsult.dk31 “NOREX” Market Capitalization

32. MFWfA March 2007 Nairobi WWW.TVRconsult.dk32 NOREX - basic principles l Joint trading system and ATS center l Common Rule book (members, trading, listing etc.) l Easy to get joint memberships l No dual listing competition l Joint cross country marketing l Joint international marketing l Other co-operations Market surveillance system Data Warehouse

33. MFWfA March 2007 Nairobi WWW.TVRconsult.dk33 Danish gains from NOREX l New and cheaper Trading system l Upgrading of rules and regulations l Many new members Nordic International l Push to equity culture development l Push to alternative market place developments for smaller companies l Push to derivative market development l New trading habits l More turnover, better liquidity and tighter spreads

34. MFWfA March 2007 Nairobi WWW.TVRconsult.dk34 What was not achieved With NOREX? l Missing CSD co-operation in NOREX scale l Lack of Nordic CCP l Still modest inter-regional trading l No formalized European connection to the European centers But remember: Still 8 different currencies in the NOREX area – when more countries join the euro further integration must be expected

35. MFWfA March 2007 Nairobi WWW.TVRconsult.dk35 How did NOREX turn out? l Co-operation became so close that merger became the obvious outcome l All NOREX exchanges (except Norway) now owned by the (Swedish) OMX Exchange Group l OMX Exchange Group has multinational management l Virtual Nordic lists are now introduced l NOREX has benefited and improved all participating markets l Still local presences (legal exchange entities) in all the countries for a long time ahead l “National Pride” has not really suffered!

36. MFWfA March 2007 Nairobi WWW.TVRconsult.dk36 Possible European “lessons” for African co-operations l All countries must be committed – no free riders l Single currency is not necessary – but wanted l Free capital movements must be implemented l Foreign investments must be allowed for all large investors l Dual listings is not the best solution It is easy and makes all exchanges look bigger, but Split of (already low) liquidity Risk of competition between alliance exchanges Risk of convergence to just one exchange Need for dual members for arbitrage Necessitates complicated, efficient linkages of CSDs and payment systems

37. MFWfA March 2007 Nairobi WWW.TVRconsult.dk37 Possible European “lessons” for African co-operations l Build on remote memberships (single license) l Allow possibility for non-EAC remote memberships l Make remote memberships easy Same broker system to all markets Shared connections Common Rulebook Easy approval procedures l Share Systems, IT-Centers and communication Lower “central costs” Cheaper member access cross border Easier CSD linkages (“trade abroad-settle at home”) Possibility for back up outside each country l Remember the CSDs - Consider a joint CCP

38. MFWfA March 2007 Nairobi WWW.TVRconsult.dk38 Thank You! l I will be in Nairobi in the coming days and will be ready to discuss in more detail various regional collaboration models and challenges. l Contact: MAIL@TVRconsult.dk