November 2006 HSBC Securities Services Middle East Securities Services in MENA Markets a Comparison with International Benchmarks

Agenda Middle East Capital Markets: An Overview Middle East markets and G30 recommendations – A comparison Suggested improvements for MENA markets

HSBC’s Custody and Clearing Global Network covers 37 markets of which 11 are in the Middle East HSBC’s global network includes 9,500 offices in 76 countries and territories

Middle East Capital Markets - An Overview

The Region – Economy and Capital Market Market cap more than USD 1 Trn. Key drivers  High oil price, creating huge liquidity  Repatriation of Arab money back to the Gulf  Diversification and privatisation efforts More stocks are opening up for foreign investors – some countries allow up to 100%, left to the discretion of the companies Stable exchange rate, no restrictions on repatriation No tax in most countries Electronic trading, stocks held in dematerialised form Significant growth (assets - 200%, trxns 140% over 2004) Needed – more robust regulations, institutional investors, international settlement and custody practices

The Region – Market Settlement features Account structure  Segregated accounts - Beneficial owner markets  Omnibus account structure not allowed Impact: Longer time to market, increased paperwork and costs Settlement practice  SD varies from T to T+3  Stock moves on T, cash on SD  Two accounts – depository and trading (broker access)  Before trading, stock should be in trading account  Hence no fails, but little scope to control movement of stock after trade – risk for sale trades Impact: Settlement exposure, inadequate custodial control, front running risk

The Region – Market Settlement features Securities Lending  No short sales, no stock lending  Securities lending announced in some markets but yet to take off Impact: Low volumes and portfolio yields Custodian services  Market settlement between brokers, not with custodian  Role of custodian not well understood, but changing Impact: Inadequate risk management

Typical Structures for Foreign Institutional Investors (FIIs) FII International Broker Local market settlement Global Custodian Local Sub-CustodianLocal Broker

Middle East markets and G30 recommendations – A comparison

G30 – Recommendations Eliminate paper and automate Eliminate issuance, use, transfer, and retention of paper certificates Market participants to automate elements of process such as confirmations and trade allocations. Use of electronic communication Avoid duplicate recording of data and manual addition of information Creating a strengthened, interoperable Global Network

G30 – Recommendations Eliminate paper and automate Dematerialized securities Issuance of electronic trade notes in MT515 format to facilitate STP Online connectivity to depositories Creating a strengthened, interoperable Global Network

G30 – Recommendations Eliminate paper and automate Dematerialized securities Issuance of electronic trade notes in MT515 format to facilitate STP Online connectivity to depositories Creating a strengthened, interoperable Global Network Harmonize messaging standards & communication protocols Adopt ISO15022 as global standard for straight through securities messaging

G30 – Recommendations Eliminate paper and automate Dematerialized securities Issuance of electronic trade notes in MT515 format to facilitate STP Online connectivity to depositories Harmonize messaging standards & communication protocols Adopt ISO15022 as global standard for straight through securities messaging – to be used across all market participants to achieve 100% STP Creating a strengthened, interoperable Global Network

G30 – Recommendations Eliminate paper and automate Dematerialized securities Issuance of electronic trade notes in MT515 format to facilitate STP Online connectivity to depositories Harmonize messaging standards & communication protocols Adopt ISO15022 as global standard for straight through securities messaging – to be used across all market participants to achieve 100% STP Creating a strengthened, interoperable Global Network Develop and implement reference data standards Identify, develop and adopt universal securities, counter party and relevant generic reference data standards Issuers, exchanges to make all relevant information available to market for a fair price and timely basis

G30 – Recommendations Eliminate paper and automate Dematerialized securities Issuance of electronic trade notes in MT515 format to facilitate STP Online connectivity to depositories Harmonize messaging standards & communication protocols Adopt ISO15022 as global standard for straight through securities messaging – to be used across all market participants to achieve 100% STP Creating a strengthened, interoperable Global Network Develop and implement reference data standards All ME markets should make use of International Securities Identification Numbers(ISINs) for securities transactions A central regional authority should be appointed and entrusted with the functionof assigning ISINs for all Middle east listed securities

G30 – Recommendations Eliminate paper and automate Dematerialized securities Issuance of electronic trade notes in MT515 format to facilitate STP Online connectivity to depositories Harmonize messaging standards & communication protocols Adopt ISO15022 as global standard for straight through securities messaging – to be used across all market participants to achieve 100% STP Creating a strengthened, interoperable Global Network Develop and implement reference data standards All ME markets should make use of International Securities Identification Numbers(ISINs) for securities transactions A central regional authority should be appointed and entrusted with the functionof assigning ISINs for all Middle east listed securities Synchronize timing between clearing, settlement, and payment systems Operation of payments and forex systems should not reduce efficiency or increase risk in the clearing and settlement systems and vice versa. Develop a comprehensive action plan to increase efficiency and safety of cross border securities transactions

G30 – Recommendations Eliminate paper and automate Dematerialized securities Issuance of electronic trade notes in MT515 format to facilitate STP Online connectivity to depositories Harmonize messaging standards & communication protocols Adopt ISO15022 as global standard for straight through securities messaging – to be used across all market participants to achieve 100% STP Creating a strengthened, interoperable Global Network Develop and implement reference data standards All ME markets should make use of International Securities Identification Numbers(ISINs) for securities transactions A central regional authority should be appointed and entrusted with the functionof assigning ISINs for all Middle east listed securities Synchronize timing between clearing, settlement, and payment systems The Middle East markets are not true DVP markets as there is no simultaneous cash and securities settlements. Several Middle East markets settle direct with brokers as against the custodians who are the settlement agents appointed by institutional investors.

G30 – Recommendations Automate and standardize institutional trade matching Market participants to collectively develop and use fully compatible and industry accepted technical and market practice standards for automated confirmation and agreement of institutional trade details on the day of trade. Creating a strengthened, interoperable Global Network

G30 – Recommendations Automate and standardize institutional trade matching Trades executed by brokers on the exchange auto match and flow into the depository systems for settlement. Pre-matching of trades between brokers and custodian is upon receipt of client instructions and broker trade note via facsimile. Creating a strengthened, interoperable Global Network

G30 – Recommendations Automate and standardize institutional trade matching Trades executed by brokers on the exchange auto match and flow into the depository systems for settlement. Pre-matching of trades between brokers and custodian is upon receipt of client instructions and broker trade note via facsimile. Creating a strengthened, interoperable Global Network Expand the use of central counterparties Assess the potentially substantial risk reduction and efficiency improvements of using a central counter party.

G30 – Recommendations Automate and standardize institutional trade matching Trades executed by brokers on the exchange auto match and flow into the depository systems for settlement. Pre-matching of trades between brokers and custodian is upon receipt of client instructions and broker trade note via facsimile. Expand the use of central counterparties The clearing house run by exchanges in the Middle East should provide a central counter party system that will guarantee that trades between members are settled and eliminate default risk. Creating a strengthened, interoperable Global Network

G30 – Recommendations Automate and standardize institutional trade matching Trades executed by brokers on the exchange auto match and flow into the depository systems for settlement. Pre-matching of trades between brokers and custodian is upon receipt of client instructions and broker trade note via facsimile. Expand the use of central counterparties The clearing house run by exchanges in the Middle East should provide a central counter party system that will guarantee that trades between members are settled and eliminate default risk. Creating a strengthened, interoperable Global Network Permit Securities Lending and borrowing Relevant authorities should permit securities lending and borrowing as a method for expediting the settlement of securities transactions.

G30 – Recommendations Automate and standardize institutional trade matching Trades executed by brokers on the exchange auto match and flow into the depository systems for settlement. Pre-matching of trades between brokers and custodian is upon receipt of client instructions and broker trade note via facsimile. Expand the use of central counterparties The clearing house run by exchanges in the Middle East should provide a central counter party system that will guarantee that trades between members are settled and eliminate default risk. Creating a strengthened, interoperable Global Network Permit Securities Lending and borrowing Securities lending and borrowing is not permitted in all ME markets Lending allows increase in portfolio yields while maintaining ownership benefits and related entitlements on lent securities. Borrowing avoids failed trades & reduces financing costs of failed settlements

G30 – Recommendations Automate and standardize institutional trade matching Trades executed by brokers on the exchange auto match and flow into the depository systems for settlement. Pre-matching of trades between brokers and custodian is upon receipt of client instructions and broker trade note via facsimile. Expand the use of central counterparties The clearing house run by exchanges in the Middle East should provide a central counter party system that will guarantee that trades between members are settled and eliminate default risk. Creating a strengthened, interoperable Global Network Permit Securities Lending and borrowing Securities lending and borrowing is not permitted in all ME markets Lending allows increase in portfolio yields while maintaining ownership benefits and related entitlements on lent securities. Borrowing avoids failed trades & reduces financing costs of failed settlements Automate and standardize asset servicing processes Market participants to advise investors all details of corporate events in an automated, timely manner and in compliance with industry standards. Harmonize and make transparent the processes, documentation and communication of information connected with foreign ownership restrictions

G30 – Recommendations Automate and standardize institutional trade matching Trades executed by brokers on the exchange auto match and flow into the depository systems for settlement. Pre-matching of trades between brokers and custodian is upon receipt of client instructions and broker trade note via facsimile. Expand the use of central counterparties The clearing house run by exchanges in the Middle East should provide a central counter party system that will guarantee that trades between members are settled and eliminate default risk. Creating a strengthened, interoperable Global Network Permit Securities Lending and borrowing Securities lending and borrowing is not permitted in all ME markets Lending allows increase in portfolio yields while maintaining ownership benefits and related entitlements on lent securities. Borrowing avoids failed trades & reduces financing costs of failed settlements Automate and standardize asset servicing processes Corporate event information is sometimes delayed on exchange websites and if available are often in Arabic that involves translation delays and thereby delayed relay of information to investors. Foreign ownership limits are monitored by the exchanges/depositories

G30 – Recommendations Financial integrity and risk management practices Settlement and clearing service providers should have in place risk management processes to enable them conduct business in safe, sound and prudent manner. Users of services of clearing and settlement service providers must establish robust due diligence procedures and counter party risk management controls. Mitigating Risk

G30 – Recommendations Financial integrity and risk management practices Due diligence should be carried out on settlement participants both upfront, while admitting for membership and ongoing. In case custodian is settling the trade, broker limits should be blocked till custodian confirms the trade Mitigating Risk

G30 – Recommendations Ensure financial integrity of clearing and settlement service providers Due diligence should be carried out on settlement participants both upfront, while admitting for membership and ongoing. In case custodian is settling the trade, broker limits should be blocked till custodian confirms the trade Mitigating Risk Ensure final, simultaneous transfer and availability of assets Link securities transfers to fund transfers in a way that achieves effective delivery versus payment (DVP). Make transparent at which stage finality of transfer is achieved with rules that enable the receiver to re-use securities and cash without further delay.

G30 – Recommendations Ensure financial integrity of clearing and settlement service providers Due diligence should be carried out on settlement participants both upfront, while admitting for membership and ongoing. In case custodian is settling the trade, broker limits should be blocked till custodian confirms the trade Mitigating Risk Ensure final, simultaneous transfer and availability of assets ME markets do not practice a true delivery versus payment (DVP) settlement system – stock moves on T, cash moves on T+2/3 In most markets, securities move out on trade date itself without confirmation of investor. Concept of trading account reduces investor control over his holdings.

G30 – Recommendations Ensure financial integrity of clearing and settlement service providers Due diligence should be carried out on settlement participants both upfront, while admitting for membership and ongoing. In case custodian is settling the trade, broker limits should be blocked till custodian confirms the trade Mitigating Risk Ensure final, simultaneous transfer and availability of assets ME markets do not practice a true delivery versus payment (DVP) settlement system – stock moves on T, cash moves on T+2/3 In most markets, securities move out on trade date itself without confirmation of investor. Concept of trading account reduces investor control over his holdings. Ensure effective business continuity and disaster recovery planning All market participants must regularly review, update and test their business continuity and disaster recovery plans as well as those of a systemically important institution. Plans should be robust to ensure with reasonable certainty that critical operations will continue with high level of integrity following disruption.

G30 – Recommendations Ensure financial integrity of clearing and settlement service providers Due diligence should be carried out on settlement participants both upfront, while admitting for membership and ongoing. In case custodian is settling the trade, broker limits should be blocked till custodian confirms the trade Mitigating Risk Ensure final, simultaneous transfer and availability of assets ME markets do not practice a true delivery versus payment (DVP) settlement system – stock moves on T, cash moves on T+2/3 In most markets, securities move out on trade date itself without confirmation of investor. Concept of trading account reduces investor control over his holdings. Ensure effective business continuity and disaster recovery planning While the depositories and exchanges have business continuity and disaster recovery plans, it is difficult to confirm the robustness of these plans in absence of testing results. Regulators must encourage the process of industry wide contingency planning.

G30 – Recommendations Ensure financial integrity of clearing and settlement service providers Due diligence should be carried out on settlement participants both upfront, while admitting for membership and ongoing. In case custodian is settling the trade, broker limits should be blocked till custodian confirms the trade Mitigating Risk Ensure final, simultaneous transfer and availability of assets ME markets do not practice a true delivery versus payment (DVP) settlement system – stock moves on T, cash moves on T+2/3 In most markets, securities move out on trade date itself without confirmation of investor. Concept of trading account reduces investor control over his holdings. Ensure effective business continuity and disaster recovery planning While the depositories and exchanges have business continuity and disaster recovery plans, it is difficult to confirm the robustness of these plans in absence of testing results. Regulators must encourage the process of industry wide contingency planning. Advance legal certainty over rights to securities, cash or collateral Market participants must be able to determine what law defines and governs their rights to securities, cash or collateral in a clearing and settlement system.

G30 – Recommendations Ensure financial integrity of clearing and settlement service providers Due diligence should be carried out on settlement participants both upfront, while admitting for membership and ongoing. In case custodian is settling the trade, broker limits should be blocked till custodian confirms the trade Mitigating Risk Ensure final, simultaneous transfer and availability of assets ME markets do not practice a true delivery versus payment (DVP) settlement system – stock moves on T, cash moves on T+2/3 In most markets, securities move out on trade date itself without confirmation of investor. Concept of trading account reduces investor control over his holdings. Ensure effective business continuity and disaster recovery planning While the depositories and exchanges have business continuity and disaster recovery plans, it is difficult to confirm the robustness of these plans in absence of testing results. Regulators must encourage the process of industry wide contingency planning. Advance legal certainty over rights to securities, cash or collateral Legal framework, particularly with respect to collateral needs improvement

Suggested improvements for MENA markets

Best practices of international markets Effective securities market rules and regulations Access to foreign institutional investors Well defined roles of market intermediaries Active involvement of market participants in market development and regulatory initiatives Robust risk management systems Effective business continuity and disaster recovery planning

Suggested steps for MENA markets Simplified account opening procedures – currently some markets require notarization and consularization of documents. Facilitate omnibus account structure Recognition of sub-custodians for institutional investors DVP settlement with simultaneous settlement of cash and securities Settlement should be controlled by custodian Restrict access to client holdings to authorized agents of the client Direct and electronic link to depository systems Electronic fund transfer and income payment infrastructure No requirements of pre-funding or pre-advice

International investor requirements… Account Administration Market News Corporate Actions Income Collection 24X7 Client Services Derivatives Reporting Taxation Treasury Cash Mgmt Trade Settlement Clearing