Strengthening Capital Markets in Smaller Economies through Regional Exchange Co-operation

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

2. Tyge Vorstrup RasmussenBack Ground • Economist • Macro-econometric models • Forecasting and policy advice • EU and OECD committees and WPs • Teaching at University and Business School • 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 • Consultant • Nordic CSD project • Nordic CCP evaluation • Nordic-European co-operation projects (finance and commodity related) • World bank and EU consultancies WWW.TVRconsult.dk

3. International Experience(and Cultural Bias!) Europe US Nordic Area The World Denmark WWW.TVRconsult.dk

4. Layout • Challenges for Xs & CSDs • Regional models • Transition problems • The NOREX experience WWW.TVRconsult.dk

5. The European Drivers EURO ISD + CAD + MiFID + Internal market initiatives Market forces (incl.. Int. Banks) Technology WWW.TVRconsult.dk

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

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

8. Strengths Part of national structure Local securities base Domestic investor base 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 Weaknesses Highly dependent on a few big listings High fixed costs Too few international members 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 SWOT for X in Small Economy WWW.TVRconsult.dk

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

10. Strategies of Exchanges Vs. CSDs CSDs International Issuers/securities Exchanges Domestic Domestic International Investors Regional alliance WWW.TVRconsult.dk

11. Vertical Integration - The “Silo” (E.G. Germany) Stock Exc. Der. Exc. CCP CSD WWW.TVRconsult.dk

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

13. Layout • Challenges for Xs & CSDs • Regional models • Transition problems • The NOREX experience WWW.TVRconsult.dk

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

15. Regional Co-operation Models • Co-operative bodies • Building an alliance • Dual listings • Joint IT systems • Common CCP • Merger of Xs and/or CSDs • A regional silo WWW.TVRconsult.dk

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

17. A Best Simple Solution? Brokers I-X Xa Xb OTC CCP Clearing members Joint IT etc. CSDa CSDb ICSD Custodians WWW.TVRconsult.dk

18. A Possible Legal Structure(Phase 1) Xa CSDa Xb CSDb Joint Holding Company ? CCP IT Center International services WWW.TVRconsult.dk

19. A Possible Legal Structure(Phase 2) - the Regional Silo Xa CSDa Xb CSDb Holding Company ? CCP IT Center International services WWW.TVRconsult.dk

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

21. Example of Possible DividedIT Structure IT Center a b EE X Services X CSD CSD CCP Services Comm Comm WWW.TVRconsult.dk

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

23. CCP As Cross Border Facilitator CSDa (I)CSD Seller Buyer DvP DvP-link (costly) DvP Settle cross-border at domestic costs FoP-link (simple) CSDa CCP (I)CSD Seller Buyer DvP DvP DvP DvP WWW.TVRconsult.dk

24. The CCP As Connectivity Provider Brokers I-X Xa Xb OTC CCP Clearing members CSDa CSDb ICSD Custodians WWW.TVRconsult.dk

25. Layout • Challenges for Xs & CSDs • Regional models • Transition problems • The NOREX experience WWW.TVRconsult.dk

26. Transition Problems • 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 • Approval and support from authorities • Agreeing on systems • Transition costs • “Central” • Members etc. • Agreeing on joint rulebook • Conflicts with member interests • Foreign trading members - new directions of international flows • Foreign CSD members - challenge to big local custodian banks WWW.TVRconsult.dk

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

28. Alternative Regional Outcomes • Regional rivalry • Loss of material to international exchange • Regional bank(s) will build strong regional OTC markets • Regional bank(s) will build strong regional custody facility WWW.TVRconsult.dk

29. Layout • Challenges for Xs & CSDs • Regional models • Transition problems • The NOREX experience WWW.TVRconsult.dk

30. What was NOREX? • A Nordic exchange alliance: • Started by Denmark and Sweden • Later joined by Norway, Finland and Iceland • Now also encompassing Estonia, Latvia and Lithuania WWW.TVRconsult.dk

31. “NOREX” Market Capitalization WWW.TVRconsult.dk

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

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

34. What was not achieved With NOREX? • Missing CSD co-operation in NOREX scale • Lack of Nordic CCP • Still modest inter-regional trading • 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 WWW.TVRconsult.dk

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

36. Possible European “lessons”for African co-operations • All countries must be committed – no free riders • Single currency is not necessary – but wanted • Free capital movements must be implemented • Foreign investments must be allowed for all large investors • 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 WWW.TVRconsult.dk

37. Possible European “lessons”for African co-operations • Build on remote memberships (single license) • Allow possibility for non-EAC remote memberships • Make remote memberships easy • Same broker system to all markets • Shared connections • Common Rulebook • Easy approval procedures • 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 • Remember the CSDs - Consider a joint CCP WWW.TVRconsult.dk

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