strengthening capital markets in smaller economies through regional exchange co-operation

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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 RasmussenTVRconsult

MFWfA March 2007 Nairobi WWW.TVRconsult.dk 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


US Europe

International Experience(and Cultural Bias!)

Nordic Area

Denmark

The World


Layout

Challenges for Xs & CSDs

Regional models

Transition problems

The NOREX experience


The European Drivers

ISD + CAD+ MiFID +

Internal market initiatives

EURO

Market forces(incl.. Int. Banks)Technology


The Changing European Landscape

DeutscheBörse

Euronext(F,NL,B,P)

London

DBAG

EUREX/DBAG

Clearstream

EUREX

Euronext

Clearnet

ClearnetEuroClear

LiffeLSE

LCH

Crest

The Rest of Europe( I, E, CH, etc.)

The Rest of the world (US!!)

NOREX


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.


SWOT for X in Small Economy

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 CSD in Small Economy

Strengths• Local, strong monopoly

Opportunities• Back office BSP • Borrow-lending• International securities

Weaknesses• Local costumers

Threats• I-CSD to take flow

as SWOT for exchanges,but


Strategies of Exchanges Vs. CSDs

Domestic

Domestic International

International

Investors

Issuers/securities

Exchanges

CSDs

Regional alliance


Vertical Integration - The “Silo” (E.G. Germany)

CCP

CSD

StockExc. Der.

Exc.


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 ...


Layout


Regional models

Transition problems



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


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


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?


A Best Simple Solution?

CCP

CSDa CSDb

Xa Xb I-X

ICSD

Brokers

Clearing members

Custodians

OTC

Joint IT etc.


A Possible Legal Structure(Phase 1)

CCP

CSDa CSDbXa Xb

ITCenter

International services

Joint Holding

Company ?


A Possible Legal Structure(Phase 2) - the Regional Silo

CCP

CSDa CSDbXa Xb

ITCenter

International services

Holding

Company ?


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


Example of Possible DividedIT Structure

CCP

CSD

Services

IT Center a b EEX

CSD

X

Comm Comm

Services


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


CCP As Cross Border Facilitator

CCPCSDa (I)CSDSeller BuyerDvP DvP DvP

DvP

FoP-link(simple)

Seller CSDa (I)CSD BuyerDvP-link(costly)

DvPDvP

Settle cross-border at domestic costs


The CCP As Connectivity Provider

CCP

CSDa CSDb

Xa Xb I-X

ICSD

Brokers

Clearing members

Custodians

OTC


Layout


Regional models

Transition problems



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


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?


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


Layout


Regional models

Transition problems



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


“NOREX” Market Capitalization

13.311

4.573

3.6043.058

2.707

1.221994 869

553 181

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

NYSE

Toky

o SE

Nasdaq

Lond

on SE

Euro

next

Deutsc

he B

örse

"NO

REX"

Afric

a (Co

mbined

)

Bomba

y SE

Bursa

Mala

ysia

Market Capitalisation (Billion US$)-2005


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


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


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


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!


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


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


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: [email protected]

strengthening capital markets in smaller economies through regional exchange co-operation

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