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 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
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 3
US Europe
International Experience(and Cultural Bias!)
Nordic Area
Denmark
The World
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 4
Layout
Challenges for Xs & CSDs
Regional models
Transition problems
The NOREX experience
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 5
The European Drivers
ISD + CAD+ MiFID +
Internal market initiatives
EURO
Market forces(incl.. Int. Banks)Technology
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 6
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
MFWfA March 2007 Nairobi 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.
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 8
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
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 9
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
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 10
Strategies of Exchanges Vs. CSDs
Domestic
Domestic International
International
Investors
Issuers/securities
Exchanges
CSDs
Regional alliance
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 11
Vertical Integration - The “Silo” (E.G. Germany)
CCP
CSD
StockExc. Der.
Exc.
MFWfA March 2007 Nairobi 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 ...
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 13
Layout
Challenges for Xs & CSDs
Regional models
Transition problems
The NOREX experience
MFWfA March 2007 Nairobi 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
MFWfA March 2007 Nairobi 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
MFWfA March 2007 Nairobi 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?
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 17
A Best Simple Solution?
CCP
CSDa CSDb
Xa Xb I-X
ICSD
Brokers
Clearing members
Custodians
OTC
Joint IT etc.
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 18
A Possible Legal Structure(Phase 1)
CCP
CSDa CSDbXa Xb
ITCenter
International services
Joint Holding
Company ?
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 19
A Possible Legal Structure(Phase 2) - the Regional Silo
CCP
CSDa CSDbXa Xb
ITCenter
International services
Holding
Company ?
MFWfA March 2007 Nairobi 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
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 21
Example of Possible DividedIT Structure
CCP
CSD
Services
IT Center a b EEX
CSD
X
Comm Comm
Services
MFWfA March 2007 Nairobi 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
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 23
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
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 24
The CCP As Connectivity Provider
CCP
CSDa CSDb
Xa Xb I-X
ICSD
Brokers
Clearing members
Custodians
OTC
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 25
Layout
Challenges for Xs & CSDs
Regional models
Transition problems
The NOREX experience
MFWfA March 2007 Nairobi 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
MFWfA March 2007 Nairobi 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?
MFWfA March 2007 Nairobi 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
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 29
Layout
Challenges for Xs & CSDs
Regional models
Transition problems
The NOREX experience
MFWfA March 2007 Nairobi 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
MFWfA March 2007 Nairobi WWW.TVRconsult.dk 31
“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
MFWfA March 2007 Nairobi 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
MFWfA March 2007 Nairobi 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
MFWfA March 2007 Nairobi 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
MFWfA March 2007 Nairobi 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!
MFWfA March 2007 Nairobi 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
MFWfA March 2007 Nairobi 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
MFWfA March 2007 Nairobi 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: [email protected]
Top Related