The Capital Markets
Linkages among the OIC
Member Countries
OIC Member States’ Stock Exchanges Forum
Istanbul, October 2-3, 2010
Joint Work by the Capital Markets Linkages
and Post-Trade Services Task Forces
At the last Working Committee meeting held in Abu Dhabi, a
decision has been taken for “an inter-committee meeting to be held
between the task forces for the OIC Capital Markets Linkages and
Post-trade Services with regards to the work carried out on
linkages.”
With regard to this decision, both Task Forces worked together and
prepared this joint work, including a guideline on how to establish a
cross-trading environment among the OIC member countries.
2
Necessitates of Exchanges Linkages
Liquidity is one of the most essential elements for a strong link between stock
markets. Possible benefits associated with regional integration of exchanges are:

Diversified risk in a wider market ;

More efficient and competitive markets ;

lower costs and higher returns ;

Increased cross-border capital flows ;

Pooling the resources of fragmented capital markets could boost liquidity and the ability of
these markets to mobilize local and international capital for development ;

Investors would gain access to a broader range of shares;

Issuers would gain access to a larger number of investors, and

Reduction of the risk of market volatility due to increase in the size of the markets.
3
Goal and Scope of
the Capital Markets Linkage

To provide local investors in the OIC Member Countries with easy
access to other OIC members’ capital markets in terms of
operational efficiency, cost effectiveness, advanced technological
and safe environment

To build a common understanding of market linkages in the OIC
Member Countries’ stock exchanges
To overcome barriers impeding to invest in the OIC capital markets
To create awareness among the OIC Member Countries on benefits
and costs of market linkages


4
Some Models of linkages among Capital Markets

CME Group and BM&Bovespa (iLink)

LATIBEX (among Five Latin America Countries

Link up Markets (among 10 leading CSDs spread from Europe to South Africa

ADX Linkage with DFM and MSM

ASEAN Trading Link

Eurex, the International Securities Exchange (ISE), and The Options Clearing
Corporation (OCC)
5
Results of the Questionnaire I
(made by the Post-Trade Services Task Force)

To explore intentions and possibilities for establishing market linkages among stock
exchanges and post-trading institutions in the OIC member countries

Replying institutions
 Abu Dhabi Stock Exchange
 Amman Stock Exchange
 Beirut Stock Exchange
 Bursa Malaysia
 Central Registry Agency, Turkey
 Egypt Stock Exchange
 Istanbul Stock Exchange
 Kyrgyz Stock Exchange
 MCSD, Egypt
 Tadawul Stock Exchange
 Takasbank, Turkey
 Tehran Stock Exchange
6
Results of the Questionnaire I
(made by the Post-Trade Services Task Force)

All the replying members denoted that;
 Their investors have interest for investing in other OIC member
states’ capital markets.
 A market access to other OIC member states’ capital markets would
attract their investors.
 They have intentions to establish capital market linkages and/or
correspondent relationships with the other OIC member states’ capital
market institutions.

Some members stated that there are some barriers to establish a
link/relationship with the correspondent institutions operating in OIC
member states.
7
Results of the Questionnaire I
(made by the Post-Trade Services Task Force)

Current direct links (only for members replied the questionnaire)




Current correspondent accounts (only for members replied the questionnaire)



Abu Dhabi SE -DFM
Egypt SE - London SE
MCSD – SIS Swiss Clearing, Link-up Markets Europe
Takasbank – Euroclear
MCSD – El Kuwait, Mid Clear
Current MoUs (only for members replied the questionnaire)


Among Stock Exchanges
Among Post Trade Instititutions
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Current Linkage Models I
Asean Link
DFM/ADX/MSM Link
iLink
Members
Thailand, Singapore,
Malaysia, the Philippines,
Indonesia, Vietnam
Dubai, Abu Dhabi,
Muscat
CME, BM&FBOVESPA
Legal Status
Exchanges remain as
independant legal entities
Exchanges remain as
independant legal entities
Exchanges remain as
independant legal entities
Infrastructure
Management
Independent
(third party)
Not independent
(jointly managed)
Not independent
(jointly managed)
Local regulations
Local regulations
Local regulations
Home country clearing
houses
Home country clearing
houses
Home country
clearing houses
Local brokerage houses
Local brokerage houses
Local brokerage houses
Regulations
Settlement and
Custody
Brokers
9
Current Linkage Models II
Asean Link
DFM/ADX/MSM Link
iLink
Trading securities
30 blue-chip stocks
from each exchange
will form the “Asean
Bulletin Board”.
All stocks
Derivatives products
Listing securities
Home country
exchange rule
Home country
exchange rule
Home country exchange rule
No need
No need
No need
n.a
Brokerage firms receive an
amount eq. to 10% of the fees
(exchange and registration
fees) on the executed trades
Full
Harmonisation
Incentives
n.a.
10
Current Linkage Models III
Asean Link
DFM/ADX/MSM Link
iLink
Order Routing
Yes
Yes
Yes
Direct Market
Access
Yes
Yes
Yes
Algoritmic
trading
n.a.
n.a.
Yes
11
Results of the Questionnaire II
(Made by the OIC Capital Market Linkage Task Force)
To discover opinions of OIC member countries stock exchanges and posttrading institutions for establishing market linkages
Replying Exchanges:

Amman Stock Exchange

Istanbul Stock Exchange

Palestine Exchange

Kyrgyz Stock Exchange

Tadawul Stock Exchange

Tehran Stock Exchange
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Results of the Questionnaire II
(Made by the OIC Capital Market Linkage Task Force)

The main points that can be extracted from the replying exchanges are:

Almost all of replying exchanges have DMA capabilities. DMA is a prerequisite and
infrastructure for any international trading linkages.

There is no restriction for foreign ownership specially strategic ownership except for Kyrgyz in
strategic ownership and Saudi Arabia that impose some restriction on non GCC investors.

Most of replying exchanges announced that currently, they don’t have a trading linkage but
may set a plan for joining to a market link in the future.

There is no restriction (such as repatriation of principle and profit) on foreign investment by the
replying members except Tadawul, even some of them offer encourages to attract foreign
investors.

Almost all of replying exchanges have a desirable capabilities in the data dissemination through
their web site or the data vendors.
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Results of the Questionnaire II
(Made by the OIC Capital Market Linkage Task Force)
Tadawul
Restriction on
foreign
investment
Tax on foreign
investors
Current trading
link
Market cap
belong to foreign
investors
Strategic
investment
allowed to
foreign investors
Amman
restriction on
Some restriction some sectors
on non Saudi
and
companies
no
no
Tehran
Palestine
Istanbul
Kyrgyz
no
no
no
no
no
no
no
no
no
no
no
no
no
No but there is
a cross listing
agreement with
Kazakhstan
2%
48.6%
5%
45%
67% of free
float
N/A
Yes
Yes
Yes
Yes
Yes
no
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Results of the Questionnaire II
(Made by the OIC Capital Market Linkage Task Force)
Tadawul
Holding
threshold
foreign
investors
Trading
system
DMA
49%
Amman
For some
companies
Tehran
20%
NASDAQ OMX NSC V900 NYSE
ATOS Euronext
system
Euronext
Yes
Yes
Yes – has this
capabilities
Data disclosure
Yes – Free
Yes – Free
through
through
Yes – Free data
through
vendors or
exchange web
vendors
exchange web
exchange
site
site
Palestine
no
HORIZON
NASDAQ OMX
Yes
Yes - Free
Istanbul
Kyrgyz
No but it is
depend on
companies
article of
association
In house
developed
electronic
system
In house
developed
electronic
system
no
Yes
no
Yes – Free in
Yes – Free but
the process of
plan to be sold
signing
through data
agreement with
vendors
Bloomberg
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Results of the Questionnaire II
(Made by the OIC Capital Market Linkage Task Force)
Clearance
Tadawul
Amman
Tehran
Palestine
Istanbul
Kyrgyz
T+0
T+2
T+3
T+3
T+3
T+3
no
no
No plans so far
Currently no
plan
N/A
no
no
Plans for
launch a
May be in the
trading linkage
future
Special rule for
international link
no
no
no
no
No
predetermined
rule
Regulatory body
permission
Yes
Yes
Yes
Yes
Yes
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Main Specifications of the
Proposed Model
Country X
Stock Exchange X
Investor X
through brokerage house X
Brokerage House X
Order
router
Risk management
Once the participant
identified, the order is
submitted to risk
analysis, conducted by
Brokerage House Y
Gateway
Country Y
1
Stock Exchange Y
Investor Y
through a brokerage house
Agreement
The order routing system recognizes that it is an order
related to the Stock Exchange Y market and routes it to the
Stock Exchange Y
2
Brokerage House Y
Order
book
1 (copy sent to the
brokerage house)
Having passed the risk
criteria, the order is included
in the order book
Clearing&Settlement
Brokerage House X
signs an agreement
with a brokerage house
from Country Y, all
trades via the e-link is
cleared&settled through
Brokerage House Y.
17
Main Specifications of the
Proposed Model (continued)

In the proposed model based on order-routing system, every exchange
continues to operate on its own trading and post-trading systems.
Current exchanges will be linked to each other through electronic
linkages.

Local brokerage houses track the other exchanges via a single
board/screen and trade directly through e-links, as if trading in their
local exchanges.

Currently effective licensing, trading and settlement mechanisms
continue to be in force.

Stocks are traded on the home country exchanges where they are listed
on single order book. This would not cause any liquidity loss.
18
Main Specifications of the
Proposed Model (continued)

It provides market access to the home country exchange for foreign
brokerage houses

No cross-membership is required

Bilateral Agreements among intermediaries have a vital role. For this
reason, the requirements of brokerage firms should be clarified and
addressed.

Regulatory authorities and exchanges keep their enforcement power and
status. Each participant is subject to its own regulations.

It does not cause any conflict of interest among exchanges because of
independent management structure.
19
Main Specifications of the
Proposed Model (cont’d)
In the proposed model,

No changes to the current set-up and no need for a new system development for
the post trade services

Local brokerage house signs an agreement with a brokerage house which is a
member of another OIC member stock exchange in which the trade is executed

Local brokerage house executes clearing & settlement of all its trades in that
exchange through bilaterally agreed brokerage house
Easy Implementation with minimal adaptation
Potential future extensions;

Opening bilateral correspondent accounts between CSDs would facilitate more
efficient post trade operations

Setting up a linkage among CSDs in order to provide market participants with a
single point for access
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Issues to be considered


Regulation Barriers

International capital flows

Trading rules

Post-trading infrastructure

Risk management

Public disclosure

Taxation

Bilateral agreements among the intermediaries
Technological Infrastructure

Capital market institutions` adequacy (order-routing capability)

Availability of efficient telecommunication services
21
Issues to be considered (cont’d)

Financing


Costs

Software

Data dissemination

Consulting services

Marketing
Sources of funding

Member exchanges

Post-trade institutions

Intermediary institutions

Multilateral institutions (Islamic Development Bank etc.)
22
Strategic View

Electronic links may first be established between the relatively developed
exchanges, and then could be expanded by the participation of the other OIC
members’ stock exchanges.

Each participant exchange is expected to allow blue-chip stocks to be traded
through this platform.

The list of selected stocks could be made available on data vendors, preferably
in real-time.

The management of the IT infrastructure should be carried out by an
independent technology provider.
It is of crucial importance to have the long-term perspective and to take
the key steps towards such closer types of cooperations, which will serve
the global presence, awareness and competitiveness of OIC capital
markets.
23
The Way Forward

To make feasibility studies on issues to be considered for the proposed model





Marketing



To determine dedicated candidates to work for the feasibility studies
To include IT people into the feasibility studies
To hold regular task force meetings
 to enforce the members` attendance
 to create an e-mail group
To take consultancy services
To organise “Capital Markets Linkages Conference” in 2011
To organise an OIC Fair/Convention
 Companies - top 10
 Capital market institutions
 Technology providers
 Institutional investors
Signing MOU among OIC Member Countries` stock exchanges and related
institutions encourages and enables them to persuade the project.
24
Signing a MOU

Signing a MOU among the interested exchanges outlines their commitment to persuade
the mutual cooperations that focus on designing, testing and implementing the
suggested E-Trading link.

Some General Guiding Principles that can be included in the proposed MOU are:
Exchanges shall act and conclude on the agreement by their good will and based
on their governing rules and regulations.
Exchanges will subsequently encourage and guide their brokers for concluding
bilateral or multilateral agreements to facilitate retail or institutional investment
in the foreign exchange.
25
Signing a MOU (cont’d)

Exchanges, with due diligence, shall act for implementation of the
agreement and smoothing the ground to expedite launching of the
OIC Capital Market Linkage.

The agreement is considered as an object for expanding the
cooperation and transparency of the exchanges' measures, as well as
a way to tackle the barriers in front of investors and brokers to
participate in the OIC Capital Market Linkage.
26