Small local CSDs in a world of
globalization and consolidation
Peter Falk, Product Director, EXIGO CSD
AMEDA meeting, Marrakech, 20 – 21 April 2006
OMX owns exchanges in the Nordic Baltic
region and develops and provides technology
and system services to financial companies
around the globe.
2
Footprint of our business
Thailand Futures
Exchange
ISE
ASX – Australian
Stock Exchange
Technology
(Customer
examples)
SGX – Singapore
Exchange
HKEX – Hong Kong
Exchanges
Nord Pool
ICAP
+ 4,000 broker
trading applications
Exchanges
Exchanges
(Marketplaces
and services)
SFE – Sydney
Futures Exchange
HKEX – Hong
Kong Exchanges
and Clearing
Nord Pool
Clearing &
CSD
EDX London
NCSD (20%)
Copenhagen Stock
Exchange
Stockholm
Stock Exchange
Stockholm Stock
Exchange
EDX London
Helsinki Stock
Exchange
Riga Stock
Exchange
Estonian CSD
4000 broker trading
applications
Partnerships:
ORC
Cameron Systems
Market
Participants
Information & Data
Services
677 listed
companies
149 members
Latvian Central
Depository
Lithuanian CSD
Tallinn Stock
Exchange
Vilnius Stock
Exchange
3
Market presence – More than 60 customers
Americas
• AMEX - American Stock Exchange
• Bahamas International
Securities Exchange
• Barbados Stock Exchange
• Bermuda Stock Exchange
• Boston Stock Exchange
• Canadian Trading &
Quotation System
• ICAP
• ISE - International
Securities Exchange
• Jamaica Stock Exchange
• NASD - National Association
of Securities Dealers
• Trinidad & Tobago Stock Exchange
Europe
• Athens Exchange
• Borsa Italiana
• Bucharest Stock Exchange
• Budapest Stock Exchange
• Copenhagen Stock Exchange (OMX)
• Cyprus Stock Exchange
• EDX London
• Helsinki Stock Exchange (OMX)
• ICAP
• Iceland Stock Exchange
• Icelandic Securities Depository
• Istanbul Stock Exchange
• Malta Stock Exchange
• MICEX
• Nord Pool / Nord Pool Clearing
• NOS
Middle East & Africa
• NYMEX Europe
• Abu Dhabi Securities Market
• OMIP – Iberian Power Exchange
• Bahrain Stock Exchange
• OPCOM / Romanian Power Exchange
• Bourse Regionale des Valeurs
• Oslo Börs
Mobilieres
• Polish Power Exchange
• Cairo & Alexandria Stock Exchange • Riga Stock Exchange (OMX)
• Doha Securities Market
• Stockholm Stock Exchange (OMX)
• Dubai Financial Market
• SWX Swiss Exchange
• Nigerian Stock Exchange
• Tallinn Stock Exchange (OMX)
• Palestine Securities Exchange
• TLX
• Tadawul (Saudi Arabia)
• Turkish Derivatives Exchange
• Tehran Stock Exchange
• Vilnius Stock Exchange (OMX)
• Wiener Börse AG
Asia
• Hong Kong Exchanges and Clearing
• Jakarta Stock Exchange
• Korea Exchange
• Philippine Dealing & Exchange Corp
• Port Moresby Stock Exchange
• Singapore Exchange
• Shanghai Stock Exchange
• Surabaya Stock Exchange
• Thailand Futures Exchange
Australasia
• Australian Stock Exchange
• Bendigo Stock Exchange
• New Zealand Exchange Limited
• SFE Corporation
4
CSD Benchmarking Framework
Example CSD Benchmark
High Quality
Target scenario
Current situation
Adherence to
International
Standards
Broad Service Offering
Efficient
Operations
Risk Elimination
Level 4: best practice local CSD
Level 5: multi-instrument, multi-currency, links
5
Business Functional Analysis
7.0
8.0
Communications
Manage
Relationships
Trades
1.0
Clearing
2.0
Settlement
Accounting
9.0
10.0
11.0
3.0
Custody
Reporting
4.0
Manage
standing
data
Registration
5.0
Asset
Servicing
6.0
Capture key functional components of a CSD
6
Agenda
• The current situation
• Problems and challenges
• Driving forces
• Elements to a strategy
Some characteristics
• Local participants
• Local securities
• Small part of regional and global market
• Small volume but also a broad offering of securities
• Local market consolidation not yet feasible
• Dematerialized?
8
Baltic region
8 markets
8 currencies
A small corner of Europe
(only a few percent)
A small corner of The Nordic Region
(only a few percent)
9
20.000 million € in custody
Value in custody (million €)
12000
10000
8000
6000
4000
2000
0
1
2
Estonia
3
-
Latvia
4
5
-
6
Lithuania
10
A broad variety of instruments
(national differences)
Government
Shares
bonds
Other bonds
Fund units
Comp.
Other
Pension
depositories
TOTAL
Estonia
5 403
0
311
510
266
0
6 490
Latvia
1 329
583
153
115
0
0
2 180
10 211
983
225
0
0
80
11 499
Lithuania
11
1000 transactions per day
Daily transaction volume 2005
700
600
500
400
300
200
100
0
1
2
Estonia
3
-
Latvia
4
5
-
6
Lithuania
12
Agenda
• The current situation
• Problems and challenges
• Driving forces
• Elements to a strategy
Problems and challenges – local level
• Size
– Small size = small revenues
– Small size = lack of development resources
• Lack of standard interfaces
• Lack of functionality
– Real time DvP
– More than one batch settlement
14
Problems and challenges – regional level
• Different market practices
– Account structure
– Corporate actions processing
– Settlement procedures
– Reporting requirements
• Different rules and regulations
– Account structure
– Unlisted companies
– Reporting requirements
• Different custody service solutions
Not all differences are important!
15
Agenda
• The current situation
• Problems and challenges
• Driving forces
• Elements to a strategy
Driving forces
• Globalization, regionalization, single market
• Localization
• Regional and international players
• Moving towards standards
• Efficiency, costs, competitive pressure
17
CSDs – a historical view
Improvement market by market
• Local models, local systems
Role models
• Frankfurter Kassenverein and DTC
• Euroclear
• VP and Sicovam
Decades of convergence
• ISSA, FIBV, G-30, BIS, IOSCO …
CSDs are mature businesses undergoing great change
18
Local securities
Local securities
Foreign securities
Foreign securities
The traditional CSD turf is getting smaller
Local investors
Yesterday
Foreign investors
Local investors
Foreign investors
Tomorrow
19
Global initiatives with implications for CSDs
• G-30
• The Giovannini Group
– 1989: 9 recommendations (*)
– 2003: 20 recommendations
• CPSS (BIS/IOSCO)
– 2001: Core principles – payment
systems
– 2001: Recommendations for
securities settlement systems (*)
– 2002: Assessment methodology
– 2004: Risk management for CCPs
• IMF and World Bank: FSAP
assessments
• Hague Convention: removal of
conflict-of-law
(*) = local scope
– Action plan for removing the 15
barriers
• ECB
– 9 minimum operational
standards for SSS
• ECB / CESR
– Moving 19 CPSS
recommendations  binding
standards
• The European Commission
– Directives on collateral, finality,
investment services
– Principles for functional
regulation.
20
Conflict: International vs. local
Regional and international market
participants request easy, secure and
low cost access to several markets.
Large issuers require large liquidity pool
Small and medium-sized issuers, local
investors, local participants and domestic
considerations request extremely efficient
STP transaction flows for domestic trades
21
Nordic and Baltic region
OMX regional ambition:
To make the Nordic and
Baltic region be perceived
as one securities market,
so efficient and attractive
that it will climb the ladder
of the leading European
markets
22
Exchange members:
growth in remote, local stable
HEX HELSINKI
STOCKHOLMSBÖRSEN
75
70
45
65
60
40
55
50
35
45
40
30
35
25
30
25
20
20
15
10
10
15
5
5
0
0
1965 1980 1987 1990 1993 1996 1999 2002
Local
Foreign owned *
Remote
1980 1983 1986 1989 1992 1995 1998 2001 2004
Local
Remote
*Foreigned owned with branch in Sweden
23
Cost of market participation – coarse view
Cost
Settlement
Exchange
0
# of trades
per year
24
NOREX is the first stock exchange alliance to
implement a joint system for equity, fixed income and
derivatives trading as well as harmonised rules
Cross membership
Single point of liquidity One single order book
ICEX
Local clearing & settlement
Link-Up opportunities
with other exchanges worldwide
Joint Infrastructure
OMX Trading & Clearing systems
A FULLY INTEGRATED MARKET!
Common regulatory
framework: Harmonized
membership and trading
rules
SB
EDX*
London
Wide range of
products and services
HEX
OB
TSE
RSE
CSE
VSE
Wide Distribution Network:
- SB Members
- OB Members
- CSE Members
- HEX members
- ICEX members
- RSE members
- TSE members
- VSE members
- (EDX London Members)
One membership and one connection for members!
Shared technology reducing cost
*Derivatives
25
Nordic vision
ICE
ICE
NO
SE
FI
EST
LAT
LIT
TRADING
TRADING
TRADING
TRADING
TRADING
TRADING
TRADING
TRADING
CSD
CSD
CSD
One access point
DK
DK
CCP
SETTLMNT
CSD
CSD
CSD
CSD
CSD
26
Agenda
• The current situation
• Problems and challenges
• Driving forces
• Elements to a strategy
Elements to a strategy
• Local CSDs with local registers, local service and support
• SWIFT standard messages
• Realignment of rules and market practices (not all!)
• Shared settlement
• A single standard systems platform
• Possibility to handle a broad list of instruments
• Step by step implementation
28
Shared settlement engine for two CSDs
Enables co-operation and retains local independence
Trading systems
CCP
Shared settlement platform
CSD A
CSD B
CLEARING
ISSUER
CSD
ISSUER
CSD
CSD
links
SETTLMT
(DVp)
INVESTOR
CSD
INVESTOR
CSD
Central Bank A
Central Bank B
Add-ons (example):
Collateral Mgmt
Sec. Borrow/Lending
 CSD A operate under the rules of country A
 CSD B operate under the rules of country B
 The settlement engine follows joint settlement rules
29
3-step roadmap
Move towards international standards
Establish
target
Roadmap Step 1
Move to “best
practice” CSD
where needed
Roadmap Step 2
Prepare for
regional
and/or
internationa
l standards
Roadmap Step 3
30
Benchmark Functional Service Offering
Sample assessment
FUNCTIONALITY
60,00
50,00
40,00
30,00
20,00
10,00
0,00
CSD1
CSD2
CSD3…
CSD
31
End of presentation
Peter Falk, Product Director, EXIGO CSD
AMEDA meeting, Marrakech, 20 – 21 April 2006