pSupranational organizations drive regulatory reformp

A MAGAZINE FOR THE EXCHANGE INDUSTRY NO.3:2011

TIME FOR GLOBAL

ACTION

Change provides growth opportunity for exchanges

EU lawmakers

respond to financial

crisis

Asia-Pacific nations look to revamp regulations

Jack Katz, Independent Consultant and former SEC Secretary on new

U.S. regulatory legislation

Commenting on Dodd-Frank is akin

to asking a restaurant critic

to evaluate a restaurant after they’ve read the menu but before they’ve actually tasted the food.

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2 MarketView

MY VIEW

CONTENTS 3:2011

NO EVENT IN THE last 50 years has affected the financial industry, including exchanges and their users, to the same extent as the

last financial crisis. In retrospect, we as an industry pursued new opportuni-ties without first putting in enough safeguards and ensuring transparency. Now the onus is on us to help create sensible reforms that make the finan-cial markets stronger, provide capital-raising opportunities for issuers and protect investors.

Adjusting to different practices and a new world order will not be easy. Nowadays, regula-tors are more vigilant and aggressive and less forgiving when errors occur. They are mindful of the interconnected-ness of the markets, cross-asset and globally, and the potential for events in one market to affect others.

THE G20 PROCESS has paved the way for the convergence of global regulatory standards. Just a few years ago, coun-tries such as the U.S. and the U.K. held out their regulatory structure as inter-national best practice, and the rest of the world followed their examples. But today, good ideas come from regulators around the world, and they are being debated in an array of forums. Underly-ing these discussions is the determina-tion not to open the door for regulatory arbitrage by encouraging market participants to migrate to the markets with the least stringent standards.

In an environment in which many new rules are being made, it is important for a range of stakeholders, including exchanges, to be engaged in consultation and debate. Policy makers have concluded that during the financial crisis, regulated exchanges performed better than most market participants. Their operations held up well, and their model is one that ought to be used in trading other financial

products. Similarly, they found that central counterparty clearing is far superior to the bilateral arrangements that were prevalent in the OTC derivatives markets.

UNCERTAINTY IS ONE of the most significant challenges faced by all market partici-pants, considering the fact that it will take some time for rules and regulations to be finalized. We are sure,

however, that the new world order will have an impact on market technol-ogy, especially the ability to manage data and manage risk in real time. For now, exchanges and clearinghouses can continue to do what they do best: provide price discovery, transparency and market integrity. We can do that by having the right systems in place to conduct surveillance and the neces-sary pre- and post-trade risk manage-ment checks mandated under the new regulations. Technology is one of our strengths, and we can use it to achieve competitive advantage.

Exchanges play a critical role in reform

EDWARD KNIGHTEXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, NASDAQ OMX

04 United we standGovernment authorities are coming together to enact guidelines to ensure global market stability.

06 The new worldMajor legislation in the U.S. is transforming the country’s regulations.

08 Lessons learnedA host of new regulations in Europe are being adopted in response to the recent financial crisis.

10 Standard deviationThroughout the Asia-Pacific region there are varying levels of response and readiness for global regulatory standards.

12 Rules of engagementNew regulatory frameworks present both challenges and opportunities for market operators. Technology is

one of our strengths, and we can use it

to achieve competitive advantage.

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SGX Reach trading engine goes liveSingapore exchange’S new securi-ties trading engine – reach – has gone live. reach offers 10 times more capacity and has ultra-low latency of less than 90 microseconds. it is part of Sgx’s $250 mil-lion technology investment to strengthen market infrastructure. reach is based on genium ineT technology from naSDaQ oMx.

MarketView 3

newS

NASDAQ OMX launches bond trading on Genium INETnaSDaQ oMx successfully rolled out bond trading on genium ineT for five of its nordic and Baltic markets. More than 5,000 listed bonds may now be traded on the fixed income markets in Denmark, Finland, Sweden, Latvia and Lithuania. Bond trading on ineT is already available in iceland. genium ineT, and its foundation ineT technology, is a comprehensive multi-asset trading and clearing system with record-breaking performance, high reliability and operating capacity, deliver-ing sub-100 microsecond latency with throughput capacity of over 1,000,000 messages per second.

Market data partnership announcednaSDaQ oMx and rTS Stock exchange have reached an agreement where naSDaQ oMx will provide rTS with a comprehensive suite of global data services to ensure compli-ance with rTS market data polices and best practices. rTS is one of the major trading venues in russia and eastern europe. The services will be performed by naSDaQ oMx global Data products, one of the largest data distribution organizations in the world, through its global access program. global access allows companies to utilize naSDaQ oMx’s vast data distribution network and its sales, administrative and technical expertise to realize profits from market data content.

SMARTS Integrity 6.3 goes live in NordicsnaSDaQ oMx has rolled out the new SMarTS integrity platform 6.3 to its nordic fixed income markets. proven in the world’s fastest and largest markets, SMarTS integrity is the industry standard for market surveillance and monitoring solutions. The latest evolution of the surveillance technology is rated to 2bn messages/day with a revamped look and feel and extended derivatives features. Updated technical architecture brings significant performance and capacity enhancements, shortened maintenance windows and easier main-tainability of the system. naSDaQ oMx continues to roll out SMarTS to its internal markets.

NASDAQ OMX debuts social media and investor productsnaSDaQ oMx announced the addition of two products to the corporate Solutions suite of services. SocialStream is the first social media aggregator for corporate web sites enabling companies to more successfully create, man-age and present a cohesive corporate message through their public-facing web site. QTarget, the latest enhancement to naSDaQ oMx’s cor-porate intelligence platform, is a robust investor outreach tool that provides unique insight into investor preferences and behavior.

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4 MarketView

FINANCIAL MARKET participants are likely to remember June 2007 as the beginning of the crisis. Liquidity dried up in the asset-backed commercial

paper market, sparking the sub-prime crisis. By September 2008, Bear Stearns and Lehman Brothers had collapsed creating a domino effect that under-mined bank stability worldwide.

In retrospect, the industry became complacent about liquidity risk man-agement. Asset managers conducted credit analysis on their counterpar-ties, but the diligence with which they looked at collateral was insufficient. Participants saw no need to put up

large margins, and the spread between AAA-rated U.S. treasuries and repur-chase agreements on Collateralized Debt Obligations became too narrow. Neither banks nor regulators could determine exposures at the individual institution or aggregate levels.

In the aftermath, governments rec-ognized the need to close gaps to ensure the safety and soundness of global finan-cial markets. The term Systemically Important Financial Institutions (SIFIs) emerged to define financial institutions whose disorderly failure would cause sig-nificant disruption to economic activity.

Cooperation and convergence were essential to minimize regulatory arbi-trage and prevent market participants from migrating to market centers with the weakest regulations. Three sets of guidelines have been produced to which financial institutions and national regulators worldwide have been asked to comply. The goal: to level the play-ing field for all stakeholders including exchanges and clearinghouses.

IN MARCH 2011, the Committee on Payment and Settlement Systems (CPSS), an arm of the Bank for International Settle-ments, and the International Organization of Securities Com-missions (IOSCO) delivered a blueprint to enhance safety and efficiency in payment, clearing and settlement arrangements within the global financial market infrastructure (FMI). FMIs include systemically important payment systems, central securities depositories (CSDs), securities settlement systems, CCPs and trade repositories.

“While FMIs contribute to maintaining financial stability and economic growth, they also concentrate risk,” says David Cliffe, spokesman for IOSCO. “If they’re not properly managed, they can be a source of financial shocks that can be transmitted across domestic and international financial markets, thus effecting liquidity and causing dislocation and credit losses.”

The consultation period ended July 29, 2011. The final report will be published in early 2012, and relevant authorities are expected to include the principles in their legal and regulatory frameworks by the end of that year. FMIs are expected to take action to incor-porate the principles into their risk management activities.

A single set of standards will provide greater consistency and improved regulatory oversight of financial market infra-structures worldwide and reflect recent lessons learned. FMIs will have the necessary guidance to assess and manage their risks robustly. While many rules are not yet finalized, FMIs can start building their infrastructure for data management, re-porting and connectivity based on what is known.

“The principles will help exchanges improve their operations to support market integrity, transparency and market efficien-cy,” says Cliffe. “Ultimately, investors will benefit.”

Writing the blueprint: CPSS and IOSCO

Recognizing the need for convergence, supranational

organizations lead the way to regulatory reform.

ILLUSTRATION VALERO DOVAL

A top down approach

“The princi-ples will help

exchanges improve their operations to support mar-ket integrity, transparency

and market efficiency.”

David Cliffe, spokesman

for IOSCO

IN FOCUS: GLOBAL REGULATIONS

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MarketView 5MarketView 5

A top down approachTHE BANK FOR International Settle-ments established the Financial Stability Board (FSB) in April 2009 to develop and promote the implemen-tation of effective regulatory and supervisory policies at the interna-tional level. It brings together national authorities, international standard setting bodies, financial institutions, sector-specific groupings of regula-tors and supervisors and committees of central bank experts.

In September 2009, G20 members agreed that all standardized OTC de-rivative contracts should be traded on exchanges or via electronic trading platforms, where appropriate; trades should be cleared through central counterparties (CCPs) and reported to trade repositories; and work to strengthen the financial markets should be continued. The implemen-tation target date is the end of 2012 at the latest.

Following the G20’s lead, the Basel Committee on Banking Supervision (BCBS) reviewed the regulatory capital treatment for counterparty credit risk (CCR) and identified areas for improve-ment.

Under Basel II, financial institutions must take into account counterparty credit risk and portfolio market risk when calculating counterparty expo-sure; calculate loss based on the loss they would incur if a client defaults on a contract and apply a credit con-version factor ratio to determine the exposure at default.

Basel III adds Value at Risk (VAR) and wrong way risk (based on the dependence between the size of the exposure and the probability of coun-terparty default) to the calculation.

This changes the counterparty credit risk formula; financial institutions will have to calculate the market value of CCR and will need robust pre- and post-trade analytics systems and calculation engines to meet these requirements.

Observers are wary of unintended consequences. According to Stand-ard & Poor’s, most additional capital requirements under Basel III will come from the VAR on a CCR’s market value, and the proposed changes could at least double current CCR capital charges. This will be coupled with a significant increase in market risk capital charges. In addition, banks may find it difficult to hedge custom-ized transactions with standardized exchange-traded instruments, thus leaving them with basis risk.

Increasing the capital require-ments on counterparties provides an incentive for banks to push OTC trans-actions through clearinghouses be-cause there will be no capital charges. Therefore, more hedges may be trans-ferred to exchanges and clearing-houses; the increased volume, while profitable for those businesses, may introduce systemic risks posed by the clearinghouses themselves.

A near final version of Basel III was released in December 2010, and certain aspects are being finalized during 2011. The proposals will need to be translated and implemented into national legislation. Implementation of the capital requirements starts on January 1, 2013. Banks will have to meet the minimum ratios expressed in risk-weighted assets, but the ratios will be increased during a transition period through 2019.

Setting the stage: G20 and Basel III

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6 MarketView 6 MarketView

The financial crisis started in the U.S., and

now its lawmakers hope to lead the way out.

TWO DECADES AGO, the internation- al consensus was that the U.S. regulatory structure repre-sented best practices. But over

time, the capital markets became complacent, so when the financial crisis hit, the world’s perception changed dramatically.

Jack Katz, an Independent Consult-ant and former SEC Secretary, says, “If the U.S. wants to maintain its preemi-nence, it’s got to pull up its socks and tighten its belt.”

And it is doing just that. Signed into law in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protec-tion Act is the biggest piece of U.S. financial legislation since the Great Depression. Some regulatory agen-

cies are being consolidated and new supervisory entities created. The law contains consumer protection reforms and provides a process for winding down bankrupt firms.

Dodd-Frank imposes a regulatory structure on previously unregulated derivatives. Many standardized deriva-tives will be required to be traded on an exchange or swap execution facility (SEF) and centrally cleared. Non-finan-cial entities that use swaps as a bona fide hedge will likely not be subject to the mandatory clearing and exchange-trading requirements.

THIS REPRESENTS AN opportunity for exchanges and clearinghouses, which should benefit from higher transac-tion volumes. However, they will have to ensure they have the system capac-ity to cope with the influx. Broker-dealers will need to adjust to new trading protocols and functionality. For instance, SEFs may stream prices, not currently the norm for many OTC derivatives.

A goal of Dodd-Frank is to introduce

competition by mandating open access to clearinghouses.

Lawmakers argue that setting the standards too high limits clearing-house membership to the “too big to fail” banks.

THE COMMODITY FUTURES Trading Com-mission’s (CFTC) proposal to lower the threshold for clearing members to $50 million is under debate. Some observers are concerned that admitting members that lack sufficient financial resources will undermine a clearinghouse’s strength. However, regulators believe that this issue can be solved by effective risk management controls over mem-bers’ participation. They also maintain that wider membership increases the clearinghouse’s financial resources and allows it to spread the risk.

Dodd-Frank also stipulates that trade data must be reported to a reposi-tory, regardless of whether the transac-tion is centrally cleared. The proposed CFTC rules specify fields that need to be reported, while the proposed SEC rules do not. Generally, any primary

ILLUSTRATION VALERO DOVAL

“If the U.S. wants to maintain

its preemi-nence,

it’s got to pull up its socks and tighten its

belt.”Jack Katz,

Independent Consultant

and former SEC Secretary

IN FOCUS: U.S. REGULATIONS

THE U.S.cleans up its act

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MarketView 7

economic term must be in the data, and the CFTC and SEC have requested that extra information, such as valuations, be included. Repositories will capture assignments, along with all other confirmable events, such as principle reductions, but none of the regulations or guidelines require repositories to track payment defaults. The statute also indicates who is supposed to report the data.

MORE TRADE DATA WILL have to be stored, managed and shared among an array of stakeholders. Workflows will have to be redefined to reflect a common under-standing of the trade lifecycle and of terms pertaining to transactions.

Lawmakers and regulators have been under pressure to produce a solution to prevent another financial crisis. The law, originally scheduled to come into effect in July 2011, has been delayed because the industry is unsure how to comply with some of its 350 rules. Thus, the details and implement-ation dates of the new regulatory structure remain in flux.

“Commenting on Dodd-Frank is akin to asking a restaurant critic to evaluate a restaurant after they’ve read the menu but before they’ve actually tasted the food,” says Katz. “It contains all the responsibilities of U.S. regulators, but the impact will not be known until after the regulations are adopted.”

SEPARATE FROM DODD-FRANK, the U.S. Market Access Rule (MAR) might serve as a template for U.S. watchdogs besides the SEC and for regulators in other jurisdictions. Canada, for example, has already introduced its version.

“The Market Access Rule represents a huge change not so much in the what as the when,”says Gary LaFever, Chief Corporate Development Officer at FTEN, a NASDAQ OMX company. “The complexity of changing when things have to happen caused several industry groups to peti-tion the SEC to delay implementation until November 30.”

Market participants traditionally performed certain functions, such as risk management, surveillance and credit checks, periodically throughout the day. A decade ago, that was appropriate given the speed, volume and velocity of trading.

The new rules now require financial, regulatory and surveillance checks to be performed pre-trade. While the broker-dealers providing market access will be re-sponsible for running the checks and be liable, they can delegate regulatory checks like those pertaining to the ‘know your customer’ and restricted stock transactions rules to other broker-dealers.

The market access broker-dealer must also immedi-ately provide copies of all transactions to the surveil-lance team in a way that has context and meaning. Broker-dealers will need a highly scalable and reliable execution platform, integrated with pre-trade, at-trade and post-trade risk controls, surveillance and compli-ance monitoring and time-to-market connectivity across liquidity venues worldwide.

“The information that needs to be provided isn’t limited to any single trading platform, asset class, or exchange,“ says LaFever. “Broker-dealers need to conduct these pre-trade checks on an aggregated basis across a cli-ent’s activity. The equities, options, fixed income and swaps desks may be located on different floors, buildings or cities and operated as autonomous units, so coopera-tion is essential.”

U.S. lawmakers are under political pressure to update and introduce regulations that reflect market innovations and address the deficiencies that led to the financial crisis. They also have an incentive to get the regulations right. After all, this is an opportunity to win back gold standard status.

Market Access Rule

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EU LAWMAKERS are currently reviewing the Markets in Financial Instruments (MiFID) and Market Abuse

(MAD) directives with an eye towards incorporating lessons learned from the financial crisis. In addition, the EU is implementing the G20 conclusions

through the new European Market Infrastructure Regulation (EMIR).

Given the interconnection of securi-ties markets and the scope of cross-border trading, legislators believe there is a need to create a level playing field and common regulatory standards. To this end, the European Securities and Markets Authority (ESMA), the organization now responsible for regulating the securities markets, is developing a single securities rulebook for all national authorities and firms in the EU.

Its other mandates include: protect-ing investors, contributing to the Euro-pean Systemic Risk Board’s financial stability agenda and directly supervis-ing credit rating agencies. ESMA will also provide guidance for national supervisors on implementation of EU law into their market(s) and will have the power to write and police certain rules in other areas.

“WE ARE DEPENDENT on the European Commission to determine the primary legislation, but then it’s in our hands to execute the detailed drafting of the rules underneath that,” says Verena Ross, Executive Director at ESMA. “We are in a similar position to the SEC and CFTC in the U.S. They have been given

MiFID IIIMPLEMENTED IN 2007, MiFID opened the European exchange industry to enhanced competition. Four years later regulators, exchanges, brokers and buy-side firms are collaborating to improve existing rules and practices.

Expanding on the original MiFID, MiFID II will cover market structure, dark pools, high frequency trading, direct market access and market transparency. New venues known as Organized Trading Facilities are being considered, similar to Swaps Execution Facili-ties in the U.S. The legislation is also expected to in-clude new trade reporting requirements and rules for the surveillance of fragmented markets.

“Depending on the outcome, the industry may have to cope with many changes all at once, and technol-ogy will have to be developed to comply with the new rules,” says Elina Yrgård, Assistant General Counsel, Government Relations at NASDAQ OMX. “MiFID I was already good, but hopefully MiFID II will result in a well-balanced and better regulatory framework than we have today.”

The EU is introducing new regulations and updating

existing ones to reflect lessons learned in the financial crisis.

ILLUSTRATION VALERO DOVAL

IN FOCUS: EU REGULATIONS

EUROPE RE-EVALUATES

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IN SEPTEMBER 2010, the European Commission published its proposal for European Market Infrastructure Regulation (EMIR), which aims to increase stability of OTC derivative markets. The regulation introduces reporting and clearing obligations for eligible OTC derivatives. It also includes measures to reduce opera-tional and counterparty credit risk for bilaterally cleared OTC derivatives, common rules for central counter-parties (CCPs) and trade repositories, and may establish a framework for interoperability among CCPs. “SOME PARTICIPANTS are concerned about the cost of implementing

EMIR, particularly relating to col-lateral that will have to be posted against CCP positions,” says Elina Yrgård, Assistant General Counsel, Government Relations, NASDAQ OMX. “But we believe greater transparency and risk reduction will outweigh the costs.”

ENSURING THE stability of CCPs is central in the legislation, so the level of funding and contributions from the members is currently under discussion. It is up to each CCP to determine if they can clear particular derivatives based on their ability to model the risk and default management. Whether CCPs should

be allowed to fail is being debated.Interoperability is on the hori-

zon for European clearinghouses. To prepare, risks associated with connecting CCPs – including net-ting, collateral management and operational aspects – are being discussed.

There is increased interest from both European and U.S. lawmakers to discuss harmonizing regulations. European lawmakers are keeping a close eye on how Dodd-Frank evolves and the issues associ-ated with its implementation. While regulatory convergence is desirable, Europe has to tailor a legislative solution to meet its unique needs.

OTC derivatives reform – EMIR

Dodd-Frank, but now must decide how to handle the individual provisions and where further elaboration of the rules is necessary.”

ESMA AND ITS predecessor organiza-tion, the Committee of European Securities Regulators, have issued several guidelines and best practices for exchanges pertaining to organi-zational structure and monitoring. It

has been active in handling requests for pre-transparency waivers for block trading, for example. Issues of this kind are decided by ESMA’s board of supervisors, which include all relevant national authorities. ESMA consults with the industry about the provisions, rules and guidance that it publishes, and exchange officials are represented in the Markets Stake-holder Group.

Graham Bishop, analyst of European

financial services regulation

MAD PROVIDES regulators and ex-changes with the means to fight insider trading and market manipula-tion, and to cooperate in interna-tional investigations. Ultimately, the legislation’s purpose is to create the basis for trust and market integrity. Once the revision becomes final, the law will be extended to MTFs and some OTC derivatives and will harmo-nize the framework for prosecuting abuses.

“When MAD was written a few years ago, I don’t think anyone quite realized how you could manipulate securities by buying lots of deriva-tives,” Graham Bishop, an independ-ent analyst of European financial services regulation, points out. “If derivative trading is not subject to MAD, then you could conduct manipulative trades without being found out.”

Once the law is implemented, exchanges will need to ensure that they have an integrated system to monitor orders, trades and quotes and to identify market manipulation, insider trading and other violations. Similarly, broker-dealers can benefit from a managed service to ensure compliance with market regulations and internal risk policies.

Market Abuse Directive

IN FOCUS: EU REGULATIONS

EUROPE RE-EVALUATES

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10 MarketView

OVER THE LAST decade, many Asia-Pacific countries have undertaken steady regulatory reforms, often aimed at enhanc-

ing the fairness and efficiency of their markets, while avoiding some mistakes made in the U.S. and Europe.

According to Mike Aitken, Chief Scientist of the Australian-based Capital Markets Cooperative Research Centre, many regulators are taking an evidence-based approach to change. They are carefully moni-toring the reform process in other nations while conducting studies to determine how potential changes will affect their individual circum-stances.

G20 members from the Asia-Pacific region have actively participated in global discussions, and today national regulators are analyzing how to adapt G20 recommendations to local markets. Many are initially focusing on cash markets, as there has been less pressure to change their smaller derivatives markets. Several national regulators plan to follow the lead of

U.S. and European regulators, whose rules will not be finalized until Q 4 2011.

Korea intends to enact legislation in line with Dodd-Frank. The Hong Kong Monetary Authority plans to set up a trade repository and establish an OTC derivatives CCP. Moreover, Singapore’s Monetary Authority expects to imple-ment a clearing infrastructure for OTC derivatives that complies with interna-tional standards. Singapore Exchange already clears OTC interest rate and foreign exchange derivatives through its AsiaClear service.

Some Asia-Pacific markets are also coming to grips with allowing competi-tion.

“Singapore introduced a quasi dark pool using Chi-East, cooperating with the potential competition rather than competing head on,” says Aitken. “Aus-tralia has introduced head-on competi-tion, but Hong Kong intends to allow its exchange to remain a monopoly for the time being. Japan is tolerating competi-tion mainly from within, and China’s market is still in a nascent stage.”

Asia-Pacifi c nations customize regulations

Countries in the Asia-Pacific region vary in their readiness to implement global regulatory standards.ILLUSTRATION VALERO DOVAL

“Japan is tolerating

competition mainly from within, and

China’s market is

still in a nascent stage.”

Mike Aitken, Chief Scientist

of the Australian-based Capital

Markets Cooperative Research Centre

IN FOCUS: ASIA-PACIFIC REGULATIONS

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MarketView 11

Asia-Pacifi c nations customize regulations

IN 2010, THE AUSTRALIAN Securities and Investments Commission (ASIC) proposed key equity market structure reforms in Consultation Paper 145. New rules are being rolled out in 2011 and 2012.

Best execution rules are now being implemented. Price is the main criterion for retail clients, while for institutional clients, the criteria relate to client instruc-tions regarding execution speed, market impact and other factors.

To improve pre-trade transpar-ency in dark pools, ASIC proposed that orders routed to such venues have a minimum size of A$20,000.

“There was a lot of push back on that and we will consult further,” says Greg Yanco, ASIC’s Senior Ex-ecutive, Market & Participant Supervision, Regional Commissioner, NSW. “We can change the zero limit to A$20,000 or A$50,000 if we have to move quickly to re-spond to deterioration in the lit markets following the growth in dark pools.”

Going forward, market participants must ensure that they only route orders to dark pools that satisfy the threshold requirements for those venues.

ASIC plans to move toward real-time reporting of short sales. Brokers will have to implement technol-ogy to tag orders that result in short sales. Currently, investors must tell their brokers if their orders result in a short sales, but the brokers do not have to advise the market in real-time.

A rule is being established requiring participants to advise ASIC when they suspect transactions breach the market manipulation or insider trading provisions of the Corporations Act. Exchanges, trading venues and market participants will need to ensure that their surveillance technology meets this requirement.

In the aftermath of the May 2010 Flash Crash in the U.S., ASX and Chi-X will need to build volatility controls into their systems. In addition, market participants may need to retool their technology to ensure that they do not initiate orders outside set volatility limits.

ASIC is concerned that algorithmic and high fre-quency trading programs could cause multiple price movements and lead to disorderly markets. It has proposed requiring traders to test their algorithms and have clients acknowledge that they have tested theirs before rolling them out.

Finally, Australia plans to review its capital require-ments and risk-based model for market participants in 2013. The clearinghouse run by ASX manages capital li-quidity requirements for clearing participants. As of Au-gust 1, 2011, ASIC manages the capital liquidity require-ments for trading participants. The Australian Prudential Regulatory Authority manages the capital requirements of clearing participants in the futures market.

Regulation down under

Greg Yanco,ASIC’s Senior Executive,

Market &Participant Supervision

SO FAR, ONLY JAPAN has enacted OTC derivatives reform legislation. The Financial Instruments and Exchange Act was amended in May 2010 to strengthen the infrastructure for do-mestic CCPs, improve regulation and supervision of securities companies, and increase investor protection.

By the end of 2012, plain vanilla OTC derivatives transactions, such as yen interest rate swaps, must be centrally cleared, and data stored and reported to a trade repository. Domestic repositories must report to the Japanese government. For foreign repositories, the Financial Services Authority is establishing a system to exchange information internationally with the supervisory agencies of each trade repository.

Certain transaction types will be exempt from central clearing, assum-ing they do not compromise inves-tor protection. For example, credit default swaps will be exempt if the reference entity is a U.S. company,

and the transaction is subject to the mandatory use of U.S. CCPs. Japa-nese regulators may defer to other jurisdictions’ rules in the event of regulatory conflict.

CCPs must establish a system and organizational structure to ensure appropriate and secure clearing of unsettled obligations which must be collateralized. A ¥1 billion minimum capital requirement for domestic CCPs has been introduced in addition to new regulations on major share-holders.

Foreign CCPs that clear OTC deriva-tives may operate in Japan once they obtain a license; applicants must have Japanese representation and have operated in a foreign jurisdic-tion for at least three years. However, foreign CCPs may operate in Japan if they clear in concert with another CCP.

Japan is also introducing new rules pertaining to property derivatives transactions and short selling.

The land of the rising sun

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VINJETT VINJETT

Market View A magazine from NASDAQ OMX, the world’s largest exchange company. It delivers trading, listing, exchange technology and public company services across six continents. Address NASDAQ OMX SE-105 78 Stockholm Sweden Phone: +46 8 405 60 00 Fax: +46 8 405 60 01 marketview@nasdaqomx.com www.nasdaqomx.com Publisher Lars Ottersgård lars.ottersgard@nasdaqomx.com Editorial committee Paul McKeown, Johan Toll, Carl Norell, Lars-Olof Svensson, Ulf Carlsson, Peter de Verdier Editor Lisa Selkin Lupo lisa.selkinlupo@nasdaqomx.com Managing Editor Sherree DeCovny Publishing agency Appelberg PO Box 7344, SE-103 90 Stockholm Project Manager Mats Falck Phone: +46 8 406 54 17 mats.falck@appelberg.com Art direction Karin Söderlind Layout and prepress Appelberg Language Editor Elizabeth P. Tierney Cover Illustration Valero Doval Print Trydells, September 2011 The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

Cautionary note regarding forward-looking statements The matters described herein contain forward-looking state ments that are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements

about NASDAQ OMX Group’s subsidiaries, investments, cooperative arrangements, technology sales, new products and new services. We caution that these statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-

looking statements. Forward-looking statements involve a number of risks, uncertainties or other factors beyond NASDAQ OMX Group’s control. These factors include, but are not limited to factors detailed in NASDAQ OMX Group’s annual report on Form 10-K, and periodic reports filed with

the U.S. Securities and Exchange Commission. We undertake no obligation to release any revisions to any forward-looking statements. © 2011, The NASDAQ OMX Group, Inc. NASDAQ OMX® and other marks referenced herein are trade/servicemarks of The NASDAQ OMX Group, Inc.

ARKETS ARE GOING through more change than ever, and the uncertainty is unsettling. Admittedly, real challenges lie

ahead as regulations are finalized and rolled out. But at the same time, there are good opportunities for those with the vision to embrace new ways of doing business.

AN ARRAY OF RULES will be introduced across the world’s OTC derivatives and equities markets to ensure competi-tion, limit counterparty risk, prevent market abuse and control market access. Many of these new regulations promote improved risk management and trans-parency and will come with significant

Expanding broker servicesEXCHANGES CAN HELP their members comply with many new regulatory requirements by providing new technology-based services. Among the areas exchanges can explore:

Clearing services Pre-trade risk management Smart order routing Market data consolidation Surveillance and compliance

SPOTLIGHT TECHNOLOGY CHALLENGES

Opportunity knocksSome markets will attract more volume and achieve competitive advantage by offering clearing and settlement services.

EXCHANGES ARE RE-THINKING their global strategy. According to Jack Katz, Inde-pendent Consultant and former SEC Secretary, exchange demutualization fundamentally changed the nature of exchanges and how they compete internationally. Historically, each country wanted to regulate its own marketplace(s) and restrict foreign ownership, yet some exchanges may no longer be viable, if they exist strictly to serve their domestic market. One way for exchanges to solve this problem is by building strategic partnerships and global alliances with their counterparts abroad.

“You will be able to execute 100 shares in the U.S. and 100 shares in Frankfurt, and on your screen it may appear to be two different stock exchanges, but in fact it’s one trading platform,” says Katz.

EXCHANGES ALREADY share technology. For example, as part of NASDAQ OMX, the Baltic markets can leverage a com-mon trading system with the Nordic markets, and international banks can access Nordic stocks. About 10 foreign remote members have joined the Baltic markets, which may not have been possible without a common platform. This is proof that strategic partnerships with technology as their foundation work well in the real world.

“Sharing trading platforms is going to happen faster than people believe,” Katz adds. “It wouldn’t surprise me if five years from now this is a fait accompli.”

M

technology requirements for exchange and market participants.

“The implications for technology are some of the biggest issues that we all face, whether it’s market participants, exchanges or regulators,” says Verena Ross, Executive Director of European Securities and Markets Authority (ESMA).

The necessary systems improvements will strengthen the integrity of financial markets. Upgrading surveillance and risk management capabilities to moni-tor orders, trades and quotes and iden-tify violations will help protect investors and issuers alike. Exchanges will be able to take advantage of the latest technol-ogy, such as cloud computing, to share data with an array of stakeholders to facilitate day-to-day operations.

Exchanges stand to grow their revenues as trading firms migrate their OTC trans- actions to regulated, transparent venues.

Global regulatory change presents technology and other challenges, but visionaries can turn them to their advantage. PHOTO ISTOCKPHOTO

Verena Ross, Executive Director

of European Securities and

Markets Authority (ESMA)

11OMX3_opportunity_knocks_4798.indd 12 2011-09-02 09:08:58