Small local CSDs in a world ofglobalization and consolidation

Peter Falk, Product Director, EXIGO CSD AMEDA meeting, Marrakech, 20 – 21 April 2006

2

OMX owns exchanges in the Nordic Baltic region and develops and provides technology and system services to financial companies around the globe.

3

Footprint of our business

Exchanges(Marketplaces and services)

Technology(Customer examples)

Market Participants

4000 broker trading applications

Partnerships:

ORC

Cameron Systems

Information & Data Services

677 listed companies

149 members

Exchanges

Thailand Futures Exchange

ISE

ASX – Australian Stock Exchange

SGX – Singapore Exchange

HKEX – Hong Kong Exchanges

Nord Pool

ICAP

+ 4,000 broker trading applications

EDX London

Copenhagen Stock Exchange

Stockholm Stock Exchange

Helsinki Stock Exchange

Riga Stock Exchange

Tallinn Stock Exchange

Vilnius Stock Exchange

Clearing & CSD

SFE – Sydney Futures Exchange

HKEX – Hong Kong Exchanges and Clearing

Nord Pool

NCSD (20%)

Stockholm Stock Exchange

EDX London

Estonian CSD

Latvian Central Depository

Lithuanian CSD

4

Market presence – More than 60 customers

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

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

Middle East & Africa• Abu Dhabi Securities Market• Bahrain Stock Exchange• Bourse Regionale des Valeurs

Mobilieres• Cairo & Alexandria Stock Exchange• Doha Securities Market• Dubai Financial Market• Nigerian Stock Exchange• Palestine Securities Exchange• Tadawul (Saudi Arabia)• Tehran 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• NYMEX Europe• OMIP – Iberian Power Exchange• OPCOM / Romanian Power Exchange• Oslo Börs• Polish Power Exchange • Riga Stock Exchange (OMX)• Stockholm Stock Exchange (OMX)• SWX Swiss Exchange• Tallinn Stock Exchange (OMX)• TLX• Turkish Derivatives Exchange• Vilnius Stock Exchange (OMX)• Wiener Börse AG

5

CSD Benchmarking Framework

Example CSD Benchmark

High Quality

Efficient Operations

Risk Elimination Broad Service Offering

Adherence to International Standards

Target scenario

Current situation

Level 4: best practice local CSD

Level 5: multi-instrument, multi-currency, links

6

Trades

Clearing

Settlement

Custody

Registration

AssetServicing

Managestanding

data

ManageRelationships

Accounting

1.0

2.0

3.0

4.0

5.0

6.0

9.0

8.0

7.0

Reporting10.0

Communica-tions

11.0

Business Functional Analysis

Capture key functional components of a CSD

Agenda

•The current situation

•Problems and challenges

•Driving forces

•Elements to a strategy

8

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?

9

Baltic region

8 markets8 currencies

A small corner of Europe(only a few percent)

A small corner of The Nordic Region(only a few percent)

10

0

2000

4000

6000

8000

10000

12000

1 2 3 4 5 6

Estonia - Latvia - Lithuania

Value in custody (million €)

20.000 million € in custody

11

A broad variety of instruments(national differences)

12

0

100

200

300

400

500

600

700

1 2 3 4 5 6

Estonia - Latvia - Lithuania

Daily transaction volume 2005

1000 transactions per day

Agenda

•The current situation

•Problems and challenges

•Driving forces

•Elements to a strategy

14

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

15

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!

Agenda

•The current situation

•Problems and challenges

•Driving forces

•Elements to a strategy

17

Driving forces

•Globalization, regionalization, single market

•Localization

•Regional and international players

•Moving towards standards

•Efficiency, costs, competitive pressure

18

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

19

Local investors Foreign investors

Loca

l se

curi

ties

Fore

ign

secu

riti

es

Local investors Foreign investors

Loca

l se

curi

ties

Fore

ign

secu

riti

es

Yesterday

The traditional CSD turf is getting smaller

Tomorrow

20

Global initiatives with implications for CSDs

• G-30

– 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

• The Giovannini Group

– 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.

(*) = local scope

21

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, localinvestors, local participants and domesticconsiderations request extremely efficientSTP transaction flows for domestic trades

22

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

23

*Foreigned owned with branch in Sweden

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

1965 1980 1987 1990 1993 1996 1999 2002

Local Foreign owned * Remote

0

5

10

15

20

25

30

35

40

45

1980 1983 1986 1989 1992 1995 1998 2001 2004

Local Remote

STOCKHOLMSBÖRSEN

HEX HELSINKI

Exchange members: growth in remote, local stable

24

# of trades per year

Cost

0

Exchange

Settlement

Cost of market participation – coarse view

25

NOREX is the first stock exchange alliance to implement a joint system for equity, fixed income and derivatives trading as well as harmonised rules

One membership and one connection for members!Shared technology reducing cost

Cross membership

Local clearing & settlement

A FULLY INTEGRATED MARKET!

Wide Distribution Network:- SB Members- OB Members- CSE Members- HEX members- ICEX members- RSE members- TSE members- VSE members- (EDX London Members)

Wide range of products and services

Common regulatory framework: Harmonized membership and trading rules

Single point of liquidity - One single order book

Joint InfrastructureOMX Trading & Clearing systems

EDX* London

Link-Up opportunitieswith other exchanges worldwide

*Derivatives

CSE

SB

OBHEX

ICEX

RSE

TSE

VSE

26

DK ICEDK ICE NO SE FI EST LAT LIT

TRADINGTRADING TRADING TRADING TRADING TRADING TRADING TRADING

CSDCSD CSD CSD CSD CSD CSD CSD

CCP

SETTLMNT

Nordic visionO

ne a

ccess

poin

t

Agenda

•The current situation

•Problems and challenges

•Driving forces

•Elements to a strategy

28

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

29

SETTLMT(DVp)

INVESTORCSD

INVESTORCSD

Trading systems

CCP

CSD links

Central Bank ACentral Bank B

Add-ons (example):Collateral Mgmt

Sec. Borrow/Lending

Shared settlement platform

ISSUERCSD

CLEARINGISSUER

CSD

CSD BCSD A

Shared settlement engine for two CSDsEnables co-operation and retains local independence

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

30

3-step roadmapMove towards international standards

Establish target

Roadmap Step 1 Roadmap Step 3Roadmap Step 2

Move to “best practice” CSD where needed

Prepare for regional and/or international standards

31

Benchmark Functional Service OfferingSample assessment

FUNCTIONALITY

0,00

10,00

20,00

30,00

40,00

50,00

60,00

CSD1 CSD2 CSD3… CSD

End of presentation

Peter Falk, Product Director, EXIGO CSD AMEDA meeting, Marrakech, 20 – 21 April 2006