Eye On Exchanges by fixglobal.com

EYE ON

Exchanges

October 2013

New exchange business models Cross-border exchange collaboration Technology updates Latest news from exchanges around the world

FIX Flyer is known all over the world for efficient speed and rock stable reliability. We are proud to offer exchanges and their members our world class software tools and services:

Formula 1 Perform comprehensive risk checks, verifications, and control actions in accordance with Rule15c3-5 and other local market rules from one centralized platform especially tuned for Direct Market Access (DMA).

Daytona Big volume trade monitoring, alerting and surveillance via network packet capture straight from FIX, no integration required! Roll up thousands of order in real time.

DMA Gateway Low latency FIX Engine with enterprise configuration, routing and transformation. Highly tuned exchange adapters shield FIX users from proprietary, non-standard implementations.

Managed FIX FIX Flyer runs software as a service hosted by you or hosted by us. Or you can license, deploy and run the FIX Flyer software yourself with 24 hour support from us. For information, visit: FIXFlyer.com or email: info@fixflyer.com New Formore more information, visit: FIXFlyer.com

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EDITOR’S NOTE Dear readers,

The roles and responsibilities of exchanges have never been more important. With ever increasing concerns over the reliability of technology and with regular outages shaking confidence in the markets, legitimate questions are being raised around the business models and technological capabilities of exchanges. Who are the exchanges’ clients? Are they the primary market, the issuers of shares for whom the capital markets represent a vital source of funding, or should focus be placed on the secondary market? In which case, what is paramount; retail flow, or long-only institutional? Or, as the case may be, should the exchanges be allowed to choose their own clients, and advantage those that give them the most revenue, as they are fundamentally profit seeking enterprises? However, does this approach potentially lead to too great a focus on HFT flow, and exchanges operating as technology solution providers and not focusing on their industry role as exchanges? These questions, and many more, are shaping the global trading debate as part of a wider conversation around risk management and risk control in the markets. As regulators look to place controls on markets, and increasingly apply pressure on the sell-side to monitor their flow, many are calling for risk checks to reside with exchanges, as a body that sees a large proportion of the flow. However, in a time of increasing fragmentation into dark liquidity and new with exchanges being built, others counter that this proposal cannot meet the necessary benchmark required. In this supplement, key industry professionals address some of the major technological changes that are happening within exchanges, and look at the broader philosophical questions around the very business models that exchanges operate. While no one knows what exchanges will look like a decade from now, we do know that the authoritative industry contributors to these pages and the firms they work for are integral to current developments and will very likely be at the cutting edge for the decade to come. As always, any feedback or responses to issues raised in this supplement are welcome. Best,

Peter Waters Editor GlobalTrading

GlobalTrading Publisher Edward Mangles

Managing Director Stephanie Lawton

Editor

Peter Waters

Sales and Marketing Yulia Kuksina Tom Clifford

Operations Manager Tammy Fung

Design & Layout Goldie Lee

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EYE ON EXCHANGES

CONTENTS 5 8 13 16 18 20 22

How Can Exchanges Gain A Competitive Edge In A Highly Complex Marketplace?

Anders Henriksson, CEO CameronTec, and Michael Buhl, Joint CEO CEESEG, look at the changing nature of the exchange marketplace, and what customers are demanding.

Exchange Roundtable: Regulations And Technology In The US, Chile, Mexico, Turkey And Greece Brian Ross, CEO of FIXFlyer sits down with senior members of some of the fastest growing exchanges around the world to discuss their technology and upcoming regulatory changes.

A Different Type Of Exchange Jos Schmitt, CEO of Aequitas Innovations looks at the traditional role of the exchange, and whether the modern venues have lost sight of their traditional clients.

A New Exchange Model? Alasdair Haynes of Aquis Exchange examines the characteristics of his new exchange, and what sets it apart from current business models.

Moscow’s Long Term Reform Program

Andrey Shemetov, Deputy CEO of the Moscow Exchange looks at the steps, in equities, fixed income, FX, derivatives, through to settlement Thai securities market’s presence inand Asia clearing, that they are taking to reform the marketplace. Market Capitalization ของตลาดหลักทรัพย์ไทยต่อ GDP ยังมีขนาดเล็กเมือ่ เทียบกับตลาดหลักทรัพย์ อื่นในเอเชีย

2 GLOBALTRADING

Market Capitalization to GDP Comparison : Asia Countries Unit: Percentage 988

Comparing Asia’s Exchanges With technology and flow of Asia’s smaller exchanges growing, just how to they line up against each other?

265

Hong Kong

Singapore

153

147

Taiwan

Malaysia

Thailand

Korea

Philippines

Indonesia

Sources: Market Capitalization from World Federation of Exchanges (WFE) and Nominal GDP from International Monetary Fund, World Economic Outlook Database, April 2013 Note: - Market capitalization in terms of USD at the end of July 2013 - Nominal GDP in terms of USD for Year 2013 (Estimated)

Product Overview; A Coming Together Of Exchanges 4

In light of changing regulation and with increasing collaboration between exchanges, Roland Schwinn, Executive Director and Head of Business Development, Asia and Middle East, Eurex, looks at what is happening in Asia.

HIGHLIGHTS “The ability to identify issues, constantly monitor, take proactive actions and communicate effectively are all challenges that exchanges today must meet.” P.6 Anders Henriksson “We have an in house developed two-tier surveillance system. We share it with our regulator for monitoring market activities. The system works real time and on investor basis so that all the orders and trades that lead to alert signals can be identified…” P.11 Ali Coplu

“We believe that regulators should focus on investor protection and market integrity, but that when it comes to market quality, commercial initiatives should provide the solutions.” P.14 Jos Schmitt

“As you continually try to innovate, you run against the efficient frontier where there may be diminishing returns with each additional entrant into the market.” P.15 Tal Cohen

“As far as we’re concerned in managing an exchange, we are simply managing message traffic and the more messages there are, the higher the costs.” P.17

Alasdair Haynes

“To be competitive on HFT, the Exchange needs to be fast, and is currently in the process of carrying out a major redevelopment of its entire system…” P.19 Andrey Shemetov

EYE ON EXCHANGES

How Can Exchanges Gain A Competitive Edge In A Highly Complex Marketplace? Exchanges today are operating in an environment that is vastly more competitive, fast evolving and regulated than ten or fifteen years ago. They face competition from alternative liquidity sources and are forced to compete in an environment that constantly demands Anders Henriksson, consistent speed, CEO, CameronTec dependability and attractive pricing. If exchanges want to compete effectively in the current marketplace, they need to make strategic choices particularly when it comes to their technology. According to Anders Henriksson, CEO at FIX technology firm CameronTec, “Today’s environment calls for building out solid infrastructure that can accommodate competitive needs, deliver consistent speed and foster reliability in order to secure customer confidence.” Growing Competition Exchanges once held monopolies over liquidity in their region and asset class, but over the past decade, market structures around the globe have evolved,

creating more competition and fragmenting liquidity. With regulatory shifts, exchanges have had to deal with upswings in competition stemming from alternate liquidity sources such as Multilateral Trading Facilities (MTF’s), systematic internalisers, dark pools, etc. “As regional market structures evolve, exchanges need to spend more time thinking about how they can compete to better attract flow from both domestic and international traders,” says Anders Henriksson. “In order to survive fierce competition, exchanges are reinventing their business models. They are taking steps to diversify their revenue sources and increase their market footprint,” says Sang Lee, Co-Manager, Managing Partner of Aite Group. “This is creating a need for many exchanges to revamp their technology infrastructures to support trading across borders and different asset classes.” Competitive pressures force exchanges to focus on innovation in pricing, product offerings, order types, and speed of execution. But it’s also important to ensure that market participants find it easy to connect and trade. “Exchanges are increasingly leveraging FIX connectivity, which is helping them reduce both time to market in onboarding new participants and latency through faster connectivity infrastructure,” says Anders Henriksson. The CEE Stock Exchange Group (CEESEG) is doing just that. CEESEG is an exchange group consisting of the stock exchanges of Vienna, Budapest, Ljubljana and Prague. They share a technology platform to “facilitate access to all exchanges within the CEESEG through uniform IT interfaces,” says Michael Buhl, joint Chief Executive Officer for CEESEG. “CEESEG FIX has been continuously developed to suit our market participants and considerably reduces the effort for market participants in terms of new releases of trading systems.” CEESEG is using CameronFIX in their gateway to route order flow to the member exchanges. Demand for Greater Exchange Reliability Outages can do serious damage to the market’s confidence. When outages occur, the order flow gets EYE ON EXCHANGES

HOW CAN EXCHANGES GAIN A COMPETITIVE EDGE

re-routed to a competitor, meaning that the exchange instantly loses transaction revenue. Once a customer has experienced such a confidence-shaking event, they are more likely to continue routing to the alternate venue. To avoid this sort of catastrophic occurrence, exchanges need to stack the deck in their favour by investing in systems that are resilient and reliable. Outages also have a serious effect on market capitalisation for listed companies and on investor portfolios. “A recent incident on the Tel Aviv stock exchange sent Israel Corp.’s investments down 99.98% within minutes. Regardless of the exact cause, these types of events reflect badly on the exchange and shake investors’ confidence. The ability to identify issues, constantly monitor, take proactive actions and communicate effectively are all challenges that exchanges today must meet,” says Anders Henriksson. According to Michael Buhl, “The Xetra® trading system as well as our FIX interface use stateof-the-art trading technology and are known for impeccable reliability. Investing in safe and reliable

6 GLOBALTRADING

“Once a customer has experienced such a confidenceshaking event, they are more likely to continue routing to the alternate venue“ infrastructure is as important as process management and IT governance, which helps to efficiently reduce IT risks.” Reconsidering Strategy Over the past two decades, exchanges used acquisitions and consolidation as key tools to drive growth. However, this approach is starting to experience some pushback from regulators, as in the case of the proposed crossborder merger of Deutsche Boerse and NYSE Euronext. This deal was shot down by the EU, as they said that the combined company’s dominance of the European derivatives market would have smitten competition. Some cases such as the ICE/NYSE Euronext merger and the BATS/Direct Edge merger may successfully obtain

regulatory approval, but exchanges cannot rely solely on mergers and acquisitions as a competitive strategy. Another strategic expansion approach involves cooperatives such as ASEAN in Asia, MILA in Latin America and CEESEG in Eastern Europe. This approach targets investors who do not limit their strategies to instruments traded in their geographical area. ”Particularly in emerging markets, growing wealth has created demand for opportunities to invest outside brokers’ home countries,” comments Anders Henriksson. “As regulatory regimes become more open to this cross border investment flow, it’s even more critical for exchanges to cooperate to facilitate this kind of trading.” In the case of CEESEG, small regional stock exchanges of Vienna, Budapest, Ljubljana and Prague have combined resources in order to gain a stronger foothold in the global marketplace. Michael Buhl explains, “We believe that a regional approach is advantageous for listed companies as well as market participants. Listed companies enjoy the highest degree of attention in their home markets, because this is where they are at the center of attention of investors, analysts, and also as employers and the general public. As a group, we successfully manage

to garner international attention to all stock exchanges within the CEE Stock Exchange Group.” According to Michael Buhl, “We facilitate access to all exchanges within the CEESEG through uniform IT interfaces such as CEESEG FIX. This user-friendly interface provides small and medium sized exchange members in the CEE region with easy and inexpensive market access by using their existing infrastructure.” Overall, exchanges need to recognise that change in this business is a constant. Therefore, they need to invest in a strong technology platform designed to meet the needs of this ongoing evolution providing flexibility for evolving regulations, mergers, acquisitions, and more. Conclusion A globalised and fast-paced trading marketplace is creating an increasingly more competitive environment for exchanges. To get an edge, exchanges need to be paying greater attention to developing strategies that are aligned with this constantly evolving environment. A major part of this initiative should be investing in systems that are reliable, flexible, standardised, and offer cost savings that can be passed down to brokers. EYE ON EXCHANGES

Exchange Roundtable: Regulations And Technology In The US, Chile, Mexico, Turkey And Greece

Exchanges are standardising on the FIX protocol, improving and upgrading their systems as regulators modernise, improving local markets and attracting foreign investors as key goals. What kind of progress are they making? We have organised a roundtable of exchange leaders to discuss recent regulatory changes and improvements in technology in the Mexico, Chile, Turkey and Greece. Exchanges in Mexico, Chile, Turkey and Greece have made progress and attracting institutional investors who are looking for familiar rules across markets. While the US investors continue to push the envelope, US regulators strive to raise the bar on oversight and surveillance. But what are the challenges ahead? How does the FIX Trading Community facilitate the discussion around business practices beyond the widely adopted FIX messaging protocol? Here is our panel of leaders from exchanges around the globe: • Moderator Brian Ross, CEO FIX Flyer • Susan Ameel, Chief Compliance Officer, National Stock Exchange • Enrique Ibarra Anaya, Senior VP of Technology, Bolsa Mexicana de Valores • Andres Araya, CTO, Bolsa de Comercio de Santiago • Ali Coplu, CIO, Borsa Istanbul • Dimitris Karaiskakis, COO, Hellenic Exchange

8 GLOBALTRADING

Brian: Susan, what do you see on the horizon in the next year from US regulators? Susan: US regulators will be busy implementing the consolidated audit trail rules. The consolidated audit trail will allow regulators to perform cross market surveillance using a central repository on a T+1 basis.

Brian: And what are some of the challenges posed by US regulators going forward? Susan: US regulators must be able to quickly analyse data, and help members quickly identify problems that may impact the integrity of the markets. The SEC has requested that each exchange adopt “kill switch” rules and technology to help achieve this goal. Regulators need to build on this process by identifying other issues that can be spotted through effective data analysis and to assist member firms to identify patterns that appear to be problematic. Early detection means that firms can address issues in a more timely fashion, improve a market’s overall integrity, and reduce the instances of the problematic activity. Brian: Susan, do you see areas that could be improved to assist in this process? Susan: Standardised data and synchronised timestamps would be key to this effort. The FIX protocol provides a starting point for obtaining standardised data. The trading community has mutually agreed to use the FIX protocol to communicate the data elements

Brian Ross, CEO, FIX Flyer

Susan Ameel, Chief Compliance Officer, National Stock Exchange

that are needed to establish the material terms of a trade. By using available standardised data, you are not recreating the wheel or putting any additional burdens on your members. In fact, each exchange publishes a FIX spec against which each member is expected to program their messaging. Of course additional information is always required but regulators should try to be as efficient as possible. However, one problem that needs to be solved is the synchronisation of timestamps as well as the required granularity of timestamps. Brian: Enrique, Mexican regulators moved to modernise their markets with RINO initiatives in 2010 and 2011 and the BMV successfully welcomed HFT, launched a new trading engine and built modern co-location facilities. Can you tell us about the BMVâ&#x20AC;&#x2122;s new trading engine and other initiatives you are planning for your members? Enrique: Yes, the BMV successfully launched our new low-latency trading engine MoNeT in the fall of 2012 and we are now working in the normal functional evolution and maintenance of the system. Two new versions have been released in 2013 with a number of functional enhancements for connectivity, latency, order types, risk management and more. We are also working to provide more info in our market data feed to allow our members and trade workstation vendors to develop a trading workstation system with the same level of information that the trading workstation of the Mexican Stock Exchange (BMV) offers. The intention of this initiative is to stimulate the development of new trading workstation solutions to allow the brokers to have diverse alternatives and to eliminate the fact that the BMV is the only provider of trading workstations for the brokerage houses.

Brian: Enrique, what changes are on the horizon in 2014 for members of the BMV? Enrique: In 2012 our new trading engine, MoNeT, introduced the feature of â&#x20AC;&#x153;market filtersâ&#x20AC;?, which works to reject orders with obvious mistakes (fat-finger errors) to protect the brokers. Enrique Ibarra Anaya, During 2014 several Senior VP of Technology, functional extensions Bolsa Mexicana de Valores will be added to the filters that monitor price and volume in the new orders. We additionally use dynamic and static price fluctuation ranges that will be further optimised in 2014. Our market is not currently anonymous and we will explore the adoption of an operational anonymity scheme in 2014. Our trading engine supports the market anonymity mode, we will discuss its use with the brokers and the regulator. We are also considering making functional adjustments to our pegged orders in 2014. Finally, next year we will launch a new market data product based on multicast transport. Our current market data product uses unicast TCP connections. Brian: Andres, in Santiago you have also been very busy. What initiatives have you been pursuing for your members in 2012? Andres: One very important initiative is the Derivatives Exchange which we aim to offer to all the capital markets, particularly institutional investors and intermediaries both domestic and foreign the ability to trade in Chile investment and hedging instruments in an open and regulated market, starting with a first step in equity index futures, then continue with currency futures, fixed income futures and options. The development of a derivatives market in Chile will enable breakthroughs in the process of diversification, risk management, liquidity and depth of the domestic capital market, and at the same time represent a major boost for the local market, facilitating the use of the capital market not only for local investors, but also to a large number of foreign investors. The Chilean capital market has grown about 10 fold in recent years in the amount and number of operations, so there is now a natural demand for new services and products, making it necessary to develop a regulated derivatives market. EYE ON EXCHANGES

EXCHANGE ROUNDTABLE

Andres Araya, CTO, Bolsa de Comercio de Santiago

Ali Coplu, CIO, Borsa Istanbul

The derivatives market of the Santiago Stock Exchange has been developed with the participation and assistance of BM&F BOVESPA who had tremendous success in the creation, operation, promotion and marketing of their derivatives market, an example that we hope will be repeated in Chile. It is noteworthy that the Derivatives Taxation Act enacted in October 2011 incorporates tax exemption on capital gains for all foreign investors, which will undoubtedly facilitate the participation of international investors in the derivatives market in Chile. Brian: Andres, were there any other important initiatives in 2013? Andres: In September of this year the BCS in conjunction with ITAU BBA began trading the first exchange traded fund that tracks the performance of the Main Chilean Index (IPSA) of the Santiago Stock Exchange named as â&#x20AC;&#x153;IPSA It Nowâ&#x20AC;?. Last year, ITAU BBA won the tender which carried the exchange to create ETFs of its major Indexes. This process gave ITAU the exclusive use of trademarks IPSA, IGPA and Inter - 10 for a period of ten years, allowing the creation, negotiation and trade of ETFs in the national and international market. Brian: Andres, what do you have planned for 2014? Andres: The Santiago Stock Exchange is making a major effort to modernise the entire infrastructure for fixed income electronic trading markets in which the BCS has almost 100% of market share. BCS will enable access to these markets via the FIX protocol and in addition to significantly increased transactional capabilities such as reduce latency and increased throughput, we are also making a major upgrade to all clearing and settlement systems of the BCS, in order to upgrade to new technologies in production and related to electronic trading.

10 GLOBALTRADING

Andres, what about your regulators? Are they asking for any changes in 2014? Andres: The Santiago Stock Exchange is in a program of international certifications ISO 27001 and ISO 22301 related to information security and business continuity. Conscious of our leadership position in the local market, Dimitris Karaiskakis, we want our best practices COO, to able to be verified by Hellenic Exchange any third party. The BCS is also in a broad initiative to incorporate COBIT 5 for IT Governance. We also have some new trading regulations around Market maker obligations that we need to address. We are working with the SVS and the Central Bank to clarify how the derivatives market will work. We expect the authorisation in October or November, and full production two or three months after that. Brian: Andres and Enrique, how do your exchanges handle trade surveillance today? Andres: The BCS in 2010 implemented a surveillance solution developed in-house with the support of StreamBase (recently acquired by TIBCO). Thus, at present the BCS uses Complex Event Processing technology (CEP) for processing real-time correlations that support the market monitoring area more efficiently. Enrique: In 2008 we developed at the Mexican Stock Exchange a system for market surveillance that we call Vigia. The system receives in real time the market data feed and, in real time too, looks for patterns of suspicious market activity. The end user has the ability, through the tools that Vigia offers, to specify new patterns. The system has access to the data warehouse in order to use historical information as needed. An ongoing initiative is to evaluate the use of SAP Hana, an in-memory database that could be used to host both the online and historical information and produce substantially faster computation results. In addition, we are re-developing the system of our central counterparty and this new system will include both real-time pre and post trade risk controls. Brian: Ali, what about Istanbul? What current initiatives are you pursuing for your members and what changes are on the horizon in 2014 for your members? Ali: We are currently adding a FIX interface for orders. The first release is expected in October with subsequent

improvements over time. This is a significant change that we hope will bring more order flow into Turkey. Additionally, starting Jan 1, 2014, the Borsa Istanbul will begin to disseminate Sarajevo bourse (SASE) data locally and abroad. In 2014 our colocation center for market participants will go live. Brian: Ali, how does the Istanbul Borsa handle trade surveillance today? Ali: We have an in house developed two-tier surveillance system. We share it with our regulator for monitoring market activities. The system works real time and on investor basis so that all the orders and trades that lead to alert signals can be identified including the immediate beneficial owner of the trades. Investors have unique registry ID given by Central Registry Agency of Turkey, Merkezi Kayıt Kuruluşu-MKK to trade and this enables us to track the investors properly. A wide spectrum of alerts and analysis tools for detecting market abuses such as market manipulation, insider trading or any other violations of rules and regulations exist in the system including new alerts and search tools which are developed continuously. We work in close cooperation with the regulator in Turkey, the Capital Markets Board-CMB, not only in daily monitoring, but also during the other stages of surveillance and investigations. Since Borsa Istanbul and CMB have a common system, both parties are simultaneously aware of the on-going activities in the market and have communication through mail and telephone and while detecting the unusual movement, while one party is focusing on trading patterns of possible offenders, the other party may reach out to the public. Also we have automated stock specific circuit breaking system which stops trading for any equity with excessive trading (volume movement) or abnormal price movement. The system checks all trades for certain criteria. Given an abnormality on a stock, at the first stage trading is suspended for 15 minutes and resumes automatically after this time. If the excessive activity or price movement does not diminish and some other conditions exist, a second level is reached. This time trading stops until the end of the trading session, and the netting facility is removed starting from the next day, for trades on the relevant security for 15 days. In case of any automated suspension, public will be informed by an immediate announcement through KAP (Public Disclosure System of Turkey) which creates public awareness and gives investors a space to review their

buying or selling decisions during the temporary suspension period. And naturally, each circuit break initiates an investigation on the orders and trades in terms of manipulation or any other market abuses. Brian: Do your members want real-time trade surveillance? Ali: In Turkey surveillance is the exchange’s responsibility given by the new Capital Market Law which went into force by the end of 2012. As mentioned above we submit our findings to CMB as a report in order to provide enough evidences for legal procedures against offenders. That said, some of our members have interest in having their own surveillance tools and filtering mechanism – limited to orders and trades routed through their facilities. This is mainly for compliance purposes and in order to provide enough shelter for avoiding customer complaints about operational abuses or negligence. Since most investors prefer to

“Since Borsa Istanbul and CMB have a common system, both parties are simultaneously aware of on-going activities...“ use more than one member/account to trade simultaneously, it is difficult for any member to see the complete market picture by monitoring orders/trades originating from its own sources. Andres: The Santiago Stock Exchange implemented pre-trade risk controls for trades via DMA and the other mechanisms allows in order to take control of any single transaction. At the same time, we allow Drop Copy Services to members’ systems in real time for their own related risk controls. Brian: Dimitris, how does the Hellenic Exchange handle trade surveillance and do your members want real-time surveillance? Dimitris: Although we operate an online and historical surveillance system which we own and built, we are currently expanding the functionality and scope of the system by acquiring a new surveillance system. We are in the last phase of a procurement procedure with a timeframe to have a new live surveillance environment in Q3 2014. EYE ON EXCHANGES

EXCHANGE ROUNDTABLE Regarding our member firms, DMA services have been offered for some years, but our brokers haven’t yet expressed any interest in real time surveillance services. I think this is something that will come up in our environment in 2015, so we have some preparation that we already planning to do.

“DMA services have been offered for some years now, but our brokers haven’t yet expressed any interest in real time surveillance services. “ Brian: Dimitris, can tell us what current initiatives you are pursuing for your members and whether there are any changes on the horizon in 2014 for your members? Dimitris: Except from the DMA that we offer through FIX and our proprietary protocol (ODL), we recently permitted sponsored access through a central FIX engine and OMS for member clients in order to have direct access to the trading system. Members can apply permissions and filters to the central OMS for orders to be executed under their name. Regarding 2014, one big project that is going live in Q1 is the consolidation of the two trading systems (cash and derivatives) into one. Actually we are expanding our equity trading and clearing systems to host the derivative market. So we offer one API (FIX and ODL) to access the market, one API for clearing and one API for market data feed. This is a big change in our market and creates a more efficient and cost performing market for all participants. Brian: Dimitris, what about your regulators? Are they asking for any changes in 2014? Dimitris: Following the ESMA guidelines our regulators ask for more compliance and audit reports not only from the exchange but for the members offering DMA services also. Brian: Ali, tell us about your systems and technology that you support How does the growth in Turkish economy affect your decisions going forward? Ali: Over the past decade, Turkey has experienced structural changes which have led to substantial

12 GLOBALTRADING

economic advances. By 2011, Turkey became the 16th largest economy in the world and the 6th largest economy in Europe. A fully automated Equity Market Trading System of Borsa Istanbul partially started on December 3, 1993 and became fully functional with all stocks tradable on an electronic environment after October 21, 1994. Trading system was purchased from a US Company called TCAM systems with the source code. During the course of time capacity in terms of number of transactions and latency has improved considerably. As of March 31, 2013, the throughput of the system is almost 5,000 orders/ second and the latency at the peak time of order flow is below 1 millisecond via FIX interface. The trading system for futures and options market has been built upon the trading system purchased from an Australian company, CSL, which was later acquired by NASDAQ-OMX. Borsa Istanbul has the source code and full authority to amend the code. The trading system supports continuous price auction as well as price fixing (call auction) mechanism. The system used by TurkDEX as the trading platform is a different version than the one used by Borsa Istanbul. After the planned takeover of TurkDEX, two different versions will merge into a single trading platform. The trading system infrastructure provides an online real-time connection with Takasbank and makes it possible to monitor all orders, transactions, margins and positions on account basis. Various types of orders including limit, market, keep remainder and market contingent (stop loss) orders are supported by the trading system. Regarding growth in the Turkish economy, the number and diversity of listed companies play a significant role in the success of our exchange. Currently, 417 companies with a market value of around $300 billion are listed. Our aim is to raise the number of traded companies to 1,000 by 2023. In line with IFC vision, we also started the Listing Istanbul project in order to attract foreign companies for listing at Borsa Istanbul. Accordingly, we will be a major funding source for both Turkish and foreign companies and support Turkey’s growth on years to come. The demand for services of an exchange is directly proportional to the size of its product range.

A Different Type Of Exchange photo

Jos Schmitt, CEO of Aequitas Innovations, looks at the traditional role of the exchange, and whether modern venues have lost sight of their traditional clients. When exchanges demutualised and became for-profit organizations, it led to a number of unintended consequences that today have a major impact on market quality and capital-raising. One of these consequences is that exchanges, and all their alternative trading platform competitors, now mainly cater to those market participants who allow them to generate most volumes, which translates into revenue. The problem is that some participants, and some HFT firms in particular, focus their presence in liquid securities, making the market maker business proposition no longer viable. This is

detrimental to both long-term investors and to the issuers as market makers are no longer there when the need is the highest; periods of stress, small and mid-cap securities or IPOs. From conversations with industry participants, we see many that want to go back to the roots of what an exchange is and implement a strategy that puts investors and issuers first. Many harbour an ambition to re-establish balance in the market and seek to improve it by proposing solutions that allow longterm investors and issuers to be more successful. We believe that exchangesâ&#x20AC;&#x2122; certain behaviour will make true market makers successful again, EYE ON EXCHANGES

A DIFFERENT TYPE OF EXCHANGE

“Across these initiatives, there is a drive to focus on reducing the cost of doing business for market participants.“ that a listing venue should focus on ensuring the readiness of corporations going public, that there’s a need for an alternative capital raising and trading venue for small and mid-cap securities, and that an exchange should seek to reduce the costs for market participants in general. Restricting Inappropriate HFT Behaviour and re-incentivizing Market Makers In order to restrict predatory strategies, exchanges can use a combination of affordable advanced technology and market structure solutions. One way to drive this change is to use smart order routing to prevent latency arbitrage and quote fading by holding market participants to the quotes they display. A further market structure solution is an eco-system of liquidity pools where two of them, a dark pool and a transparent liquidity pool, will only allow long-term investors to take liquidity, will prioritise executions in a way that no longer lets time prevail while allowing market makers to be part of more good trades, and will not support the maker/taker fee model. The third liquidity pool in this kind of ecosystem will be a classic lit pool that will prioritise executions in a way that preferences long-term investors’ resting orders. This ecosystem will prevent rebate strategies, exploratory trading and technological front running, while promoting larger trades. Should a new exchange tackle the HFT issues or should this be left to the regulators? We believe that regulators should focus on investor protection and market integrity, but that when it comes to market quality, commercial initiatives should provide the solutions. There is a lot of debate about HFT firms, with its proponents and its opponents, so why not let market participants decide for themselves by providing them with choice, true choice? Having regulators micro-manage behaviours can lead to many unintended consequences, not to mention that change is permanent.

14 GLOBALTRADING

Jos Schmitt, CEO, Aequitas Innovations

Another initiative that is being driven by industry feedback is focused on the capital raising process with a two-fold strategy. A public listing venue that will only allow for the listing of senior corporations; corporations that at are at a stage in their development where they can handle the burden that comes with a public listing, where they can generate investor interest to fuel natural liquidity and analyst coverage, and where being listed is a proposition that will allow them to successfully support future capital raising needs. This can be complemented with a private market tailored to the individual needs of small and mid-sized corporations where they will have efficient access to risk tolerant investors and secondary liquidity. Across these initiatives, there is a drive to focus on reducing the cost of doing business for market participants. This will be achieved through competitive fees, challenging the maker/taker fee structure, providing affordable technology solutions, and developing to new solutions in the market data space.

The Incumbent Exchanges With Tal Cohen, CEO, Chi-X Global

Where you have entrenched monopolies or incumbents their businesses have grown into concentric circles with their customers, in which the customers and exchange have a very close relationship. When a new competitor comes in to town, there’s a level of inertia that must be broken in order for viable competition to take hold. There may be significant hurdles in terms of breaking culturally ingrained habits for start-ups to overcome. It’s not just the rival of competition that drives a change in behaviour. Often what is required is a catalyst to overcome the inertia, which enables competition to showcase its value, and drive firms to change behaviour and take advantages of competition. That’s not to say that the member firms are not doing the right thing, it simply highlights the fact that their infrastructure, technology, and workflows are designed over a long period of time and it takes time to recalibrate that to embrace a multi-market environment. When launching an alternative market, you need to present a value proposition through innovative products and solutions that meet industry needs. It can start with bringing better technology, being more costefficient, improving investor performance or through the advocacy of positive regulatory reform. Competition enables market constituents with different investment needs and different time horizons, a variety of options for interacting in the market. In a single market environment meeting a diverse set of investment needs is difficult, so with a monopoly it’s almost like the early days of cars in which Ford with the model “T” stated; you can have any colour you want as long as it’s black. It’s not about taking the pie and slicing it in half, it’s about growing the overall market, identifying trends, identifying customer needs that a single market model, especially in a regulated environment, can’t possibly satisfy. Finding the balance of fragmentation To compare and contrast Australia and the US; in Australia, the benefit of competition is well understood and appreciated. In Australia we’ve forced ASX to raise the level of its game. They have pushed out new products, lowered pricing and become more responsive to customers. Because of competition they fragmented their own market and now they run three books in an effort to meet industry needs. The expansion of choice has brought about a positive change for the market’s constituents by lowering costs and increasing choice. And so that level of

competition has been healthy. Now, the challenge with competition as it evolves, and this will bring me into the US, is that the markets become more complex. As you continually try to innovate, you run against the efficient frontier where there may be diminishing returns with each additional entrant into the market. For some of the new Tal Cohen, businesses that are challenging CEO, Chi-X Global the status quo, technology can get you in the game; it doesn’t necessarily differentiate you. In the more mature or developed markets its difficult to innovate without really changing the rules of the game. Asking regulators to change the rules of the game has the potential to create an environment in which reforms determine the winners and losers or could lead to regulatory arbitrage, and I think regulators should have it as a goal to avoid doing so when they look at how market microstructure should evolve. Generally, regulators are looking more and more like technology firms. The regulators need different skill-sets and tools; they need to invest much more in technology than they did ten years ago. Market manipulation hasn’t really changed all that much, but the techniques and the mechanisms with which they monitor and detect it are very different. Changing the exchange model One reason for the change in exchange models is because the economics have forced them to change. Fundamentally, they’ve brought down the price of doing business when it comes to execution and clearing. The model was to bundle services, and this bundle was expressed in execution fees. Now that execution and clearing fees have come down, how can you reverse the commoditisation of the service? The exchanges, very much like brokers, have unbundled their services and are being forced to examine the value they provide to the Street. It’s going to be a process in which they learn by obtaining feedback from their clients and better understand where the real value of an exchange is. And this is the challenge; their fundamental premise and reason for being hasn’t changed. They are there to service issuers and investors. They serve in some respects in a utility function by enabling issuers to raise capital and in the secondary market by allowing investors to effectively transfer of risk. What is now being debated are the products, services and technology by which they provide those services. And then on the other side of that is, what risks are being taken while commercialising themselves. There needs to be a balance. EYE ON EXCHANGES

A New Exchange Model? Alasdair Haynes of Aquis Exchange examines the characteristics of his new exchange, and what sets it apart from current business models.

Despite Europe appearing to be a very fragmented market and most exchanges being nationalistic in their outlook, if we look at the market today, around 95% of all business in each country is done by either the national exchange or BATSChi-X. That, to me, is a duopoly – 95% of business done in two places means the market is not fragmented. So looking at the European market in its entirety, there is plenty of room for a new exchange to set up on a Pan-European basis and become a third player, which I think the market needs. Our intention is to grow the markets and we believe it is right that national markets will not have such a dominant share in the future. The model that we are introducing – which is a subscription, all-you-can-eat model –is based on the way telecoms and mobile phone companies operate. The main issue in Europe is; how do we grow the equities market? One of the ways to do this is to bring in a completely new, very disruptive pricing methodology which is exactly what we intend to do. Trading volume in the United States is four times that of Europe but they have equal GDPs and Europe’s population is slightly larger. There are currently only two venues where there’s any liquidity; either BATS-Chi-X or the national market. When we consider where we position ourselves, we want to bring utility pricing and utility business to the exchange industry. We don’t see ourselves as niche players, we want to become the third market in Europe and grow from there. We have set the barriers to entry for our Members as low as we can, we’ve set up a data centre in the same place as many of our potential members are located (in Slough), we are using FIX which has become an industry standard and we have a proprietary protocol designed and built by us which is very simple to use. We believe that this technology, built and owned by us, is going to move markets to the next dimension. Where did the inspiration for a different pricing model come from? I was sitting in a shop buying a phone for my 13-year-old son and we were having a conversation about the type of phone he wanted. Like every other 13-year-old, he wanted the ‘all you can eat, download whatever I want and play as many games as I can in one’ package. And I then realised that we needed to use this model in financial services. There are plenty of academic papers about subscription pricing. In almost every case you look at the certainty of earnings which generally brings down prices; as long as you have consistency of earnings, you don’t get the variability that other firms do and, therefore, you can price

16 GLOBALTRADING

“As far as we’re concerned in managing an exchange, we are simply managing message traffic and the more messages there are, the higher the costs.“ Alasdair Haynes, CEO, Aquis Exchange

competitively. The second thing is that it raises standards because you can’t afford to lose your subscriptions. I’ve spoken to over 55 customers of all different types; market makers, investment banks, mid-sized, small-sized, large-sized brokers. There were two or three who said they would like to see liquidity move first, but many others looked at the model and agreed that it makes sense in our industry for somebody to do this. And the reason it has not been done before is that we are capping our upside, something that the quoted exchanges can’t really do. This type of market can move to different geographical locations and within different asset classes because we’re charging for message traffic just as a telecoms business does. As far as we’re concerned in managing an exchange, we are simply managing message traffic and the more messages there are, the higher the costs. It’s not to do with the value being traded. So we want to match our customers’ costs to the exchanges’ costs, and if you can do that, you can allow the market to grow. Have you thought about the potential impacts of HFT and excessive orders and cancellations? Yes, absolutely we have. You will find if you look at your television or telephone package contract, that you will have a ‘reasonable usage policy’. So we too will have a reasonable usage policy as it is not in an exchange’s interest for anybody to have a huge quote-to-trade ratio. We want our model to allow for growth, but not furious unlimited traffic; which is not good for a market. That is handled within the ‘Market Abuse Directive’ – if a market is being abused, then you can monitor and control that your own way. We have applied for our MTF license and have discussed reasonable usage with the regulators. We have hosted subscription pricing forums with the market every six to eight weeks over the last six months or so.

We have worked with the industry to find out exactly how and where they would like to price. Our initial pricing is simple: if you are a designated market maker making a two-way price consistently in the market, any passive order that you submit and any order you have or message you put on the system, doesn’t count as a message. That’s the simplest way of getting people to come to your market. Anybody else (who’s not a designated market maker and including the designated market makers) can send up to 25,000 messages a day for £2,500 a month. If they send more than 25,000 messages a day, then we will charge £10,000 a month. That price will go up as liquidity builds from £10,000 to £20,000 to £30,000 and eventually to £50,000. £50,000 will be the top rate for the next couple of years. We think the pricing is extremely beneficial and that we will be profitable because we own our own technology and we built it using a new design, which means we can operate and manage it extremely successfully at a lower cost. We’ve also sold the technology to another group in Africa and are in negotiations with others who are interested in buying the technology. So if you look at the two main costs of running an execution platform – start-up costs and technology – firstly, we own the technology and secondly, we don’t pay people in the same way, as our staff share in the company’s equity so they are incentivised through that equity share. We believe these factors will make this project a success. What’s your timeline going forward? FCA approval is essential. We are in the process of doing user acceptance testing so we have customers currently connecting to us. We are completing our second round of financing, which I believe will probably be our last round as we expect to be over-subscribed. Therefore we are on target to launch by the end of this year. But, I’ve been in this game for 35 years and I am more than aware of all we must achieve in order to be in business; regulation, new technology etc. We may have to push things back a bit but we’re certainly on target to make the fourth quarter this year. EYE ON EXCHANGES

Moscow’s Long Term Reform Program photo

The year 2013 has been one of change on many fronts for the Moscow Exchange. Perhaps most publicly, the Exchange held a successful IPO on its own platform, raising $500 million from a diverse set of international and domestic investors in February. The offering valued Moscow Exchange at around $4.0 bn and was a highly significant event in the life of the Exchange. It also helped put the spotlight on the progress that regulators and the Exchange have made in reforming the Russian financial market infrastructure to facilitate more international money flows. While much good work has already been done, there is a lot more still to achieve. For this reason now is a particularly exciting time in Russia’s capital markets, and for the Exchange in particular as one of the institutions spearheading this development. Probably the product that most immediately comes to mind with any stock exchange is equities. Historically trading in some Russian equities has taken place abroad, with London and New York the chief beneficiaries. This is attributable to a number of factors, not least that Russian companies would look to other exchanges for broad and deep pools of liquidity, while a local investor base in Russia is still yet to emerge. In this context, the transition to T+2 settlement represents a step-change that is already bringing benefits and will help to attract more foreign liquidity. T+0 trading for equities was switched off at the end of

18 GLOBALTRADING

August, though government bonds (OFZs) will continue to be tradeable in both modes for the time being. The shift to T+2 has brought Moscow into line with global standards. The benefits of this and other recent changes – including the establishment of the central depository and centralised clearing, and the acceptance of US dollars and Euros as collateral – are already being seen. Citigroup, Credit Suisse, Merrill Lynch, and Morgan Stanley all started to offer their clients direct market access (DMA) to securities trading on Moscow Exchange in September, with more banks set to follow during the quarter. Yet while equities may be the “public face” of most exchanges, one of Moscow Exchange’s distinguishing features is the diversity of its offering, with bonds, FX, money-market products and derivatives being particular strengths and key sources of growth. As well as offering more possibilities for traders, this has the additional benefit of making for a more resilient business model. Our recent results for 1H 2013 reflected the advantages of this revenue diversification, with net income up by 39% on the previous year. One recent landmark was the signing of an agreement with Deutsche Börse to cooperate on trading of FX derivatives.

Ruble/euro and ruble/dollar futures will be available through Eurex later in 2013, while traders in Moscow will gain access to futures on five German blue-chip stocks. International partnerships such as this expand the range of trading strategies and hedging opportunities available to market participants, and help to improve risk-management. The Exchange’s recent developments and emergence as a major player on the global stage is underpinned by a longerterm programme of investment in infrastructure. Moscow Exchange is unusual in having a vertically integrated offering, from pre-trading through the trading process itself and post-trade clearing and settlement through the National Clearing Centre and Central Securities Depository, both 100%-owned subsidiaries of Moscow Exchange.

“One target is to increase the amount of high-frequency trading on Moscow Exchange’s platforms...“ As well as making the trading process simpler and cheaper, this arrangement works to the benefit of traders by reducing the risks involved in trading in Russia and offering a higher degree of protection. All incoming trades are subject to a clearing certainty check, meaning that each incoming order is checked against the margin collateral held by the clearing house to support the trade if it happens. This gives members a lot of peace of mind regarding the stability of the central counterparty and that the trade is actually going to be cleared and delivered. European and US markets simply cannot do something like this, because the clearing function is separated from trading at the corporate level. Individual traders have no way of knowing whether the DTCC is actually going to clear the trade, so that in some sense represents a risk for them. In markets like the US, or the UK or other European markets this is less of a problem, because the brokers are stronger and can absorb a lot of the risk involved. But in developing countries like Russia the onus of supporting the financial system lies more on the central counterparty and the clearing house, which need to make sure that they are holding sufficient margin collateral. One target is to increase the amount of high-frequency trading on Moscow Exchange’s platforms from the current levels of about 40% of total trading – less than would be expected in a more mature market such as London or New

York. To be competitive on HFT, the Exchange needs to be fast, and is currently in the process of carrying out a major redevelopment of its entire system to improve its platform, for example by bringing down latencies and increasing productivity.

Andrey Shemetov, Deputy CEO, Moscow Exchange

This is a three-year programme that involves moving from the current risk and clearing model to a new risk-check model that will cut the time for risk-checking from the current time of about 50-70 microseconds to less than 5 microseconds. Another area of focus is the improvement of data systems to complement trading systems, because traders need to be able to see market data fast enough to avoid trading blind.

This August saw another important step in the Exchange’s infrastructure programme with the completion of the consolidation of its trading systems in a single state of the art data centre, the M1 Data Centre. Consolidation of all trading and clearing systems makes life simpler for members, as they only need support access to one data centre and can have simultaneous access to all markets. For foreign investors, the launch of the Central Securities Depository in November 2012 removed a major barrier that had prevented them from trading in Russian local shares. Another important step on the road to attracting more investors from abroad was Euroclear and Clearstream opening foreign nominee securities accounts with the National Settlement Depository and the launch of settlement services for transactions involving Russian government bonds (OFZs). It is planned that Euroclear and Clearstream will start providing settlement services for equities from July 2014 or earlier. Looking forward, the Exchange continues to pursue its goal of attracting a greater share of trade in Russian equities. While better trading platforms play an important role, important work also remains to be done on modernising the listing process and improving corporate governance standards in Russia – a perennial area of concern for investors and one that crops up in any discussion. As in other areas, the Moscow Exchange is a strong advocate of best practice in corporate governance, and will continue to work with the relevant authorities to bring Russia into line with international standards. EYE ON EXCHANGES

Comparing Asia’s Exchanges Exchanges in Asia are still dominated by the major markets of Hong Kong, Singapore and Japan, but the smaller markets of Thailand, Malaysia and the Philippines are gaining in share. Technology is evolving in the smaller countries, with an increase in electronic trading offerings and exchanges that are increasingly global in outlook. International sell-sides and local buy-sides are increasingly Thai securities market’s presence in Asia cooperatingMarket to drive innovation and these exchanges Capitalization ของตลาดหลั กทรัพflow ย์ไทยต่to อ GDP ยังมีขmarkets, นาดเล็กเมือ่ เทียand บกับตลาดหลั กทรัพย์ are upping theirอื่นefforts ในเอเชีย to attract investment. Market Capitalization to GDP Comparison : Asia Countries Unit: Percentage 988

265 153

Hong Kong

Singapore

147

Taiwan

Malaysia

Thailand

Korea

Philippines

Indonesia

Thai securities market’s presence in Asia

ณ สิน้ เดือนกรกฎาคม 2556 ตลาดหลักทรัพย์ไทยยังมีขนาดค่อนข้างเล็ก และมีสภาพคล่องสูงเมือ่ เทียบกับตลาดหลักทรัพย์ในภูมภิ าคเอเชีย

• Market Capitalization*

Unit: Billion USD

2,773

• Share Turnover Velocity**

Unit: Percentage

116 90

87 45

1,105 759

758

482

446

399

233

Source:

Source: WFE Note: *Market Capitalization at the end of July 2013. ** Share Turnover Velocity is calculated by {Share Turnover (at the end of July 2013)/Market Capitalization (at the end of July 2013)}*12.

20 GLOBALTRADING

Thai securities market’s presence in the world

มูลค่าการซือ้ ขายหมุนเวียนสะสมในเดือนมกราคม-เดือนกรกฏาคม 2556 จัดอยูใ่ นอันดับที่ 20 เมือ่ เทียบ กับตลาดหลักทรัพย์ทวโลก ั่ NYSE Euronext (US) NASDAQ OMX Japan Exchange Group - Tokyo Shenzhen SE Shanghai SE London SE Group NYSE Euronext (Europe) TMX Group Deutsche Börse Korea Exchange Hong Kong Exchanges Australian SE BME Spanish Exchanges BM&FBOVESPA SIX Swiss Exchange Taiwan SE Corp. NASDAQ OMX Nordic Exchange National Stock Exchange India Borsa Istanbul The Stock Exchange of Thailand Saudi Stock Exchange - Tadawul Johannesburg SE Singapore Exchange Moscow Exchange Mexican Exchange Bursa Malaysia Indonesia SE GreTai Securities Market Oslo Børs BSE India Philippine SE Tel Aviv SE Santiago SE Colombia SE Wiener Börse Athens Exchange Abu Dhabi SE Irish SE Egyptian Exchange Budapest SE Muscat Securities Market Lima SE Amman SE Casablanca SE Buenos Aires SE Colombo SE Ljubljana SE Mauritius SE Luxembourg SE Malta SE Cyprus SE Bermuda SE

Total Value of Share Trading (USD Billion) January-July 2013

ตลท.อยู ใ่ นลาดับmarket ที่ 20 จาก 52 at 20th from 52 Thai securities is ranked ด้วWith ยมูลTotal ค่าการซื ้อขาย 261.27 พันล้261.27 านดอลลาร์ รอ. Value of Share Trading (USDสBillion) • •มี8.45 มลู ค่าtimes เป็ น of8.45 เท่า ของSEPhilippine SE Philippine Indonesia • •มี3.32 มลู ค่times าเป็ น of 3.32 เท่า ของSEIndonesia SE Bursa • •มี2.88 มลู ค่าtimes เป็ น of 2.88 เท่าMalaysia ของ Bursa Malaysia • 1.42 times of Singapore • มีมลู ค่าเป็ น 1.42 เท่า ของExchange Singapore Exchange of Hong • •มี0.34 มลู ค่าtimes เป็ น 0.34 เท่าKong ของ Exchanges Hong Kong Exchanges

0 Source:

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Source: WFE Note: Thailand trading value includes SET & mai Note : JPX - Osaka SE: On 16 July 2013, Osaka SE cash equity products were listed on Tokyo SE JPX - Tokyo SE: On 16 July 2013, Osaka SE cash equity products were listed on Tokyo SE Total excludes Osaka to avoid double counting with Tokyo

9,000

EYE ON EXCHANGES

PRODUCT OVERVIEW

A Coming Together Of Exchanges In light of changing regulation and with increasing collaboration between exchanges, Roland Schwinn, Executive Director and Head of Business Development Asia and Middle East of Eurex, looks at what is happening in Asia, and what Eurex is doing to help. What are the major challenges for derivatives market participants and how does Eurex Group address them? Far-fetching regulatory changes were suggested by the G20 in 2008, and a wide range of new rules that aim to increase transparency and efficiency of the OTC derivatives markets have been issued for all major financial markets. In the European Union, the rules include OTC derivatives to be centrally cleared on CCPs. All G20 jurisdictions including Japan and Korea, as well as Singapore and Hong Kong have agreed to implement similar guidelines. This affects the Asian markets in the same way as US and Europe. Market participants worldwide are required to implement fundamental changes in their business models, and this puts infrastructure providers on the spot as well. In parallel to having actively participated in developing the new regulatory framework, our clearinghouse Eurex Clearing AG also has defined a strategic roadmap back in 2010. This Clearing Roadmap, as we call it, has prepared us and our customers for the upcoming challenges. It is our unique value proposition to offer solutions for the new requirements as quickly as possible. In Asia, Eurex Clearing has received growing customer interest and has therefore started to prepare for regulatory approvals of the Clearing House, so that we are able to offer Clearing Memberships in several Asian jurisdictions. In addition, we already offer many services that can help clients to oversee and manage risk. For example, with our EurexOTC Trade Entry Services, we offer a well-established suite of centrally cleared contracts that are equivalent to

22 GLOBALTRADING

Roland Schwinn, Executive Director and Head of Business Development Asia and Middle East of Eurex

common OTC contracts and meet market needs for the clearing of OTC transactions, reduced counterparty risk, margin and collateral efficiencies and legal certainty. The focus here lies on providing more robust protection, establishing greater efficiencies and setting a platform for growth and further advancements for our world-class clearing services. We also offer a new portfolio-based risk management approach – Eurex Clearing Prisma – for more accurate risk netting effects for listed, and between listed and OTC positions. This also means that Eurex Clearing Prisma will allow cross-margining between listed and OTC derivatives in a single methodology, improving capital and operational efficiency. Depending on the customers portfolio, you will be able to see margin efficiencies of more than 70 percent. Additionally, our Enhanced Risk Solution provides Clearing and Non-Clearing Members with direct access to our real-time risk monitoring system and provides real-time risk data across all markets cleared by Eurex Clearing.

PRODUCT OVERVIEW Global exchanges are constantly expanding their asset class coverage. What added values do these asset classes bring to our market participants? The offer of a well diversified range of asset classes helps market participants to manage their risk and portfolio more efficiently and creates additional opportunities for hedging and spreading. Our fixed income derivatives, for example, are the world’s most heavily traded fixed income derivatives. With these products our clients can trade the European yield curve. Eurex’ launch of 10-year Italian government bond futures (FBTP) in 2009 and 10year French government bond futures (FOAT) in 2012 has been very successful, and the offer has been gradually completed by further contracts on shorter maturities. To give you an impression, more than 48,000 contracts on OAT futures contract were traded on average per day in the first half of 2013. Other benchmarks to be traded at Eurex Exchange are Futures and Options on MSCI indexes. Here our offer covers the entire world including the developed Asian markets outside Japan and Korea, as well as Asian emerging markets like China, Thailand, India, and Russia. In June 2008, we were the first exchange to list dividend futures: the EURO STOXX 50 Index Dividend Futures. The contract quickly established itself as a benchmark and has successfully captured most of the dividend swaps market in Europe. Today we offer exchange-listed dividend futures

on over 80 of the largest Eurozone and panEuropean companies, thus creating an important addition to the existing over-the-counter offering. Our customers enjoy the benefits of on-exchange trading, mainly due to the ability to open a position with one counterparty and closing it against another and with the central counterparty (CCP) in between. Eurex also guarantees the efficient handling of corporate actions and a daily mark-to-market. Implied volatility is also highly interesting as an asset class in itself and we offer volatility index products that are attractive tools for investors such as equity fund managers. Our VSTOXX futures and options have enjoyed growing popularity with clients, who appreciate the transparency and liquidity of listed products. Our products can be used to hedge against a market sell-off or to gain exposure to an equity market rally. VSTOXX Futures and Options are simple to trade, and expire against a volatility forecast that is derived from the market prices of EURO STOXX 50 index options. How is Eurex working together with the Asian exchanges and how do our market participants benefit from these cooperation? Asian markets offer enormous potential and we are strongly committed to engaging in the region over the long haul. That is why we have at a very early stage built on co-operations and partnerships with exchanges in the Asia-Pacific region. Our cooperation with the Korea Exchange (KRX)

Eurex KOSPI Product – Traded Contracts

EYE ON EXCHANGES

PRODUCT OVERVIEW has been a resounding success and has helped us to build up trust in this important region. We recently celebrated the third birthday of our Eurex/KRX Link. And we are proud to say that the resulting Eurex KOSPI Product continues to be very successful. On 6 September 2013 we saw a record high of 247,416 contracts and the average daily volume for 2013 is now around 84,000. The number of active end customers has increased further in the past twelve months, as has the number of direct Eurex and KRX participants. Whereas nine KRX and Eurex participants were trading the Eurex KOSPI Product at launch, there are now 20 Eurex Exchange and 23 KRX participants. Four more KRX and Eurex participants are currently in the admission process. At the beginning of this year we signed a cooperation agreement with TAIFEX, the Taiwan Futures Exchange. As a first step, Eurex will list daily futures on TAIEX options and TAIEX futures in the near future. Our members will benefit from direct access to one of the most successful derivatives contracts in Asia, while Taiwanese market participants will have the opportunity to trade Taiwan’s most liquid index derivatives contracts during Taiwanese after hours. And, of course, we also aim to attract new Eurex customers for TAIEX products outside of Taiwan and increase the interest for Eurex products from Asia-Pacific. Another example is the linkage of our co-location center in Asia with the Singapore Exchange (SGX) to offer our respective customers an easier and more cost-effective access to both markets. We have also agreed earlier this year on a technology partnership with the Bombay Stock Exchange whereby we provide the BSE with our new trading architecture T7, making the BSE together with the International Securities Exchange in New York (ISE), one of the first worldwide users of this new platform. What educational and training initiatives is Eurex undertaking in Asia and what long term impact will these education and collaborative initiatives have on the markets in Asia? In August 2010 we launched the “Asia Training & Education Initiative” is based on building partnerships and providing know-how to industry professionals. The initiative currently covers China, Hong Kong, Taiwan, Singapore, India, Japan,

24 GLOBALTRADING

the United Arab Emirates, Malaysia and Australia. In all these markets we offer regular educational training about European markets and derivatives trading for trading and investment professionals as well as to young academics. By joining forces with educational institutes such as the Chinese University of Hong Kong, the Shanghai Jiao Tong University/Shanghai Advanced Institute of Finance (SAIF) and the National Taiwan University (NTU) and others, we provide essential information about the European market structure and the market models of Eurex, to our customers of tomorrow. Another example is the cooperation with the Singapore Management University (SMU), Singapore’s first public-funded autonomous university. We will grant access to high-quality market data in real-time what will surely enrich the learning experience for all students of the SMU Master of Science in Quantitative Finance programme. With the China Futures Association (CFA), for example, we have successfully organised trainings in China and Germany. In May this year a delegation of 45 financial analysts and traders from Chinese futures firms attended a three week training program in Frankfurt. Over 5,000 participants have already joined the programs held by experienced traders from trading companies, academic lecturers from universities and dedicated Eurex staff. As these initiatives will be extended to Korea soon with additional training to be offered in markets such as India, China and Malaysia. We also will continue joint business development and marketing activities with major brokerage and clearing partners in Asia in order to better serve the needs of institutional investors. It is my profound conviction that we will only be successful through knowledge exchange. We are aiming to intensify our partnerships in Asia and I am personally looking forward to act jointly with new cooperation partners.

www.eurexchange.asia

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