The Capital Markets Linkages among the OIC Member Countries OIC Member States’ Stock Exchanges Forum Istanbul, October 2-3, 2010

Joint Work by the Capital Markets Linkages and Post-Trade Services Task Forces At the last Working Committee meeting held in Abu Dhabi, a decision has been taken for “an inter-committee meeting to be held between the task forces for the OIC Capital Markets Linkages and Post-trade Services with regards to the work carried out on linkages.” With regard to this decision, both Task Forces worked together and prepared this joint work, including a guideline on how to establish a cross-trading environment among the OIC member countries. 2

3 Necessitates of Exchanges Linkages Liquidity is one of the most essential elements for a strong link between stock markets. Possible benefits associated with regional integration of exchanges are:  Diversified risk in a wider market ;  More efficient and competitive markets ;  lower costs and higher returns ;  Increased cross-border capital flows ;  Pooling the resources of fragmented capital markets could boost liquidity and the ability of these markets to mobilize local and international capital for development ;  Investors would gain access to a broader range of shares;  Issuers would gain access to a larger number of investors, and  Reduction of the risk of market volatility due to increase in the size of the markets.

Goal and Scope of the Capital Markets Linkage To provide local investors in the OIC Member Countries with easy access to other OIC members’ capital markets in terms of operational efficiency, cost effectiveness, advanced technological and safe environment  To build a common understanding of market linkages in the OIC Member Countries’ stock exchanges  To overcome barriers impeding to invest in the OIC capital markets  To create awareness among the OIC Member Countries on benefits and costs of market linkages 4

5  CME Group and BM&Bovespa (iLink)  LATIBEX (among Five Latin America Countries  Link up Markets (among 10 leading CSDs spread from Europe to South Africa  ADX Linkage with DFM and MSM  ASEAN Trading Link  Eurex, the International Securities Exchange (ISE), and The Options Clearing Corporation (OCC) Some Models of linkages among Capital Markets

Results of the Questionnaire I ( made by the Post-Trade Services Task Force) To explore intentions and possibilities for establishing market linkages among stock exchanges and post-trading institutions in the OIC member countries Replying institutions  Abu Dhabi Stock Exchange  Amman Stock Exchange  Beirut Stock Exchange  Bursa Malaysia  Central Registry Agency, Turkey  Egypt Stock Exchange  Istanbul Stock Exchange  Kyrgyz Stock Exchange  MCSD, Egypt  Tadawul Stock Exchange  Takasbank, Turkey  Tehran Stock Exchange 6

Results of the Questionnaire I (made by the Post-Trade Services Task Force) All the replying members denoted that;  Their investors have interest for investing in other OIC member states’ capital markets.  A market access to other OIC member states’ capital markets would attract their investors.  They have intentions to establish capital market linkages and/or correspondent relationships with the other OIC member states’ capital market institutions. Some members stated that there are some barriers to establish a link/relationship with the correspondent institutions operating in OIC member states. 7

Results of the Questionnaire I (made by the Post-Trade Services Task Force) Current direct links (only for members replied the questionnaire) Abu Dhabi SE -DFM Egypt SE - London SE MCSD – SIS Swiss Clearing, Link-up Markets Europe Current correspondent accounts (only for members replied the questionnaire) Takasbank – Euroclear MCSD – El Kuwait, Mid Clear Current MoUs (only for members replied the questionnaire) Among Stock Exchanges Among Post Trade Instititutions 8

9 Current Linkage Models I Asean LinkDFM/ADX/MSM LinkiLink Members Thailand, Singapore, Malaysia, the Philippines, Indonesia, Vietnam Dubai, Abu Dhabi, Muscat CME, BM&FBOVESPA Legal Status Exchanges remain as independant legal entities Infrastructure Management Independent (third party) Not independent (jointly managed) Not independent (jointly managed) Regulations Local regulations Settlement and Custody Home country clearing houses Home country clearing houses Brokers Local brokerage houses

10 Current Linkage Models II Asean LinkDFM/ADX/MSM LinkiLink Trading securities 30 blue-chip stocks from each exchange will form the “Asean Bulletin Board”. All stocksDerivatives products Listing securities Home country exchange rule Full Harmonisation No need Incentives n.a.n.a Brokerage firms receive an amount eq. to 10% of the fees (exchange and registration fees) on the executed trades

11 Current Linkage Models III Asean LinkDFM/ADX/MSM LinkiLink Order Routing Yes Direct Market Access Yes Algoritmic trading n.a. Yes

12 Results of the Questionnaire II (Made by the OIC Capital Market Linkage Task Force) To discover opinions of OIC member countries stock exchanges and post- trading institutions for establishing market linkages Replying Exchanges:  Amman Stock Exchange  Istanbul Stock Exchange  Palestine Exchange  Kyrgyz Stock Exchange  Tadawul Stock Exchange  Tehran Stock Exchange

13 Results of the Questionnaire II (Made by the OIC Capital Market Linkage Task Force)  The main points that can be extracted from the replying exchanges are:  Almost all of replying exchanges have DMA capabilities. DMA is a prerequisite and infrastructure for any international trading linkages.  There is no restriction for foreign ownership specially strategic ownership except for Kyrgyz in strategic ownership and Saudi Arabia that impose some restriction on non GCC investors.  Most of replying exchanges announced that currently, they don’t have a trading linkage but may set a plan for joining to a market link in the future.  There is no restriction (such as repatriation of principle and profit) on foreign investment by the replying members except Tadawul, even some of them offer encourages to attract foreign investors.  Almost all of replying exchanges have a desirable capabilities in the data dissemination through their web site or the data vendors.

14 Results of the Questionnaire II (Made by the OIC Capital Market Linkage Task Force) KyrgyzIstanbulPalestineTehranAmmanTadawul no restriction on some sectors and companies Some restriction on non Saudi Restriction on foreign investment no Tax on foreign investors No but there is a cross listing agreement with Kazakhstan no Current trading link N/A 67% of free float 45%5%48.6%2% Market cap belong to foreign investors noYes Strategic investment allowed to foreign investors

15 Results of the Questionnaire II (Made by the OIC Capital Market Linkage Task Force) KyrgyzIstanbulPalestineTehranAmmanTadawul no No but it is depend on companies article of association no20% For some companies 49% Holding threshold foreign investors In house developed electronic system HORIZON NASDAQ OMX ATOS Euronext NSC V900 NYSE Euronext NASDAQ OMX system Trading system YesnoYes Yes – has this capabilities Yes DMA Yes – Free in the process of signing agreement with Bloomberg Yes – Free but plan to be sold through data vendors Yes - Free Yes – Free through exchange web site Yes – Free data vendors Yes – Free through exchange web site Data disclosure through vendors or exchange

16 Results of the Questionnaire II (Made by the OIC Capital Market Linkage Task Force) KyrgyzIstanbulPalestineTehranAmmanTadawul T+3 T+2T+0Clearance N/A Currently no plan No plans so farno May be in the future Plans for launch a trading linkage no No predetermined rule no Special rule for international link noYes Regulatory body permission

Main Specifications of the Proposed Model 17 Investor X Investor Y Country X Country Y Stock Exchange X Stock Exchange Y Gateway Order book Order router Having passed the risk criteria, the order is included in the order book The order routing system recognizes that it is an order related to the Stock Exchange Y market and routes it to the Stock Exchange Y Agreement Risk management Once the participant identified, the order is submitted to risk analysis, conducted by Brokerage House Y Brokerage House X Brokerage House Y Clearing&Settlement Brokerage House X signs an agreement with a brokerage house from Country Y, all trades via the e-link is cleared&settled through Brokerage House Y. through brokerage house X through a brokerage house 12 1 (copy sent to the brokerage house)

Main Specifications of the Proposed Model (continued) In the proposed model based on order-routing system, every exchange continues to operate on its own trading and post-trading systems. Current exchanges will be linked to each other through electronic linkages. In the proposed model based on order-routing system, every exchange continues to operate on its own trading and post-trading systems. Current exchanges will be linked to each other through electronic linkages. Local brokerage houses track the other exchanges via a single board/screen and trade directly through e-links, as if trading in their local exchanges. Local brokerage houses track the other exchanges via a single board/screen and trade directly through e-links, as if trading in their local exchanges. Currently effective licensing, trading and settlement mechanisms continue to be in force. Currently effective licensing, trading and settlement mechanisms continue to be in force. Stocks are traded on the home country exchanges where they are listed on single order book. This would not cause any liquidity loss. 18

Main Specifications of the Proposed Model (continued) It provides market access to the home country exchange for foreign brokerage houses No cross-membership is required Bilateral Agreements among intermediaries have a vital role. For this reason, the requirements of brokerage firms should be clarified and addressed. Bilateral Agreements among intermediaries have a vital role. For this reason, the requirements of brokerage firms should be clarified and addressed. Regulatory authorities and exchanges keep their enforcement power and status. Each participant is subject to its own regulations. Regulatory authorities and exchanges keep their enforcement power and status. Each participant is subject to its own regulations. It does not cause any conflict of interest among exchanges because of independent management structure. It does not cause any conflict of interest among exchanges because of independent management structure. 19

Main Specifications of the Proposed Model ( cont’d ) In the proposed model, No changes to the current set-up and no need for a new system development for the post trade services No changes to the current set-up and no need for a new system development for the post trade services Local brokerage house signs an agreement with a brokerage house which is a member of another OIC member stock exchange in which the trade is executed Local brokerage house signs an agreement with a brokerage house which is a member of another OIC member stock exchange in which the trade is executed Local brokerage house executes clearing & settlement of all its trades in that exchange through bilaterally agreed brokerage house Local brokerage house executes clearing & settlement of all its trades in that exchange through bilaterally agreed brokerage house Easy Implementation with minimal adaptation Potential future extensions; Opening bilateral correspondent accounts between CSDs would facilitate more efficient post trade operations Opening bilateral correspondent accounts between CSDs would facilitate more efficient post trade operations Setting up a linkage among CSDs in order to provide market participants with a single point for access Setting up a linkage among CSDs in order to provide market participants with a single point for access 20

Issues to be considered Regulation Barriers Regulation Barriers International capital flows International capital flows Trading rules Trading rules Post-trading infrastructure Post-trading infrastructure Risk management Risk management Public disclosure Public disclosure Taxation Taxation Bilateral agreements among the intermediaries Bilateral agreements among the intermediaries Technological Infrastructure Technological Infrastructure Capital market institutions` adequacy (order-routing capability) Capital market institutions` adequacy (order-routing capability) Availability of efficient telecommunication services Availability of efficient telecommunication services 21

Issues to be considered (cont’d) Financing Financing Costs Costs Software Software Data dissemination Data dissemination Consulting services Consulting services Marketing Marketing Sources of funding Sources of funding Member exchanges Member exchanges Post-trade institutions Post-trade institutions Intermediary institutions Intermediary institutions Multilateral institutions (Islamic Development Bank etc.) Multilateral institutions (Islamic Development Bank etc.) 22

23 Strategic View Electronic links may first be established between the relatively developed exchanges, and then could be expanded by the participation of the other OIC members’ stock exchanges. Each participant exchange is expected to allow blue-chip stocks to be traded through this platform. The list of selected stocks could be made available on data vendors, preferably in real-time. The management of the IT infrastructure should be carried out by an independent technology provider. It is of crucial importance to have the long-term perspective and to take the key steps towards such closer types of cooperations, which will serve the global presence, awareness and competitiveness of OIC capital markets.

The Way Forward To make feasibility studies on issues to be considered for the proposed model  To determine dedicated candidates to work for the feasibility studies  To include IT people into the feasibility studies  To hold regular task force meetings to enforce the members` attendance to create an group  To take consultancy services Marketing  To organise “Capital Markets Linkages Conference” in 2011  To organise an OIC Fair/Convention Companies - top 10 Capital market institutions Technology providers Institutional investors Signing MOU among OIC Member Countries` stock exchanges and related institutions encourages and enables them to persuade the project. 24

25  Signing a MOU among the interested exchanges outlines their commitment to persuade the mutual cooperations that focus on designing, testing and implementing the suggested E-Trading link.  Some General Guiding Principles that can be included in the proposed MOU are:  Exchanges shall act and conclude on the agreement by their good will and based on their governing rules and regulations.  Exchanges will subsequently encourage and guide their brokers for concluding bilateral or multilateral agreements to facilitate retail or institutional investment in the foreign exchange. Signing a MOU

26 Signing a MOU (cont’d)  Exchanges, with due diligence, shall act for implementation of the agreement and smoothing the ground to expedite launching of the OIC Capital Market Linkage.  The agreement is considered as an object for expanding the cooperation and transparency of the exchanges' measures, as well as a way to tackle the barriers in front of investors and brokers to participate in the OIC Capital Market Linkage.