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THE MARKET THAT NEVER
SLEEPS: HOW DO WE GET
THERE?Richard R. Lindsey
Callcott Group LLC
May 14, 2008
©C
allcott G
rou
p L
LC
, 2008
KEY IDEAS
� National/Local Identity
� Differing Regulatory Schemes
� Trading Issues
� Clearance and Settlement Issues
©C
allcott G
rou
p L
LC
, 2008
NATIONAL/LOCAL IDENTITY
� If you don’t have a stock exchange can you be a
“developed” country?
� If you have a stock exchange you want to protect
it.
� Are stock exchanges important to national
security?
� Or to the domestic economy?
©C
allcott G
rou
p L
LC
, 2008
DIFFERING REGULATORY SCHEMES
Regulation of:
�Securities
�Intermediaries
�Markets
Differs Widely
� Tied strongly to economic policy and “control”
over the economy (and, perhaps, investor
protection).
©C
allcott G
rou
p L
LC
, 2008
OVER SIMPLIFIED VIEW OF
SECURITIES TRADING
SecuritiesMarket
Investor
©C
allcott G
rou
p L
LC
, 2008
ACTUAL CYCLE OF SECURITIES
TRADING
Financial
IntermediaryInvestor
Clearing
&
Settlement
Securities
Market
Financial
Intermediary
©C
allcott G
rou
p L
LC
, 2008
MARKET LANDSCAPE CIRCA 2007
X
30 M
ar 0
6
29.16%%1243p bid
20 Nov 06
London Stock Exchange
3Nov03 SETSmm
Euro
NM.
AmsNuovo
Mercato
Neuer
Markt
closed
Sep 2002
Tech MARK Nouveau
Marche
MonepMat if
BelfoxIDEM
MAFF
Nov 01
Euronext
ownsLIFFE
Mef f
LCHUsers = 75.0%
LME = 5.4% + IPE = 1.9%
CLEARNETChicago Clearing 21
xclear(SIS)
MS
Interbolsa
ExpressII26 Jan 04
Monte
Titoli99%
owned by
BIG Dec 02
APKSIS Crest
VPCNewclearEuroclear +
Paris[Sicovam]
SCLV
+ AEX
+ BVLP
ASELUX
HEX
DeutscheBoerse
Paris Bourse
OM
GroupSpain
Holding
Comp
Vert ical
Silo
SWX
M ar 00
22 Sep 00 : incorporated22 Nov 01 : adopts
FTSE classif icat ion
Jiw ayNov 00-
Jan03 w ound up
NorexGEM 1
Note:1 GEM = Global Equity Market
Global alliance of 10 exchanges: NYSE, Euronext [Paris+Amsterdam+Brussells], Aust ralia, Hong Kong, Toronto, Mexico, San Paolo, Tokyo
The sett lement netw orkBridge
Key: Core trading plat form
Secondary exchange, ATS, Market segment
Derivat ives exchange
Cent ral counterparty
Other
Integrated t rading and sett lement
Proposed link Exist ing link
JV Nasdaq
EuroCCPLtd
EuroCCP
Ltd
3
De
c
01
NasdaqEurope
[Easdaq]
100%
virt-x
8 Jun 01-
26 Jun 03: s/h
vote to close
by 30 Nov 03
25 Jun 01
39%
Eurex
Clearing:Cash
Equit ies CCP
Apr 03
EOC owns Clearnet:19.4%
50%
50%
100%
X
X
virt -x mult i-CSD universe
Ownership
DTCC
Nasdaq+INET8 Dec 05 completed
26
Fe
b0
1
Eurex85 : 15
dbag:swx
DJ STOXX
classif icat ion
7 Mar 06 NYSEGroupNYSE Arca [Arca/PCX]
80.6%
3%
0.3% BIG
CCG
59% owned
by BIG
JSE
HK
CC
P 5
M
ay
0
3
MEFFacts as
CCP for
deriv
mkts
+ BEX
E U R O N E X T
NECIGEF + CIK +E U R O C L E A R
Euro
NM.
Belg
BorsaItaliana
Group
Wiener Boerse
Clearstream
OEKB
Irish SE
3Feb05
EurexCto Crest
Oslo
Copenh
agen
VPSISDCSD SA VP
ICEX3 Feb 03
31%
69%
SSE CCP
VPC CCP .NordClear .
100%
17.7%
HEX
clear
3
De
c
01
LSE Dutch29 Mar
delayed:
24 May 2004
DBAG Dutch
17 Nov
2003
OM X
Feb 05 4 Sep 03
X25 Nov
2003
LCH.Clearnet ef fect ive 22 Dec 2003
Vilnius
CSDL
54.5%
32%
30
M
ar
04
22 Apr 04
NCSD
26
F
eb
20
01
EDXJV
OMX
OTC
OTC
1 Oct 0415 Nov 04
13 Dec 04
20 Dec 04
3 May 06
JSE
Office of Fair Trading
29 Mar 05 referral
Federal Cartel Office MTS CC&G or LCH.Clearnet
ADEX
ADECH
Riga
Tallinn
LCSD
ECSD
Balt ic OM X
Macquarie Group8 Dec 05: 580p v 15 Dec
15 A
ug 05
X
ENXT 23 May 06 AGM
14.99% LSE
1175p,11 Apr 06
To 18.7% LSE1218p, 03 May 06
to 24.1%1248p 10 May
To 25.1%
1235.5p 19 May
DIFC19Apr06 1%3.48% 21May
Nasdaq9 Mar 06: 950p
ENXT + Borsa Ital
X
EurexUS: USFEMan Group27Jul06 70%
MTF: Chi-X
Firm: Inst inet
MTF: Equiduct
Exchange: Easdaq
MTF: European
Firms: 7 banks
BOAT: Report ing
Firms: 9 banks
BIDS: USA
Firms: 6 banks
X
7 N
ov 06
X15 Nov
06TokyoSELOI
31 Jan 07
India NSE
10 Jan 07
5%
Brazil
China
15%
others
Russia
10 F
eb
07
©C
allcott G
rou
p L
LC
, 2008
THREE PRIMARY CONSIDERATIONS
� The trading of non-US-registered securities in
the US
� Non-US-registered broker/dealers doing business
in the US
� Access to non-US-registered exchanges from the
US
©C
allcott G
rou
p L
LC
, 2008
NON-US REGISTERED SECURITIES
Concerned with:
� Comparability of reporting and disclosure
requirements
� Enforceability of anti-fraud provisions of US
securities laws
� GAAP reconciliation
� Sarbanes-Oxley compliance
©C
allcott G
rou
p L
LC
, 2008
US BROKER-DEALER
REGISTRATION
� Competency and integrity qualifications
�Member of a self regulatory organization
� Comply with:
�Prohibitions on fraud, deceit and manipulation
�Safeguarding of customer funds
�Rules about providing margin
�Maintaining capital adequacy standards
�Specific record keeping and reporting obligations
� Subject to SEC enforcement powers
©C
allcott G
rou
p L
LC
, 2008
NON-US REGISTERED BROKER-
DEALERS
15a-6 Controls
� Can execute only unsolicited orders
� Can solicit US institutional investors if
a US registered broker/dealer
intermediates contacts and executions
� Can solicit and transact with US
registered broker/dealers
©C
allcott G
rou
p L
LC
, 2008
US EXCHANGE REGISTRATION
� Transparency, access and evenhandedness
� Rules against market manipulation, insider
trading and sales of fraudulent securities
� Surveillance, trade reporting and enforcement of
rules
� Approval of trading rules/market design
� Consistent clearance and settlement system
� Subject to SEC regulation and enforcement
©C
allcott G
rou
p L
LC
, 2008
NON-US REGISTERED EXCHANGES
No-Action Letters Control
� Can conduct solicitation in the US limited to US registered broker/dealers and qualified institutional buyers (QIBs)
� Can link with a US registered exchange
� Boston-Montreal
� American-Toronto
� Midwest-Toronto
� Nasdaq-London
� Nasdaq-Singapore
©C
allcott G
rou
p L
LC
, 2008
EU REGIME FOR NON-EU
EXCHANGES
�Joint venture with an EU exchange
�Takeover of an EU exchange
�Application to an EU national authority to
operate within that national jurisdiction
�Application to an EU national authority to
operate throughout EU under “single
passport””
©C
allcott G
rou
p L
LC
, 2008
TRADING ISSUES
�Markets tend to operate where people are
awake – during normal business hours.
�Either:
� We have “round the clock” trading now,
or
� We need to “pass the book”, or
� We need to run trading “shifts”.
©C
allcott G
rou
p L
LC
, 2008
CLEARING AND SETTLEMENT
ISSUES
�STP does not currently exist within most
firms – need to “close the day”
Differences in:
�Regulations
�Mechanisms
�Cycles
�Costs
©C
allcott G
rou
p L
LC
, 2008
DOES IT MATTER?
�Market Cap of Top Three US Exchanges in World
Federation of Exchanges is 45% of Total
� US Companies Represent 60% of the Top 100
Global Companies
� US Investors Hold Approximately 10% of Their
Holdings in Foreign Equities
� Top 25 Pension Funds Hold Approximately 20%
of Their Funds in Foreign Equities
� US Investors Hold More EU Securities than Vice-
Versa
©C
allcott G
rou
p L
LC
, 2008
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