THE MARKET THAT NEVER

SLEEPS: HOW DO WE GET

THERE?Richard R. Lindsey

Callcott Group LLC

May 14, 2008

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LC

, 2008

KEY IDEAS

� National/Local Identity

� Differing Regulatory Schemes

� Trading Issues

� Clearance and Settlement Issues

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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?

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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).

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LC

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OVER SIMPLIFIED VIEW OF

SECURITIES TRADING

SecuritiesMarket

Investor

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, 2008

ACTUAL CYCLE OF SECURITIES

TRADING

Financial

IntermediaryInvestor

Clearing

&

Settlement

Securities

Market

Financial

Intermediary

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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

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allcott G

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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

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, 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

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, 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

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, 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

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, 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

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allcott G

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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

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allcott G

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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””

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allcott G

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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

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allcott G

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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