November 2006 HSBC Securities Services Middle East Securities Services in MENA Markets a Comparison...

November 2006

HSBC Securities ServicesMiddle East

Securities Services in MENA Marketsa Comparison with International Benchmarks

Agenda

• Middle East Capital Markets: An Overview

• Middle East markets and G30 recommendations – A comparison

• Suggested improvements for MENA markets

HSBC’s Custody and Clearing Global Network

Bahrain Mauritius

EgyptPalestinian

Autonomous Area

Jordan Qatar

Lebanon Saudi Arabia

Oman United Arab Emirates

Greece UAE - DIFX

Kuwait Turkey

Malta

Australia Malaysia

Bangladesh New Zealand

Hong Kong Philippines

India Singapore

Indonesia Sri Lanka

Japan Taiwan

Kazakhstan Thailand

Korea VietnamMainland China

(Shenzhen, Shanghai)

Argentina Bermuda

Brazil M exico

Middle East/Mediterranean

Asia Pacific

Americas

covers 37 markets of which 11 are in the Middle East

HSBC’s global network includes 9,500 offices in 76 countries and territories

Middle East Capital Markets- An Overview

The Region – Economy and Capital Market

• Market cap more than USD 1 Trn.• Key drivers

High oil price, creating huge liquidity Repatriation of Arab money back to the Gulf Diversification and privatisation efforts

• More stocks are opening up for foreign investors – some countries allow up to 100%, left to the discretion of the companies

• Stable exchange rate, no restrictions on repatriation• No tax in most countries• Electronic trading, stocks held in dematerialised form • Significant growth (assets - 200%, trxns 140% over 2004)

• Needed – more robust regulations, institutional investors, international settlement and custody practices

The Region – Market Settlement features

• Account structureSegregated accounts - Beneficial owner marketsOmnibus account structure not allowed

Impact: Longer time to market, increased paperwork and costs

• Settlement practiceSD varies from T to T+3Stock moves on T, cash on SDTwo accounts – depository and trading (broker access)Before trading, stock should be in trading accountHence no fails, but little scope to control movement of stock after trade – risk for sale trades

Impact: Settlement exposure, inadequate custodial control, front running risk

The Region – Market Settlement features

• Securities Lending No short sales, no stock lending Securities lending announced in some markets but yet to

take off

Impact: Low volumes and portfolio yields

• Custodian services Market settlement between brokers, not with custodian Role of custodian not well understood, but changing

Impact: Inadequate risk management

Typical Structures for Foreign Institutional Investors (FIIs)

FII

International Broker

Local market settlement

Global Custodian

Local Sub-Custodian Local Broker

Middle East markets and G30 recommendations –

A comparison

G30 – Recommendations - 2003

Eliminate paper and

automate

• Eliminate issuance, use, transfer, and retention of paper certificates

• Market participants to automate elements of process such as confirmations and trade allocations.

• Use of electronic communication

• Avoid duplicate recording of data and manual addition of information

Creating a strengthened, interoperable Global Network


Eliminate paper and

automate

• Dematerialized securities

• Issuance of electronic trade notes in MT515 format to facilitate STP

• Online connectivity to depositories



Eliminate paper and

automate





Harmonize messaging

standards &

communication

protocols

• Adopt ISO15022 as global standard for straight through securities messaging


Eliminate paper and

automate




Harmonize messaging

standards &

communication

protocols

• Adopt ISO15022 as global standard for straight through securities messaging –

to be used across all market participants to achieve 100% STP



Eliminate paper and

automate




Harmonize messaging

standards &

communication

protocols




Develop and

implement reference

data standards

• Identify, develop and adopt universal securities, counter party and relevant generic reference data standards

• Issuers, exchanges to make all relevant information available to market for a fair price and timely basis


Eliminate paper and

automate




Harmonize messaging

standards &

communication

protocols




Develop and

implement reference

data standards

• All ME markets should make use of International Securities Identification Numbers(ISINs) for securities transactions

• A central regional authority should be appointed and entrusted with the

function of assigning ISINs for all Middle east listed securities


Eliminate paper and

automate




Harmonize messaging

standards &

communication

protocols




Develop and

implement reference

data standards




Synchronize timing

between clearing,

settlement, and

payment systems

• Operation of payments and forex systems should not reduce efficiency or increase risk in the clearing and settlement systems and vice versa.

• Develop a comprehensive action plan to increase efficiency and safety of cross border securities transactions


Eliminate paper and

automate




Harmonize messaging

standards &

communication

protocols




Develop and

implement reference

data standards




Synchronize timing

between clearing,

settlement, and

payment systems

• The Middle East markets are not true DVP markets as there is no simultaneous

cash and securities settlements.

• Several Middle East markets settle direct with brokers as against the custodianswho are the settlement agents appointed by institutional investors.


Automate and

standardize

institutional trade

matching

• Market participants to collectively develop and use fully compatible and industry accepted technical and market practice standards for automated

confirmation and agreement of institutional trade details on the day of trade.



Automate and

standardize

institutional trade

matching

• Trades executed by brokers on the exchange auto match and flow into the depository systems for settlement.

• Pre-matching of trades between brokers and custodian is upon receipt ofclient instructions and broker trade note via facsimile.



Automate and

standardize

institutional trade

matching




Expand the use of

central counterparties

• Assess the potentially substantial risk reduction and efficiency improvementsof using a central counter party.


Automate and

standardize

institutional trade

matching



Expand the use of


• The clearing house run by exchanges in the Middle East should provide acentral counter party system that will guarantee that trades between membersare settled and eliminate default risk.



Automate and

standardize

institutional trade

matching



Expand the use of




Permit Securities

Lending and

borrowing

• Relevant authorities should permit securities lending and borrowing as a method for expediting the settlement of securities transactions.


Automate and

standardize

institutional trade

matching



Expand the use of




Permit Securities

Lending and

borrowing

• Securities lending and borrowing is not permitted in all ME markets

• Lending allows increase in portfolio yields while maintaining ownershipbenefits and related entitlements on lent securities.

• Borrowing avoids failed trades & reduces financing costs of failed settlements


Automate and

standardize

institutional trade

matching



Expand the use of




Permit Securities

Lending and

borrowing




Automate and

standardize asset

servicing processes

• Market participants to advise investors all details of corporate events in an automated, timely manner and in compliance with industry standards.

• Harmonize and make transparent the processes, documentation andcommunication of information connected with foreign ownership restrictions


Automate and

standardize

institutional trade

matching



Expand the use of




Permit Securities

Lending and

borrowing




Automate and

standardize asset

servicing processes

• Corporate event information is sometimes delayed on exchange websites and if available are often in Arabic that involves translation delays and thereby delayed relay of information to investors.

• Foreign ownership limits are monitored by the exchanges/depositories


Financial integrity and

risk management

practices

• Settlement and clearing service providers should have in place risk management processes to enable them conduct business in safe, sound and prudent manner.

• Users of services of clearing and settlement service providers must establishrobust due diligence procedures and counter party risk management controls.

Mitigating Risk


Financial integrity and

risk management

practices

• Due diligence should be carried out on settlement participants both upfront,while admitting for membership and ongoing.

• In case custodian is settling the trade, broker limits should be blocked tillcustodian confirms the trade

Mitigating Risk


Ensure financial

integrity of clearing

and settlement service

providers



Mitigating Risk

Ensure final,

simultaneous transfer

and availability of

assets

• Link securities transfers to fund transfers in a way that achieves effectivedelivery versus payment (DVP).

• Make transparent at which stage finality of transfer is achieved with rules thatenable the receiver to re-use securities and cash without further delay.


Ensure financial



providers



Mitigating Risk

Ensure final,


and availability of

assets

• ME markets do not practice a true delivery versus payment (DVP) settlement system – stock moves on T, cash moves on T+2/3

• In most markets, securities move out on trade date itself without confirmation of investor.

• Concept of trading account reduces investor control over his holdings.


Ensure financial



providers



Mitigating Risk

Ensure final,


and availability of

assets




Ensure effective

business continuity

and disaster recovery

planning

• All market participants must regularly review, update and test their business continuity and disaster recovery plans as well as those of a systemicallyimportant institution.

• Plans should be robust to ensure with reasonable certainty that critical operations will continue with high level of integrity following disruption.


Ensure financial



providers



Mitigating Risk

Ensure final,


and availability of

assets




Ensure effective

business continuity


planning

• While the depositories and exchanges have business continuity and disaster recovery plans, it is difficult to confirm the robustness of these plans in absence of testing results.

• Regulators must encourage the process of industry wide contingency planning.


Ensure financial



providers



Mitigating Risk

Ensure final,


and availability of

assets




Ensure effective

business continuity


planning



Advance legal

certainty over rights to

securities, cash or

collateral

• Market participants must be able to determine what law defines and governstheir rights to securities, cash or collateral in a clearing and settlement system.


Ensure financial



providers



Mitigating Risk

Ensure final,


and availability of

assets




Ensure effective

business continuity


planning



Advance legal

certainty over rights to

securities, cash or

collateral

• Legal framework, particularly with respect to collateral needs improvement

Suggested improvements for MENA markets

Best practices of international markets

• Effective securities market rules and regulations

• Access to foreign institutional investors

• Well defined roles of market intermediaries• Active involvement of market participants in market

development and regulatory initiatives

• Robust risk management systems

• Effective business continuity and disaster recovery

planning

Suggested steps for MENA markets

• Simplified account opening procedures – currently some markets require notarization and consularization of documents.

• Facilitate omnibus account structure

• Recognition of sub-custodians for institutional investors

• DVP settlement with simultaneous settlement of cash and securities

• Settlement should be controlled by custodian

• Restrict access to client holdings to authorized agents of the client

• Direct and electronic link to depository systems

• Electronic fund transfer and income payment infrastructure

• No requirements of pre-funding or pre-advice

International investor requirements…

Account Administration

MarketNews

CorporateActions

IncomeCollection

24X7

Client

Services

Der

ivat

ives

Reporting

Taxa

tionTreasury

Cash M

gmt

TradeSettlement

Clearing

November 2006 HSBC Securities Services Middle East Securities Services in MENA Markets a Comparison...

Documents

Transcript of November 2006 HSBC Securities Services Middle East Securities Services in MENA Markets a Comparison...