Syn Market Liquidity Efficiency in Market Infrastructure Donal

Syn~ Market Liquidity: Efficiency in Market Infrastructure Donal O’Brien November 2006 Atos Euronext Market Solutions

Market Liquidity: Agenda Introduction Operating Model Efficiency • • • Clearing Model Settlement Model Depository Management - Hybrid Model Registry Management Short-Selling Controls Infrastructure Efficiency • • • Localisation Easy Deployment Integration with Exchanges and Banks Integration with Brokers and Custodians Whole Market Infrastructure Atos Euronext Market Solutions 2

Market Liquidity: AEMS - Ownership Premier Global IT Services Provider Leading Global Exchange 50: 50 ownership Atos Origin and Euronext Atos Euronext Market Solutions 3

Market Liquidity: AEMS - What do we do? IT Services to Exchanges, Clearing houses, Banks and Brokers • • • Financial IT Solutions Global Data Centre Operations Dedicated Financial Network for Trading Our Product Range • • • Regulatory: Exchange: Clearing & Settlement Capital Markets Interbanking Atos Euronext Market Solutions ARAMIS NSC, CONNECT Syn~Clear, CLEARING 21, SARA Syn~Broker, Investiciel, Apollo Crystal, Diamis 4

Market Liquidity: AEMS Global Service Provision Montréal Casablanca BVM Tunis Toronto Euronext. liffe Euronext ICE Futures LCH. Clearnet Warsaw Beirut Amman Tehran Stock Exchange Winnipeg BOX BSX Minneapolis CME CBOT TFX Kansas City Board of Trade DIFX Muscat Securities Market BM&F Bovespa Bursa Malaysia NSC® Atos Euronext Market Solutions CONNECT® 5

Market Liquidity: Agenda Introduction Operating Model Efficiency • • • Clearing Model Settlement Model Depository Management - Hybrid Model Registry Management Short-Selling Controls Infrastructure Efficiency • • • Localisation Easy Deployment Integration with Exchanges and Banks Integration with Brokers and Custodians Whole Market Infrastructure Atos Euronext Market Solutions 6

Market Liquidity: Clearing Model Clearing House: Controls risk for open trades between Trade and Settlement Date Risks: • • Buyer does not provide Cash Seller does not provide Securities Trade Novation into Clearing House name • • • Anonymity of Settlement Liquidity of Market Allows efficient net settlement of securities and cash Atos Euronext Market Solutions 7

Market Liquidity: Clearing Model Margin Requirement Collateral Management • Member firm specific account structure • Initial Margin Calculation – Risk of change in price going forward • Pledge of Securities or Cash • Intra-day Margin Calls • Variation Margin Calculation – Risk of change in price since trade was done • Multi-asset offsets Atos Euronext Market Solutions 8

Market Liquidity: Settlement Models Free of Payment Settlement • • High Risk Inefficient • No Guarantee Three ‘Against Payment’ Models: • • • DVP 1: Gross settlement of Securities and Cash DVP 2: Gross settlement of Securities, Net Settlement of Cash DVP 3: Net settlement of Securities and Cash CSD Provides: • • • Guaranteed Settlement Efficiency Lower Cost OTC Markets: Exchanges: Atos Euronext Market Solutions Typically DVP 1 settlement Move towards DVP 2 or DVP 3 Settlement 9

Market Liquidity: Settlement Efficiency Settlement Cycle • • • Net Settlement by Broker (Securities and Cash) Instruction Generation Settlement Cycles – • Securities Blocked until Cash Settled via RTGS Cash Delivery Management – – – ISO 15022 Cash Instructions sent to Central/Clearing Banks (RTGS) Full response tracking Unblocking and settlement of Securities Fails Management • • Settlement Tracking Lending Pools and Auto-Borrowing Buy-In Process Compensation Atos Euronext Market Solutions 10

Market Liquidity: Depository Management Position-Keeping Models: • Direct Holding – – • Indirect Holding – • Final Investor is directly known to the Issuer and the CSD (Current Model) Final Investor known only to Broker (European and US Model) Hybrid Model – Final Investor position with Broker known to the Issuer and the CSD Advantages of Hybrid Model: • • • Full disclosure of Final Investor known at CSD Corporate Action processing well defined Allows efficient Netting at Broker level for DVP 3 settlement Atos Euronext Market Solutions 11

Market Liquidity: Registry Management Central Registry held at CSD Real-time Investor Positions • • • Tradeable Blocked Borrowed and Lent Encumbered Pledged Held for Inheritance Support for Corporate Actions • • Benefits, Re-orgs, Advices and IPOs Calculation of Entitlements Transformation of Pending Trades Cash Distribution Atos Euronext Market Solutions 12

Market Liquidity: Short-Selling Controls Short-Selling in US and Europe: • • Trade-date position allowed to be negative Automatic overnight borrow based upon projected Settlement-date position Trade allowed to Fail (as of Settlement Date) Claim process for fails Short-Selling Restrictions: • • Today – No Short-Selling (should be restricted within Exchange system) Tomorrow – Allow Sell of Security before Buy is Settled Uncleared Selling Levels 1. 2. 3. No Short Selling allowed Short Sell allowed on Trade Date but checks for pending Buy Full Short Selling Allowed (European Model) Control Systems: CSD Pledging Fee • Fee calculated on Short Position between Trade and Settlement Date • Configurable rate to control Market Liquidity Atos Euronext Market Solutions 13

Market Liquidity: Agenda Introduction Operating Model Efficiency • • • Clearing Model Settlement Model Depository Management - Hybrid Model Registry Management Short-Selling Controls Infrastructure Efficiency • • • Localisation Easy Deployment Integration with Exchanges and Banks Integration with Brokers and Custodians Whole Market Infrastructure Atos Euronext Market Solutions 14

Market Liquidity: Localisation Multiple Languages • Arabic, Farsi, English, French, Spanish … Multiple Calendars • • Gregorian, Persian Holidays Settlement Date Intervals Bond Accruals Ownership point • Trade date vs. Settlement Date • Corporate actions • Registry updates Atos Euronext Market Solutions 15

Market Liquidity: Easy Deployment Core Processing Infrastructure • • • Grid Processing – Scale Linux / Windows – Low-cost Service Oriented Architectures – Flexibility – – – Lifecycle Models Workflow Messaging (XML, ISO 15022, FIX) Web-based Front Ends • • Zero Footprint Scales Reporting and Queries • • Denormalised relational model of all data (separate from the OLTP) Standardised third-party Report Writer support Atos Euronext Market Solutions 16

Market Liquidity: Integration with Exchanges and Banks Atos Euronext Market Solutions 17

Market Liquidity: Integration with Brokers and Custodians Atos Euronext Market Solutions 18

Market Liquidity: Whole Market Infrastructure Entire Market Infrastructure • • • Exchange Systems Clearing Systems CSD Systems On-line Client Portals Brokerage Systems Central ASP Provision • • Shared infrastructure - Low cost Standardised Data Centre Management - Low risk Large infrastructure – Inherent scale Easily deployed Regulatory and Market Changes Atos Euronext Market Solutions 19

Market Liquidity: Questions Atos Euronext Market Solutions 20