Towards an integrated Regional Stock Exchange System / by

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Towards An Integrated Regional Stock Exchange System

Regional Integration Operation Trading & Settlement System

By Marlon Yarde, General Manager Barbados Stock Exchange Inc.

Caribbean Connect: A High Level Symposium on the CSMEJune 28-30, 2006

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Content

• Objective• Current reality• Definition• Charting the Way

Forward Experiences Recommendation Benefits Hurdles to Overcome Hurdles set Aside The RIO Proposal

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Objective

A capital market that is:• Vibrant• Liquid• Transparent & fair• Efficient • Cost-effective• Well regulated• Predictable – consequences of actions are known

Where all participants achieve their objectives

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Objective

Participants:• Issuers • Investors • Intermediaries

Underlying factor – they all want to achieve their financial goals (wealth creation).

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Objective

Other participants:• Regulators• Central Banks• Stock Exchanges

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Current Reality

• 7 exchanges – Bahamas (19), Barbados (26), Eastern Caribbean (9), Guyana (0), Jamaica (42), Suriname (11) and Trinidad & Tobago (34).

• Relatively high transaction cost.• Low liquidity.• Relatively small number of listed companies• A few securities dominate trading on an

exchange.• Varying legislation and rules across the region• Cross-listing regime

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Definition

What do we mean by a single regional capital market:

“Stock market integration means, to us, that investors can buy and sell shares in those markets without restriction and that identical securities can be issued and traded at the same price across the markets after foreign exchange adjustment.” Phillip A. Wellons – Integration of Stock Exchanges in Europe, Asia, Canada and the U.S.

This is the essence of the regional capital market.

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Charting the Way Forward

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Experiences

• European Capital Market

• Inter-connected Stock Exchange of India Limited

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Recommendation

• CARICOM-wide connectivity using state-of-the-art technology connecting brokers (intermediaries);

• multiple markets through single network connectivity;

• a fair and well-informed market for financial securities;

• an internationally competitive market.

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Recommendation

FOCUSInterconnected/integrated stock exchanges

of the Region thereby creating a single capital market space for the Region.

Consistent with the goals of CSME

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Benefits

• Encourage optimum financing for regional firms• Increase the attractiveness of the region as an

area for investment – extra-regionally• Wealth creating opportunities for the people of

the region – increased investment opportunities• No need for cross-listing• Facilitate the realization of part of CSME goal –

of free movement of people, goods, services and capital - promote movement of capital across the region

EDUCATION - Key success factor

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Hurdles To Overcome

• Regulatory Oversight/Co-operation• Harmonized Legislation• Harmonized Rules (Listing, Trade Days,

Settlement Cycles, Settlement Currency, Reporting, Take-over code etc.)

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Hurdles To Overcome

• Dispute resolution• Business culture of debt vs. equity financing• Costs

Technology & Telecommunications not an issue

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Hurdles Set Aside

Current technologies will enable brokers at each brokerage house across the region to access

securities on the other exchanges. All brokers must first log on to their domiciled exchange in order to participate in the single regional capital

market

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RIO Proposal

Two Phases:Phase 1

Integration of the trading and clearing settlement of the 3 markets – Barbados, Jamaica and Trinidad & Tobago. (Approx. cost USD $60,000 plus expenses – 3 months).

Phase 2The opening of the market to other regional exchanges and the international markets via a fixed gateway & international order desk. (Approx. cost USD $85,000 plus expenses – 4 to 5 months).

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Proposal Elements

• NO Common Trading Platform– Trades are executed in the country or

exchange of issuance

• NO Central Depository or Clearing House – Settlement is with the country of issuance

• NO Cross-Border Memberships

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Proposal Elements

• NO Cross-Border Listings

• NO New Trading / Settlement Systems required

• NO broker or security selection issues

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Linked Trading Systems Advantages

• National identity maintained

• Improved price discovery

• All orders meet all other orders

• Provides an international Best Bid /Offer

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Linked Automated Trading

Preserve your ability to set business direction.

RIO NetworkRIO Network

Eastern CaribbeanEastern Caribbean

JamaicaJamaica

BarbadosBarbados

TrinidadTrinidad

CaymanCayman

Dutch West IndiesDutch West Indies

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Give Non-Residents and Foreigners Access to the RIO marketplace via Internet

RIO makes this Region an International Player.

RIO BrokersRIO BrokersOrder Entry

InternetPort

AutomatedAutomatedTradingTrading

MarketMarketDataData

CH/DeposiCH/Depositorytory

Local Local TraderTrader

BrowseTerminal

Foreign-based non-resident Foreign-based non-resident or otheror other

International TraderInternational Trader

InternetRIO

Foreign TraderForeign Trader

OrderRouting

Affirmations

Foreign BrokerForeign Broker

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Advantages to Linked Markets

• Local markets continue to exist in their present form

• Simplest alternative, easiest to implement• All IT requirements are developed with current

staffs• Operating costs within current structure• Moderate or minimal communications

requirements• Maintain existing trading and settlement systems

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How it would operate

• RIO’s network would collect from each Participant exchange - their quotes, orders and trade execution data

• RIO’s network would disseminate this data to all Participants

• Brokers can trade on any Participating exchange from its own “country” exchange system and settle all trades in their home country

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How it would operate (cont.)

• Each Participant exchange (and Depository) would link its systems to the RIO network

• Buyers and sellers would settle with their local Depository

• Each country would maintain its own trading and settlement rules and operational procedures

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Market Data Dissemination• In addition to each market sending its bid, offer

and last sale data to RIO network, and• The RIO system broadcasting this data back to all

Participants,• RIO’s network would deliver these data to Reuters

et al on a real-time basis• Each market would use these data to create a RIO

Best Bid/Offer (BBO) display• Full Reg NMS compliant

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Trade Execution

• All trades would be executed by and on the trading system of the Exchange of Corporate Issuance (ECI)

• A broker wishing to trade on a participating ECI would have its order routed through the RIO network to the appropriate exchange

• The ECI would execute the order and would report the trade to the buying and selling brokers as well as the entire network

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Clearing and Settlement

• The depositories would settle against each other via multi bi-lateral equal and opposite omnibus accounts

• All positions would be held in the depository of the country where the security is traded

• Trades would settle via book entry• Each depository would guarantee its members’

trades• A single settlement for all trades

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Money Settlement

• Money Settlement can be via a common (US$, etc.) or local currency

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Every Settlement

• Debits and Credits in total of all settlement accounts will be equal

• A single net Pay /Collect will exist with each participating depository for money settlement

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Every Settlement

• FX transaction required for (net) settlement

• Only one daily FX transaction, single (e.g. US$) or local currency, initiated by (bank of) paying Depository, for each country

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Money Settlement illustration• Each account would be equal and

opposite with the participating depository

• Example (in local currency)- Jamaica is a net buyer of Trinidadian securities:

SettlementIn Trinidad

Jamaica Depository Acct:

2.1 mil. USD DEBIT

In Jamaica

Trinidad Depository Acct:

2.1 mil. USD CREDIT

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Build a Superior Market Data System

• Real-Time Trade & Quote information– Protect data via an error-correcting Protocol– Continuously refresh trade & quote data

• Corporate Action Announcements• News pertaining to country / corporate

information• Research Reports (as a service to brokers)

• This can be a significant income generating activity.

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RIO Steering Committee

• Composition of Committee• Determine Rules and Resolve Issues such as:

– Criteria and Decision (and Removing) for Adding Participants

– Distribution of additional fees and other income (see proposal)

– Rules for individual exchange “system down”– Revenue sharing– Frequency of registered ownership

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Conclusion

Chairman of The Securities & Exchange Board of India, Mr. G.N. Bajpai, in his address to the South Asian Assoc. For Regional Co-Operation stated:

“It is not only the beaming blessings but definite & determined decisions that will fructify the dream. National priorities naturally take precedence over regional resolutions. Fortunately, the current environment and understandings are relaying very positive signals.”

August 29, 2004.

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Contact Information

Marlon Yarde – General ManagerBarbados Stock Exchange Inc.

1st Floor Carlisle HouseHincks Street, Bridgetown

Barbados.

marlon.yarde@bse.com.bbTelephone: (246) 436-9871/2

Fax: (246) 429-8942Website: www.bse.com.bb