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Market Liquidity: Efficiency in Market Infrastructure

Atos Euronext Market Solutions

Donal O’Brien November 2006

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

Atos Euronext Market Solutions

50:50 ownership Atos Origin and Euronext

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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 ARAMIS NSC, CONNECT Syn~Clear, CLEARING 21, SARA Syn~Broker, Investiciel, Apollo Crystal, Diamis Atos Euronext Market Solutions 4

Market Liquidity: AEMS Global Service Provision

Toronto Montréal Casablanca BVM Tunis Euronext.liffe

ICE Futures LCH.Clearnet

Euronext Warsaw

Stock Exchange

Winnipeg BOX BSX Minneapolis CME CBOT Kansas City Board of Trade BM&F Bovespa Beirut

Stock Exchange

Amman

Stock Exchange

Tehran

Stock Exchange

Muscat TFX DIFX

Securities Market

Bursa Malaysia

Atos Euronext Market Solutions

NSC®

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CONNECT®

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

• Initial Margin Calculation – Risk of change in price going forward • Variation Margin Calculation – Risk of change in price since trade was done • Multi-asset offsets

Collateral Management

• Member firm specific account structure • Pledge of Securities or Cash • Intra-day Margin Calls Clearing Member Fails Account House Accounts Trading Member 0 (Same as Clearing Member) Client Accounts House Accounts Trading Member 1 Client Accounts Trading Member 2 House Accounts Client Accounts Atos Euronext Market Solutions 8

Market Liquidity: Settlement Models

Free of Payment Settlement

• • • High Risk Inefficient No Guarantee

Three ‘Against Payment’ Models:

• DVP1: Gross settlement of Securities and Cash • DVP2: Gross settlement of Securities, Net Settlement of Cash • DVP3: Net settlement of Securities and Cash

CSD Provides:

• Guaranteed Settlement • • Efficiency Lower Cost

OTC Markets: Exchanges:

Typically DVP1 settlement Move towards DVP2 or DVP3 Settlement Atos Euronext Market Solutions 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 – – Final Investor is directly known to the Issuer and the CSD (Current Model) • Indirect Holding – 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 DVP3 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, ISO15022, 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

Internet RCE [Data Repository] Trading Applications Control Module [Investor Checking] SPI [Buy-In Order Creation] NSC [On-Exchange Trades] TCS [OTC Trades] Aramis [Market Surveillance] HUB MMTP Interface FTP Interface Syn~Clear $ SWIFT RTGS Clearing Banks Users Web Server Atos Euronext Market Solutions 17

Market Liquidity: Integration with Brokers and Custodians

Client / End Investor

Orders

Broker System (Syn~Broker) Orders Executions PAM Tehran Stock Exchange (NCS) Se ttle m en ts OTC Trading (TCS) Clearing Bank Cash Transfers CSDR (Syn~Clear) 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

Questions

Atos Euronext Market Solutions 20