Kazakhstan securities market: migration to T+2 settlement cycle

Presenter: Idel SABITOV, Deputy CEO KASE

10 September 2015 XII International Conference ACDE Almaty • Shares market: statistics

• KASE Index – Kazakhstan's shares market's business card

• T+2: goals

• Т+2: recommendations and standards

• Transition from T+0 to T+2: timeline

• T+2: main conditions

• T+2: prefunding requirements and risk management elements

• T+0: flowchart

• T+2: flowchart

• From T+0 to T+2

2 Shares market: statistics

Traded Volume, bn USD Market Capitalization, bn USD Primary market (IPO) Secondary market 120

100

1.5 80 3.9 bn USD 48.7 bn USD as of 01.09.15 60 as of 01.01.05

40 2.8

Volume, bnUSD 1.7 20 0.4 1.1 0.4 0.7 0.7 0.9 0.3 0 0.2 0.1 0.1 0.2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015'8M

Issuers by Industry Sectors Equities Market Energy Financials 102 103 108 99 92 95 100 7.9% 78 81 79 78 74 66 68 Provision of telecommunications Materials 11.4% 34.7% services Industrials Consumer staples

10.7% Provision of municipal services Information Technology

2009 2010 2011 2012 2013 2014 2015 Health Care Consumer Discretionary (September) 31.5% Issuers Instruments

3 Shares market: statistics

100 Members of securities market 90 Volume of shares trading (as of 01.09.2015) (for 8 months 2015) 80

70

60 5 1 11%

50 40 48 492 30 17 participants 25 mln USD 20

10 89% 0 Shares 1st Shares 2nd category category

Number of shares National Bank Brokers: banks KASE Index shares Non-Index shares Brokers: asset managers Other Total number of shares is 108

4 KASE Index – Kazakhstani securities market business card 3001443 405 3068 3000 9 280 2701.84 260 Shares in KASE Index 2500 240 220 3 1 200 2000 1 1886.11 2 180 1815.83 2

160 1500 140 1253.36 120 1069.23 834.51 CCBN KZTK 100 626.84 1000 GB_KZMS KEGC KZTO HSBK RDGZ KCEL 80 KKGB 60 500 Code of shares Listed company 40 CCBN Bank CenterCredit JSC 20 GB_KZMS KAZ Minerals PLC HSBK Halyk Bank JSC - 0 KCEL Kcell JSC KEGC KEGOC JSC KKGB Kazkommetsbank JSC KZTK Kazakhtelecom JSC" Average daily volume (USD '000) Average daily number of trades (number) KASE Index KZTO Kaztransoil JSC RDGZ RD Kazmunaigaz JSC

5 T+2: goals

• Increasing liquidity of Kazakhstan shares market by attracting foreign investors and increasing activity of Kazakhstan based investors

• Providing to trade participants/investors additional opportunities to effectively manage assets/liquidity during the trading day and up to the date of settlement of the executed securities transaction

T+2 • Reducing number of settlement transactions and investors' costs associated with execution of deals (as obligations and rights will be offset and settlements will be done based on unified net position)

• Establishing clearing and settlement system compliant with international standards

6 Т+2: recommendations and standards

"Introducing a T+3 settlement cycle, as a consequence, has a considerable direct impact on liquidity." "if the T+3 settlement system is introduced, the multilateral netting scheme will be enabled, and KASE will be able to efficiently respond to increasing liquidity"

"Continuous settlements should be conducted on all securities markets. Final settlements should be done no later than on T+3."

ASTANA INTERNATIONAL "Gradual transition to the T+n settlement system" FINANCIAL CENTRE "Members providing for clearing and settlement strive to comply with CPSS / IOSCO / G-30 requirements"

"Clearing & settlement - T + 3 , T + 5 for Frontier" More than 90% of stock exchanges on FTSE list use T+n scheme

7 Transition from T+0 to T+2: timeline

2nd stage: 3rd stage: Preparation stage 1st stage: trial period (both cycles apply) T+2 only CCP

Concept (extended) Amendments on Trades of KASE Draft law on NPL Transfer of T+2 Results of Obtaining for T+2 scheme and margin for T+2 Index shares on with amendments functions to the main Kazakhstan CCP status, changes to the scheme to the T+2 scheme to implement T+2 trading system shares introducing legislation Rules #9 market's T+2 for other assessment securitiesг by FTSE

Т+2

n

Т+ 09

09.09.2013 27.05.2014 29.06.2015 07.08.2015 19.08.2015 Sept–Oct 2016 and

.20

2015 further

09 .

24 Conceptof

Т+0 31.05.2011 Oct–Nov 2015 Share trades T+0 termination date for on Т+0 scheme KASE Index shares trading

8 T+2: main conditions

• Clearing House – KASE • Settlement cycle – Т+2 ongoing periodic settlement

• CCP – KASE (at a later stage of the project) • Clearing – multilateral netting

• Settlement House – Central Securities Depository • Unified position: unified position of the trade participant to account for margin and assets used in order to cover • Financial instruments – KASE Index shares payment obligations during settlement

• Prefunding – partial (i.e. margin, see rates) and full • Short selling – allowed (100% of securities for sell orders and repo open orders) • Securities lending – repo with netting

• Clearing members – KASE securities market • Default management – until T+5 incl., separation members procedure, auction to sell default positions, final cash settlement (default fee 0.01% of volume for each day)

9 T+2: prefunding requirements T+2: risk management elements

KASE Index share Price change limit (%) Initial margin rate (%) Margin contributions (clearing participants) Initial margin Additional margin CCBN 14 28

KZTK 13 26 Limits (KASE) GB_KZMS 14 28 Price change limit HSBK 7.5 15

KCEL 7 14

KEGC 10 20 Guarantee fund (clearing participants)

KKGB 11 22

KZTO 9 18 Reserve fund (KASs) RDGZ 7 14

10 1. Securities and cash accounts are maintained in CSD, except for cases where cash accounts of banks are maintained in KISC of the T+0: flowchart National Bank 11. 2. CSD provides KASE information on balances of accounts in CSD 3. Trade participants, or in case of custodial clients – asset managers, 3. provide assets for settlements in CSD and/or KISC NB 4. Trade participants submit orders Trade participant 1* Trade participant 2 11. 5. Checking orders in the TS for assets availability and, if deal is fully covered, accepting orders 6. Matching orders in the TS, blocking assets when concluding deals 3. 4. 4. 7. Confirmation of concluded deals in TS by account managers

8. KASE provides CSD an order to conduct settlements 2. 5. 1. 9. 9. CSD conducts settlements in accordance with KASE order KASE 8. CSD 10. CSD provides KASE with report on execution of the order 6. 10. 11. CSD provides results of settlement to trade participants and account managers

7. 3.

Account manager 1. 3. KISC NB (Custodian)* 7.

11. *Provide services to custodial client

11 1. Maintaining securities accounts of trade participants and account managers in CSD T+2: flowchart 2. CSD provides KASE information on the balances of accounts in CSD 8. 3. KASE prepares and uploads to TS information for the trading day: settlement prices, price change limits and margin rates Trade 4. Trade participants, or in case of custodial clients – asset managers, 9. Trade participant 2 provide margin participant 1* 9. T+0 5. Trade participants submit orders based on set limits and margin rates 6. Checking orders in TS for compliance with limits and margin rates and 15. if compliant, accepting orders. Matching orders in TS, blocking margin 8. when concluding deals 5. 4. 5. 11. 7. KASE conducts clearing on concluded deals 8. KASE provides clearing session results to trade participants and asset managers 2. 3. 1. 13. 12. 9. Trade participants and account managers reconcile concluded deals in KASE 7. CSD ** TS on T+1 (making changes or submitting cancellation requests) 6. 14. T+1 10. Account managers provide settlement instructions to KASE on T+2 11. 4. 11. Trade participants, or in case of participation by custodial clients – by 10. account managers, provide assets for settlements to CSD accounts 8. 15. 12. KASE provides CSD the order to conduct settlements T+2 13. CSD conducts settlements based on KASE order Account manager 14. CSD provides KASE the report on execution of the order (Custodian)* 9. 15. CSD provides trade participants and asset managers with settlement confirmations

*Provide services to custodial client ** CSD controls minimal balances availability

12 From T+0 to T+2 X V

[Х] fully prefunded orders [V] partially prefunded orders [Х] transaction should be fully prefunded at transaction execution time [V] transactions execution results in lower transaction costs (due to netting) [Х] settlements are done at transaction concluding day [V] settlements are done on the second working day [Х] management of assets used as collateral is complicated [V] is compliant with international trade execution procedure [Х] It is inconvenient to serve international clients [V] facilitates more convenient assets management [Х] is not compliant with international trade execution procedure [V] allows for more convenient services to international clients

13 Questions?

14 Thank You!

Contact Information Address: Kazakhstan Stock Exchange Almaty Towers, Northern Tower, 8th Floor 280, Baizakov Str., Almaty 050040, Kazakhstan

Phone: (+7 727) 237 53 00 Fax: (+7 727) 296 64 02 E-mail: [email protected] [email protected] Website: www.kase.kz

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