Frontier, FEAS Newsletter, December 2015, Issue 4

FRONTIER

Newsletter from the Federation of Euro-Asian Stock Exchanges December 2015, Issue 4

Iranian market infrastructure is ready to welcome global investors

Tehran Stock Exchange has all the underpinnings to serve to the needs of investors. Hassan Ghalibaf Asl, the veteran chief executive of the exchange, drives a technology-oriented, diversified, fair and transparent marketplace.

Hassan Ghalibaf Asl, CEO

Tehran Stock Exchange The Tehran Stock Exchange (TSE) is the largest stock 2010 by listing single stock future contracts. Embedded Put exchange in the Islamic Republic of Iran, which opened in Option Contracts were introduced in 2012. February 1967. TSE, a founding member of the Federation The TSE trading system is an order driven system, which of Euro-Asian Stock Exchanges, has been recognized one of matches buying and selling orders of the investors. All the world's best performing stock exchanges in the years transactions must be carried out on the Trading Floor using 2002 through 2013. Today, TSE has evolved into an exciting the Exchange's Automated Trading System (ATS). Trading is and growing marketplace where individual and conducted from 9:00 am to 12:30 pm for cash and bonds institutional investors trade securities with a total market and derivatives market, Saturdays through Wednesdays, capitalization of US$ 91,143 million of over 318 companies with the exception of public holidays, including a pre- in 37 sectors such as chemicals, financial services, metals, opening period of 30 minutes starting from 8:30 am. TSE telco operations, manufacturing and other industries. Since defines daily fluctuation for all products and rights 7 years ago, around 170 mutual funds have been formed in respectively as ± 5% and ± 10%. This can be changed in our market, managed by professionals, making the capital specific situation by the TSE in case of unusual price market a safer place for ordinary investors with less movements resulting in an extremely high or low P/E ratio. financial literacy. Short selling is not permitted. The clearing and settlement TSE has two equity markets as well as two separated period is T+3 for shares as well as T+1 for corporate bonds. markets for bonds and derivatives. Equity markets are divided into two segments: First market (including two boards) and second market. In bonds market, muni bonds and SEO's registered companies' participating bonds can be issued at TSE. The futures market was launched in July

Frontier, FEAS Newsletter, December 2015, Issue 4

Foreign investors who are willing to trade on TSE are 10 Top Sectors by Market Cap, Oct 2015 described as non-strategic and strategic. Non-strategic Motor Vehicles Chemicals & By- And Auto Parts; others; 17,16 products; 26,39 foreign investors are subject to below restrictions: a) the 3,02 Medical, Precision number of shares owned by the foreign investors shall not & Optical Instruments; 3,27 exceed 20% of the floating shares of the each listed Transportation and companies on TSE. b) The number of shares owned by each Storage; 3,38 Metal Ores Mining; Monetary foreign investor shall not exceed 10% of the total number 4,41 intermediation; of any company. Refined Petroleum 13,24 Products; 5,33

Post and Strategic foreign investor refer to the one who intends to Basic Metals; 7,67 Diversified telecommunicatio possess over 10 percent of a listed share. Such foreign Industrials ns; 8,25 (Holdings); 7,89 investors should contact "Organization for Investment, Economic and Technical Assistance of Iran (OIETAI)" which TSE Market Capitalization (USD Million) provides license to acquire up to 100% of a listed share (as 200.000 172888 Foreign Direct Investment "FDI"). 140843 150.000 116638 107650 91143 TSE operates a fair, efficient and transparent market 100.000 86690 58698 equipped with diversified instruments and easy access to 48712 42600364403631543885 50.000 27544 create added value for shareholders. TSE aims to achieve 5892 7358 11761 below strategic goals: 0

 Increasing the share of capital market in financing

the economic activities  Applying effective rules and procedures to protect the market's integrity and shareholders' rights  Expanding market with the use of updated and efficient technology and processes  Developing financial knowledge and improving investment and shareholding culture in Iran  Facilitating market access by means of information technology  Observing accountability and transparency in TSE Markets cooperation with shareholders main board 65  Constant expansion of the company's intellectual First market secondary board 61 properties and human resources Equity Market second market 192 Total 318

Participation Certificates (Islamic Bond) 6 Sukuks 2 Bonds and Certificates of Deposit (CD) 1 Derivatives market ETFs 4 Single-Stock Futures Contracts 7 Embedded Put Option Contracts 2

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Iran Fara Bourse weighs on innovation for liquidity and diversity

Amir Hamooni, the hard-working CEO of Iran Fara Bourse, has transformed the domestic SME market into a sophisticated one with diversified product portfolio. It is nothing short of a benchmark for alternative markets around the world. Amir Hamooni, CEO Iran Fara Bourse

As an innovative marketplace for small to medium size Iran Fara Bourse Annual Index and Market Capitalization

1,200 900 businesses, Iran Fara Bourse (IFB) was established in 2008 867 776 800 1,000 as an official stock exchange under the supervision of SEO. 697 1,015 700 IFB maintains markets for both listed and unlisted 939 800 600 780 securities including equity, sukuk, certificate of deposit 500 600 419

(CD), mortgage rights, exchange traded funds (ETF), 400 IFX Index IFX

IRRTrillion 276 472 intellectual property (IP) rights and construction fund 400 300 190 200 certificates. Only recently, Islamic treasury bills market 200 278 100 was launched on IFB. Investors can trade securities listed 85 0 0 on IFB by any of its registered brokers using different 2010 2011 2012 2013 2014 Oct 31, 2015 means such as the online trading. The IFB has licensed 99 Market Capitalization IFX: Total Return Index brokerage companies to intermediate trading on its markets.

IFB carries a broad portfolio of projects to broaden its Iran Fara Bourse Market Capitalization By Sector services such as segregating markets for small and Chemical Products 14% medium sized enterprises, introducing a platform for Banks & Credit Institutions

Basic Metals venture capital and private equity firms, launching a 2% 18% 31% segment for selling incomplete projects of government 3% Financing Securities 3% 2% Petroleum Products 2% 40% through IFB auction market and creating new indices. 3% Investment Companies 3% 3% Insurance & Pension Funds Iran Fara Bourse Annual Trades 8% Support to Financial Intermediaries 14 70 11% Mortgage Rights 12.0 12 11.0 60 4% Others 9% 9% 8% 9.5 10.0 15% 10 50 Inner Ring (2014/12/31): IRR 939,133 Billion 12% Outer Ring (2015/10/31): IRR 779,720 Billion 8 40 6.8

6 61 30 Billion

USD Billion USD 4.8 52 4 40 20

27 2 10 15.6 15

0 0 2010 2011 2012 2013 2014 Oct 31, 2015

Traded Volume Traded Value-$ Billion

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Investment banks help to spur capital markets activity

Since 2007, investment banks are actively involved in underwriting, brokerage, advisory and other capital market transactions. They add value through high-quality professional services for individuals and institutions, explains Ali Sanginian, CEO of Amin Investment Bank. Ali Sanginian, CEO Amin Investment Bank

Securities Market Law of the Islamic Republic of Iran in from SEO of which 6 of these Investment banks are November 2005 was a breakthrough for the financing directly linked to the traditional commercial banking system. As a result, financial institutions such as system while 3 of them are operating independently. investment banks have been introduced. Based on the Since 2007, the public and private companies both in Securities Market Act, the investment bank is a medium government and private sectors began to fulfill their between securities issuer and public investors and is financial needs through investment banks rather than allowed to perform brokerage activities, act as a dealer, existing traditional banking system. As a result, the share market maker, and adviser, portfolio of securities, of banking system in financing fell slowly (from 93% in subscription, subscription undertaking and similar 2007 to 74% in 2013) whereas the share of capital market activities through receiving permit of the SEO. The main solutions gradually rose (from 4% in 2007 to 20% in areas of investment banks’ activities include: subscription, 2013).Currently the majority of finance solutions through underwriting and pledge to buy securities in the investment banking in Iran was equity issuances (96%) secondary offerings either on their own or through while around 4% was done through debt issuances. formation of syndicates. The secondary areas of activity Revenue breakdown of investment banks in Iran as are as follows: advisory services, marketing and/or follows: 53% investment and asset management, 35% managing the trend of securities transfer, office underwriting and financial services, 6% market procedures represented by the issuer concerning the making/book runner, 2% valuation advisory and 5% other securities and obtaining the license thereof, services financial services. Most of Investment Banks in Iran have relating to design and issue of financial instruments for their own investment funds (ETF, Fixed income and companies, assets management, investment funds and mutual funds). Investment Banks in Iran, are trying to management, brokerage, broker/dealership, portfolio introduce new financing solutions. They advise their management, market-making, attraction of the protection clients which instrument would work best according to of banks, insurances, credit financial institutions and the company’s financial structure, securities exchanging financial entities for the company in the area of securities regulations and market atmosphere. subscription, assistance to companies in providing finance (funds and credits), assistance for issuance, confirmation and acceptance of letters of guarantee. State privatizations and rising competition among companies to seek faster and cheaper financing solutions made a stage for investment banking in Iran.

Two years after the Parliament approval on SEO Act, the first and the leading investment bank of Iran, Amin Investment Bank, was established in 2007. Currently, nine institutions have received investment banking license

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Commodity market delivers endless opportunities

As a large commodity production and trade market, Iran has been adversely affected due to recent commodity slump. Iran Mercantile Exchange, however, offers a broad range of securities for investors and producers to hedge their portfolios. It is a nominee to be listed among the top commodity markets around the world. Hamed Soltani Nejad, CEO Iran Mercantile Exchange

Iran Mercantile Exchange (IME) is a leading multi- IME has a Local Trading Floor in Tehran and an Export commodity exchange and the only multi-faceted market in Trading Floor in Kish Island (Persian Gulf). Various Iran and the Middle East. It was established in 2007 in products and commodities are listed and traded in IME accordance with the Securities Market Law and following which are categorized in three classifications: a) Spot the merger of the agricultural and metal exchanges of Market: Industrial Products and Commodities, Oil Tehran. The merger marked a new chapter in Iran capital Products and Petrochemicals, Agricultural b) Derivatives market providing endless trading opportunities for the Contracts: Gold Coins, Cumin Seeds, Soybean Meal, Gold clients in and out of the country. Enjoying the state-of- Bullion (10lb), Wire Rod c) Secondary Market: Non- the-art technology, full-electronic trading floor, fully transferable Properties such as real estate, lands and electronic derivatives market, low latency and efficient terrains, Transferable Properties that are listed trading system, and unmatched sound and fast commodities which couldn't be traded in the spot pit, and settlement- delivery mechanism, the IME has been able to other commodities or underlying assets. There are 81 provide a transparent, competitive marketplace where listed brokerage companies trading on IME. investment needs and trade requirements of a nationwide The scope of the IME services is as under: range of market participants and foreign entities are met in the best manner. The scope of the exchange services to  Performing as the first market providing access to the industry producers to offer their products ranging the initial offering of the listed commodities from agricultural, petrochemical and industrial to the  Price discovery and price making for the OTC, petroleum and oil-related products has made it a world- secondary markets and the end users class and viable market rendering services to the  Providing venue for government sales and individual and institutional suppliers and buyers at procurement purchases internationally certified level. Having in place spot market  Providing Trading platform and user interface alongside with derivatives market especially the futures  Providing Clearing & Settlement services contracts has brought about a robust mechanism for the  Risk management and technology services trade counterparties and clients to sell and purchase their industry requirements. The exchange has provided risk management services to the market. This service helps market participants manage their risks and take part in the prompt delivery process and at the same time take reverse positions in the futures contracts in order to hedge against the adverse market movements.

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Post trade supports trading in global standards

Upon a complete overhaul of Iranian capital markets in 2005, the post trade company, CSDI, has also been demutualized to operate under international capital markets standards. Today, CSDI serves to the needs of investors in a wide variety of domestic markets through its cutting-edge technology and high-quality services. Mohammad Reza Mohseni, CEO Central Securities Depository of Iran

Founded in 2005 as a public joint stock company, Central currency (USD, IRR, Euro) with a high netting efficiency of Securities Depository of Iran (CSDI) is the sole registry 85 percent. entity and custodian in the Iranian capital market using Responsible for taking care of post-trade-related tasks, the hybrid registry system with a fully dematerialized ranging from the deposit and registration of securities to book entry system. the clearing and settlement of the transactions carried out Enjoying a history of 45 years, the Iranian capital market in the financial market, it plays a significant role in infrastructure was demutualized in 2005 and as a result, managing systemic risk. To this purpose, CSDI has CSDI was legally segregated from the rest of the capital designed and launched the service of Settlement market institutions and commenced to work as an Guarantee Fund (SGF), along with other mechanisms, independent and separate entity. It is the central registrar towards managing the risks related to the clearing house. and clearing house for all the exchanges in Iran including IT is a crucial element in CSDI roles, but also developing Tehran Stock Exchange (TSE), Iran Farabourse (IFB), Iran the capital market infrastructures in the pre- and post- Mercantile Exchange (IME), and Iran Energy Exchange trade functions is not achievable unless through its (IEE). solutions. CSDI enjoys various home-made software The prospects of CSDI are to prepare the infrastructures systems for variety of operational objectives. indispensible for the efficiency, continuity, and growth of Concerning the determinant role of CSDs in connecting the economy of the markets under its cover. CSDI capital markets globally, CSDI has commenced plenty of provides thriving and secured financial investment fruitful collaborations with foreign organizations by being infrastructures to contribute to the development of a fair affiliated to international associations and signing MoUs and transparent capital market both nationwide and with its own counterparts in other countries. worldwide by guaranteeing security and efficiency in the capital market and safekeeping investors’ financial properties.

It takes over the registry, clearing, and settlement issues related to equity, Islamic securities (Sukuk), derivatives, energy contracts, electricity, mercantile products by means of a full-fashioned registry system and multi-

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Market professionalism is at high caliber to serve investors

Regulatory environment has been built to enforce self-regulation for brokers and dealers in Iran. Securities and Exchange Brokers Association (SEBA) provides guidance, oversight and training. Gender diversity among market professionals is impressive. Seyed R.Mirsanei, Secretary General SEBA

SEBA was established in September 2007 upon the changes in Securities Market Law in 2005. SEBA today maintains its Breakdown of Brokers' Employees by Gender activities as a self-regulated organization and perform a multitude of duties:

• Suggesting registration, suspension or cancellation of Female regulations concerning the membership of SEBA members 40% Male and enforcing them. 60% • Supervision and assessment on SEBA members. • Ordaining and enforcing professional and disciplinary policies for SEBA members. • Dispute settlement between brokers, traders brokers, others Education Levels Doctoral market handlers and other relevant professionals. 5% 3%

• Regulating means of communications between members Diploma and relevant people. 10% Associate • Helping to prepare and codify laws, provisions and Degree Master regulations relevant to members and SEO. 6% 27% • Continuous reviewing the market capacity of the services Bachelor provided by SEBA members and developing it. 49% • Suggesting to SEO changing fees ceiling and the price of provided services provided by SEBA members. • Suggesting the use of new financial instruments in securities market in order to make variety in provided services by members. • Preparing necessary facilities for developing systematic, professional and continuous training to relevant people to improve their knowledge and the quality of provided services. • Doing research activities and publishing professional publications and books and help to these types of activities. • Efforts in order to create a fair, competitive and efficient securities market to attract investors.

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Energy Market is a latecomer but comes in full-throttle

Energy and commodity trading has been an upward trend given price fluctuations in global markets. Iranian authorities have embarked on a strategy to establish a sound and transparent electricity market by also assuring risk and collateral management through post trade processes. Seyed Ali Hoseini, CEO of Iran Energy Exchange (IRENEX), explains how they Seyed Ali Hoseini, CEO have achieved it. Iran Energy Exchange

Iran Energy Exchange (IRENEX) was established in market is divided into two rings, domestic and accordance with the law of the Securities Market of the international. Each product has its own prospectus which Islamic Republic of Iran and on July 7, 2012 it was officially is available through IRENEX official website. This registered as a public company with the Office for prospectus contains information regarding the supplier Registration Companies and Non-Commercial Institutions. company, specifications of the product and every other The company was officially inaugurated on 9 March 2013 valuable and important information needed and by exchanging three energy carriers (power, coal and coal recognized by our listings board and council. In addition to tar). the product prospectus, each supply date has its own “supply information” which is published three business The Company’s mission is to develop a market in which days prior to an international supply and one business day trades are done under utmost transparency, efficiency prior to a domestic one. and liquidity. Creating a healthy competitive atmosphere to discover the fair price of products and to solve some of The derivatives market has the potential of listing the issues that matter most to the domestic and global different types of instruments such as futures, options and energy markets are other essential objectives. According swaps and is currently trading standard parallel Salam on to the Statute of IRENEX, all energy carriers and all the derivatives panel. This market, due to its vast commodity based derivatives may be listed and traded on applications, is not limited to a certain number of one of the company’s main markets. contracts and Iran Energy Exchange is preparing for new innovations in this field. As of November 2015 IRENEX, a self-regulatory organization, has admitted 49 eligible brokers and the Central Securities Depository of Iran Company (CSDI) plays the role of clearing house of the exchange. It is worth mentioning, all activities during the trading sessions (pre- trade, trade and post trade activities) are done electronically.

The Physical Market, Derivatives Market and Subsidiary Market are the three existing markets in IRENEX.On the physical market a wide variety of energy carriers are listed There are three initial instructions in Iran Energy and standardized for supply and trade, all of which lead to Exchange; these instructions create the foundations of physical delivery. Based on the fact that the product is every contract and trade executed in IRENEX. sold for domestic purposes or for export, the physical

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 Listing of Commodity & Commodity-based type of contract should be explained in detail in the supply Securities Instruction information of the product.  Commodity & Commodity-based Securities Trades Fuel oil Standard Parallel Salam (SPS) contracts offered on Instruction the derivatives market and the export of fuel oil through  Registration and Deposit of Commodity & the physical market are some of the recent achievements Commodity-based Securities and the Settlement which made Iran Energy Exchange (IRENEX) demonstrate and Clearing of Trades Instruction its bright future. Different contracts are engineered to be tradable on the On April 21, 2015, with the initial offering of fuel oil SPS physical market, some of which are as follows: contracts by the National Iranian Oil Company (NIOC), a Cash Contracts: The delivery of the underlying product considerable amount of funds were raised for the and its payment are done immediately. The term financing of NIOC’s development plans. Since then more immediately, defined in the settlement instruction of Iran than five thousand billion Rials has been raised in the Energy Exchange, is three business days after the trade initial offerings and by November 1, 2015 the overall value date, for the maximum settlement allowance and three of trades on the secondary market reached almost one business days after the settlement period for delivery of thousand two hundred billion Rials. More than 106,000 the product in the domestic ring. For international ring the contracts have been traded on the secondary market settlement period is five business days after trade date. during this period, which is proof of high liquidity. It is worth mentioning, SPS contracts have been traded on Credit Contracts: The delivery is made upon trade IRENEX power market and have had great applications for whereas the payment is referred to a time in the future. sales, financing and hedging in Iran’s power industry. On The settlement procedures of these types of contracts are August 26, 2015, the first successful 35,000 tons of fuel oil fully explained in the settlement instruction. 380 Cst was exported on the international ring of the Salaf (Salam) Contracts: The Salaf contract is an physical market. The positive atmosphere regarding the agreement which is set between two parties, where the possibilities of financing through IRENEX and the buyer prepays the amount of transaction at the date of facilitation of fuel oil and other petroleum products’ trade and the seller is committed to deliver the exports is an indication of growth and prosperity of commodity in a specified time in the future. This kind of IRENEX in the years to come. contract can be an instrument for financing producers and on the other hand the buyers could benefit a discount compared to the cash contracts.

Differential Contracts: The Differential contract is an agreement upon which buyers and sellers of a commodity agree on a premium or discount with respect to a specific reference (This reference could for example be a well- Frontier Newsletter, December 2015, Issue 4 known price assessment organization or publication). The Published by Federation of Euro-Asian Stock Exchanges (FEAS) parties promise to trade in a specified time in future Please contact us at: according to the final price (which is equal to the absolute Borsa Istanbul Building, Emirgan, 34467 Istanbul value of reference price plus the differential discovered on T : +90-212-2982160 the exchange market). The payment procedure for this www.feas.org

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