Presentation – December 2016 Why interconnectivity? Many African securities exchanges need more liquidity Too few issuers/listings, too few opportunities to invest in (lots of investment capital is looking for opportunities) Not enough secondary trading for buyers or sellers to get fair price and desired timing Markets are inefficient, less desirable and have high transaction costs, increased cost of capital for issuers Local markets are best for needs of local economies Instead of merging exchanges, technology means linkages between national exchanges Combine markets to get more opportunities to invest and more investors CoSSE interconnectivity aims Enterprises can raise capital across SADC if they are approved to raise on one exchange Investors on one exchange can buy shares seamlessly on other exchanges within SADC region The region’s capital markets become more liquid and more efficient Global interconnectivity initiatives Association of South East Asian Nations - ASEAN Trading Link 2011 Single market access for 7 stock exchanges First - Bursa Malaysia, Philippines Stock Exchange, Stock Exchange of Thailand and SGX-ST (equities of Singapore Exchange) CEESEG AG owns 4 stock exchanges of Budapest, Ljubljana, Prague and Vienna as equal subsidiaries SEE, backed by the European Bank for Reconstruction and Development (EBRD), links 3 Balkan stock exchanges Mercado Integrado Latinoamericano (MILA) founding members Lima Stock Exchange (Perú), Santiago Stock Exchange (Chile) and Colombia Stock Exchange Trading lower than expectations (partly due to post-trade issues) African interconnectivity East African Community interconnectivity project ongoing (interconnectivity hub in Arusha) – Nairobi, Dar es Salaam, Uganda, Rwanda Bourse Régionale des Valeurs Mobilières SA (BRVM) headquarters in Abidjan One of the world’s most integrated regional exchanges Links 8 francophone countries (Benin, Burkina Faso, Guinea- Bisssau, Côte d’Ivoire, Mali, Niger, Sénégal and Togo) BRVM joins Ghana, Nigeria and Sierra Leone stock exchanges in West African Capital Market Integration Council (WACMIC), set up 2013 African Development Bank and African Securities Exchanges Association working on African Exchanges Linkage Project (AELP) to link Johannesburg, Nairobi, Casablanca and Nigerian stock exchanges. Interconnectivity and SADC SADC Common Agenda (Article 5 of the SADC Treaty) Regional Indicative Strategic Development Plan (RISDP) refers specifically to CoSSE (para 5.3.2) Targets of RISDP operationalized through SADC protocols Finance and Investment Protocol (FIP) 2006 (especially Chap 7, Articles 13 & 14 and Annex 11): Objective to facilitate financial integration through developing a harmonized securities market environment; establish “an integrated real time network of the national securities markets within SADC; pave the way towards cross-border listings and trading and investments.. facilitate the process of financial integration within the Region”. Other SADC development - SIRESS SADC Committee of Central Bank Governors (CCBG) developed + implementing SADC Integrated Regional Electronic Settlement System (SIRESS). First transaction July 2013 73 banks participating (includes 6 central banks) 9 countries participating Volumes of payments much larger than initially expected – by Jan 2016 had settled ZAR1.8 trillion ($114bn), total 381,879 transactions. Peak month was 24,960 transactions in Oct 2015, ZAR99bn in Sep 2015. CoSSE previous work on interconnectivity Has been working on interconnectivity since 2008-9 Interconnectivity Project Steering Committee proposed technology hub solution Could not raise funding CoSSE business plan 2012 proposed new capital structure 2 or more exchanges could take the lead Equity/for-profit investment structure to involve DFIs Did not go forward. CoSSE principles for interconnectivity (since 2008) Exchanges operate different trading, clearing and settlement platforms Exchanges regulate their own listings but exchanges’ instruments should be visible to other markets. Exchanges regulate their own trading, however, accessibility of trading on other markets is requirement Exchanges will comply with individual country legislation and other exchanges’ company law, insider trading legislation, etc. Exchange control in various countries, Common Monetary Area is not considered in timeline Exchanges will trade and settle in their own currency Securities will be held in the country of register Exchanges to decide on data sales independently and manage individually. However, market data should be visible internationally progress 2015-2016 CoSSE interconnectivity African Development Bank funded consultant 2015-16 Update 2012 business plan and 2008-9 project Discuss way forward with exchanges and stakeholders (regulators, stockbrokers, investment institutions, etc) Met 9 potential IT suppliers Stock exchange trading systems and smart order routers Broker network providers Data vendors Investigate alternatives in line with business needs CoSSE Interconnectivity project 2 Review international (ASEAN, MILA, CEESEG, SEE, etc in Europe) and African linkages (EAC, WACMIC) and lessons Review changing landscape, including SIRESS (SADC cross- border payment system) Recommendations regarding way forward, including relations with SADC including CISNA, CCBG Report adopted by CoSSE in Windhoek March 2016 Background to recommendations Cross-border trading already possible Client in one country can tell broker to place order with broker in another country Little volume for this Obstacles to more trading? Information – information about prices, trading, opportunities Contacts between brokers and others, ease of opening accounts, etc Regulatory and risk structures including sharing risks across borders, institutional regulations (domestic assets/prudential limits for pension/insurance funds – 5% in some countries), exchange controls Market opportunities, lack of attractive investments Post-trade, clearing and settlement, custody, etc 3 technology options 1. Information providers – buy-side and stockbroker traders see data on their trading screens call each other/use messaging to trade, book through exchange. 2. Network provider s and broker order management networks – share broker data screens, straight-through processing (STP) from buy-side clients (either approve or sponsored direct market access/DMA). 3. Smart order router networks and exchange technology suppliers used for linkages in Latin America and South-East Asia exchanges joint venture owns + operates technology sends orders from brokers/automated trading system/ATS) via gateways on one exchange to another exchange. East Africa similar approach to be owned/operated by the East African Community Technology issues How do systems fit with existing stock exchanges? FIX protocol is global standard for pre-trade orders (SWIFT is standard for post-trade transfers of value) Existing networks already in use by Investment institutions local and foreign Stockbrokers local and foreign Saves on new buy-in and adoption Windhoek decisions (March 2016) Exchange timeframes Member Readiness to Option for fees Comments Integrate Botswana Long term % of Txn value TBA Malawi Long term % of Txn value No Infrastructure Mauritius Short term Per Trade TBA Mozambique Long term Per Trade Need for a proper legal framework Namibia Immediate % of Txn value Zambia Long term % of Txn value Need for a proper legal framework South Africa TBA Per Trade Will depend of the nature of the implementation Tanzania Immediate % of Txn value Based on questionnaire sent to members (from SADC-CoSSE Project Final Report April 2015) CoSSE recommends 1 – Stockbroker network Exchanges inform stockbrokers and “buy-side” (institutional investors) Linkages CoSSE and SADC organs to encourage and facilitate links between stockbrokers in different countries Investigate next steps – broker profiles in central database, sharing stockbroker research, capacity-building on research and cross-border trading Stockbrokers first step in information campaign to “buy side” Investigate if broker network technology providers can support more cross-border trading CoSSE recommends 2 – regulatory issues Where regulatory barriers identified to cross border trade between 2 exchanges Regulators, central banks and others work on bilateral basis Bilateral is supplementary and pilot for regional bodies removing obstacles Work closely with CISNA Includes banking, payments, funds (pension/insurance), etc CoSSE recommends - Phase 2, in future Re-investigate feasibility of technology solution/ hub-and- spoke Based on feedback from brokers and Phase 1 Other exchanges to join Relate to developments in AELP project Concrete assumptions (user survey, commitments, track record) to update business plan Invest in technology when business case exists. - Next steps The goal Enterprises, governments and others can raise capital across SADC by listing on one exchange Investors on one exchange can buy shares seamlessly on other exchanges within SADC The region’s capital markets become more efficient and liquid – encourage savings, investment & integration. Next steps Proceed with front-runner exchanges Information exchange and stockbroker network Identify bilateral regulatory or other restrictions/blocks Resolve issues with regulators and Ministry of Finance, etc. Memoranda of understanding Investigate issues for cross-border IPOs, buy and sell orders starting from frontrunner