Money spinning

The Dubai International Financial Exchange (DIFX) aims to become the leading international stock exchange located between Western Europe and East Asia when it starts trading on its new platform on September 26.

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By  Sarah Gain Published  September 24, 2005

The DIFX will be unique in the Middle East region with standards comparable to those of international stock exchanges in New York, London and Hong Kong. The DIFX is located in the Dubai International Financial Centre (DIFC), a financial free zone that opened for business in 2004 and has an independent legal system so that all financial activities that occur inside the centre are governed to international standards by independent regulator, the Dubai Financial Services Authority (DFSA). “Building up an international stock exchange with the right infrastructure, the right security, integrity and a world-class data centre will attract a lot of investment into the region,” explains Stuart Turner, head of market operations at DIFX. Since the DIFX has applied to the DFSA for a licence to operate as an authorised market institution, it must comply with the authority’s licensing conditions by operating a fair and informed market. The DIFX Markets Authority is the body responsible for, among other things, monitoring the market to ensure that it meets the required operating standard and avoids issues such as insider trading or false and misleading trading. “The surveillance system used by the Markets Authority will identify abnormal movements in the price or volume of a particular security which could indicate anomalous transactions,” Turner explains. “It will also be responsible for the Listing Authority to review applications from companies to have their securities admitted to the official list and decides whether or not they can be admitted.” This framework will play a key role in attracting members to the DIFX and the organisation recognises that public confidence in its marketplace will be crucial to its success. In order to achieve this confidence, the DIFX is providing a regulatory structure that meets the highest international standards, with Listing, Business, and Clearing and Settlement Rules regulating the processes and operational procedures. The technology behind the scenes is vital when it comes to generating support from potential member companies, however, as Turner suggests: “AtosEuronext is a leading international supplier of technology to exchanges around the world and it will supply the DIFX with a fully-automated electronic trading platform. This will in turn be supported by clearing and settlement arrangements of the highest quality.” The DIFX platform is the latest version of the AtosEuronext NSC trading platform, which provides all the features needed in modern cash and derivatives trading systems, and offers a level of familiarity to major international market participants. Although the central systems are physically located in remote suburbs of Paris, the market is managed and operated by the DIFX’s own staff. “The platform is best described as a hybrid trading system. It is an anonymous, order-driven market but allows for liquidity providers to make markets in the products listed, thereby qualifying for lower trading fees,” says Turner. The trading solution provides a connectivity known as an application programme interface (API), which allows providers of trading systems to make a technical connection to the exchange and offer DIFX trading through their systems. With this method the DIFX is not constraining members to the use of a specific trading terminal. In this region, however, the DIFX will supply and recommend GL Win, the trading terminal from GL Trade. “GL Win is a sophisticated terminal, used in many markets worldwide. In addition to this local use, in any jurisdiction that allows DIFX terminals to be located, it will be possible to use the existing worldwide GL network to connect members easily and cheaply,” Turner explains. The trade confirmation system (TCS) is a trading and reporting module that can be used in parallel with the NSC trading engine, providing reports for services such as block trading and after hours trading. To ensure any TCS declarations or registrations are at fair market price, they are controlled by their size, as well as by the last traded price available on the NSC platform. “Once the DIFX opens, the TCS will be available to members prior to the start of each trading day until sometime after the main trading session closes, enabling declarations to be made from trading terminals or by the DIFX’s market operations team on the behalf of members,” Turner continues. The DIFX clearing house functions to clear and guarantee the financial performance of trades executed on its platform. The DIFX clearing house offers a central counter-party facility (CCP), acting as an intermediary to all trades and, as Turner puts it, “Becoming the buyer to every seller and the seller to every buyer.” The organisation’s clearing solution also offers a multi-lateral netting facility for settlement and margin calculations, ensuring that members will only have one securities settlement per ISIN per day. “The clearing system combines all transactions executed in a particular ISIN and gives a netted position for settlement and margin obligation. This makes it far simpler for investors to calculate their settlement values as they get a report of the net amount of all their transactions at the end of each day’s trading. It makes it easier for people to do business with the DIFX,” says Turner. Ease of use is also a key factor in the DIFX system functions for members. Clearing members can use their highly secure access details, including user name, password and encryption key, to log on and query the system at any time, giving them an up-to-date portfolio of what has been received from the clearing house. This helps members’ back office staff to reconcile positions against their own internal systems in real-time and will also help to reduce the volume of queries the DIFX receives on settlement days. According to Turner, “The clearing system generates several end-of-day reports for members including reports on account position, initial margin, variation margin, settlement obligation and trade history.” The DIFX owns and operates a central securities depository (CSD), which uses the TCS eClearSettle product to facilitate settlement of DIFX trades. All clearing members will have a designated settlement pool account with the CSD to facilitate settlement with the CCP. The settlement for DIFX trades occurs in the CSD on a trade date + 3 cycle (T+3) and members must ensure the required security balances are available in their settlement accounts before the reservation deadline is announced by the clearing house on T+3. “Any shortfall of securities is handled by the fails management mechanism which includes securities lending and borrowing, buy-in auction and a close out. Only clearing members are allowed to borrow securities through the SLB module in order to fulfil their shortages as part of a settlement fails management,” Turner explains. Business partners with both the CSD and the DIFX share registry via the eClearSettle system, which is capable of executing various instructions such as account transfers, delivery-versus-payment and delivery-free-of-payment, or for sending and receiving messages through a fixed layout file format upload through the FTP. Alternatively, users can exchange messages with the eClearSettle system using the Swift network. “Communications via the Swift gateway involve the use of a standardised set of messages in the ISO 15022 format that can be used to request services or actions,” says Turner. In order to raise awareness and understanding about the DIFX, the organisation will stage a series of workshops in Dubai, and throughout the rest of the Middle East and Europe during 2005 and 2006. The scheme will target banks and brokerages interested in learning more about the DIFX membership and issuance. Detailed information will be available to assist potential members in getting to grips with the DIFX's complex market model and regulatory framework, as well as its trading, clearance and settlement systems. As Turner states, “These events will give finance professionals an opportunity to learn more about the international market the DIFX will create. The workshops will raise awareness on an international scale and this will help to ensure the venture’s success.” With the infrastructure now firmly in place, the DIFX is ready to open its doors for the first year of what it predicts to be big business. The organisation expects to have approximately 15 initial price offerings (IPOs) listed on it in the first 12 to 18 months of its existence. At the end of the first year, it also anticipates that it will have 30 or 40 members carrying out trading, including both large international investment banks and regional investment banks. “When the exchange opens, our main aim will be to demonstrate that the DIFX is a reliable and efficient platform that is attractive to all who use it — the issuers of shares and other securities, its members, and investors,” says Turner. “It will then develop, over time, into a leading international exchange.” The DIFX was incorporated as a limited liability company under the DIFC in September 2004 and is a wholly owned subsidiary of the DIFC Authority, presided over by His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Crown Prince of Dubai. With this backing, DIFX intends to become the platform of choice in the region for a range of products and services including equities, bonds and funds, as well as Islamic products, index products and derivatives. The DIFX aims to have an innovative, broad-based product strategy that will enhance the attractiveness of the DIFX as a listing destination. The organisation has also invited leading banks and brokers to become members and the DIFX has been working in conjunction with influential market participants since 2003 to identify and develop products that better serve the needs of the issuer, the intermediary and the investor. By filling the vacuum between London and Singapore, the DIFX will not only be a driving force for the further development of a robust capital market in the region, providing regional issuers with access to international and regional investors, but will also create a conduit for international institutional investors seeking exposure to the region. For international investors, the DIFX will be the main gateway to opportunities in the emerging markets of the GCC states and the rest of the Middle East and North Africa (MENA) region, as well as South Africa, Turkey, Central Asia and the Indian sub-continent. “DIFC is going to be the financial centre for the whole region and no financial centre exists without a stock exchange at its heart. Dubai was selected as a location because it is mid-way between the great financial markets of London and Singapore, and is ideal because the local infrastructure already makes it a regional hub,” explains Turner. Listings on the DIFX will be primarily derived from IPOs, alternate listings for companies already quoted on other exchanges, and fixed income listings at the both the corporate and sovereign levels. According to Turner, “The initial target footprint of the DIFX includes the GCC, MENA, Turkey, the Indian sub-continent, and South Africa. Members of the DIFX will have the opportunity to operate and make markets in a large and highly liquid market, in a region where international participation has been limited until now.”

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