Bright Futures. TCS Financial Solutions. NASDAQ Dubai launches derivatives exchange in the Middle East

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1 TCS Financial Solutions Banking Capital Markets Insurance 2009 Number 6 Bright Futures NASDAQ Dubai launches derivatives exchange in the Middle East ALSO IN THIS ISSUE Arab Bank Australia Takaful International in Bahrain Cloud Computing Celent on Islamic Banking and Finance TowerGroup on State Bank of India EXHIBITION & CONFERENCE BAHRAIN 2009 Visit TCS Financial Solutions, Booth V1 Experience certainty. IT Services Business Solutions Outsourcing

2 Cover Story The Gate Building, Dubai International Financial Center 6

3 winning the race to the future The race to build a substantial derivatives platform in the Middle East has been won. The winner: NASDAQ Dubai. By R. Vivekanand, Global Head, TCS BaNCS Market Infrastructure, TCS Financial Solutions Starting in November 2008, the NASDAQ Dubai exchange launched the region s first major derivatives market, giving investors the ability to implement prudent hedging strategies in a turbulent economy. The exchange now facilitates trading in Single Stock Futures on UAE-listed equities and in derivatives based on the FTSE NASDAQ Dubai UAE 20 index. These financial instruments provide investors with flexibility in support of trading strategies for sound portfolio management, while bolstering liquidity and stability in the underlying shares. The timely launch of derivatives trading enables NASDAQ Dubai to become the preeminent exchange for the Gulf Cooperation Council (GCC) countries, and a premier destination for foreign investment, with financial market standards and instruments comparable to those at other international exchanges in New York, London and Hong Kong. Peter FitzGerald, Chief Operating Officer of NASDAQ Dubai, describes the launch of the equity derivatives market. Q: What s your background in the securities industry, and what brought you to NAS- DAQ Dubai? A: I ve been involved in the exchange and clearinghouse business since I worked for the Australian Stock Exchange, initially in the derivative area through 1992, and then in a range of rules from derivatives clearing to helping them to manage their equities and derivatives markets. In 2007, they were looking for someone to head up their market operations area, which is my area of expertise. They were also looking to develop a new derivatives market, and I was attracted by the opportunity. 7

4 Time-to-market is a key part of our business model. Q: Derivatives have been blamed for their role in the credit crisis. Is this the right time to launch a derivatives market? A: Derivatives are risk management tools. They re not for everybody, but if used properly by people who understand them, they provide a very important risk management function. Investing in the Middle East is ideal for times of market uncertainty, and equity derivatives make it more feasible by enabling people to take out price insurance on their equity portfolios. It s not derivatives per se that have caused this financial crisis. The concerns regarding derivatives have come mainly because of over-the-counter derivatives, because counterparties did not honor their commitments. The marketplace model that we re offering is a centrally-cleared counterparty service, just like any major exchange-traded derivatives market. The counterparty risk is ours, not that of the individual brokers. Q: Why was creating a derivatives market such a high priority for NASDAQ Dubai? A: The simple reason is that there was demand for it from our customers and from our potential customers. In the UAE in particular, and in the GCC generally, there wasn t an established equity derivatives platform of the sort that exists in other developed markets. We had an opportunity to create risk management tools for the local marketplace, and given the benefit of the DIFC regulatory regime, we had the capacity, the motivation and the ability to take advantage of the opportunity. No one else in the region is running a derivatives market. We re the only one offering these particular products. Now we have a large number of customers asking, How do we join your derivatives market? This gives us the first-mover advantage. Timeto-market is a key part of our business model. We need to be able to do things and do them quickly. Q: How did the launch go? A: As expected. We knew it would be quiet when the market started all new markets are. We were happy to have it start in a quiet way, to enable our participants to lock down the various systems and processes in an orderly way. We ve done a few trades, the systems are working fine, and we haven t had any problems or inconveniences for anybody, and so we re happy with the approach we ve taken. Q: What was TCS Financial Solutions contribution to the success of the project? A: First, TCS Financial Solutions assisted us by building new interfaces between our new equities trading system and our existing TCS BαNCS clearing and settlement system, which was a very important part. Then, we came to the conclusion that TCS BαNCS could also support the necessary derivatives functionality for a derivatives exchange. We already had a degree of futures capability within the system. Our existing processes involve doing margining of our cash equities which is effectively running a three-day futures contract. That gave me some comfort that we could quickly adapt the system for the derivatives market. We worked with TCS Financial Solutions on coming up with the right specifications for the key functionality, using an iterative process that worked very well. The system we needed on day one was there, and we know we can make improvements in the future. Q: Please describe some of those key functionalities. A: TCS BαNCS Market Infrastructure provides daily position management for futures and options contracts in a portfolio. TCS BαNCS sends daily position files to SPAN, a portfolio margining engine used throughout the industry, to work out the initial margin liability. When those numbers come back, TCS BαNCS sends the margin requirements off to the trading banks via SWIFT messages. The banks then settle with their customers based on that information. Q: What has been your experience with TCS Financial Solutions support and service? A: We have great support from the organization, and we have the people alongside of us when we need them. We have the ability to talk to people at all levels, and from top to bottom, the organization has functioned as a team. And there hasn t been a single occasion where we haven t finished processing at the time we re supposed to finish processing each day, even during our busiest times. That s my sole measure of success: Does it work? And it does. Q: What s next for NASDAQ Dubai? A: We ll probably add options to the platform, and add other GCC markets as demand requires. We can literally put onto the exchange derivatives over stocks from any market or region, as long as the market wants us to do so. TCS BαNCS provides multi-asset class and multicurrency capability, so as there s demand for other asset classes we ll look at that as well. We ve created the infrastructure and the marketplace. Our challenge now is to sell it to the interested parties and to make sure they can try it. n istockphoto.com 8

5 A brief history of nasdaq dubai September 2004: Dubai International Financial Center (DIFC), a 110-acre economic development zone, is created by HH Sheikh Mohammed Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, together with the Government of Dubai, with the aim of creating a worldclass international financial center. January 2005: Dubai International Financial Exchange (DIFX) is formed in DIFC as a venue for institutional investors. DIFX selects Tata Consultancy Services to provide clearing and settlement systems. September 2005: DIFX launched. June 2006: FTSE Group and the DIFX create the first GCC country tradable indices for domestic, GCC and international investors. August 2007: The Dubai Government creates a new holding company, Borse Dubai, to consolidate its holdings in DIFX and in Dubai Financial Market (DFM), a local stock exchange catering to retail investors. December 2007: DIFX commences a project to introduce derivatives trading. February 2008: Borse Dubai sells a one-third share in DIFX to NASDAQ OMX. November 2008: DIFX is rebranded as NASDAQ Dubai, and the exchange goes live with its equity derivatives listings. TCS BαNCS Market Infrastructure v3.0 provides clearing and settlement services for equities and derivatives trading. 9