The BRICS Securities and Derivatives Markets - Hong Kong ...

THE BRICS SECURITIES AND DERIVATIVESMARKETSBy Research & Corporate Development 31 December 2012The BRICS Exchange Alliance was announced in October 2011. Member exchangeshave begun cross-listing their respective benchmark equity index derivatives, and areplanning to develop new equity index products together. This paper briefly describes eachmarket in the alliance – the key exchanges and their market segments, product offerings,and latest international cooperation initiatives.The BRICS 1 acronym refers to the five developing countries — Brazil, Russia, India, Chinaand South Africa — which have attracted attention because of their growth potential. InOctober 2011, Hong Kong Exchanges and Clearing Limited (HKEx) in the Chinese economyand exchanges from the other BRICS countries — BM&FBOVESPA from Brazil, MoscowInterbank Currency Exchange (MICEX, now Moscow Exchange MICEX-RTS) from Russia,BSE Limited (BSE) and the National Stock Exchange of India (NSE) from India, and theJohannesburg Stock Exchange (JSE) from South Africa — announced the formation ofBRICS Exchange Alliance.The alliance’s first initiative was the cross-listing of benchmark equity index derivatives onone another’s trading platforms in March 2012. The initiative enables member exchanges toexpand their product offerings beyond their own markets and their investors to gain exposureto the dynamic, emerging, and increasingly important BRICS economics. The alliance iscontinuing to work on possible new product initiatives.This article gives a brief description of each BRICS country’s securities and derivativesmarkets (focusing on financial derivatives), profiling their respective positions in the worldeconomy and exchange markets. An overview is given of each market, followed by anintroduction to the key exchanges’ market segments and product offerings, and their otherinternational cooperation initiatives.1. BRICS IN THE WORLD ECONOMY AND EXCHANGE MARKETSAccording to the World Bank, the BRICS countries are middle-income economies 2 ; the 108middle-income economies in aggregate constituted one-third of the world’s Gross DomesticProduct (GDP) in 2011 3 . The five BRICS economies enjoyed spectacular growth, more thanquadrupling their GDP from 2002 to 2011 in nominal terms while the rest of the world’s GDPgrew 84%. The BRICS economies accounted for one-fifth of global GDP in 2011(compared with 9% in 2002) (see Table 1-1). Based on the World Federation of Exchanges123The acronym, BRIC, was coined by Jim O’Neill of Goldman Sachs in 2001 to refer to the rising emergingeconomies in Brazil, Russia, India and China. Since 2008, the BRIC leaders have met annually to discussissues of global significance, such as development, peace and security, energy and climate change, and socialissues. In 2011, the leaders invited South Africa to join, thus becoming the BRICS.Hong Kong is classified as a high-income economy.Source: International Monetary Fund (IMF) statistics and World Bank classification.- 1 -

US$ billionNYSE Euronext (US)NASDAQ OMX (US)LSE Group (UK & Italy)Tokyo SENYSE Euronext (Europe)HKExShanghai SETMX GroupDeutsche BoerseASX (Australia)BSE (Mumbai)SIX Swiss ExchangeBM&FBOVESPAKorea ExchangeShenzhen SESpanish ExchangesNASDAQ OMX(Nordic)Johannesburg SEMoscow ExchangeSingapore ExchangeThe BRICS Securities and Derivatives Markets(WFE) statistics, exchanges from these five countries are among the top 20 in terms of marketvalue of domestic listed companies and contract volume of financial derivatives (see Figures1-1 and 1-2).CountryTable 1-1. GDP in BRICS countries (2002 vs 2011)GDP (current prices, US$ billion)% of global GDP2002 2011 % change 2002 2011China 1,454 7,298 402% 4.4% 10.4%Brazil 506 2,493 393% 1.5% 3.6%Russia 345 1,850 436% 1.0% 2.6%India 510 1,827 258% 1.5% 2.6%South Africa 111 409 267% 0.3% 0.6%BRICS 2,926 13,877 374% 8.8% 19.9%Rest of the world 30,428 56,022 84% 91.2% 80.1%All countries 33,355 69,899 110% 100.0% 100.0%Source: International Monetary Fund (IMF), World Economic Outlook Database, October 2012Figure 1-1. Top 20 exchanges in terms of market value of domestic listed companiesTop 20 exchanges by market (end of value October of domestic 2012) listed shares (October 2012)16,00014,00013,62512,00010,0008,0006,0004,0004,5263,526 3,2752,677 2,6332,314 2,0441,392 1,348 1,203 1,176 1,162 1,114 1,098 964 933 835 767 7412,0000BRICS marketsSource: WFE monthly statistics- 2 - Research & Corporate Development, HKEx31 December 2012

Contracts (million)CME GroupKorea ExchangeNSE of IndiaEUREXBM&FBOVESPAChicago Board OptionsExchangeMoscow ExchangeNYSE Euronext (US)NASDAQ OMX (US)NYSE.Liffe EuropeInternational SecuritiesExchangeBSE (India)Osaka SEASX DerivativesTradingTAIFEXHKExOMX Nordic ExchangeASX SFE DerivativesTradingSingapore ExchangeJohannesburg SEThe BRICS Securities and Derivatives Markets2,000Figure 1-2.Top 20 exchanges in terms of contract volume of financial derivatives(January-October 2012)Top 20 exchanges by financial derivatives contract volume (January-October 2012)1,8001,773 1,712 1,6701,3561,6001,4001,2001,1411,000800600946876825 8207835934002000194 168132 126 99 92 85 65 63BRICS marketsSource: WFE monthly statistics2. BRAZILIn Brazil, BM&FBOVESPA is the only exchange operator of securities and derivativesmarkets. It is a publicly listed company created in 2008 through the integration of the SãoPaulo Stock Exchange (BOVESPA) and the Brazilian Mercantile & Futures Exchange(BM&F). The Brazilian financial market is under the regulation and monitoring of threeauthorities — the National Monetary Council (CMN), the Brazilian Central Bank (BCB)and the Brazilian Securities and Exchange Commission (CVM).CVM is the direct regulator of BM&FBOVESPA; it directly regulates and oversees theBrazilian capital markets, including the exchange markets and the organised over-the-counter(OTC) markets, and the market participants. CMN is responsible for formulating monetaryand credit policies for the financial and capital markets. BCB is responsible for theimplementation of CMN’s policies. BCB also oversees the operation of financial institutionsin Brazil.BM&FBOVESPA itself has incorporated a specific entity for self-regulation —BM&FBOVESPA Market Supervision (BSM). The main responsibility of BSM is tosupervise the markets managed by BM&FBOVESPA to ensure compliance with applicablelaws, rules and regulations by market participants and by the exchange itself.- 3 - Research & Corporate Development, HKEx31 December 2012

The BRICS Securities and Derivatives Markets2.1 Market segmentsBM&FBOVESPA operates two major market segments — BOVESPA and BM&F — forsecurities and derivatives trading. Products traded on BOVESPA comprise: (1) equities —including shares, Brazilian Depository Receipts (BDRs) representing shares of domestic andforeign issuers, exchange-traded funds (ETFs) and warrants; (2) equity derivatives — mainlystock options and index options; and (3) corporate debt securities. The BM&F segmentprovides trading for commodity derivatives (agricultural, gold and energy), financialderivatives (currency, interest rate and equity indices), spot foreign exchange (forex) andpublic debt securities.Besides exchange-traded products, BM&FBOVESPA runs the Organised OTC Market (theonly one in Brazil) for the trading of equities and derivatives. Derivatives products includeflexible options, forwards and swaps on equity indices, commodities, forex and interest rates.For equities, there is a special trading segment of the Organised OTC Market, BOVESPAMais (meaning “BOVESPA Plus”), which provides a stepping stone for companies registeredwith CVM to move to the listing segment. In addition, unsponsored BDRs 4 , which do notinvolve the foreign companies that issue the shares underlying the BDRs, are available fortrading on the Organised OTC Market.In Brazil, there is a Brazilian Commodities Exchange (BBM) which centralises the trading ofagricultural commodities and OTC agribusiness securities. It is a private mutualised entityin which BM&FBOVESPA holds a majority membership interest.The clearing and settlement of securities and derivatives are handled by BM&FBOVESPA’sfour clearing houses for different product types, which are in the process of integration, bothentity-wise and technology-wise. The post-trade process is integrated with BM&FSettlement Bank (a wholly-owned subsidiary of BM&FBOVESPA), which providessettlement, depository, registration and custody services to clearing houses and participants.The existing four trading systems for the different securities and derivatives products are alsoto be integrated. The trading system for BM&F derivatives and spot forex — PUMATrading System, which is jointly developed by BM&FBOVESPA and CME Group — willreplace the other three trading systems for securities and other derivatives products.2.2 Securities marketBOVESPA has three special listing segments in addition to the traditional market — NovoMercado (meaning “New Market”), Corporate Governance (CG) Level 1 and CG Level 2.These segments were launched in 2000 and adopt additional and more stringent corporategovernance requirements. BM&FBOVESPA itself is listed in Novo Mercado, which adoptsthe highest corporate governance standards among all listing segments.Brazil has the largest stock market in Latin America by market value, with 373 listedcompanies and a total market capitalisation of US$1,223 billion at the end of 2011.Currently, more than 80 BDRs are available for trading and 70 of them are unsponsoredBDRs on foreign stocks which include big names such as Coca-Cola, Exxon Mobil, General4BDRs can be classified into sponsored and unsponsored BDRs. Sponsored BDRs involve the issuer ofunderlying shares which has an agreement with the depository bank.- 4 - Research & Corporate Development, HKEx31 December 2012

Market capitalisation / share trading value (US$bn)No. of listed companiesThe BRICS Securities and Derivatives MarketsElectric and Microsoft. In 2011, the total value of share trading was US$931 billion (seeFigure 2-1) and the average daily trading value was US$3.7 billion. Almost all securitiestrading came from stocks (95% in 2011); options exercise contributed another 4%; otherproducts such as investment funds, structured products and fixed-income securitiescontributed only 1% of the total trading value (see Figure 2-2).Figure 2-1. DomesticDomesticstockstock marketmarketcapitalisation,capitalisation,annual shareannualtrading valueshareandtrading value andno. of listed no. of listed companies on on BM&FBOVESPA (2002 -(2002 2011) – 2011)1,6001,400No. of listed companiesMarket capitalisationShare trading value1,3991,3411,5426005251,2001,00080060040020003994041,223393 385 381369373358343 350869 93175072360748258864534123416612410568276462002 2003 2004 2005 2006 2007 2008 2009 2010 2011Sources: Sources: BM&FBOVESPA monthly & World operational Federation data of Exchanges and WFE (WFE) monthly statistics450375300225150750Trading value by security type on BOVESPA segment (2011)(excluding equity derivatives)Figure 2-2. Trading value by security type on BOVESPA (2011) (excluding equity derivatives)Others0.04%Investment funds1%Options exercise4%Stocks95%Notes:(1) Numbers may not add up to 100% due to rounding.Notes:(2) Trading in round-lot market, odd-lot market and auction market is classified as trading in “Stocks”.(1) Numbers may not add up to 100% due to rounding.(3) “Others”(2)includesTradingstructuredin round-lotproducts,market, odd-lotinvestmentsmarketcertificatesand auctionandmarketfixed-incomeis classifiedsecurities.as "Stocks".Source: BM&FBOVESPA (3) "Others" includes annual structured statistics products, investments certificates and fixed-income securities.Source: BM&FBOVESPA- 5 - Research & Corporate Development, HKEx31 December 2012

IPO funds raised (US$bn)No. of newly listed companiesThe BRICS Securities and Derivatives MarketsThe significant growth of market capitalisation over the past decade shown in Figure 2-1,however, was not accompanied by a corresponding increase in number of listings. In fact,primary market activities were not very active except in 2007. In 2011, BOVESPA saw 24new listings and US$4 billion of funds raised through initial public offerings (IPOs),compared to the peak levels of 71 new listings and US$30 billion IPO funds raised in 2007(see Figure 2-3).3228Figure 2-3. IPO funds raised and no. of newly listed companiesIPO funds raised on BM&FBOVESPA and no. of newly listed companies (2002 on – BM&FBOVESPA 2011) (2002 - 2011)IPO funds raisedNo. of newly listed companies30240210241802015016127113120908765442 3820111562149 130242002 2003 2004 2005 2006 2007 2008 2009 2010 2011Note: IPO funds raised figures for 2002 and 2003 are not Note: IPO funds raised figures for 2002 and 2003 are available.Source: BM&FBOVESPASource: BM&FBOVESPA monthly operational data603002.3 Financial derivatives marketBoth market segments of BOVESPA and BM&F offer trading in financial derivatives. Thekey products on BOVESPA are stock (including ETF) options and IBOVESPA options (theonly index options offered by BOVESPA segment). BM&F offers a much wider range offinancial derivatives, including futures and options (F&O) on interest rates, forex and equityindices, and futures on sovereign debt securities. Of all product types on BM&FBOVESPA,stock options are the dominant volume contributor, accounting for 56% of the total derivativestrading volume (including OTC contracts) in 2011. They are followed by F&O on interestrates (32%) and on forex (8%). Other derivatives (including agricultural and energyproducts) account for only a small fraction (4%). In terms of open interest, the top three arestill interest rate derivatives (64%), stock options (26%), and forex derivatives (8%). (SeeFigure 2-4.)- 6 - Research & Corporate Development, HKEx31 December 2012

IBOVESPA daily closing (points)Futures trading volume (mil contracts)The BRICS Securities and Derivatives MarketsFigure 2-4. Derivatives trading volume and open interest by product typeon BM&FBOVESPA (2011)BM&FBOVESPA — Derivatives market open interest by product type (2011)BM&FBOVESPA — Derivatives market trading volume by product type (2011)(a) Trading volume(b) Open interestBOVESPA stockoptions56%BOVESPA stockoptions26%Other derivatives4%BM&F forex F&O8%BM&F interest rateF&O32%Other derivatives2%BM&F forex F&O8%BM&F interest rateF&O64%Notes:Notes:(1) Numbers may not add up to 100 per cent due to rounding.(2) “Other derivatives” comprise: (i) BOVESPA options on ETFs and IBOVESPA; and (ii) BM&F F&O on equity indic(2) “Other derivatives” comprise: (i) BOVESPA options on ETFs and IBOVESPA; and (ii) BM&F F&O on equity indices,Notes:(1) Numbers may not add up to 100 per cent due to rounding.(1) Numbers may not add up to 100% due to rounding.gold, agricultural products and energy.gold, agricultural (2) “Other products derivatives” and energy. comprise: (i) BOVESPA options on ETFs and IBOVESPA; and (ii) BM&F F&O on equity indices,Source: Futures Industry Association (FIA)gold, agricultural products and energy.Source: Futures Industry Association (FIA) monthly statisticsSource: Futures Industry Association (FIA)Total: 1.5 billion contractsTotal: 52 million contractsIn the BRICS Exchange Alliance, futures on IBOVESPA, the benchmark index of theBrazilian stock market, is the cross-listed product. The monthly trading volume ofIBOVESPA futures on BM&FBOVESPA has been quite stable over the past decade. Theaverage daily contract volume was the lowest (in terms of the current contract size) at 42,775contracts in September 2002 and reached a high of 151,119 contracts in August 2007. (SeeFigure 2-5.) The average daily volume for the year 2011 was 86,948 contracts.Figure 2-5. IBOVESPA daily closing and monthly trading volume of IBOVESPA futuresIBOVESPA daily on closing BM&FBOVESPA and monthly trading volume (2002 of – IBOVESPA 2011) futures (2002 - 2011)80,00070,000IBOVESPA futures monthly volumeIBOVESPA daily closing73516 (2008/05/20)161460,0001250,0001040,00056754 (2011/12/29)830,00013872 (2002/01/02)620,0008370(2002/10/16)29435 (2008/10/27)410,0002002002/01 2003/01 2004/01 2005/01 2006/01 2007/01 2008/01 2009/01 2010/01 2011/01Year/monthNote: The Note: contract The contract size size of of IBOVESPA futures was reduced to one-third to since since 17 April 172006. April For 2006. comparison, For comparison, the trading the tradingvolumes volumes of IBOVESPA of IBOVESPA futures futures from FIA for Jan 2002 to to Apr Apr 2006 2006 were were multiplied multiplied by 3. by 3.Sources: Reuters and Futures Industry Association (FIA)Sources: Reuters and FIA- 7 - Research & Corporate Development, HKEx31 December 2012

The BRICS Securities and Derivatives Markets2.4 Other international cooperation initiativesBM&FBOVESPA partnered with CME Group in the development of the PUMA TradingSystem and a derivatives order routing arrangement. This routing arrangement allowsBM&FBOVESPA customers to trade CME Group’s products through the PUMA system.Similarly, customers of CME Group can access the Brazilian derivatives market through theCME Globex platform. This was further strengthened by the signing of a cross-listingagreement in March 2012 involving S&P 500 Index futures and BOVESPA Index futures, thebenchmark futures products of the two exchanges. Besides CME Group, NASDAQ OMXhas provided technologies to BM&FBOVESPA for market data and market surveillance.Separately, BM&FBOVESPA formed an alliance with Chi-X Global in 2012 to launchChi-FX Brazil, a new trading platform for overseas investors to trade BM&FBOVESPA-listedstocks in their local currencies.Furthermore, BM&FBOVESPA has signed memoranda of understanding (MOU) with anumber of exchanges, including the Toronto Stock Exchange (TSX, now part of TMX Group),the Santiago Stock Exchange in Chile, the Colombian Stock Exchange (BVC), the MexicanExchange (BMV), the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange(SZSE).3. RUSSIAIn Russia, the principal exchange operator is Moscow Exchange MICEX-RTS (“MoscowExchange”). It was formed in December 2011 when the two principal exchange operators atthat time — MICEX Group and RTS Group — merged. Besides the Moscow-basedexchange, the group has exchange centres in regions like Ural, Volga and Siberia.There are a few regional exchanges which are not part of the Moscow Exchange Group.These include the St. Petersburg Currency Exchange, the Samara Currency InterbankExchange and the St. Petersburg Exchange (in which Moscow Exchange has a minorityshareholding). The first two exchanges, as implied by their names, focus on currencytrading while the St. Petersburg Exchange mainly trades commodities and related derivatives.The principal regulator of the exchanges and the capital market in Russia is the FederalService for Financial Markets (FFMS). The Central Bank of Russia (CBR) is responsiblefor regulating Russia’s banking industry and forex market and is the organiser of thegovernment securities market. The Federal Anti-monopoly Service (FAS) and the Ministryof Finance (MOF) are two other important supervisory bodies in Russia’s regulatoryframework, with authority over the maintenance of competition in the financial market andthe issuance of public debt securities respectively.- 8 - Research & Corporate Development, HKEx31 December 2012

The BRICS Securities and Derivatives Markets3.1 Market segmentsProducts of Moscow Exchange can be classified into forex, corporate securities, governmentsecurities and derivatives (financial and commodity). Moscow Exchange also extends itsoffering of commodity products through its associate, National Mercantile Exchange(NAMEX). Besides on-exchange products, Moscow Exchange operates an OTC marketwhich has several systems for reporting OTC trades. One function of the OTC market is tofacilitate trading in securities of foreign issuers, including depository receipts (DRs) on thesesecurities.The post-trade processing of transactions on Moscow Exchange is handled by its fivesubsidiaries — National Clearing Centre (NCC), RTS Clearing Centre (RTS-CC), NationalSettlement Depository (NSD), Depository Clearing Company (DCC) and RTS SettlementChamber (RTS-SC) — for different securities market sectors (see below) and asset classes.NCC and RTS-CC are the clearing houses for the forex market and derivatives marketrespectively. They also provide clearing services for different sectors of the securitiesmarket. Settlement and depository services for the securities market are provided by NSDand DCC. RTS-SC is a non-banking credit institution which provides settlement services totrading participants on Moscow Exchange. As the post-trade facilities of a merged exchange,these five institutions are in the process of integration.3.2 Forex marketForex trading is a significant business segment of Moscow Exchange, given that MICEX wasfounded in 1992 as a currency exchange. In 2011, total trading volume on the on-exchangecurrency market reached RUB86.8 trillion (US$3 trillion), representing 29% of the aggregateturnover on the regulated markets of Moscow Exchange. The electronic currency tradingsystem of MICEX supports trading (including currency swaps) in US dollar, euro, Ukrainianhryvnia, Kazakhstan tenge, Belarusian rouble and, since December 2010, Chinese renminbi(RMB). Similar to the global market, forex trading on MICEX has been dominated by USdollar and euro, which account for almost 100% of the trading volume.3.3 Securities marketsCorporate securities listed on Moscow Exchange comprise equities (including Russiandepository receipts (RDRs)), corporate debt securities and investment funds, and are traded onthree sectors — Main Market (formerly under MICEX), Standard, and Classica (formerlyunder RTS-SE). The Main Market is the most liquid sector, accounting for over 80% ofequity turnover and more than 99% of bond trading volume in the Russian securities market.Figure 3-1 shows the market capitalisation of domestic listed companies and the annualsecurities turnover on MICEX from 2002 to 2011.- 9 - Research & Corporate Development, HKEx31 December 2012

Market capitalisation / Turnover (US$ bil)The BRICS Securities and Derivatives MarketsFigure 3-1. Domestic stock market capitalisation and annual securities turnover of MICEX(2002 – 2011)1,4001,200Domestic stock market capitalisation and annual securities turnover of MICEX (2002 - 2011)Market capitalisationSecurities turnover*1,2221,0008879498007367716004002664206244273374744435392000138 1535936 73100 1142002 2003 2004 2005 2006 2007 2008 2009 2010 2011* Comprising stocks, RDRs and investment funds* TurnoverSources:of stocks,MoscowRDRsExchangeandandinvestmentWorld Federationfundsof Exchanges (WFE)Sources: Moscow Exchange and WFESecurities that have gone through the listing procedure are admitted to trading on any one ofthe five quotation lists — A1, A2, B, V and I — depending on the requirements satisfied bythe securities (A1 has the most stringent requirements while V and I have the least).Alternatively, securities can go through a simplified procedure for admission to tradingwithout being listed. In 2011, both MICEX and RTS-SE had two newly listed companiesthrough IPOs, raising capital of US$2 billion in total 5 .Moscow Exchange operates the Innovation and Investment Market (IIM), created jointlywith the Russian State Corporation of Nanotechnologies (ROSNANO), to help growthtechnology companies attract investment. This sector consists of three segments: (1) theInnovation and Growth Companies (IGC) sector to allow IPOs of eligible companies; (2) aprivate placement platform; and (3) the IPOBoard (an online information and trading system)to facilitate fund raising by non-public technology companies.Securities trading constituted 51% of total cash market trading value of MICEX in 2011. Ofthis, about half was in bonds and bond repurchase agreements (repos) (see Figure 3-2) inwhich government securities play an important role. GKO, OFZ (two types of governmentbonds — zero-coupon treasury bills and coupon-bearing bonds respectively) and CBR bondsare the main instruments of this segment. MICEX calculates the Russian Government BondIndices (RGBI) and yield indicators based on the prices of these instruments. Notably, repotrading on stocks is also popular, constituting 17% of total cash market trading of MICEX.5Figures are from WFE annual statistics, which may include dual-listings.- 10 - Research & Corporate Development, HKEx31 December 2012

The BRICS Securities and Derivatives MarketsTrading volume of securities, bonds and currencies on MICEX (2011)Figure 3-2. Trading volume of securities, bonds and currencies on MICEX (2011)Stocks, investmentfunds and RDRs9%Currency49%Bond repos22%Stock repos17%Bonds3%Total: US$5,909 billionSource: Moscow Exchange3.4 Financial derivatives marketDerivatives products of Moscow Exchange are traded on FORTS and MICEX Derivatives.FORTS (abbreviation for “Futures and Options on RTS”) is the main derivatives market ofMoscow Exchange in terms of volume (99% of the total in 2011). Products on FORTS arefutures on shares (including RDRs), stock indices, bonds, currencies, interest rates andcommodities, and options on futures (except interest rates). MICEX Derivatives offersfinancial futures on currencies, interest rates, a stock index (MICEX Index) and Russianstocks with fewer contract types than FORTS.Figure 3-3 shows that financial derivatives are the dominant products on Moscow Exchange’sderivatives market in terms of both trading volume and open interest. In 2011, index futures,stock futures and forex futures are the most actively traded products, contributing 35%, 33%and 24% of the total derivatives trading volume respectively.Commodity F&O*4%Forex options0.1%Stock options0.8%Index options3%Interest rate futures0.7%Source: Moscow ExchangeFigure 3-3. Derivatives trading volume and open interest by product typeon Moscow Exchange (2011)MICEX-RTS derivatives trading volume by product type (2011)(a) Trading volumeForex futures24%Index futures35%Stock futures33%Forex options2%Stock options2%Index options7%Interest rate futures5%MICEX-RTS derivatives open interest by product type (2011)Commodity F&O*3%(b) Open interestIndex futures12%Forex futures45%Stock futures23%Total no. of contracts: 1,099 millionTotal no. of contracts: 3.2 million* Agricultural products, energy and metalsNote: Numbers do not add up to 100% due to roundingSource: FIA* Agricultural products, energy and metalsNote: Numbers do not add up to 100% due to roundingSource: Futures Industry Association (FIA)* Agricultural products, energy and metalsNote: Numbers do not add up to 100% due to roundingSource: Futures Industry Association (FIA)- 11 - Research & Corporate Development, HKEx31 December 2012

MICEX Index weekly closing (points)Futures trading volume (mil contracts)The BRICS Securities and Derivatives MarketsThe first cross-listed product of Moscow Exchange for the BRICS Alliance is futures on theMICEX Index, the benchmark index of the Russian stock market. Trading in MICEX Indexfutures in the local market was relatively inactive in the first two years after launch in 2007and the monthly volume even dropped to zero in November 2008. In early 2009, MICEXintroduced a number of measures to boost the liquidity in its equity derivatives market,including reduction of the minimum price fluctuation, commission fee and margin depositrates for this product. Subsequently, the trading volume picked up rapidly and reached thepeak of 46,990 contracts on an average daily basis in October 2010. (See Figure 3-4.) Theaverage daily volume for the year 2011 was 10,805 contracts, compared to 1,523,571contracts for the most active RTS Index futures.Figure 3-4. MICEX Index weekly closing and monthly trading volume of MICEX IndexMICEX Index weekly closing and monthly trading volume of MICEX Index futuresfutures on Moscow Exchange (2002 – 2011)2,5002,000MICEX Index futures monthly volumeMICEX Index weekly closing(2002 - 2011)1943 (2008/05/18)2.01.61,5001.21,0001402(2011/12/30)0.8500256 (2002/01/06)0.4513 (2008/10/26)02002/01 2003/01 2004/01 2005/01 2006/01 2007/01 2008/01 2009/01 2010/01 2011/01Year/monthNote: MICEX Note: Index MICEX futures Index futures were launched were launched in in June 2007Sources: Reuters and Futures Industry Association (FIA)Sources: Reuters and FIA0.03.5 Other international cooperation initiativesBefore merging with RTS Group, MICEX Group signed memoranda of cooperation with anumber of overseas counterparts, including Chicago Mercantile Exchange (CME), DeutscheBörse (DB), HKEx, the London Stock Exchange (LSE), NASDAQ Stock Market, the NewYork Stock Exchange (NYSE), the SHSE, the SZSE and Tokyo Stock Exchange (TSE). Inaddition, NASDAQ OMX is a partner of both MICEX Group and RTS Group in the area ofmarket data services.Moscow Exchange also has several joint ventures in Ukraine and Kazakhstan. In 2008, RTSGroup cooperated with a group of brokers in Ukraine to establish the Ukrainian Exchange,and provided the new exchange with equity and derivatives trading systems. Currently,Moscow Exchange has a 43% stake in the Ukrainian Exchange. Moscow Exchange wasalso the majority shareholder in the PFTS Stock Exchange in Ukraine and the EvraziyskaiaTrading System (ETS) Commodity Exchange in Kazakhstan as at the end of 2011.- 12 - Research & Corporate Development, HKEx31 December 2012

The BRICS Securities and Derivatives Markets4. INDIAThere are over 20 stock exchanges and over 20 commodity exchanges in India. Among thestock exchanges, the National Stock Exchange of India (NSE) and BSE Limited (BSE) arethe most prominent. These two exchanges offer trading in stocks, ETFs, bonds and financialderivatives. The commodity exchanges offer trading in commodity futures while trading incommodity options is still prohibited. Among them, Multi Commodity Exchange of India(MCX), which became India’s first exchange to get listed on the BSE in March 2012, has thelion’s share by trading volume.The principal regulator in the Indian securities market (in legislative terms, “securities”includes financial derivatives) is the Securities Board of India (SEBI). It regulates stockexchanges, market intermediaries and other service providers and their activities, andpromotes investor education and training of market intermediaries. The market for domesticgovernment securities (G-secs), which are traded both OTC and on exchange, is developedand managed by the Reserve Bank of India (RBI), the nation’s central bank. It also issuesG-secs on behalf of the Indian Government.At the policy level, the Ministry of Finance (MOF) is responsible for formulating polices andadministering the relevant Acts for the regulation and development of the securities market;and the Ministry of Corporate Affairs (MCA) is primarily responsible for administering theActs governing the corporate sector.4.1 Key exchangesThe NSE and the BSE are the most prominent stock exchanges in India — almost all cashmarket trading (equities and other securities, excluding financial derivatives) is done on thetwo exchanges, with the NSE having the lion’s share (81% in 2011/12 6 ). These twoexchanges are also the only exchanges in India offering equity derivatives, in which tradingvolume is also dominated by the NSE (97%). Currently, only the NSE, MCX StockExchange (MCX-SX) and the United Stock Exchange of India (USE) offer currencyderivatives, in which the NSE has again the largest share by trading volume (47% in 2011/12),followed by MCX-SX (37%). (See Figure 4-1.)The NSE offers the trading of shares, warrants, mutual funds (including ETFs), fixed incomesecurities (include G-sec), futures and options contracts on equities, equity indices andcurrencies, and interest rate futures. The National Securities Clearing Corporation Limited(NSCCL), the NSE’s wholly-owned subsidiary, clears and settles the transactions of equityand financial derivatives.The BSE’s product offering is similar to the NSE’s except that the BSE does not offer tradingof interest rate futures and has suspended the trading of currency futures since April 2010.BOI Shareholding Limited (BOISL, 49% owned by the BSE) is the BSE’s clearing house forfunds and securities while Indian Clearing Corporation Limited (ICCL), the BSE’ssubsidiary, provides clearing and settlement services for the BSE’s mutual funds andcorporate debt segments.6The financial year in India is from April to March the following year (the same convention is used for thisIndia section of the article).- 13 - Research & Corporate Development, HKEx31 December 2012

Market capitalisation / cash market turnover (US$ billion)Market capitalisation / cash market turnover (US$ billion)No. of listed companiesNo. of listed companiesThe BRICS Securities and Derivatives Markets4.2 Cash marketFigure 4-2 shows the growth of the cash markets operated by the NSE and the BSE in the pastdecade. Although the BSE has a much larger number of listed companies than the NSE(5,133 vs 1,646 as at the end of March 2012), they have similar equity market capitalisation(US$1,192 billion for the NSE vs US$1,215 billion for the BSE) given that most of thecompanies listed on the NSE are dual-listed on the BSE. NSE’s total cash market turnoverhas grown to 4 times that of BSE by 2011/12 (US$549 billion vs US$130 billion).Figure 4-2. Market capitalisation, turnover value and number of listed companiesin the NSE’s and the BSE’s cash market segment (2002/03 – 2011/12)NSE1,8001,6001,4001,2001,000800600400200Preiod-end Market capitalisation, cash market trunover and no. of listed companies on NSE (2002/03 - 2011/12)818130No. of listed companiesMarket capitalisationCash market turnover909258970362253 2611,0691,228631 7733524461,3811,2158881,4325685401,4701,5741,331 1,5019178011,6461,1925491,8001,6001,4001,2001,00080060040020001132002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/120Reporting yearPreiod-end Market capitalisation, cash market trunover and no. of listed companies on BSE (2002/03 - 2011/12)BSE1,8001,6001,4001,2001,0008006004002000No. of listed companies5,650Market capitalisation1,5325,528Cash market turnover1,3661,2851,2155,1335,0674,9758134,9294,887677 4,8214,7314,78160638827739512030521918321624766 116 1191302002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/125,8005,6005,4005,2005,0004,8004,6004,4004,200Reporting yearNotes:(1) Market capitalisation and turnover are converted to USD using period-end exchange rates (source: RBI).(2) The reporting year covers April each year to March the following year.(3) The significant decrease in the number of listed companies in the BSE from 2003/04 to 2004/05 is partlydue to the delisting of 552 companies in July 2004 because of their non-compliance with the BSE’s listingagreements.Sources: NSE statistics and SEBI Bulletins- 15 - Research & Corporate Development, HKEx31 December 2012

The BRICS Securities and Derivatives Markets4.3 Financial derivatives marketThe NSE is not only the largest exchange in India in terms of contract volume of financialderivatives but also a prominent derivatives exchange in the world. It ranked 3 rd in terms ofaggregate derivatives volume in 2011, behind Korea Exchange (KRX) and CME Group 7 .Among the various product types, index options are the most actively traded, surpassingcurrency futures in 2011/12 — contributing 40% of the NSE’s total derivatives volume,compared to 32% for currency futures (see Figure 4-3). In respect of trading activity byunderlying, option contracts on the S&P CNX Nifty Index were the most active in the year2011, contributing 39% of the total 8 . It was followed by futures contracts on US dollar (US$)against Indian Rupee (32%), option contracts on US$ against Indian Rupee (11%) and futurescontracts on the S&P CNX Nifty Index (6%). Stock futures and stock options accountedfor 7.3% and 1.5% respectively of the total (see Table 4-1).Table 4-1. Top 5 derivatives products by contract volume on NSE (2011)Rank Derivatives Contract volume % of total1 S&P CNX Nifty Index Options 868,684,582 39.5%2 US Dollar/Indian Rupee Futures 697,825,411 31.7%3 US Dollar/Indian Rupee Options 252,807,126 11.5%4 S&P CNX Nifty Index Futures 123,144,880 5.6%5 EUR/Indian Rupee Futures 18,065,186 0.8%- All individual stock futures 160,878,260 7.3%- All individual stock options 33,172,963 1.5%- Others 45,788,242 2.1%All NSE products 2,200,366,650 100.0%Source: FIA statisticsAlthough the BSE is the first exchange to offer equity derivatives in India (SENSEX futuresin 2000), it captured only a 1%-3% market share in equity derivatives each year in the pastdecade. In view of this lacklustre performance, the BSE introduced a series of LiquidityEnhancement Incentive Programmes (LEIPS) in late September 2011 to boost lastingliquidity in the segment. As a result, total trading volume in the BSE derivatives marketincreased from 6,000 contracts in 2010/11 to 32 million contracts in 2011/12 contributedmainly by equity derivatives — 77% in 2011/12 by index options and 22% by index futuresproducts (mainly SENSEX Index futures). (See Figure 4-3.)78Source: FIA statistics. It should be noted that the contract sizes of the NSE’s products are much smallerthan the US standards. For example, the multiplier of the NSE’s S&P CNX Nifty Index futures/options isINR100 (US$1.9 as of end-2011) per index point, with a contract size of US$8,324, compared with US$50per index point for CME’s E-mini S&P 500 Index futures, with a contract size of US$62,880 as of end-2011;the contract size of the NSE’s US dollar/Indian Rupee futures/options is US$1,000, compared with €125,000(US$162,156) for CME’s Euro FX futures.Source: FIA statistics- 16 - Research & Corporate Development, HKEx31 December 2012

Number of contracts (million)Number of contracts (million)The BRICS Securities and Derivatives MarketsFigure 4-3.NSEContract volume of all financial derivatives on the NSE and the BSE(2002/03 – 2011/12)2,5002,0001,5001,0005000[ ] Total contract volume( ) % share[17] [57] [77]Contract volume of financial derivatives in NSE (2002/03 - 2011/12)[690]33212[425](31%)[219] 55222[158]204(48%)81 10581 157[1,058]33379(36%)341(32%)[1,784]3714712(40%)651(36%)36[2,179]272(12%)701(32%)864(40%)(32%) 146 186 158210(30%)178 165 1462002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12Reporting yearIndex Futures Stock Futures Index OptionsBSE3530Stock Options Currency Futures Currency OptionsContract volume of financial derivatives in BSE (2002/03 - 2011/12)[ ] Total contract volume( ) % share[32]252025(77%)151050[0.1] [0.4] [0.5] [0.0002][1.8]2[7.5]7(96%)[0.7][0.009] [0.006]7(22%)2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12Reporting yearIndex Futures Stock Futures Index Options Currency FuturesNotes:(1) The reporting year covers April each year to March the following year.(2) Contract volume figures of the NSE’s interest rate futures and the BSE’s stock options are too small to beidentifiable in the chart.(3) The volume of the BSE’s products grew very strongly in 2011/12 after the launch of a series of LiquidityEnhancement Incentive Programmes in late September 2011.Sources: NSE statistics and SEBI BulletinsIn the BRICS Exchange Alliance, futures on SENSEX, one of the benchmark indices of theIndian stock market, is the cross-listed product. Figure 4-4 shows the monthly tradingvolume of SENSEX Index futures on the BSE from January 2011 to June 2012 (where data isavailable) and the daily closing of the underlying index for the past decade. The averagedaily volume was 57,433 contracts in 2012 up to June.- 17 - Research & Corporate Development, HKEx31 December 2012

SENSEX Index daily closing (points)Future trading volume (million contracts)The BRICS Securities and Derivatives MarketsFigure 4-4.Daily closing of SENSEX Index and monthly trading volume ofSENSEX Index futures on the BSE (2002 – 2012H1)SENSEX daily closing and monthly volume of SENSEX Index futures (2002 - 2012H1)25,0004SENSEX Index futures monthly volumeSENSEX Index daily closing21005 (2010/11/05)17430 (2012/06/29)20,000315,000210,0005,0003264 (2002/01/01)12834 (2002/10/28)02002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120Note: Volume figures of SENSEX Index Futures are available since January 2011 and those before late 2011are too small to be identifiable in the chart.Sources: Reuters and FIA4.4 Other international cooperation initiativesAlliances that the Indian exchanges have reached with their overseas counterparts are mainlyin the area of derivatives product development.The NSE has established a cross-listing relationship with CME Group for the listing of futurescontracts on the NSE’s S&P CNX Nifty Index in the US and futures and options contracts onthe two US indices S&P 500 Index (S&P 500) and Dow Jones Industrial Average (DJIA) inIndia. The NSE has also partnered with Singapore Exchange (SGX) in the listing of futuresand options contracts on S&P CNX Nifty Index in Singapore. Launched in 2000, SGX’sS&P CNX Nifty Index futures achieved a significant trading volume — 14.7 million contractsin 2011, representing 20% of SGX’s total derivatives volume. On the other hand, themini-futures contracts on the index launched by CME Group in 2010 had only about 46,000contracts traded in 2011.Reciprocally, the NSE launched S&P 500 futures and options and DJIA futures in August2011, which achieved average daily volumes of 1,846 contracts, 99 contracts and 2,464contracts respectively in the first half of 2012. The next attempt of the NSE to offer tradingof futures and options on foreign indices in India was made in May 2012 when it partneredwith FTSE Group (part of LSE Group) to launch FTSE 100 Index futures and optionscontracts. These products achieved average daily volumes of 5,064 contracts and 830contracts respectively up to June 2012. The NSE, which has signed a “letter of support” onthe BRICS Exchange Alliance, has not joined the other alliance members in the cross-listingof benchmark equity index products.- 18 - Research & Corporate Development, HKEx31 December 2012

The BRICS Securities and Derivatives MarketsThe BSE, whose shareholders include DB and SGX (5% each), partnered with Eurex of theDB Group to launch SENSEX Index futures and options in Germany in October 2010.However, little or no trading has been recorded since then. In addition, the BSE agreed withthe US International Securities Exchange (ISE) of the DB Group for the introduction ofderivatives based on ISE’s indices in India. However, such products are not yet launched.Separately, the BSE signed a MOU with the Osaka Securities Exchange (OSE) in April 2011for the development of financial markets in India and Japan.To promote sustainable investment practices in its market, the BSE joined in October 2012 theSustainable Stock Exchange Initiative which is promoted by five global exchanges —NASDAQ OMX, BM&FBOVESPA, the JSE, Egyptian Exchange and the Istanbul StockExchange.5. CHINA/HONG KONGMainland China and Hong Kong operate independent securities and derivatives markets,under different rules and regulations and with different market infrastructure. In MainlandChina, there are two stock exchanges ― the Shanghai Stock Exchange (SHSE) and theShenzhen Stock Exchange (SZSE); one financial derivatives exchange ― China FinancialFutures Exchange (CFFEX); and three commodities exchanges ― Shanghai FuturesExchange (SHFE), Dalian Commodity Exchange (DCE) and Zhengzhou CommodityExchange (ZCE) which offer futures trading on commodities. Apart from that, there is anational off-exchange (over-the-counter) trading system ― the Agency Share Transfer System― for the trading of delisted stocks and for technology growth companies. 9 In Hong Kong,HKEx is the dominant exchange operating both the securities and the derivatives market.This section focuses on the stock exchanges and the financial derivatives exchanges in theChina/Hong Kong markets, although the Mainland exchanges are not yet members of theBRICS Exchange Alliance.The China Securities Regulatory Commission (CSRC) is the securities and futures marketregulator in Mainland China. It regulates the exchanges and clearing houses, marketintermediaries, investment fund companies and other service providers in the market. ThePeople’s Bank of China (PBOC, the Central Bank) and the China Banking RegulatoryCommission (CBRC) are responsible for the regulation of the banks which provide servicesfor the securities and futures market. The China Insurance Regulatory Commission (CIRC)is responsible for regulating the insurance companies, including their scope and degree ofparticipation in the securities and futures markets. In the process of gradual market opening,the CSRC works with the other two regulators and other government authorities, including theState Administration of Foreign Exchange, in formulating related policies and regulations.9There are also numerous local equity or property rights exchanges in the Mainland, which provide tradingvenues for the shares and assets of non-listed companies. These are outside the scope of the current article.- 19 - Research & Corporate Development, HKEx31 December 2012

The BRICS Securities and Derivatives MarketsIn Hong Kong, the Securities and Futures Commission (SFC) is the securities andderivatives market regulator while the Hong Kong Monetary Authority (HKMA) is thefrontline regulator of banks which conduct securities and futures businesses.5.1 Securities marketOf the exchanges in the China/Hong Kong markets, only HKEx is currently a member of theBRICS Exchange Alliance. It operates a Main Board and the Growth Enterprise Market(GEM). Listed securities include equities, equity warrants, derivative warrants, CallableBull/Bear Contracts (CBBCs) 10 , debt securities and funds (including ETFs). Clearing andsettlement is performed by the Hong Kong Securities Clearing Company (HKSCC) on animmobilised basis. Securities registration is performed at the share registrars.On the Mainland, the SHSE operates a Main Board while the SZSE operates a Main Board, aSmall and Medium sized Enterprise (SME) Board (launched on 24 June 2004) under the MainBoard, and a separate board, ChiNext, for growth enterprises (launched on 30 October 2009).Listed securities on the SHSE and SZSE include equities, government bonds, corporate bonds(including convertibles), equity warrants, investment funds (including ETFs) and bondrepurchases. Securities clearing, settlement and registration is performed by the ChinaSecurities Depository & Clearing Corporation (SD&C) 11 in electronic book-entry form asthe Mainland securities market is already dematerialised.The Mainland securities market is partly opened to foreign investors through the QualifiedForeign Institutional Investor (QFII) scheme for investment in A shares and through thespecialised equity product, B shares, which are traded in foreign currencies. The investmentof QFIIs is subject to authorised investment quota controlled by the Mainland Government.B shares were originally designed for foreign investors but were subsequently opened todomestic residents in February 2001. The Hong Kong market, on the other hand, is an openmarket without restriction on investor participation and fund flows.The Hong Kong market and the Shanghai market have comparable market size by value oflisted companies while the Mainland markets have higher turnover value. Figure 5-1 showsthe trend in market capitalisation and turnover for the three markets in the past decade. As atthe end of 2011, the market capitalisation of HKEx was US$2,258 billion and that of theSHSE was US$2,355 billion. Among the three, the SHSE has the largest average dailyturnover value (US$30 billion in 2011 vs US$13 billion for the SZSE and US$9 billion forHKEx) while the SZSE has the highest equity turnover ratio (227% in 2011 vs 160% forSHSE & 69% for HKEx).1011CBBCs are a kind of structured product issued by a third party, usually an investment bank, that tracks theperformance of an underlying asset without requiring investors to pay the full price required to own theactual asset.SD&C is the securities central clearing house established by the two exchanges, which operates two branchcompanies in Shanghai and Shenzhen to serve the respective markets.- 20 - Research & Corporate Development, HKEx31 December 2012

Equity market capitalisation (MC)Total market turnover value (TV)The BRICS Securities and Derivatives MarketsUS$bn4,0003,500Figure 5-1.Equity market capitalisation and total market turnover valueon SHSE, SZSE (2002 and - 2011) HKEx (2002 - 2011)Equity market capitalisation and total market turnover value on SHSE, SZSE & HKEx7,215US$bn8,0007,0003,0006,0002,5002,0001,5001,0002,3552,2583,0662,2091,0545,0004,0003,0002,0005001,00002002 2003 2004 2005 2006 2007 2008 2009 2010 2011SHSE TV SZSE TV HKEx TVSHSE MC SZSE MC HKEx MC0Source: Monthly statistics of SHSE amd SZSE, HKEx Fact Books 2002-2011.Figure 5-2 shows the trading composition by type of security on the markets. Securitiestrading on the SHSE is contributed almost equally by equities and debt securities while thaton the SZSE is dominated by equities. A significant proportion of HKEx’s securities tradingis contributed by structured products including derivative warrants and CBBCs.Trading composition by security type on SHSE, SZSE and HKEx(2011)Figure 5-2. Trading composition by security type on SHSE, SZSE and HKEx (2011)US$55 bn (1%)US$46 bn (1%)US$55 bn(2%)US$89 bn(3%)US$577 bn(26%)US$3,770 bn(52%)US$2,922 bn(95%)US$1,554 bn(70%)Total (US$bn)SHSE 7,215SZSE 3,066HKEx 2,209US$77 bn(4%)US$3,344 bn(46%)Equities Debt securities Funds Structured productsSource: Monthly statistics of the respective exchanges.- 21 - Research & Corporate Development, HKEx31 December 2012

Funds raised (FR) by NLCsNo. of newly listed companies (NLC)The BRICS Securities and Derivatives MarketsFigure 5-3 shows the new listing activities on the markets. SZSE, which offers a listingplatform for smaller companies, has attracted the most number of listings since 2007. Fundsraised by newly listed companies on HKEx has been the highest among the three exchangessince 2009.Figure 5-3.Number of and funds raised by newly listed companies (NLC) onSHSE, SZSE and HKEx (2002 - 2011)Number of and funds raised by newly listed companies on SHSE, SZSE & HKEx(2002 - 2011)US$bn703213506060.357.83005042.945.52432504037.52003032.028.728.733.51502010010118.41018915.1907116.162 846910.78.5 9.2525.9352.14.4392526136 92002 2003 2004 2005 2006 2007 2008 2009 2010 2011SHSE FR by NLC SZSE FR by NLC HKEx FR by NLCSHSE NLC SZSE NLC HKEx NLC100500Source: Monthly statistics of the respective exchanges.5.2 Financial derivatives marketHKEx, a member of the BRICS Exchange Alliance, offers trading in various products,comprising equity index futures and options, single-stock futures and options, and otherproducts 12 on its derivatives market. In the Mainland, CFFEX is the only exchangeoffering financial derivatives. The only product currently available for trading is the CSI300Index futures, which started trading since 16 April 2010. In February 2012, CFFEXcommenced simulated trading in government bond futures which has been suspended sinceMay 1995 after serious market malpractices. In 2011, the average daily contract volume onHKEx and CFFEX was 572,275 contracts and 206,606 contracts respectively.Figure 5-4 shows the trading composition by product type on the two exchanges.Derivatives trading on HKEx in terms of number of contracts is dominated by optionsproducts, mainly stock options (53% in 2011). Equity index futures contributed 36% —16% by Hang Seng Index futures standard contracts, the cross-listed product in the BRICSExchange Alliance. Figure 5-5 shows the monthly trading volume of this contract on HKExover the past decade. The average daily trading volume for the product was 94,036 contractsin 2011, 4 times that ten years ago.12Other products are interest rate futures, fixed income futures and gold futures.Their volumes are minimal.- 22 - Research & Corporate Development, HKEx31 December 2012

HSI daily closing (points)Trading volume (mil contracts)The BRICS Securities and Derivatives MarketsFigure Trading 5-4. Trading composition composition by derivatives by derivatives product product type on type CFFEX on CFFEX and HKEx and HKEx(No. of of contracts) (2011)74.3m(53%)50.4m(100%)50.3 m(36%)ContractsHKEx 140,493,472CFFEX 50,411,86015.4 m(11%)0.4(0%)Equity index futures Equity index options Single-stock futures Single-stock optionsSource: Annual statistics of CFFEX, HKEx Fact Book 2011.Figure 5-5. Hang Seng Index (HSI) daily closing and monthly trading volumeof HSI futures on HKEx (2002 - 2011)Hang Seng Index (HSI) daily closing and monthly trading volume of HSI futures (2002 - 2011)3500030000HSI futures monthly volumeHSI daily closing31638.22 (2007/10/30)872500018434.39 (2011/12/30)62000051500011350.85 (2002/01/02)11015.84 (2008/10/27)431000050008409.01(2003/04/25)2102002/01 2003/01 2004/01 2005/01 2006/01 2007/01 2008/01 2009/01 2010/01 2011/01Year/month0Sources: Reuters and HKEx Fact Book, 2002-2011Source: Reuters and HKEx Fact Books 2002-2011.- 23 - Research & Corporate Development, HKEx31 December 2012

Equity market capitalisation / Equtiy turnover (US$bn)The BRICS Securities and Derivatives Markets6.1 Market segmentsThe JSE provides issuance, trading and post-trade services across the markets of equities,interest rate products and derivatives. Equity products include ordinary and preferenceshares, ETFs, warrants, real estate investment trusts (REITs), South African DepositoryReceipts (SADRs) on foreign shares and some less typical products (Krugerrand gold coinsand carbon credit notes). The interest rate market offers spot trading and repo trading incorporate and government bonds and their related futures products. Other derivativesavailable are futures and options on equities, currencies and commodities (including metals,crude oil and agricultural products) which are traded on the Yield-X business segment of theJSE. Yield-X is in the process of merging its interest rate product segment with BESA afterthe JSE’s acquisition of the latter in 2009.Equity market trading is conducted on the LSE’s latest technology platform, MillenniumExchange. Interest rate and derivatives products are traded on the Nutron Trading System.The equity clearing system is the Broker Deal Accounting (BDA) System, the back-officesystem that JSE members must use for maintaining their accounting and client records.Electronic securities settlement is conducted on a T+5 cycle by Strate for dematerialised orimmobilised securities, including bonds. Derivatives products are cleared by the SAFEXClearing Company (SAFCOM), a wholly owned clearing house of the JSE.6.2 Equity marketThe JSE’s equity products are traded on two markets — Main Board and AlternativeExchange (AltX). The latter caters for smaller companies which are not yet able to list onthe Main Board. There was a third market — Africa Board — for the listing of Africancompanies domiciled outside South Africa but it was closed in April 2012, with the listingsmoved to the Main Board. Over 70 Main Board-listed companies are also dually listed onoverseas exchanges, including Australian Stock Exchange (ASX), the LSE, Nasdaq StockMarket and the NYSE. Figure 6-1 shows the growth in market capitalisation of all listedcompanies and annual turnover on the JSE equity markets in the past decade.Figure 6-1. Equity market capitalisation and turnover on JSE (2002 – 2011)1,2001,000Equity market capitalisation and turnover on JSE (2002 - 2011)Equity turnover valueEquity market capitalisation1,0138007158348058566005654002684563014364863493804524072001889611318320202002 2003 2004 2005 2006 2007 2008 2009 2010 2011Sources: Monthly statistics of JSE and WFESources: Monthly statistics of JSE and WFE- 25 - Research & Corporate Development, HKEx31 December 2012

Capital raised (US$m)No. of newly listed companiesThe BRICS Securities and Derivatives MarketsFigure 6-2 shows key statistics on the JSE’s primary market activities in the same period.During this period, there were not many newly listed companies — the largest number oflistings, 62, was observed in 2007 before the global financial crisis. Alongside, equitycapital raised through means that require publication of a prospectus (including IPOs) wasrarely recorded — the biggest amount was recorded in 2003 (17% of total capital raised).Figure 6-2. Equity capital raised and number of newly listed companies on JSE (2002 – 2011)20,000Equity capital raised and number of newly listed companies on JSE (2002 - 2011)Capital raised via prospectusCapital raised via other meansNo of newly listed companies[18,268][ ] : Total capital raised16015,000[14,528]120[11,988][12,953][12,405][12,222][10,844]10,00080[7,424]62[8,200]5,000[3,395]9 817 1937231014 164002002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: JSE monthly statisticsSource: JSE monthly statistics06.3 Interest rate marketVarious types of cash debt instruments, including vanillas, commercial papers, consumer priceindex (CPI)-linked instruments, credit-linked notes and equity structured notes, are availableon the JSE’s interest rate market. Compared to the equity market, the bond market is muchmore active in terms of turnover — constituting 87% of total market turnover value in 2011(see Figure 6-3) — despite a much smaller market capitalisation (some 20% that of equities).As at the end of September 2011 (the latest available statistics), there were 1,137 bonds listedon the JSE, with a total market capitalisation of ZAR1,414 billion (US$176 billion). Themajority of these bonds were issued by corporates (mostly by banks) but in value terms it wasdominated by government and public organisation issues (see Figure 6-4). In 2011, therewere 733 newly issued bonds, with a nominal value of ZAR378 billion (US$47 billion).- 26 - Research & Corporate Development, HKEx31 December 2012

The BRICS Securities and Derivatives MarketsFigure 6-3. Market share of equity products, bonds and bond reposMarket share of equity products, bonds and bond repos in turnover value on JSE (2011)in turnover value on JSE (2011)Equity products*13%Bond repos58%Bonds29%* Equity products include ordinary shares, debentures, DRs, ETFs, ETNs, funds, warrants and REITs.Source: JSE monthly statisticsFigure 6-4.Distribution in number and market capitalisation of bond listingson JSE by type (Sep 2011)(a) No. of listingsTotal turnover value: US$3,216,719m* Equity products include ordinary shares, debentures, depository receipts, ETFs, ETNs, funds, warrants and REITs.Source: JSE monthly statisticsNo. of bond listings on JSE by type (Sep 2011)Market capitalisation of bond listings on JSE by type (Sep 2011)(b) Market capitalisationWater authorities1%State-owned enterprises4%Municipal government1%Central government7%Corporates57%SPVs*27%Municipal government1%Water authorities2%State-ownedenterprises13%Corporates19%Central government60%SPVs*6%Others^1%Others^3%Total: 1,137Total no. of listings: 1,137Total: US$176 billion Total market cap: US$176 billion* SPVs are special purpose vehicles, which are backed by single assets or pools of assets.^ “Others” includes bonds issued by non-resident organisations.Note: Numbers may not add up to 100% due to rounding.* Special purpose vehicles (SPVs) are backed by single assets or pools of assets.^ Others include bonds issued by non-resident organisations.Source: JSE Quarterly Review of Interest Rate MarketSource: JSE Quarterly Review of Interest Rate Market, 2011Q36.4 Financial derivatives market* Special purpose vehicles (SPVs) are backed by single assets or pools of assets.^ Others include bonds issued by non-resident organisations.Note: Numbers do not add up to 100% due to rounding.Source: JSE Quarterly Review of Interest Rate MarketThe JSE derivatives market is dominated by financial derivatives, the underlying assets ofwhich are equities, currencies and interest rates. Among them, equity derivatives are themost actively traded. Almost 99% of the total derivatives trading volume and open interestin 2011 came from financial derivatives and over 88% is attributable to equity derivatives.Single-stock futures and options (available for both domestic and foreign stocks) had a 57%dominant share in equity derivatives trading volume, in which single-stock futures had abigger share than single-stock options (49% vs 8%). Notably, single-stock dividend futures- 27 - Research & Corporate Development, HKEx31 December 2012

The BRICS Securities and Derivatives Marketsalso had a substantial share (27%). Index futures (including volatility index futures) andoptions accounted for only 15% of the equity derivatives trading volume with the majority(9%) came from a single product — futures on the FTSE/JSE Top 40 Index, the benchmarkindex of the South African stock market. (See Figure 6-5.)Although the JSE does not operate an OTC market, it seeks to incorporate the flexibility ofOTC derivatives into listed derivatives by introducing “Can-Do” futures and options, whichallow investors to negotiate the contract terms in respect of the underlying asset and expirydate. The underlying asset may be a single stock, an index or a basket of shares. Similar tomany OTC derivatives, Can-Do futures and options are not suitable for general retailinvestors given the considerable minimum contract size of ZAR10 million. Theycontributed only 1% of the equity derivatives trading volume in 2011.Figure 6-5.Distribution of JSE derivatives trading volume and open interestby product type (2011)Derivatives market trading volume of JSE by product type (2011)(a) Trading volumeDerivatives market open interest of JSE by product type (2011)(b) Open interestCommodities F&O*2%Interest rate F&O1%Commodities F&O*1%Interest rate F&O4%Currencies F&O9%Equity options10%Equity futures79%Currencies F&O6%Equity options17%Equity futures72%Total no. of contracts: 167,503,211 Total no. of contracts: 167,503,211Total no. of contracts: 13,321,940Total no. of contracts: 13,321,940* Agricultural products, crude oil and metalsNote: Numbers do not add up to 100% due to roundingSource: JSE monthly statistics(c) Trading volume of equity derivatives* Agricultural by underlying products, crude asset oil and metalsEquity derivatives trading volume of JSE by underlying asset (2011)Source: JSE monthly statisticsCan-do F&O1%Other index F&O6%Single-stock futures^49%FTSE/JSE Top 40 Indexfutures9%Single-stock dividendfutures^27%Single-stock options8%Total no. of contracts: 148,821,912 Total no. of contracts: 148,821,912* Agricultural products, crude oil and metals^ Including ^ International Including International Derivatives (IDX), which which are futures are on futures internationally internationally listed shares listed sharesSource: JSE monthly statisticsNote: Numbers may not add up to 100% due to rounding.Source: JSE monthly statistics- 28 - Research & Corporate Development, HKEx31 December 2012

Daily index closing (points)Futures trading volume (mil contracts)The BRICS Securities and Derivatives MarketsFutures contract on FTSE/JSE Top 40 Index is the first cross-listed product of the JSE for theBRICS Alliance. This index was launched in June 2002 by the JSE and FTSE (now part ofLSE Group) to replace JSE’s benchmark index at that time. Figure 6-6 shows the dailyclosing and the monthly futures trading volume of this index from 2002 to 2011. Since theindex futures is a quarter-month contract, it assumes a 3-month pattern of exceptionally highvolume at quarter-end months when roll-over takes place. In 2011, this futures productconstituted 72% of the total trading volume of all index futures on the JSE, with an averagedaily trading volume of 53,070 contracts.Figure 6-6.3500030000Daily closing and monthly futures trading volume of FTSE/JSE Top 40 IndexDaily closing and monthly futures trading volume of FTSE/JSE Top40 Indexon JSE (2002 – 2011)Monthly index futures volumeDaily index closing(2002 - 2011)31315(2008/05/22)762500052000028469(2011/12/30)41500010336(2002/01/02)15905(2008/11/20)31000050006763(2003/04/25)2102002/01 2003/01 2004/01 2005/01 2006/01 2007/01 2008/01 2009/01 2010/01 2011/01Year/monthSources: Reuters and and FIA FIA06.5 Other international cooperation initiativesThe JSE is one of the ten member exchanges of the Committee of SADC Stock Exchanges(COSSE). SADC is the Southern African Development Community, the aim of which is tocreate a community providing for regional peace and security, and an integrated regionaleconomy. COSSE seeks to contribute to the establishment of a regional common market byfacilitating regional integration in the finance and investment field. To enhance regionalcooperation, the JSE has signed MOU on cooperation with a number of regional exchanges,including exchanges in Namibia, Kenya, Nigeria, Ghana, Mauritius and Egypt. In Asia, theJSE signed a MOU with the TWSE in 2003.LSE Group has been an important technology and business partner of the JSE since 2002when the latter launched the SETS trading system provided by LSE Group. The JSE’s SETSsystem was replaced by another LSE platform — TradElect — in April 2007. In July 2012,the system was further upgraded to the Millennium Exchange platform of LSE Group. TheLSE and JSE also reached an agreement in 2002 on dual listing, remote access and marketing- 29 - Research & Corporate Development, HKEx31 December 2012

The BRICS Securities and Derivatives Marketsactivities. As for the cooperation on derivatives products, the JSE has signed licensingagreements with CME Group to launch futures on corn, precious metals and crude oil.Before BESA was acquired by the JSE, it formed a partnership with NASDAQ OMX tolaunch BondClear, a new clearing house for OTC interest rate derivatives in South Africa.NASDAQ OMX initially had a 20% stake in BondClear but the stake was subsequently soldto the JSE. BondClear is now wholly owned by the JSE and is awaiting a clearing houselicence from the FSB.The JSE has been an active promoter of socially responsible investment (SRI) among SouthAfrican listed companies. A further step was taken in June 2012 when the JSE, NASDAQOMX, BM&FBOVESPA, Istanbul Stock Exchange and Egyptian Stock Exchange announcedtheir joint commitment to promote long-term sustainable investment and improvedenvironmental, social and corporate governance disclosure and performance among theirlisted companies.* * *DisclaimerThe analysis and framework of this paper are developed by Research & Corporate Development Departmentbased on the information derived from sources believed to be reliable. Any views and comments in this papercaptured within the framework do not necessarily represent those of HKEx.- 30 - Research & Corporate Development, HKEx31 December 2012