NASDAQ Dubai - Notice No. 31/10 - Bank Guarantees as Eligible Margin

BANK GUARANTEES AS ELIGIBLE MARGIN

A. Background

This Notice explains the changes that NASDAQ Dubai is making to its Margin procedures, as a result of its plans to outsource its trading, clearing and settlement functions for equities to the Dubai Financial Market (DFM). The term "Clearing Member" is used throughout this Notice to refer to Individual Clearing Members and General Clearing Members.

This Notice is issued pursuant to NASDAQ Dubai Business Rules Version 7.4, Rules 6.2.11 and 6.2.14(1), and provides procedures for Clearing Members to use bank guarantees as Eligible Margin with NASDAQ Dubai. This Notice should be read with NASDAQ Dubai's Proposed Business Rules Version 7.5 and Version 7.6., which were released for public consultation on 14 March 2010.

NASDAQ Dubai Business Rule 6.2.11 defines Margin as:

"an amount of cash, or the number of Eligible Securities, bank guarantees or other assets as NASDAQ Dubai may determine, which is calculated in respect of a Clearing Member's Net Open Position and/or liabilities under CCP Transactions ."

In addition, NASDAQ Dubai Business Rule 6.2.14 (1) gives NASDAQ Dubai sole discretion to determine Eligible Margin and "specify the type of cash, Eligible Securities, bank guarantees and other assets comprising Eligible Margin by Notice." Eligible Margin may consist of "US Dollar cash and such other cash, Eligible Securities, bank guarantees and other assets which Members may provide to NASDAQ Dubai for Margin purposes as set out by Notice."

This Notice explains the process by which NASDAQ Dubai will accept bank guarantees under the outsourcing, provides a list of eligible banks, and introduces the concept of "settlement cap" for Clearing Members to utilize as part of the margining process going forward.

B. Eligible Margin

NASDAQ Dubai will accept as Eligible Margin:

1. Irrevocable and unconditional bank guarantees in favour of, and approved by, NASDAQ Dubai. Third party bank guarantees are encouraged and strongly preferred, although related party guarantees (approved by NASDAQ Dubai) will be accepted for a period of 12 months from the Effective Date of this Notice (to be announced). Related party bank guarantee means a bank guarantee issued by a bank which is in the same financial group as the NASDAQ Dubai Member.

2. US Dollars cash for Margin requirements denominated in USD, and UAE Dirhams cash for Margin requirements denominated in AED. Any Member firm that does not wish to obtain a bank guarantee may deposit cash margin in the appropriate currency for the settlement cap (described below).

3. If the situation warrants, NASDAQ Dubai may call for additional Eligible Margin in the form of bank guarantee and/or cash in the currency that is available on that particular day, e.g. on Sundays, NASDAQ Dubai may call for Margin in AED after converting the USD Margin requirement into AED.

4. Clearing Members may allocate their Eligible Margin as follows:

a. Settlement cap purposes for NASDAQ Dubai securities traded and cleared on DFM as part of outsourcing arrangements;

b. To cover margin requirements for Derivatives and other securities traded on NASDAQ Dubai trading and clearing system not outsourced to Dubai Financial Market.

Any change in allocation will be effective immediately on best effort basis if submitted before 15.00 hours. Changes submitted after 15.00 hours will be processed no later than 11.00 hours the next business day.

C. The settlement cap

1. A Member may match buy trades up to the value of its "settlement cap". The settlement cap for a Individual Clearing Member at the start of a trading day is the value of the bank guarantee and/or cash deposited with NASDAQ Dubai in a designated Margin account. The settlement cap of a Trading Member at the start of the trading is the value of the bank guarantee and/or cash deposited by the General Clearing Member.

2. All buy trades of an Individual Clearing Member are validated against the Individual Clearing Member's settlement cap. All buy trades of Trading Members are validated against the General Clearing Member's settlement cap. Th e Individual Clearing Member and the General Clearing Member may, at any time (subject to approval procedures below), deposit an additional bank guarantee and/or cash with NASDAQ Dubai to increase the settlement cap.

3. During the trading day, the settlement cap is adjusted as follows: settlement cap equal value of bank guarantees and/or cash plus value of all sell trades minus value of all buy trades. The settlement cap is adjusted on a real-time basis, based on the value of trades (ie. matched orders).

4. Settlement cap will be calculated in AED, irrespective of the currency in which bank guarantees or cash are provided. All cash obligations will be calculated in AED for application to compare with settlement cap limit. The exchange rate used for such conversion will be USD1 = AED 3.67.

5. Generally, the face amount of the bank guarantee and/or cash margin available at the start of the previous trading day is rolled-over as the settlement cap for the next trading day. For example, if the settlement cap for the previous trading day was AED 100 million, then the settlement cap for the next trading day would begin at AED 100 million. However, NASDAQ Dubai has the discretion to not roll-over the full value of the previous trading day's settlement cap for a specific Clearing Member on a case-by-case basis. NASDAQ Dubai will inform the Clearing Member, should it decide to take such action.

6. The bank guarantee (plus any additional cash) provided by a General Clearing Member at the start of a trading day is used to determine the settlement cap for the validation of buy trades of all its associated Trading Members.

7. A General Clearing Member is responsible for monitoring the exposures of its Trading Member(s) and may instruct NASDAQ Dubai to suspend any of its Trading Members from trading. A General Clearing Member will remain liable for outstanding cash settlement obligations arising from the Trading Member's activities before the suspension is effective.

D. Examples of how a settlement cap is adjusted daily:

T day

Activity

Transaction Value

Settlement Cap

Bank guarantee/Cash lodged with NASDAQ DUBAI is AED 1,000,000

1,000,000

Matched buy order

-100,000

900,000

Matched Sell order

300,000

1,200,000

Matched buy order

-500,000

700,000

Matched buy order

-800,000

-100,000

Existing Buy order in order book

-200,000 (canceled)

Once settlement cap value is breached, no more new buy orders are accepted and all existing buy orders in the Order Book are canceled

Trading system will not allow any new buy orders

Member must increase settlement cap immediately with cash, additional bank guarantee or matched sell trades

T+1: Settlement cap refreshed to AED 1,000,000

E. Breach of settlement cap

1. If an Individual Clearing Member breaches the limit of its settlement cap during the trading day, no new Orders can be created and existing Orders are canceled and can be reentered once the settlement cap breach is remedied.

2. If a General Clearing Member breaches the limit of its settlement cap during the trading day, no new Orders can be created by the Trading Members associated with that General Clearing Member and existing Orders are canceled and can be reentered once the settlement cap breach is remedied by the General Clearing Member.

3. Although NASDAQ Dubai will inform the Clearing Member when it has reached the settlement cap, the Clearing Member remains responsible for its own compliance (and the compliance of its Trading Members in case of a General Clearing Member) with the settlement cap requirements.

4. Any breach of settlement cap during the trading day must be remedied immediately by the Clearing Member. The Clearing Member has the options of lodging additional cash, bank guarantee or executing sell trades to replenish the settlement cap.

F. Additional Margin Deposit

Additional Margin deposits of cash or bank guarantees may be requested by NASDAQ Dubai, beyond the settlement cap, if NASDAQ Dubai determines that the situation requires additional Margin to mitigate risks.

G. Bank Guarantee Procedures

1. Each Individual Clearing Member is required to obtain a bank guarantee and/or deposit cash before it is permitted to trade NASDAQ Dubai securities. General Clearing Members are required to obtain a bank guarantee before the Trading Members associated with the General Clearing Member are permitted to trade. The bank guarantee must be substantially in the form attached to this Notice, and must name NASDAQ Dubai as payee and beneficiary. If a Member does not wish to obtain a bank guarantee, it may deposit cash as Eligible Margin, up to the amount of the desired settlement cap.

2. Bank guarantee can be provided in AED or USD. Each Member may determine the minimum value of its bank guarantee and/or cash, provided that no Member may commence trading with a settlement cap of less than AED 1,000,000 or an amount otherwise approved by NASDAQ Dubai based on the Member's historical and expected trading volumes.

3. Subject to exposure and concentration limits, NASDAQ Dubai will generally accept bank guarantees from the banks listed in Section H of this Notice. Clearing Members are advised to seek approval from NASDAQ Dubai before securing a bank guarantee from one of these banks, as exposure and concentration risks may fluctuate. Any Member request for bank approval must state the name of the bank, the jurisdiction of licensing and incorporation, and the expected monetary amount of the bank guarantee. If the Clearing Member does not seek approval in advance, it is possible that NASDAQ Dubai will reject the bank guarantee based on risk assessment.

4. NASDAQ Dubai will inform the Clearing Member in writing whether the issuing bank is acceptable.

5. NASDAQ Dubai will accept bank guarantees issued by a party related to the Clearing Member (such as a parent entity or an entity that is a member of the same financial group of companies) for an interim and transitional period of 12 months. Upon expiry of the related party bank guarantee, the Clearing Member will be required to submit a third-party bank guarantee subject to NASDAQ Dubai acceptance policy. Related party bank guarantees are subject to NASDAQ Dubai approval process which takes exposure and concentration limits into account.

6. No alterations in bank guarantee value can be made once a bank guarantee is lodged. If any alterations are required, a new bank guarantee will be required.

7. Valuation of bank guarantees will generally be calculated at face value. However, NASDAQ Dubai reserves the right to apply haircuts in some instances, based on its risk assessment.

8. Bank guarantees must have a minimum validity of one year and are required to be renewed at least one month before the expiry date. If the bank guarantee (by its terms) is automatically renewed each year, the Clearing Member must submit to NASDAQ Dubai a letter from the issuing bank confirming that the bank guarantee is still valid at least one month before the anniversary date of the bank guarantee.

9. Individual Clearing Member(s) as well as Trading Members which clear through a General Clearing Member will be suspended from trading three trading days before expiry of the bank guarantee if no notice of renewal or confirmation of the continuing validity of the bank guarantee is received by NASDAQ Dubai.

10. Apportionment of the value of the bank guarantee for each market segment of NASDAQ Dubai may be made by Clearing Members through a prescribed form. This means that one bank guarantee can be lodged with NASDAQ Dubai, and be used to cover margin for equities, derivatives, and structured products.

11. To withdraw a bank guarantee lodged as Eligible Margin, the Clearing Member must submit a written request to NASDAQ Dubai, stating the date on which it wishes to withdraw the bank guarantee, the reasons for the withdrawal, and the Clearing Member's plans to cover Margin going forward or suspend trading privileges.

12. NASDAQ Dubai will permit the withdrawal of a bank guarantee only when replacement Eligible Margin is lodged, in the form of cash or a replacement bank guarantee. A bank guarantee can only be withdrawn in full. NASDAQ Dubai will not permit partial withdrawals.

13. Bank guarantees shall be payable by the issuing bank to NASDAQ Dubai on demand. NASDAQ Dubai may demand the amount guaranteed in case of:

a. An actual or anticipated Event of Default as set out under Business Rule 10.1

b. A Declared Default as set out under Rule 10.2

H. List of Eligible Commercial Banks:

The following table lists banks licensed to operate in the UAE or DIFC. Subject to exposure and concentration limits, NASDAQ Dubai will generally accept bank guarantees issued by these institutions. Other banks licensed to operate in the UAE or the DIFC but not included in the list, or in some circumstances international banks, may be approved on a case by case basis.