Customized Indices and Exchange Traded Islamic

Financial Products Task Force

OIC Member States’ Stock Exchanges 4th Forum Meeting

October 2-3 2010, Istanbul

Şenay PEHLİVANOĞLUIstanbul Stock Exchange (ISE)

Assistant Director

◦ Coordinator: Istanbul Stock Exchange, Turkey

◦ Participants: Amman Stock Exchange Bursa Malaysia Berhad Dhaka Securities Market Doha Securities Market Dubai Financial Market Egyptian Exchange Islamabad Stock Exchange Kyrgyz Stock Exchange Lahore Stock Exchange Muscat Securities Market Saudi Arabian Stock Exchange (Tadawul) Tehran Stock Exchange

Task Force Members

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At the meeting, the following decisions were taken regarding “Customized Indices, ETFs and Islamic Depositary Receipts” Task Force:

◦ The name of the Task Force is converted to “Customized Indices and Exchange Traded Islamic Financial Products”

◦ The Task Force is mandated to:

Communicate with various index providers to determine alternative types of investable indices

Consult with IIFM and AAOIFI to determine ways to offer practical, easily comprehensible and cost effective financial instruments, particularly exchange traded commodity contracts and Islamic repo and make recommendations

The Third Forum Meeting Decisions (Istanbul, October 24-25, 2009)

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◦ As a part of Task Force activities, IIFM has been visited on March 2, 2010.

◦ It was agreed that IIFM officials would present the Sukuk Collateralized Commodity Murabaha (I’aadat Al Shira’a) and Tahawwut Master Agreement at the Working Committee meeting in Abu Dhabi.

◦ IIFM released its Reference Paper on I’aadat Al Shira’a concepts and structuring possibilities on 28th July 2010. We encourage all forum members to comment on this reference paper that can provide a basis in terms of finding a widely acceptable and market based solution to liquidity management as well as the creation of a more active Sukuk secondary market.

Cooperation with Standard Setting Bodies

IIFM

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◦ The ISE Group also have paid a visit to Mr. Khairul NIZAM, Assistant Secretary General of AAOIFI.

◦ Mr. NIZAM affirmed that the Institution would like to organize training activities on-demand about Shariah standards related to Islamic financial instruments for OIC Members.

◦ In order to organize such events we will be delighted to receive suggestions from Forum participants.

Cooperation with Standard Setting Bodies

AAOIFI

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Customized IndicesRoadmap for an OIC Index

Stage 4 - DecisionDeciding on index provider, constituent members Setting the rules, discussing costs and revenues

Stage 3 - Consult Consulting with index provider companies

Stage 2 - Analyse Getting information about members’ capital markets, Analysing FEAS and GT-30 customized indices as models

Stage 1 – Start Establishing “Customized Indices and Exchange Traded Islamic

Financial Products” Task Force

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In accordance with the decisions taken at the 3rd Forum Meeting in Istanbul, we consulted with the reputable Index Providers:

Customized IndicesIndex Providers

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Paradox: ◦ Numerous Islamic indices / Non-Islamic countries’ equities

Purpose:◦ To include Shariah-compliant equities from OIC Member

States’ Stock Exchanges Priorities:

◦ Facilitating the collaboration among the OIC Exchanges◦ Promoting the OIC Member States’ Stock Exchanges

Forum◦ Creating different investment alternatives

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Customized IndicesConsultations with the Index

Providers

◦ Two Types of Indices:

A broad index representing the whole OIC region (benchmark index), widest coverage to highlight the OIC Brand

A narrower index(investable index), will serve as the basis of a tradable product

◦ Launch: OIC Shariah Compliant Indices are expected to be launched in 2011.

◦ Projection:

Besides regional and tradable indices, we are open to different alternatives e.g. sectoral and corporate governance indices and would consider working with different index providers for different indices.

Customized Indices

Consultations with the Index Providers

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Customized Indices Comparison of Index Providers - Coverage

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COUNTRY STOCK EXCHANGE Task Force Member

MSCI S&P FTSE

1 ALBANIA Tirana Stock Exchange, Albania

2 ALGERIA Bourse d'Alger, Algérie

3 AZERBAIJAN Baku Interbank Currency Exchange, Azerbaijan

4 AZERBAIJAN Baku Stock Exchange, Azerbaijan

5 BAHRAIN Bahrain Stock Exchange, Bahrain 1 1 1

6 BANGLADESH Dhaka Stock Exchange, Bangladesh 1 1 1 1

7 BANGLADESH Chittagong Stock Exchange, Bangladesh 1

8 COTE D'IVOIRE Bourse Regionale Des Valuers Mobilieres, Côte d'Ivoire 1 1

9 EGYPT Egyptian Exchange, Egypt 1 1 1 1

10 INDONESIA Indonesia Stock Exchange, Indonesia 1 1 1

11 IRAN Tehran Stock Exchange, Iran 1 1

12 IRAQ Iraq Stock Exchange, Iraq

13 JORDAN Amman Stock Exchange, Jordan 1 1 1 1

14 KAZAKHSTAN Kazakhstan Stock Exchange, Kazakhstan 1 1 1

15 KUWAIT Kuwait Stock Exchange, Kuwait 1 1 1

16 KYRGYZ Kyrgyz Stock Exchange, Kyrgyz Republic 1

17 LEBANON Beirut Stock Exchange, Beirut 1 1

18 MALAYSIA Bursa Malaysia Berhad, Malaysia 1 1 1 1

19 MOROCCO Casablanca Stock Exchange, Morocco 1 1 1

20 MOZAMBIQUE Mozambique Stock Exchange

21 NIGERIA Nigerian Stock Exchange, Nigeria 1 1 1

22 OMAN Muscat Securities Market, Oman 1 1 1 1

23 PAKISTAN Lahore Stock Exchange, Pakistan 1 1

24 PAKISTAN Karachi Stock Exchange, Pakistan 1 1 1

25 PAKISTAN Islamabad Stock Exchange, Pakistan 1

26 PALESTINE Palestine Securities Exchange, Palestine

27 QATAR Qatar Exchange, Qatar 1 1 1 1

28 SAUDI ARABIA Saudi Arabian Stock Exchange 1 1 1

29 SUDAN Khartoum Stock Exchange, Sudan

30 TUNISIA Tunisia Stock Exchange, Tunisia 1 1 1

31 TURKEY Istanbul Stock Exchange, Turkey 1 1 1 1

32 UGANDA Uganda Stock Exchange, Uganda

33 UNITED ARAB EMIRATES Dubai Financial Market, United Arab Emirates 1 1 1 1

34 UNITED ARAB EMIRATES Abu Dhabi Securities Exchange 1 1 1

35 UZBEKISTAN Toshkent Republican Stock Exchange, Uzbekistan

13 17 Countries,18 Exchanges 19 Countries, 20 Exchanges 19 Countries, 22 Exchanges

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Customized Indices Comparison of Index Providers

Criteria

The Comparison of Index Providers

Index Name Methodology Shariah Criteria Index Coverage Selection Process Recognition and Experience Cost Models

All index providers;

have recommended to use both of the index provider and OIC brand names as the index name. have recommended to use market cap weighted free float adjusted method as the methodology of calculation. have declared that they receive service from well known Shariah Scholars. declared that approximately 15-20 OIC member stock exchanges would be covered in the benchmark index. are following similar processes for selection. are internationally well recognized and have sufficient experience in the Shariah compliant index calculation. declared to undertake 100% of the calculation and dissemination costs.

All index providers we consulted are eligible and experienced in their field and have minor differences in their index calculation policies. Considering that, we sent follow-up questions to FTSE, MSCI and S&P, and asked the number of ;

◦ their conventional and Islamic indices, ◦ covered companies, ◦ ETFs/funds tracking their indices, ◦ AUMs of these ETFs/funds etc.

We gathered all these information then emailed our Final Report to the Task Force members.

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Customized Indices Comparison of Index Providers

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Customized Indices Comparison of Index Providers

FTSE

MSCI S&P

The number of Total (breakdown is not available)

Conventional Islamic Conventional Islamic

Indices Over 150.000 Approx 120.000 1,384 Approx 3.000 headline indices with a total of over 600.000 indices

Approx 102 headline indices and a total of 400 indices

countries covered Over 80 76 markets 72 markets 82 countries, 112 exchanges 82 countries, 112 exchanges companies covered Over 8.000 securities 8,738 (April 2010) 1.620 currently 16.505 10,078 currently real time indices Over 1.000 9.000 They create RT indices on a

as needed basis. 1.151 3

ETFs based on these indices

130 (50 in USA) N/A 3 260 3 (a)

AUM of these ETFs (if possible the breakdown)

Over $ 100 bn Approx $230 bn Total $ 76.2 mn USA Islamic: $20.7 mn World Islamic: $ 30.6 mn Emerging Markets Islamic: $24.9 mn

Total $ 227.2 bn US listings: $195.8 bn European list: $9.3 bn Canadian list: $18.9 bn Australia list: $2.6 bn Japan : $ 0.6 bn

$18.8 mn

Exchanges that these ETFs are listed

Not provided by MSCI 1 15 1

Fund managers benchmarking these indices (estimated)

Over 400 (b) 25 ETF Managers 1 ETF Manager

AUMs of funds tracking their indices (estimated)

$ 3 Trillion N/A over $ 4.83 Trillion (c) $ 95-100 bn

Table is based on data supplied by each index provider. Numbers for FTSE are derived from their presentation dated March 2010.

(a) HSBC’s first Shariah ETF in Saudi Arabia will use S&P as calculation agent. (b) They have approximately 2000 clients subscribing to the MSCI Indices. Their Middle Eastern clients also subscribe to their Islamic Indices (about 30 clients). MSCI Islamic Index clients also include asset managers and custodians in the US, UK, Continental Europe, Asia Pacific and Malaysia. MSCI announced that they will discontinue the calculation of all MSCI Indices containing securities listed on Tadawul, the Saudi Stock Exchange (S&P will). As a result, Saudi Stock Exchange Data will no longer be available to MSCI effective Sept 30, 2010 and MSCI will discontinue all indices containing Saudi securities as of the close of Sept 29, 2010 (c) Benchmarked assets is a summation of over US$ 2.31 trillion institutional assets sourced from Nelson Marketplace, over US$ 2.27 trillion retail assets sourced from Morningstar Inc., with US$ 154.82 billion tied to exchange traded products, and the remaining as internally managed assets by pension plans sourced from S&P Indices Annual Survey of S&P Indexed Assets. For 2009, S&P Indices estimates over US$ 4.83 Trillion benchmarked to the S&P 500 alone, with indexed assets making up approximately US$ 1.1 trillion of this total. Over US$ 1 trillion was directly indexed to S&P indices.

Considering their flexible approach from business point of view and more importantly, their eagerness to cooperate with the OIC Stock Exchanges, S&P has been invited to make a detailed presentation to Forum participants.

S&P covers 19 OIC member countries and 20 exchanges, if any of the remaining countries in the OIC are added to their global coverage in the future, they will also be included in their indices.

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Customized Indices Comparison of Index Providers