 We anticipate having a new parliament building designed by the world known Italian architect Renzo Piano, and some may also wonder whether a Stock Exchange currently housed in an ex-Services Garrison church will also be relocated there. This idea may mimic the driving force of our 65 politicians and who knows it may act as natural catalyst for an improved exchange with a wider base of securities. The Malta Stock Exchange (MSE), which was established in 1990, experienced many developments, for example the movement to electronic trading and later on, in September 2001, to remote off-the-floor trading. However, the MSE is undersized in comparison with other countries of similar size.
Presently the Malta Stock Exchange operates two markets; the Regular Market, consisting of Equities, Corporate Bonds and Government Bonds, and the Treasury Bill Market. The latter was established in April 2007 after the introduction of the Malta Treasury Bills (Dematerialisation) Regulations 2007.
As can be expected, the financial crisis did not leave our exchange unscathed .It experienced a significant decline in equity trading during 2009. In 2008, an equity trading turnover value reached €49.1 million whereas in 2009, equity trading resulted just in a turnover value of €25.3 million, a deterioration of nearly 50%. In total, about 13 million shares were transacted during 2009, compared to the 22 million shares in 2008.
The turnover value in Malta Government Stocks also decreased slightly. The saving grace was the popularity of corporate (unsecured) bonds issued by local industries which offered attractive coupon rates and were snapped up like hot cheese cakes. Thus last year saw the trading turnover reaching of €553 million, an increase of 13.3% compared to 2008, because of an increased trading in Corporate Bonds and Treasury Bills.
During 2009, 12 new corporate bonds were listed and traded on the MSE. Compared to 2008, the turnover value from trading in corporate bonds (€34.5 million) experienced an increase of 36%. For the year ended 31 December 2009, the MSE generated a modest profit before tax of €1,197,835.
But much more is expected to really provide gravitas to the financial markets. Why did we under-utilise its growth potential during the past 20 years? Is there a magic therapy to the sluggishness reached so far?
Does the board of directors lack the wherewithal to merge with other foreign bourses? Are we happy with the status quo?
According to BörsKonsult ApS there are different strategies that should be considered by small and medium sized stock exchanges namely to strengthen the domestic market, develop a niche, a co-operation and/ or merger and to open up internationally.
Arthur Galea Salomone, Chairman of the Malta Stock Exchange, recently said that 2010 will be another challenging year due to a changing regulatory and economic environment, as well as tough technological developments: “whilst seeking to sustain the momentum of interest in the listing of fixed income securities, the Exchange will seek to broaden its range of products and services, leveraging the esteem with which the Exchange is held. In particular a number of measures will be implemented with a view to grow our business. These measures will include a replacement of our trading system so that it may better serve its principal purpose as a business enabler, the development of investor access facilities, improvement of connectivity and the revamping of our research and marketing functions.
“The Board of Directors is confident that these measures will assist to develop the MSE into a proactive institution which provides greater value to its stakeholders and which is increasingly relevant to the local economy”, said Salomone.
But facts speak louder that words. Can we actively harness our initiative to look for niches in the markets, rather than pontificate that the domestic appetite for investment is weak? Blaming local investors as being ‘risk averse’ or stating that the financial services sector is still in its infancy, will not wash.
Typically we see how the Oslo Stock Exchange has developed its “Oil Services” segment and has been able to lure a lot of Canadian companies. The Stock Exchange of Luxembourg has a leading position in listing international bonds and UCITS, and the Irish Exchange has managed to set up a Global Exchange Market (GEM), which is a specialist debt market for professionals. The Stuttgart Stock Exchange is well known for dealing with warrants and the Tel Aviv Stock Exchange has managed to develop a very significant Exchange Traded Funds (ETF) segment. So which niche could be developed by the Malta Stock exchange?
One possible solution is the Islamic Finance segment. According to Sharia law, the payment or acceptance of interest fees for the lending and accepting of money is prohibited. Furthermore, it prohibits Muslims from investing in businesses that provide goods or services deemed to be contrary to the principles of the Islamic law. These include for example the investment in businesses dealing with prostitution, immoral operations or companies dealing with the production of pork.
The good news is that on the March 24, 2010, the MFSA has published a “Guidance Note for Shariah Compliant Funds”. To license a Shariah compliant fund, it has to be in line with the legal and regulatory framework generally applicable to normal funds and with the recently published MFSA Guidance Note for Shariah Compliant Funds. In case of any deviations from that Guidance Note, an express approval of the MFSA is necessary. No doubt this niche needs to be adequately promoted in neighbouring Muslim countries to reach the critical mass to achieve a successful segment.
The same route applies to Commodity funds that generally invest in non-conventional asset classes like Ijarah Funds. Murabaha Funds can just be licensed under the PIF regime in Malta, too. The Manager of such a fund has to appoint a Shariah Advisory Board with at least two internationally recognised Islamic Shariah Scholars. The Shariah Advisory Board, for example, has to provide guidance and assure that the Shariah compliance standards will be met.
Another avenue to be tried is the path of seeking a partner to merge our nascent stock exchange. This will not be a original idea since we witnessed many mergers & acquisitions amongst exchanges in the past decade. The stock exchanges of Vienna, Budapest, Ljubljana, and Prague are equal subsidiaries of the holding company, CEESEG AG (CEE Stock Exchange Group). There is the NYSE-EURONEXT, a holding company created by the combination of NYSE Group, Inc. and Euronext N.V, operating the stock exchanges in Paris, Amsterdam, Brussels and Lisbon. The London Stock Exchange Group (LSE Group) is the result of the merger of Borsa Italiana and London Stock Exchange in 2007. The exchanges in Helsinki, Copenhagen, Stockholm, Iceland, Tallinn, Riga and Vilnius belong to the NASDAQ-OMX Group. According to Poul Erik Skaanning-Jørgensen, President of BörsKonsult ApS, most exchanges, especially small and medium sized ones, are part of groups today. Those who are not part of groups are either looking to form groups themselves, up for sale or preparing for it. Due to the fact that there is an intense and growing competition from other exchanges as well as Multilateral Trading Facilities (MTFs), MSE cannot afford to play the hermit and surmount the uphill struggle to grow organically.
According to Poul Erik Skaanning-Jørgensen, it is necessary for the survival of the local market to exacerbate international interest amongst investors. To attract these international investors the enhanced participation of global or EU wide bankers and brokers is needed. They, in turn, will call for a trading system, which they are used to. That means an international and not a home- grown or stand-alone system. Incidentally international investors will demand systems like those of NASDAQ-OMX, NYSE-Euronext, London Stock Exchange Group, Deutsche Börse and SWX. Exchange groups use the same systems and Exchanges that are not part of such a group use systems from other exchanges. Some of these systems can be bought or rented , while others only with an additional agreement for strategic co-operation. To conclude a lot has been invested by way of systems and management structures to launch a home grown exchange. It is in the interest of all that a strategic rethink is conducted to take the next step forward. Certainly it helps if the structure is built on stilts.
Romy Schmager
is a Law and Finance Researcher
PKF Malta
info@pkfmalta.com
|