BSX and the Global Capital Markets

By Greg Wojciechowski, President and CEO, Bermuda Stock Exchange (01/02/2013)

It has been an exciting period for the Bermuda Stock Exchange (BSX). Despite the economic ill winds that continue to beat the global economy the BSX continues to prove itself as a niche Exchange on the world platform.

Founded in 1971, the BSX has been in existence for 40 years - it was established to provide market support for shares in Bermuda domestic equities and fixed income and plays an integral role in the development of Bermuda’s domestic capital market.

Although the Bermuda market is small by comparison to other World Federation of Exchanges (WFE) member exchanges, the BSX was created for very similar important domestic reasons as other members, such as capital raising support, investor protection, transparency, price discovery, order execution and post trade related services.

As Bermuda’s domestic economy and international business segments rapidly grew, the need to modernise the stock exchange was necessary and in 1992, the BSX initiated a significant modernisation process resulting in the structure and market in operation today.

Changes in 1992 included, incorporating the Exchange by way of Private Act thus creating a for profit/private entity (one of the very few at that time), an expanded board of directors and commencement of work on the Exchange’s regulatory and operating infrastructure, which was completed in 1995.

During the BSX’s modernisation process, critically important Exchange recognitions and designations were sought and received from The Bermuda Monetary Authority, The US Securities and Exchange Commission, the United Kingdom’s Financial Services Authority, HM Revenue & Customs, The Australian Tax Office and most recently Canada’s Ministry of Finance.

The result of the above is the structure in place today. The BSX operates a fully electronic/integrated trading, clearing, settlement and depository system (technology licensed from NASDAQ/OMX). Over 600 securities are listed with a market capitalisation (excluding listed investment funds) of over US$300 billion.

The BSX plays a significant role in Bermuda’s domestic economy with the market capitalisation of domestically listed securities being approximately 25 per cent of the Gross Domestic Product of the country (based on 2010 figures), and as a stakeholder in the Bermudian economy, the BSX plays a critical role in domestic policy and regulatory discussions.

Foreign Investors

Decades ago, the Bermuda Government enacted legislation which prevented foreign ownership stakes in domestic companies exceeding 40 per cent of the shares in issue. Over the last five years, interest in the domestic market has grown to such an extent that many large BSX domestic issuers reached their statutory foreign ownership levels. Realising the impact this had on price discovery, capital raising and market liquidity, the BSX worked closely with the Government to seek a solution.

In the summer of 2012, the Bermuda Government made amendments to the law so that domestic companies could be free of foreign ownership restrictions if they were listed on the BSX and operating within specified industries. As of today, two BSX domestic issuers have sought and received exemptions and one application is nearing conclusion.

Healthy markets support capital formation for companies that allows them to grow, enhance or develop products and services, which in turn benefits consumers and by extension through corporate growth provides employment opportunities for a country’s work force. The ability for public companies to seek capital in the most efficient and effective manner is a significant development for the Bermuda’s domestic capital market and mirrors internationally accepted principles that underpin modern capital market and stock exchange operation.

On the international side of our business, all other products are driven from external sources and have international institutional support.

Accessibility to the Exchange is something that the management of the BSX is very focused on at present.

New Products

Recently there has been very robust business in the Insurance Linked Securities space and our SME market.

Bermuda is the world’s third largest supplier of reinsurance (behind London and NY), with Bermuda insurers writing 15 per cent of the aggregate global reinsurance premiums and supplying 40 per cent of broker placed reinsurance in the EU and the US.

The method by which global reinsurers are seeking capital is evolving and risk transfer directly into the capital market is becoming more frequent. Capital market vehicles such as Catastrophe Bonds are becoming better understood by global institutional investors.

Given the importance of Bermuda in this industry and the platform that the BSX has created, Bermuda and the BSX is the logical place for the insurance and capital markets to converge.

To date, the BSX has listed over 45 structures with an aggregate market capitalisation of over US$5.4 billion which represents over 25 per cent of the issued market.

The BSX is actively working with participants in the secondary market to expand exchange support to the asset class.

In relation to the work being done in the SME space, the BSX has for several years successfully operated its ‘Mezzanine Market’, a segment of our international equity board. The Mezzanine Market targets high growth potential companies in their early stages of corporate life.

2012 in Review

The total market capitalisation of the BSX as at 31 December 2012 (excluding fund listings) stood at over US$421 billion of which approximately US$1.53 billion represented the domestic market.  Total trading volume for the period was 12.7 million shares with a corresponding value of US$38 million compared to 6.5 million shares with a corresponding value of US$25.3 million for 2010.

The RG/BSX Index closed the year at 1090.82 which was four per cent higher than 2011.

As of 31 December 2012 there were 633 securities listed on the BSX. Included in the new listings were the Variable Note Programs of Everglades Re, Eurus III and Blue Danube. The further listing of Queen Street Re V, VI, VII and Lakeside Re III along with Program issuances by Embarcadero Reinsurance plus Compass Re and the launch of the specialist exchange traded fund Blue Capital Global Reinsurance Fund raised the number of Insurance Linked Securities listed on the BSX to 38 with an approximate market capitalisation of US$5.81 billion.  There were 23 new collective investment vehicles, 15 international equities and three fixed income securities listed and nine subsequent issues from listed issuers.

Looking Forward

It is inevitable that the continued headwinds caused by global economic conditions will continue to make an impact in Bermuda and right around the global economy.

Although the Bermuda domestic market is small, the country’s international business sector is significant and as such reacts to global economic conditions which therefore impacts domestic market sentiment. That said, we are beginning to see green shoots of recovery.

Two areas on which we remain keenly focused are keeping up with regulatory/market changes occurring outside the jurisdiction which could impact on business and clients and continuing to deepen the accessibility of our market to international participants.

The BSX has taken careful and deliberate steps to be part of the global capital market framework by leveraging its unique strategic physical location (nestled between two of the largest capital markets in the world) and supporting products that play to the strengths of Bermuda’s international business platform.

It has been innovative and entrepreneurial in approach since its inception and that is now coded in the organisations DNA such that the BSX will continue to seek new applications for the Exchange and the jurisdiction.

In respect of the global exchange space, there is a place for regional and niche focused markets and exchanges. The type of work being in Bermuda and at the BSX clearly lends itself to becoming more and more important and interconnected.