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Partnering for success: Strategies for collaboration between financial centres

Article - March 30, 2016

As conditions tighten in their home markets, investors look for new options in cross-border trade. Bourses with links to other financial centres provide a gateway to new opportunities for their customers.

International cooperation is often the way countries navigate their way out of a financial crisis. G20 and G7 financial leaders meet regularly to discuss shared concerns and goals. Now the same spirit of collaboration is spreading to the world’s stock exchanges as many are finding international partners to help extend their reach beyond traditional boundaries.

The Balkans
The Balkans is the inspiration behind SEE Link, a project that links the stock exchanges of Bulgaria, Macedonia and Zagreb. Launched earlier this year with a portfolio of more than 400 companies and offerings from all three exchanges, SEE Link is designed to enhance the cross border trading of securities listed in all three markets.

Thanks to state of the art routing technology SEE Link integrates the regional equities markets without a merger or corporate integration. The participating stock exchanges remain independent yet complement one another to allow investors more flexibility to move among the exchanges through a local broker.

 “The SEE Link is a prominent initiative aimed at increasing liquidity in Southern and Eastern Europe,” says Jacek Kubas, a representative from the European Bank for Reconstruction and Development (EBRD). “We’re delighted to support the regional integration efforts that will contribute to improving options for raising funding through capital markets. SEE Link will standardise and improve financial services in the region, making it more attractive to international investors including EBRD.”

 The EBRD is helping to fund the project with a $600,000 grant to support the electronic re-routing system and each of the exchanges is claiming equal ownership with a $90,000 stake in the operation, based in Skopje, the capital of Macedonia.

 “For many years one of the main priorities for the Macedonian Stock Exchange (MSE) was establishing some kind of regional network,” said Ivan Steriev, CEO of the MSE. “The foundation of our joint company and ensuring support from the EBRD are very encouraging steps for successful creation of functional linkage model which will be beneficial for all regional securities markets players.” Ivan Takev, CEO of Bulgarian Stock Exchange, adds, “Our common project is developing rapidly and successfully and we are encouraged by the preliminary interest expressed by investors.”  

Ivana Gaži, President of the Management Board of the Zagreb Stock Exchange, echoes the same enthusiasm. “We strongly believe in success of the project and we think that we have found the model that could strengthen regional markets,” she says. “The attention that the project already got in this early stage from the financial community certainly proves that.”

SEE Link simplifies cross border trading by providing a single point of entry for routing buy and sell orders between investment firms from different countries. It acts as both the messenger and the traffic cop, receiving the orders then re-routing them to a designated investment intermediary who then is responsible for placing the orders with the respective exchanges. The system is flexible enough to take on new participants, and the Serbian and Slovenian stock exchanges have also expressed interest in the project.

While SEE Link may be just the latest model in cross border trading, many other markets are adopting collaborative strategies to increase their visibility and value. Bourses with links to other financial centres are providing a gateway to new opportunities for investors.

Across China
Earlier this year the Hong Kong Bourse announced a three year-plan to expand links to China that would include starting a system for mainland investors that would allow them to take part in the city’s initial public offerings.

“Our vision is connecting mainland China with the world,” says Charles Li, Chief Executive of Hong Kong Exchanges and Clearing Limited. Mr. Li views the relationship as a key growth factor. “Only if we focus on China willl we be able to develop rapidly and prepare in advance for any emerging risks.”

The HK Exchange’s plan is designed to capitalise on fund managers with an appetite for Chinese assets as well as interest from mainland investors who want to move their money out of their home markets. Hong Kong currently has a link to the Shanghai Stock Exchange, which was established in November 2014, and plans are underway to create a similar link that would connect Hong Kong to Shenzhen.

Istanbul & NASDAQ
Finding the right partner can also put a stock exchange on the fast track to world-class status. That’s the case for Borsa Istanbul, as its partnership with NASDAQ will give Turkey one of the world’s most advanced exchange technologies.

Last December Borsa Istanbul and Nasdaq, the world’s electronic stock market, announced the Turkish exchange had officially gone live with nine of Nasdaq’s market leading technologies including trading and clearing, settlement, market data management, index calculation, market surveillance, business intelligence and pre and post trade-risk management. Adopting Nasdaq’s technologies was a complex, ambitious program that took the better part of two years, but it was a crucial step toward making Turkish capital markets more competitive on the world stage.

“We’re delighted to have established a high impact global partnership with Nasdaq,” says Tuncay Dinc, CEO of Borsa Istanbul. “I’m confident that our combined know-how, powered by one of the most advanced technology suites available in the world today, will consistently offer a cutting edge trading experience to customers worldwide with greater opportunity, innovation, and flexibility.”

The technology upgrades will help Borsa Istanbul secure its position as the capital markets centre of the Eurasia Region. Borsa Istanbul is a shareholder in numerous exchanges in the region including those in Sarajevo, Baku, Krgyzstan, and Montenegro.

London & Lima
Longstanding relationships are paying off in a number of ways. The London and Lima Stock exchanges recently announced that they would work together to enhance liquidity in Peruvian financial markets. Among the activity the exchanges planned to pursue was collaborating on the ELITE programme, a business support programme to boost growth of private companies.

The partnership represented a major boost for the Lima Stock Exchange, or the Bolsa de Valores de Lima (BVL), which is also a member of the Integrated Latin American Market (MILA). MILA brings together the stock exchanges of the Pacific Alliance, including Mexico, Colombia, Chile, and Peru and represents the 8th largest market in the world and the largest in Latin America.

“The UK is the natural partner for Latin America’s international financing needs,” says George Osborne, Chancellor of the Exchequer, who was speaking at an annual IMF meeting in Lima. Noting that for more than a century, half of Latin American foreign investment came from the UK, Osborne said the region once again represented fertile ground for investment. “UK-based financial institutions can help provide access to international capital via London, supporting growth in Peru and across Latin America.”

The ELITE programme, run by the London Stock Exchange (LSE) Group is designed to help small and medium businesses grow. It currently has operations in the UK, Italy and Spain, and under new agreement LSEG is looking to expand into Peru. The scope of the work also includes helping Peru to enhance its trading and post-trading activities, as well as assisting with its technology, and legal and regulatory framework.

Asia Pacific
The LSE Group’s helping hand has considerable reach, and last December it announced it was working with India’s National Stock Exchange (NSE) to set up a research centre with the aim of collaborating on products and services that would address capital market issues.

“India is one of the world’s fastest developing economies and global investors are keen on exploring investment opportunities,” says Chitra Ramkrishna, the CEO of India’s NSE. The partners are eyeing the potential in developing India’s special economic zone initiative, the Gujarat International Finance Tec-City, or “GIFT,” which is being touted as the country’s first global financial hub. Gujarat’s natural beauty, which includes hundreds of miles of pristine coastline, is a natural draw. The vision is to make it a world-class financial district catering to India’s commercial sector that would incorporate state-of-the-art connectivity, infrastructure and transportation access. The proposed research centre plans to conduct feasibility studies on areas of development in GIFT City including the potential for establishing a global trading platform.

As growth in the Asia Pacific region remains steady at a rate of 5.5%, financial integration among stock exchanges is increasingly being viewed as a way to maintain if not increase growth. But there are formidable challenges concedes Dr. Vajira Kulatilaka, Chairman of Sri Lanka’s Colombo Stock Exchange.

“The region needs stock exchanges to integrate so that capital flows freely,” says Dr. Kulatilaka. “This will make it easier for any business. We need countries to open up and allow capital to move which is a good thing for us, but the most difficult task is to integrate infrastructure resources.”

Overcoming the logistical challenges associated with integration is the least of the stumbling blocks according to Dr. Kulatilaka, who also chairs the South Asian Federation of Exchanges.  “We see integration as a huge challenge, because of the nationalistic feelings attached to stock exchanges and capital markets,” he says. “Integration may take longer here but I’m certain that capital will flow freely from one country to another in the future. It’s not going to be a fast approach, as we have to open people’s minds before we aim for a full integration. The process will be slow – we come from very different environments.”

While regional integration remains a distant prospect, the Colombo Stock Exchange (CSE) is looking to cultivate a wider breadth of international resources for growth opportunities.

“We’ve experienced strong renewed interest from foreign investors such as Europe and the U.S. Potential and existing investors should take into consideration that present market volatility has not dissuaded foreign investors, but rather increased their contribution to overall market turnover and daily average turnover,” says Rajeeva Bandaranaike, CSE’s CEO.

The CSE is also hoping to capitalise on interest from the Middle East, which contributed 10% to Sri Lanka’s foreign investment inflow in 2014.

“Qatar and Saudi Arabia have shown interest in Sri Lanka in the past,” says Dr. Kulatilaka. “I believe it’s time to return to the negotiation process with them as they are countries with a lot of capital to offer.”

Like the Colombo Stock Exchange, Philippines’ Bourse has attracted considerable attention for its vigorous performance in recent years. The institutional investment magazine Alpha Southeast Asia, in February named PSE the ‘Best Stock Exchange in Southeast Asia.’

“We take pride in being named the Best Stock Exchange in Southeast Asia for the second time in the last three years. We share this recognition with our stakeholders who have been supportive of our projects and initiatives,” says PSE President and CEO Hans B. Sicat.

The Philippine Stock Exchange earned the award for striving to achieve world-class standards for disclosure and corporate governance among its listed firms as well as accomplishing its trading system shift in record time. Also noteworthy was the record high of 8,126.48 the bourse hit in 2015, capping a seven-year streak of double digit gains and a place on the list of the world’s top ten best performing markets in 2014.

China’s economic slowdown has set the PSE on a reverse course since the start of the New Year. While the PSE has been experiencing a sharp downturn in recent months, analysts are optimistic about the country’s growth prospects. And there has been increasing pressure on the Manila exchange to launch new products prompting the PSE to cultivate its international ties to meet investor demand.

CEO Mr. Sicat travelled to Japan last year to speak to executives from 150 Japanese companies about the benefits of issuing stock in the Philippines, and it has cut a deal with the Singapore Exchange to offer access to contracts based on the MSCI Philippines index.

Stock exchanges are traditionally considered a motor for development and nowhere is that more apparent than in Africa where the number of bourses has grown from five to 25 in 20 years. Investors who grumble about stagnant growth rates in developed markets are hungry to explore the continent for its untapped potential.

“Africa is seen to be becoming more politically mature and easier to access and this, together with its growing population and rise in consumption, is adding to its attractiveness for foreign investors,” says Geoffrey Odundo, CEO of the Nairobi Securities Exchange (NSE). “Africa also has vast tracts of unutilised land and significant mineral and other untapped resources.”

However lifting the countries out of poverty by 2020 or 2030 will require an immense amount of capital, some estimates put the figure at $200 billion a year to cover energy, infrastructure, transportation. The bill is just as high for improvements to social services like health, education and law enforcement.

“Countries will need to make progress on all these fronts to reduce poverty and improve the standard of living of their populations. Africa is looking for ways to accelerate development and meet the expectations of their populations,” says Mr. Odundo. “Financial institutions are making great strides, and traditionally African financial markets are still dominated by banks. However capital markets are slowly developing and are beginning to play an increasingly important role.”

So too is foreign investment, with changes in government regulations having stimulated foreign trading on the NSE, making Kenya one of the fastest growing financial centres in Africa.

“We’re 70% foreign traded market, which again is good volume,” says Mr. Odundo. “We have sought to create further incentives for foreign traders, removed things like foreign tax on companies. Now 100% of foreign ownership is allowed.”

Kenyan President Uhuru Kenyatta hopes he can attract more investment dollars when he hosts several heads of state this year, including British Prime Minister David Cameron who is expected to visit the country in a bid to improve bilateral ties. The impending visit is being viewed with great excitement, an opportunity for Kenya and Britain to strengthen cooperation on economic, diplomatic and security fronts.

Cameron’s visit will be a chance to build on Kenya’s close ties with UK’s business community. The Capital Markets Authority, a regulating agency responsible for supervising, licensing, and monitoring the activities of the stock market, recently hosted a dual listing seminar that would allow a Kenyan company to raise both domestic and global equity capital to finance growth through a single offer.

“If you look at the current investor profile in our market, it is already mainly from London,” says Mr. Odundo. “A dual listing in London and Nairobi will allow a Kenyan company to raise both domestic and global equity capital to finance its growth through a single offer. It will offer Kenyan companies a chance to attract the world’s largest investors and gain international visibility without compromising its ability to tap domestic capital and develop a robust domestic shareholder base.”

Mr. Odundo hopes to achieve even greater visibility on a more personal level. He is planning a Capitals Day, a field trip to London, where participants, investors, traders and issuers will meet and engage with their counterparts in the U.K.
“We have great companies here especially in the SME sector that are looking for venture capital investors. We want to showcase SMEs to potential investors so they can identify target companies,” says Mr. Odundo. “I think we have got everything right in place, we just need to scale up on growth, so I’m very bullish about it. That’s why we need to do things in a different and modern way so we can continuously compete with other destinations.”

The formula for success for exchanges appears to be equal parts competition and collaboration no matter what part of the world you’re in.