It is hard to imagine, but in 1971 the Bermuda Stock Exchange (BSX) pulled ping-pong balls out of a velvet bag to decide who had the first chance to buy or sell shares. Nowadays, things have changed.
The BSX started out primarily as a domestic equities market and has grown and evolved in line with the booming financial services sector. The exchange, which had a market capitalisation, excluding fund listings, of $120bn at end-2003, has had to be nimble to keep pace and prosper in a small retail market with little liquidity.
Yet, with constant innovation the BSX has become the world’s largest offshore, fully electronic securities market, offering a full range of listing and trading opportunities for international and domestic issuers of equity, debt, depository receipts, insurance securitisation and derivative warrants.
Insider trading ban
The government has just put in place laws to outlaw market manipulation and insider trading in a bid to keep up with international financial regulations.
“We have changed a lot over the years,” says Greg Wojciechowski, BSX chief executive officer. “Originally the banks came together to buy and sell stock, and the exchange was born. And it has moved from being an over-the-counter exchange to being much more regulated.”
Part of the natural evolution was the creation of the “mezzanine market”, a listing for start-up, high growth potential companies, which did well in the dot-com boom and still thrives today. Hopes are high for the BSX’s International Crossing Market. In 2003, it stayed at the same levels as 2002 with 12.5 billion shares traded with a share value of $364bn.
Mr Wojciechowski is now looking for growth. “In respect of international trading volumes, our crossing market remained strong in 2003 and we have every reason to believe that this trend will continue,” he says.
Regulation is needed
As part of the growth of any international exchange, stringent regulation by an independent body is key. The BSX is regulated by the Bermuda Monetary Authority, which has become more independent from government in response to the advice of international financial regulators. Bermuda has been reviewing its financial sector in line with international guidelines following reviews from the Financial Action Task Force, Organisation for Economic Co-operation and Development, KPMG and the IMF.
“It is not that we have more of a problem here than anywhere else with this kind of fraud. We have never had an investigation that has led to any proceedings here,” says Mr Wojciechowski.
He says that, although there are codes of conduct forbidding insider trading and market manipulation, it is important to have the law on the statute book to comply with international standards, and that the BSX is seen to comply with the rules.
On passing the law in the House of Assembly, the island’s parliament, finance minister Paula Cox said: “This is an important area of weakness in the framework of Bermuda’s investment and securities legislation.” She told the island’s lawmakers that the BSX had been hampered on the international stage by the absence of such laws.
Mr Wojciechowski says: “There has been renewed interest around the world, especially in the EU, on clamping down on insider trading. Bermuda is good at being flexible and evolving as situations develop.”
Trading volumes
In 2003, the BSX annual report said it had domestic trading volumes of 2.8 million, worth a total of $50.8m, down nearly a third from the same period the previous year after the de-listing of the main trading stock on the exchange, Bank of Bermuda, when it was bought over by HSBC Bank. Since then, the BSX has sought to boost business by encouraging debt issues to list on its markets, says Mr Wojciechowski. “It is a very popular way to invest. And we think that the stock exchange is an ideal place to trade in debt.”
He is also on a mission to get more Bermuda-based companies to take out secondary listings on the exchange. HSBC has just completed its secondary listing and many of the publicly traded insurance companies have joined up.
The BSX belongs to the World Federation of Stock Exchanges; and the US Securities Exchange Commission recognises it as a “designated offshore securities exchange”. The next step is for the exchange to be recognised by the UK Financial Services Authority – this is pending – which will widen the BSX’s scope in Europe.
“We now have all the tools in the toolbox to help us to be more successful in the international arena,” says Mr Wojciechowski. “We are hoping that by being in line with international standards and regulations, we will achieve more recognition and this will give us a lift.”
