Offshore Stock Exchanges
By Lowtax Editorial
06 December, 2016
Think "stock exchange," and "FTSE," "Dow Jones," "Nasdaq," and "Dax" are probably the words, abbreviations and acronyms that spring to most people's minds first.
And it is certainly the case that the vast bulk of the world's securities are still traded through these large, well established bourses, a state of affairs that will likely continue well into the future, despite the emergence of information technologies which have effectively done away with the need for trading to be housed in a physical "place."
However, financial exchanges, as we see below, are by no means restricted the world's major cities and wealthiest economies. Over the last 20 years and more, several small, offshore and low-tax jurisdictions have launched exchanges.
If you're wondering why these tiny territories think they can possibly compete with the likes of London, New York, and Tokyo as centers for business, when their populations tend to be measured in the tens of thousands rather than the tens of millions, and given they are home to a relative handful of small companies, then you are kind of missing the point! For, as demonstrated here, they are not necessarily competing for the same business.
Why Use An Offshore Stock Exchange?
While many offshore stock exchanges do list the shares of local companies, naturally these tend to be small-scale listings which attract infrequent and irregular trades. So, what is the use of an offshore stock exchange in the first place?
Just as offshore financial centers tend to specialize in certain niche areas of international investment and finance, offshore stock exchanges cater for increasingly specialized forms of financial instruments. So, while you might see only a few conventional stocks listed on offshore stock exchanges – or in some case none at all – you are more likely to encounter a more sophisticated array of securities, such investment funds, unit trusts, and equity- and debt-linked securities.
Such instruments are rarely traded with the regularity and in the same volumes as securities on the world's more establish stock exchanges, so liquidity, or the lack of it, is not such an issue for listing entities.
What's more, offshore stock exchanges have become attractive to those looking for a place to list more specialized financial securities because their regulatory systems are more flexible and accommodative, and, in many instances, because they offer tax efficiency.
Essentially, it is often cheaper, and significantly less hassle, for a company to list an instrument on an offshore stock exchange than it is to list on one of the large bourses. Also, there is also something of a "herd" effect, with certain types of listings tending to gravitate to certain jurisdictions.
As highlighted by the sample below, offshore stock exchanges share similar characteristics, but are by no means identical to each other.
Channel Islands Securities Exchange (CISE)
With a business established in 1998, the Channel Islands Securities Exchange (CISE) has more than 2,000 listings on its official list with a total market capitalization in excess of GBP300bn (USD382bn).
The CISE specializes in the following listings:
- Trading companies: primary and secondary listings of equities and debt;
- Specialist debt: bonds and loan notes including convertibles and high-yield products;
- Investment vehicles: open and closed-ended funds, real estate investment trusts (REITS) and other vehicles;
- Special Purpose Acquisition Companies: cash shells used for a very specific objective;
- Extractive industries: listing of equities from the extractive industries such as mining, oil and gas; and
- Insurance-linked securities: listed structures including cat bonds, collateralized reinsurance and ILS funds.
The CISE is the trading name of The Channel Islands Securities Exchange Limited. Its wholly-owned subsidiary, The Channel Islands Securities Exchange Authority Limited, is licensed to operate an investment exchange under the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, by the Guernsey Financial Services Commission (GFSC).
Steps taken by the CISE to enhance and diversify its offerings contributed to a 13 percent increase in new business during the first half of 2016, following an eight percent increase in the number of securities listed on the exchange in 2015. Notably, the previous year saw China Cinda Finance (2014) II Limited become the first issuer with an ultimate parent company domiciled in China to be listed on the CISE.
Listings by investment vehicles have increased following updates to the listing rules to encompass all types of investment vehicles, including not just for open- and closed-ended funds but also investment companies and REITs, with the Exchange now home to 13 of the UK's 52 REITs.
The membership rules previously only allowed entities established in the Channel Islands to act as sponsors. However, on October 10, 2016, these rules were updated to allow sponsors to be based in any jurisdiction deemed acceptable to the Exchange.
High yield bonds listings have become increasingly popular as issuers react to the onerous nature of the European Union's Market Abuse Regulation in contrast to the Exchange's rules for these vehicles.
A growing number of trading companies are also seeking a listing, and the exchange is currently reviewing its listing rules to ensure they are appropriate for small- and medium-sized enterprises.
The exchange is also hoping to expand into the area of Islamic finance listings, announcing in August 2016 that it was seeking to revise its listing rules for investment vehicles and publishing Islamic finance guidance notes.
There are currently 40 members of the CISE, comprising banks, fund and trust administrators, law firms and stockbrokers.
In May 2016, the Exchange was named "Best Independent Stock Exchange" by Acquisition International. The accolade was part of the publication's Offshore Excellence Awards 2016.
Cayman Islands Stock Exchange (CSX)
Founded in 1996, the Cayman Islands Stock Exchange (CSX), is home to more than 4,000 listed securities with a market capitalization of more than USD190bn.
The CSX is fully owned by the Cayman Islands Government and is subject to supervision and regulation by the Stock Exchange Authority, an autonomous body established in 1996 under Cayman Islands law as the dedicated regulator for the CSX.
The CSX highlights its main advantages as: reduced administrative requirements that come with being incorporated and listed in the same jurisdiction; competitive pricing; international standards of regulation; and experience providing a specialized listing and trading facility for investment funds, specialist debt securities, and Eurobonds.
The CSX has used the Deutsche Börse XETRA® trading platform since March 25, 2016, and provides a secondary listing facility and an offshore trading venue for securities listed and traded on other recognized exchanges, as well as offering domestic companies the ability to list and trade locally.
There is no minimum subscription level for Cayman-domiciled funds, and no restrictions on investment policy and principal investment objectives. Investment policies can be changed provided that the mechanism is disclosed in the listing document.
The CSX does not insist on any prescribed degree of investment diversification (e.g. it can list currency or commodity funds), and there is no requirement for majority board independence. In addition, listed entities are not required to report using International Accounting Standards/International Financial Reporting Standards, as long as an appropriate accounting standard is used.
The CSX became the first offshore stock exchange to be granted approved organization status by the London Stock Exchange (LSE) and securities listed on the CSX are eligible for trading in the LSE's international equity market and for quotation on the SEAQ (Stock Exchange Automatic Quotation) international trading system.
The CSX also is a "recognized stock exchange" under the United Kingdom's tax law. Consequently, qualifying debt securities listed on the CSX are now eligible for the Quoted Eurobond Exemption. This allows an issuer liable to pay UK tax to make payments of interest on the listed securities without deduction for tax. There are also UK capital gains and inheritance tax benefits to investing in shares listed on a recognized stock exchange such as the CSX.
Bermuda Stock Exchange (BSX)
The Bermuda Stock Exchange is one of the oldest offshore stock exchanges, having been established in 1971. A fully electronic exchange, the BSX has more than 700 listings consisting mainly of investment funds, debt and insurance-related securities, and small and medium-sized companies. In particular, the BSX has corned the market for insurance-linked security listings, with the exchange home to more than 100 ILSs, around half of ILS listings worldwide.
The BSX prides itself on its "speed to market" with many listings taking as little as two weeks to complete. The exchange also has a mezzanine listing facility, which provides development stage companies with an opportunity to list and raise capital at a much earlier stage than a traditional initial public offering.
The BSX's electronic trading, settlement and depository platform is licensed by NASDAQ OMX, and is specifically designed to support the secondary market trading and settlement of sophisticated listed securities.
The exchange does not impose minimum capital requirements or investment restrictions (with the exception in most instances of disallowing a fund to take control of its underlying investments, unless the fund restricts investment to Qualified Investors) and allows flexibility for hedge funds and the use of prime brokers.
The BSX has been officially recognized by regulators in the United Kingdom and the United States, and by the tax authorities in Australia, Canada, Ireland and the UK.
In recent developments, the BSX extended its daily trading hours from 8:30am to 4:30pm in September 2016, and signed a memorandum of understanding with the CISX to explore opportunities for collaboration in November 2016.
Barbados Stock Exchange (BSE)
The original trading facility in Barbados was the Securities Exchange of Barbados, which was established in 1987. The company was reincorporated in 2001 under the Securities Act 2001-13 and is now known as the Barbados Stock Exchange (BSE).
The BSE remained a privately owned (by its members), non-profit organization until December 22, 2015 when it became a shareholder-owned, for-profit organization. The BSE and its wholly-owned subsidiary, the Barbados Central Securities Depository, are designated as Self-Regulatory Organizations under the Securities Act and are regulated by the Financial Services Commission.
The BSE operates a fully electronic trading system, having replaced the previous open-outcry trading method in 2001. Orders are queued immediately on entry to the system but trades occur only when two or more orders match. Limit orders at specified prices are executed at that price or better and it was the responsibility of the Brokers to ensure that clients settle their accounts/trades within the specified time of T+5, or five business days after trade day.
Traditionally, the BSE has catered for the listing the shares in local companies and mutual funds, with a junior market launched in 1999. These include some cross-listings of securities also listed on other securities exchanges in the region.
However, in May 2016, the BSE formally launched an international securities market (ISM), which operates as a separate market from the BSE with distinct rules that apply to membership, trading, clearing and settlement, and the listing of securities. As such, the ISM is designed to attract issuers from both Barbados and international markets that may otherwise be listed and traded on other exchanges.
According to the exchange, the fees for listing on the ISM are at least 30 to 50 percent lower than those of larger exchanges in North America and Europe.
Commenting on the development, Marlon Yarde, CEO & General Manager, BSE Inc & Barbados Central Securities Depository Inc., said: "Though attractive to international companies of all sizes and from all regions, the Barbados ISM will be particularly attractive to companies that would value the lower listing fees and robust, yet right -sized regulation to be found in Barbados."
"Traditional markets for Barbados in North America and Europe will likely be early adopters of the ISM. However, we anticipate that the ISM will be well received by international businesses globally," he added.
Stock Exchange of Mauritius (SEM)
The Stock Exchange of Mauritius Ltd (SEM) was incorporated in Mauritius on March 30, 1989 under the Stock Exchange Act 1988, as a private limited company, before becoming a public company in October 2008.
The SEM has grown from very humble beginnings to one of the most important financial exchanges in Africa. Initially, trading took place on the SEM just once a week for a mere five minutes!
In these early days, there were just five listed companies for a total market capitalization of USD92m. Today, there are 51 companies listed on the Official Market representing a market capitalization of almost USD9.2bn. In addition, there are 43 companies listed on the junior market, the Development and Enterprise Market, with a market capitalization of USD1.3bn as at November 30, 2016.
The SEM was opened up to foreign investors in 1994 following the lifting of exchange controls. Generally, foreign investors can invest freely via the SEM without approval, an exception being the holding of shares in sugar companies; foreigners may hold no more than 15 percent of a sugar company's stock. Foreign investors now account for about 40 percent of the daily trading volumes on the exchange.
In June 2001, the SEM became the first exchange in Africa to move to an automated electronic trading system and now uses the same technology platform as both the London Stock Exchange and the Johannesburg Stock Exchange.
For most of its life, the SEM has been an equity-centric exchange. However, in recent years the company has been keen to diversify into the sorts of specialized markets captured by other offshore financial exchanges. Thus, as part of a development strategy launched in 2008, the SEM is aiming to become the regional center for the listing of extractive companies, Africa-centered ventures, specialist-debt products, and government securities.
According to the SEM, around 50 instruments have been listed under this strategy, including, in 2016, the the CoreShares S&P500 ETF, the first S&P500 product to be listed on an African exchange. The SEM also listed its first "Masala Bond" (Indian-rupee bonds issued by Indian corporate entities) in December 2016.
The SEM is officially recognized for tax purposes by HMRC in the UK, and for regulatory purposes by the Cayman Islands Monetary Authority.
Gibraltar Stock Exchange (GSX)
The Gibraltar Stock Exchange (GSX) is a relatively knew entrant to the world of offshore stock exchanges, having been established as a private limited company in 2012 and licensed by the Gibraltar Financial Services Commission in 2014.
The GSX is an EU regulated market for the technical listing of collective investment schemes (both open and closed-ended) and, since January 2016, all types of debt securities, such as ILSs, asset-backed securities, project bonds and derivative securities.
Like other offshore exchanges, the GSX prides itself on being able to offer a low-cost, fast-to-market route to capital and investors.
The GSX achieved official recognition by the UK tax authority, HMRC, on August 16, 2016. This followed similar designations by the European Securities and Markets Authority in January 2016, and the Cayman Islands Monetary Authority in March 2015.
The GSX achieved a first in July 2016, when BitcoinETI, an asset-backed exchange-traded instrument that is invested exclusively in Bitcoin, announced its decision to list on the exchange. This was said to be the first European regulated product for the leading digital currency.
Gibraltar is particularly exposed to the uncertainties associated with the United Kingdom's decision to withdraw from the European Union, and the GSX has acknowledged that it will likely need to demonstrate equivalence to the EU regulatory environment. However, the exchange said in July 2016 that it sees little change to its regulatory regime in the short term.
Currently EU legislation forms much of the legal basis upon which Gibraltar operates and is unlikely to be repealed wholesale, the exchange said. Gibraltar's compliance with EU directives will remain unchanged, the GSX said, and it can still provide EU gateway services until clarity is reached on the UK's ability to "passport" financial services.
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