Let us first begin with a definition of an International Securities Market or ISM. At the Barbados Stock Exchange (BSE) we think of the International Securities Market as: A market for the listing and trading of securities of issuers incorporated in Barbados that would otherwise be listed and traded on other exchanges around the world.
This initiative was contemplated as far back as 1991 when, on April 24th the Board of Governors of the then Securities Exchange of Barbados amended its By-Laws to establish an “Exempt Trading Floorâ€. The purpose of the Exempt Trading Floor was to facilitate the trading of an “Exempt Securityâ€. An Exempt Security is a security of any company or body corporate which in all respects qualifies for listing according to the rules of listing, save and except that the country of incorporation of such company or body corporate shall be a territory other than a CARICOM country or alternatively if incorporated in Barbados shall be registered under the International Business Companies Act, Offshore Banking Act or Exempt Insurance Act. This facility was set up for a specific purpose and to list a specific security. It was a testing ground for what we are endeavoring to set up in the form of the International Securities Market.
International Securities Markets are by no means a new concept as there currently are quite a number of successfully operated International Securities Markets across the globe; most notable of which are those operated by the Bermuda Stock Exchange (BSX), Cayman Islands Stock Exchange (CSX) and the Channel Islands Stock Exchange. A brief look at the BSX and CSX may help emphasize how their development has led to increased activity and development in the International Business Sectors of their respective jurisdictions and their economies as a whole.
The BSX, a full member of the World Federation of Exchanges and recognized by numerous international organizations, was established in 1971 primarily to facilitate the trading of domestic equity securities. As the international financial sector grew, due primarily to an economic dependency shift from tourism to international business circa 1995, so too did the BSX as it sought to develop products and services which catered to the specific needs of various offshore entities doing business in Bermuda and across the globe. The BSX states that it “is 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 securitization and derivative warrants.â€ A very bold statement but the fact is that this Exchange has experienced significant growth in recent years largely in part to its ability to develop creative offerings for its ‘niche’ offshore market in an environment that fosters and encourages this type of activity. A prime example of this is its Mezzanine Market which is a “unique pre-IPO market listing for start-up, high growth potential companies.â€ What differentiates this market from markets such as the AIM of the London Stock Exchange and the European Neuro Market is that it “offers development stage companies the opportunity to list on a recognized international stock exchange without having to commit to a full IPO.â€ To support this rapidly growing exchange other sectors such as Telecommunications and Technology have responded by providing the infrastructure necessary to ensure its success.
Established in 1996 under The Cayman Islands Stock Exchange Company Law as a private company, the CSX has grown to become one of the leading offshore exchanges in the North American hemisphere for the listing of mutual funds and hedge funds with approximately 2,000 listings of this type. They are also one of the leading offshore exchanges for special debt securities, Eurobonds, and insurance and risk-related securities with approximately 1,000 listings currently on their Board. The CSX prides itself on its understanding of the needs of Issuers seeking to list various instruments and has developed clear, concise and flexible rules for each instrument set that allow for fast, accurate and efficient service making it the prime venue for offshore companies seeking to list on an internationally recognized stock exchange. The CSX is currently recognized and/or affiliated with the UK Revenue and Customs Office, The Intermarket Surveillance Group, The International Organization of Securities Commissions, World Federation of Exchanges, Asia Pacific Offshore Institute, European Securitization Forum and the Alternative Investment Management Association.
Both Exchanges cite their innovative and flexible approach as the key ingredient to their significant and sustained growth over the last few years. Other major contributing factors cited were “light but effectiveâ€ regulatory environment which encourage new and innovative product listings as well as the evolution of their regulatory and legal systems by their respective Governments which facilitates the international business sector by providing the necessary infrastructure conducive to the growth and expansion of the sector. They both enjoy much greater regulatory oversight over their respective markets allowing them to respond much more quickly to any sudden changes or to satisfy new needs that may develop in the market.
It must be noted, however, that concerns were expressed in Bermuda over its high dependence on the International Business and Financial Services Sector and the fact that the negatively performing Tourism sector could not supplement any economic shortfall in the International Business and Financial Services Sector. To this end the Government of Bermuda, in what now appears to be its traditional fashion, have responded by establishing the Ministry of Business Development and Tourism in 2011. The Ministry is responsible for Tourism, Business Development and Regulation, Registrar of Companies, E-Commerce and Intellectual Property. In her post-budget address Minister Patrice Minors stated that, “The establishment of the brand new Ministry was the first step to solidify the commitment made to leverage the synergies between Tourism and International Business.â€ This type of rapid response is critical if we intend to take the next step towards seeking international acclaim.
The ISM envisioned by the BSE is intended to be under the regulatory umbrella of the Exchange, which in turn is regulated by the Securities Commission, which will be soon subsumed in the new Financial Services Commission, but having its own separate operating structure and rules governing the listing and trading of international offshore products.
Participants in the International Securities Market, who are likely to be International Offshore Banks and IBC entities, would be regulated by the Barbados Stock Exchange, which is a self regulatory organization, for their activities under the rules of the International Securities Market and continue to be subject to prudential regulation by the Central Bank of Barbados. They would also continue to be regulated by the Securities Commission for take-overs, insider trading and market manipulation. This would enable the BSE to ensure a strong regulatory focus for the International Securities Market absent in many less well regulated offshore international centers.
There are likely to be four categories of participants in the International Securities Market, they are:
- Trading participants
- Clearing and settlement participants
- Issuers; and
- Sponsors (nominated advisers)
The membership rules will allow an applicant to be for one or all four if necessary. Therefore a fund administrator may bring their issue to listing and act as the nominated advisor for the issue.
The range of products being considered for listing on the International Securities Market includes, but not limited to:
- Equities (including mining and forestry companies incorporated in Barbados)
- Mutual funds (including funds already listed in other jurisdictions acceptable to the BSE)
- Bonds, asset backed securities, spv’s,
- Real estate investment trusts
- Exchange traded funds
All will be denominated in USD with consideration being given to resident high-net worth individuals provided it does not breach exchange control regulation. Other foreign currency may be offered to offshore international investors as well.
The establishment of the International Securities Market will be beneficial not only to the international business community but to the economy as a whole. It is a vital step towards making Barbados the premier capital market hub for the region and supports Government’s recognition of the important role the International Business and Financial Services Sector plays in the development of this great nation. The benefits to be derived by Barbados from our initiative are:
- Strengthens and expands possibilities for the existing international business community
- Raises the profile of Barbados internationally as an international financial centre and further solidifies Barbados as an international business destination
- Raises the possibility of attracting new types of international business to Barbados
- Encourages positive use of the numerous double taxation treaties
- Enables new types of business to be undertaken such as listing sponsors
- Catalyst for changing dated legislation and removing obstacles to company registration
- Creation of new jobs and opportunities for persons with specialized skills
- Creates a One Stop Shop for the international business community
- Additional tool to the Invest Barbados toolkit for selling the Barbados Brand
- Assists in future double taxation agreement negotiations and trade agreements
- Enhances the current international financial services infrastructure with new and updated legislative framework
The benefits to be directly derived by the BSE include:
- It expands the range of instruments listed on the BSE
- It brings to membership a new group of participants from the international business community both from within Barbados (the international offshore banks) and externally (remote members)
- It creates new trading opportunities for existing members
- It raises the profile of the BSE both in Barbados and throughout the world
- It strengthens the position of the BSE in the Caribbean and moves the BSE from being a purely domestic exchange to an international one
- By launching the International Securities Market now, it makes it more likely to attract participants from Trinidad & Tobago and Jamaica. If they get their international offshore markets off the ground before the International Securities Market here, those participants are less likely to join.
- Looking at future profits prospects, it will strengthen the value of the shares of the demutualised BSE
In order for the International Business and Financial Services Sector and the Barbadian economy to reap real rewards from these benefits previously outlined there are certain key success factors which must be addressed. These include:
- STEP 1 – Government support for legislative changes
- STEP 2 – Secure funding for the initiative
- STEP 3 – Establish the rules for the International Securities Market
- STEP 4 – Recruit staff with the right drive, knowledge and experience
- STEP 5 – Sign up the international business community
- STEP 6 – Secure products for listing
- STEP 7 – Launch
- STEP 8 – Obtain International recognition
The first step mentioned was Government support for legislative changes. It must be emphasized that unless this matter is addressed promptly we may lose out on the opportunities that may be afforded to Barbados, the International Business and Financial Services Sector and of course, the BSE. Funding is also a key success factor but we believe once the appropriate changes are made to the legislative framework and companies in the International Business and Financial Services Sector approve of these changes, getting financial support for this initiative should be a much easier process. Support from the international business community is a critical element in the success of the International Securities Market, as they will be the primary users of the market. If the international business community is not convinced of the benefits that the Barbados International Securities Market has to offer, the uptake on the International Securities Market will take much longer; the result of which is the International Securities Market having lower product listings than expected.
It is imperative to note that our “comradesâ€ in both Jamaica and Trinidad & Tobago are also our biggest competitors; not just in the pursuit of having the first vibrant International Securities Market in the region but also our pursuit of the wider goal of being the premier International Business Financial Centre; we must capitalize on the advantages we will have as first-mover and gain as much of the market as possible. The Jamaica Stock Exchange (JSE) is currently the largest Exchange in the region and their Government is very supportive of the efforts being made there to enhance the products and services currently being offered as exemplified in their thrust to support growth and expansion of the Junior Market of the JSE. Similar support is also seen in Trinidad & Tobago.
A study conducted to assess the viability of the International Securities Market and to develop a full Business Plan and Regulatory Review highlighted key issues that were raised by a panel of participants. The participants cited the need for what they referred to as ‘a proper level of regulation’. They also expressed some frustration with the current legal framework, noting that legislation in a number of areas should be modernized to make the Barbados International Financial Centre more efficient. To address these concerns, we recommend a regime of appropriate regulation for the International Securities Market rather than a light-touch approach. In order to ensure that the regulatory regime as a whole is flexible enough to adapt to changing products and trading practices it is recommended that a greater self-regulatory role be conferred to the Barbados Stock Exchange (both in administering the International Securities Market and the domestic securities market) and that legislative and process changes be prepared and completed to ensure Barbados has an efficient capital markets with high standards of investor protection and market integrity.
Although no legislative or regulatory changes are necessary to establish the International Securities Market, there are a number of changes that should be made in order for it to be successful. These changes will also make the Barbados International Financial Centre more competitive with other offshore centers including Bermuda, Cayman Islands and the Channel Islands. Where possible, these should be done as regulations, to shorten the time needed for implementation.
A robust and coherent legislative framework is essential for economic development and Barbados faces tough competition as an international financial centre. Foreign entities looking to invest or do business in Barbados want certainty in the rules that govern them, and business will move elsewhere if it takes too long to get an approval or if the rules are not clear. Particularly with respect to mutual funds, updated, comprehensive legislation will bring new players to the market who are unwilling to conduct business under the current legislation and supporting systems. There are other international and geopolitical factors which are becoming more apparent, for the keen student of international affairs, which will allow Barbados as a jurisdiction to take advantage of its position in a manner almost too extreme to conceive. Barbados has a stable economic and political environment, well established Westminster style democracy with an appropriate legislative and regulatory framework.
Unfortunately, the legal regime falls short in a number of critical areas and needs to be updated to ensure that Barbados remains competitive. The following are some examples of these deficiencies:
- Statutes have been enacted without accompanying regulations, requiring market participants to turn to the courts for certainty. Examples include the Mutual Funds Act and the Bankruptcy Act.
- Key concepts in legislation are not defined, leading to uncertainty and conflicting opinions among practitioners. An example of this is the requirement to file a prospectus for an “offer to the public.â€
- The Companies Act and the Securities Act are both modeled on long outdated Canadian legislation and need to be modernized.
- The prospectus and take-over rules are too expansive, and cover many transactions that do not need that level of regulation or disclosure. More specific exemptions should be provided, although some existing exemptions are vague enough that they are open to abuse.
- There is unnecessary overlap in legislation governing companies, securities, mutual funds and bankruptcy. Prospectuses must be filed and cleared by both the Securities Commission and the Companies Registry, not to mention the stock exchange.
- The Mutual Funds Act is inadequate and an impediment to the development of an international funds market.
- There is no legislation providing for limited liability partnerships, which is a preferred vehicle for many fund sponsors.
In addition, there are a number of procedural concerns. These include:
- Prospectus Approval — It takes too long to clear a prospectus, especially for novel securities.
- Registration of Companies — The Registrar of Companies performs its own substantive review of filed documents. This leads to delays in filing Articles of Incorporation or Amendment and Prospectuses and Statements in Lieu of Prospectus. Decisions of the Registrar are not published, and participants may find that something filed previously is no longer acceptable.
- Several participants in our study believed that the Securities Commission and the Registry are underfunded and understaffed. It is anticipated, however, that with the establishment of the Financial Services Commission, this perceived problem will be rectified.
Ideally, there should be an overall review of the relevant legislation to ensure that the final product is coherent and comprehensive and overlaps are eliminated. We tend to look towards Canadian legislation as a model for most domestic laws; however, we believe that the laws of Guernsey, the Cayman Islands and Bermuda should also be considered, as these are the legal regimes that will be most familiar to many participants in the International Securities Market. The local law should only impose more onerous requirements than competing markets if such requirements are necessary for investor protection or the efficient functioning of the market. One important feature in Canada’s legislative landscape is that of the Law Reform Commission which has the primary responsibility of reviewing legislation on an on-going basis and drafting recommendations for amendments. The implementation or establishment of such a unit would help to ensure that legislation, once enacted, stays up-to-date, something that has not been done in the case of several acts that were reviewed in our study. The critical and important pieces of legislation identified as requiring modernizing and/or amending include:
- Mutual Funds Act,
- Securities Act,
- Companies Act,
- Partnership Act
- Stamp Duty and Property Transfer Tax Act
It should be noted that the Securities Commission has done tremendous work over the years through Committees that at it has set up to review various pieces of legislation, including some mentioned above, but alas we still wait to see the fruits of their labor.
There are also a number of threats that we need to consider, that can hamper the success of this initiative. They include but are not limited to the following:
- Pending legislative changes (worldwide) to address international tax evasion and aggressive tax avoidance — E.g.: Canada’s “International Tax Fairness Initiativeâ€.
- Canadian based parent corporations migrating subsidiary corporations from Barbados and/or establishing new business operations in jurisdictions other than Barbados.
- Over Regulation
- Emerging global markets such as those in Dubai, Ireland and Singapore.
- Emerging regional competitors for global financial centre — Jamaica; Trinidad & Tobago.
- Offshore/Tax haven perceptions due primarily to the negative reports received from the OECD.
Consideration must also be given to what the International Business and Financial Services Sector would be without a vibrant International Securities Market. All premier locations where international business is conducted successfully are complimented by a well established and functioning international capital market affording offshore companies the opportunity to contribute more, not just to the sector but also to the economy as a whole. The establishment of a vibrant International Securities Market will add great value to the existing International Business and Financial Services Sector and lend itself to greater expansion of and deepening of the capital market in Barbados.
There has been considerable interest in the International Securities Market shown from potential issuers and advisers in Canada following the presentation organized by our consultants in Halifax in November 2010 and from the mutual funds industry in the UK. Only by making positive steps towards the establishment of the International Securities Market will we be able to capitalize on that interest.
In concluding, whilst it must be noted that we have received a highly favorable response on this initiative from Government, it was made clear that the responsibility for its success rests with the BSE. However, the BSE is but one voice and the success of the International Securities Market is hinged on so much more. In discussing this initiative it is believed that we can garner much needed support for the International Securities Market so that our one voice becomes a resounding collective, calling to action all stakeholders in an effort to generate the desired recognition of the pivotal role the International Securities Market can play in assisting in the development and sustained growth of the International Business and Financial Services Sector and the Barbados economy as a whole. We must not rest on our laurels and allow this opportunity to pass us by and fall in the lap of another country in the region, only to later reflect on the brilliant idea we once had and postulate on the ‘what if’, the ‘had we done this’, and the ‘what could have been’; the time to act is now!
For more information on the International Securities Market and for a membership application form contact:Â firstname.lastname@example.org