The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas International Securities Exchange (BISX) is striving to list the $3 billion government debt market “in the shortest time possible”, its chief executive yesterday saying the capital markets will “simply not improve” without this.

Keith Davies told Tribune Business that BISX was “actively preparing”, in conjunction with the Government, Central Bank of the Bahamas and Securities Commission, a plan to list and trade all government-issued paper on the stock exchange.

Describing government debt as “the gold standard” benchmark for all other Bahamas-based securities, particularly when it came to pricing, Mr Davies said it was “the single largest component” of the country’s capital markets.

Some $2.8 billion worth of Bahamas Government Registered Stock (BGRS) was issued and outstanding as at end-September 2012, along with $202.5 million worth of short-term debt in the form of Treasury Bills.

This places the size of the Government’s locally-issued debt market at just over $3 billion, a sum greater than BISX’s own market capitalisation of $2.8 billion.

And, further illustrating the importance of placing the Government debt market within a formalised, regulated environment, BISX officials said its true weighting - as a proportion of the capital markets - was masked by the large amount of equities held by majority/controlling shareholders of listed companies.

Holland Grant, BISX’s listings manager, explained that because these holdings were effectively not available for trading, just $600-$700 million of the exchange’s market capitalisation was “freely floating”.

This makes the Government’s paper debt securities even more valuable to the overall health of the Bahamian capital markets, and Mr Davies said all the major parties involved were now working to make their BISX listing a reality.

“We are at a stage where we are actively preparing communications on a plan for the listing and trading of government securities,” he told Tribune Business.

Indicating that recent comments in favour of this by Michael Halkitis, the minister of state for finance, had acted as “the signal and the trigger” for discussions to intensify, Mr Davies added: “We’re working with the Government, the Central Bank and the Commission to move this initiative forward. Work is actively being done with these parties.

“The process involves putting all the components together. We have the listing, trading and registering aspects.”

The Government debt market has been something of a ‘sore spot’ for BISX since its inception in 1999, although live trading did not begin until 2000.

The exchange ‘ramped up’ its staffing and operational levels in anticipation the government paper market would be listed on it from the ‘get go’, but this never happened, and was one of the reasons BISX ran into well-publicised financial problems over the 2002-2005 period.

These were eventually resolved, but successive governments appeared deeply reluctant to ‘let go’ and allow BISX to be the primary vehicle for the listing and trading of their securities - in essence, letting the exchange create a secondary market.

Both Christie administrations, though, have appeared to favour this concept more than the Free National Movement (FNM), and this appears to be the case yet again.

Mr Davies said BISX and the regulators had done “a lot of work already” on how the listing and trading of government securities via the exchange would work.

But this was having to be reviewed and analysed to make sure it complied with recent changes to accompanying laws, such as the new Securities Industry Act and payments legislation.

Asked by Tribune Business whether BISX wanted the listing of government securities to start by 2013, Mr Davies replied: “If we can do the things required, that would be something I would strive for.

“Our goal is in as short a time as possible, while taking into regard the work that needs to be done.”

Recalling the history, Mr Davies said: “From our inception we’ve identified, and it’s been stated by my chairman, Board and myself on numerous occasions, it is vital for the continued development of our Bahamian capital markets for the government securities to be placed within a regulated market of a stock exchange, and using all the modern infrastructure of a facility where there’s trading and transparency.

“As a nation, we’re simply not going to improve on this aspect of our financial services environment until that happens.

“To their credit, the Government understands this, but with all things there needs to be a road map for getting from the desire. It’s one thing to want it, quite another to begin to put it in place, and the fact we have these entities central to making it happen involved and engaged, with the support of the Minister, is a very positive step.”

Currently, government BGRS securities are released and priced through the Central Bank using an auction system, but the reforms would likely create a primary market where broker/dealers would bid on their issuance.

Effectively, market mechanisms would determine the pricing of government securities, with new rules and procedures developed for how they were placed.

Once listed, BISX would provide the secondary platform where government paper is traded between different players, creating far more liquidity than today.

Explaining the importance to BISX, and the wider capital markets, of placing government debt in a formalised market, Mr Davies told Tribune Business: “It’s vital. It is by far the single largest market in most countries.

“It’s the gold standard, the starting point, the bellwether and benchmark for all other securities. It is the true indication of the creditworthiness of your country and soundness of the economy.

“It’s a benchmark against which all bonds are measured. It’s a confidence booster in terms of the operation of the market, and ultimately leads to a streamlining of the process and a reduction in the costs to the Government and the people of the Bahamas.”

Mr Grant said the listing of government debt on BISX would lead to the creation of a yield curve, which would help to price all debt securities.

He added that placing government debt on BISX would “lend credibility to the capital markets” and show they were “moving in the right direction”.

“Figuring out the cost of capital is difficult,” Mr Grant said, adding that many corporate preference share issues found it difficult to explain their pricing.

“Getting these [government paper] listed in the US and developed countries, whole not listed on an exchange, operates like it does. We don’t have a big secondary market here to operate like that. The only place it can is over an exchange.”

Critical to facilitating the listing of government debt securities on BISX is the development of “straight through processing” at the Bahamas Central Securities Depository (BCSD), the nation’s registered clearing facility.

Completing this facility was “a key component to the securities market”, as it would allow seamless trading, clearing and settlement of all securities trades via BISX.

Suggesting that this would ultimately lower market costs, Mr Davies said the ‘trading’ link between BISX and the BCSD had been established, but the latter then needed to be tied to the Central Bank and the payments system (RTGS). Discussions were now happening on this issue.