The Malta Stock Exchange - past, present and future

The Malta Stock Exchange started out just over a decade ago with some 8,000 accounts. Today the number has surged to 150,000 and with a formidable track record, its future is even more so. DAVID LINDSAY speaks to Exchange General Manager Eileen Muscat about the Exchange’s change in role from regulator to promoter, the enormous opportunities the Exchange is capitalising on thanks to a change in legislation, its role as an EU member, the promising BorzaMed project and a wide range of other issues in this extensive interview

The Malta Stock Exchange has seen its role changing from that of regulator to that of promoter. How has the MSE repositioned itself in this respect and what activities are underway?
Since October the Malta Stock Exchange no longer has the role of regulator and we are now operating purely in a competitive environment. The new legislation put in place allows for a multiplicity of exchanges and as such any sort of monopoly the Exchange had in the past has been or will be removed by certain provisions of the Act coming into force.
This leaves the Exchange looking at its operations in a different way. We were, in a way, always hampered or held back from certain activities due to our role as regulator since there was always a certain conflict of interest between regulating and operating.
One example that comes to mind is that because we were the listing authority, also considering that we were responsible for their obligations once a company has been listed, a certain conflict of interest would arise in that you could not try and encourage companies to come on the list and then you would be regulating them.
Now the Exchange has been freed to a certain extent, opening the way for us to go out to companies and offer other services to companies that we couldn’t offer before.
The removal of our regulatory powers means that we are now operating in a purely commercial sense. The Exchange, although it has never been a private company, was always a self-financing operation - basically we offered services that we charged for and through this charge we were able to cover our operating costs. The only government subsidy we received was the initial injection when we were first set up. However, that has now been repaid many times over in the sense that the services we offer to government are offered at a subsidised rate.
Although we were never a private company in itself, we were always run with the mentality of bringing back our operating costs. I have to say that we did make a certain amount of profit, but, unlike a private company, our main aim was not to make a profit but to recuperate our operating costs.
Now in this new scenario, although at the moment we can say that we are the only exchange in Malta there is nothing in the new legislation to prevent another exchange from being set up. We are now competing, with EU accession, in a greater marketplace. So one has to look at the services we offer and the framework in which we operate, which is a selling point in the sense that the Maltese market is a regulated market with a very strong infrastructure.
The time we spent before the new legislation went through had allowed us the time to build up our infrastructure. This is a selling point in comparison to perhaps other exchanges that could come on board locally – that we have proven systems in place. This also means that we can now look at other options such as other services that we can offer, perhaps even services to non-listed companies.
We provide, for example, registrar services to listed companies and we are looking to see if we can extend these services to non-listed companies. For example, depository is a very big service provider. We are looking at all these things, while also looking to streamline our operations to make them more cost effective.
So we are also looking at the setup of the Exchange within the new scenario. There is no private shareholding, but we are an entity setup under law so we’re also looking at how we can alter the set up of the Exchange to that of an actual company, perhaps, with a view to making it more cost effective and efficient. All these factors are being looked at and this is how we see the Exchange developing in the future.
The new legislation and the new regulations coming on board have also opened up the possibility of bringing different instruments into the market. Apart from the shares, funds, bonds and government stock there are a lot more instruments out there that would make the market more attractive.
What kind of instruments are we talking about?
There are different kinds of funds – pension funds, hedge funds, options, derivatives – we’re not saying that we are going to list all these, but there is a huge, wide spectrum that the new legislation and other legislation coming on board would enable us to list. Obviously you have to make the exercise cost effective. You have to see the costs involved and determine their viability, but we feel the greater the spectrum of instruments, the more attractive the market will be.
We are also looking at our IT systems and our procedures with a view to streamlining to make them better geared toward a competitive edge, as opposed to regulation. Regulation, of course, is still very important – having a regulated, transparent market is a huge selling point and as such is still very important to us.
Being a regulator, you look at things very differently and now being freed from our regulatory role allows us greater freedom to sell yourself and your services.
However, our experience as regulators is very useful, as it prevents us from falling into certain pitfalls that we would have fallen into without the experience we have. In fact, one of the greatest difficulties is to stop thinking as a regulator, to think that regulation is not our primary concern. However, we do still maintain responsibility for the market, so we do still have a regulatory role, but perhaps this is more of a whistle-blowing function than a sanctioning function.
Although people are sometimes frightened of change, we consider this new scenario as positive and that even without the change in legislation and EU accession this change of role would have been a natural development anyway and we have always known this would eventually happen.
Change is always difficult and these changes are significant, perhaps more significant for the market players than for the actual investor in the sense that investors have not been impacted at this stage since trading has continued all the same, but I think for all the people within the sector these changes have been quite significant. In our Annual Report we did mention that perhaps to the outside world it appeared that nothing much was taking place this year but in reality the biggest changes for the Exchange took place in 2002. The fact that the investor has not felt this change is a good sign, indicating there has been a smooth transition.
It is difficult to take a step back, to forget regulation and to work within our own framework. Yet now there is the even wider regulation of Europe, which some say opens a can of worms, but I prefer to view it as opening a great many opportunities. With opportunity comes competition but at the end of the day it’s a frame of mind and the whole ethos of the Exchange is to look forward because we are such a young institution and because we have been constantly changing over the last ten years and constantly evolving.
What does EU membership mean to the MSE?
Hopefully it will bring what is available on the European markets closer and more available to Malta.
European companies will be able to list on the Malta Stock Exchange but obviously there would have to be certain regulations. Financial intermediaries will also be able to act in Malta as well, obviously within the framework legislation.
We consider this to be an expansion. The local market is what it is; it can only expand so far because with Malta’s relatively small population you have a finite number of companies and investors. One always considers the home market to be the prime market and while one mustn’t get lost in the bigger market, I think it would be very short sighted if we were to look only within our shores.
We feel that over the years we’ve consolidated the local market, which has expanded fairly rapidly over since we first began operations. We started out with 8,000 accounts and today there are some 150,000 accounts. The turnover in the market might not be very big, but you cannot judge the market by what’s happening on the trading system alone.
If you look at IPOs, at primary issues and bond issues one can see the interest and that we have seen an incredible amount of growth. But like any other market we’ve seen ups and downs and now we are seeing a slight recovery in the market, with prices stabilising to a certain extent.
As such, we are viewing EU accession as a window into the greater European market, and vice-versa.
The BorzaMed Protocol was signed some 10 months ago. What are the ideas behind the project, how would you gauge its potential and what progress has been achieved to date?
The idea behind the BorzaMed project is to create a Mediterranean stock exchange with Malta at the hub. When looking to enlarge our market, even before the issue of EU accession, we always felt we could use Malta’s traditional location as a bridge between north and south. The markets to the north are very well developed and the markets in North Africa and the Middle East are also fairly well developed but there doesn’t seem to be much linkage between them, despite the fact that there is this huge market in North Africa and the Middle East to be tapped.
The idea is to create an alliance between all these exchanges, even those of southern Europe which have their particular problems, and create that stepping stone between them, which would offer opportunities for everyone. Malta can offer its understanding of the natures of these markets – plus many other inherent benefits such as the fact that we are English speaking, our proven technological systems and that we’re the only market within the Mediterranean region that is fully compliant with and is a member of all the international standards setting organisation. We also have a very well educated workforce, good telecommunications and a good IT infrastructure.
Reactions to the project have been very positive in the sense that both sides see it as a stepping stone to each other’s markets and while they may be wary of dealing directly with each other, they are prepared to do so through Malta.
The idea is to start as a common trading platform based on mutual recognition rather than on trying to harmonise each other’s rules. Instead we aim to accept each other’s rules, obviously in line with certain minimum criteria so the investor is always aware that they are listed or trading in a home country but that there is a common level of regulation and that there is always a base standard.
We started a few months ago originally with just Malta, Tunisia and Egypt. We started a feasibility study and we felt it to be very positive. Infrastructure-wise we found no difficulties since most trading systems talk to each other today anyway. There are always certain difficulties in regulatory policies, but no great stumbling blocks.
For various reasons, as the months went by we felt the focus should be wider and, rather than starting with such a small number of markets, we felt we should get more people on board. This was catalysed by changing situations both locally – with our accession to the EU – but also due to the situation with the other participators. So at the moment we are still going ahead with the project, we are widening the target group and we have some activities planned along these lines over the next few months.
I feel this is a very valid way for the Exchange to go. Our accession to the EU is a plus in this case since we are seen as a window. Again, we are looking at the expansion of our market – both by giving our customers opportunities to be listed and to trade on other markets and also to have other customers on our market.
The feedback we are receiving has been very positive, we know there have been other countries trying to do the same or similar things, which demonstrates the degree of interest in such an idea. But our great advantage is our regulatory framework, which has proved to be a huge plus.
Investor education has always been of paramount importance to the Exchange and it has carried out a good deal of activities to this end. How would you gauge the success of the investor education programmes?
We’ve always placed a great emphasis on investor education because ultimately if you don’t have investors, you don’t have a market. As such, you have to attract people to the market and the way to do that is to explain how the market works, explain the risks, the advantages and disadvantages.
It’s interesting that when we started out, the stock exchange was something that few people thought would actually thrive in Malta. The Maltese by nature are savers and there is a lot of money out there. As I said, we only had 8,000 accounts at the outset and when we set up we made a great effort, even before we started trading, to go out there to explain what’s happening and to explain the trading system.
Even when we started trading, we purposely started trading on a manual system when we could have started on an electronic system straight away, but we decided that we needed a system that could be easily understood and followed by Mr Joe Public. We started going to schools, the university, we had different groups coming in - professional groups such as lawyers and accountants - because we needed to explain what was happening.
I think we hit home in the sense that we got a lot of investors on board. We also had another challenge before us, which was the companies. This was in many ways a more difficult nut to crack because other interests are involved. It’s a more difficult audience, but again because of our previous role as regulator, there was only so much we could do at the time.
Investor education has always been ongoing and as the investor became more sophisticated and knowledgeable about the market – and Maltese are very knowledgeable – the method changed. While today we still speak about the overall system, we have now begun to speak more about the different instruments available, changes to regulation and how it helps them with their investments. As such, this is an ongoing exercise that we’ve always had in the process.
Even now, although investor education is now the responsibility of the regulator as the competent authority, we still feel we have a role in this educational process. But rather than educating the investor on how the system works and what services we offer, it’s now more about what’s available on the market and how the market reacts or shouldn’t react.
Investor confidence in the market is paramount and it’s always important that the investor knows what’s happening in the market. We’ve had several courses in English and Maltese for the general public, who have been very well attended and we will be continuing these this year. Again, while this is no longer one of our primary responsibilities, we still think we should invest in education.
Investor confidence has suffered on a global level in the wake of the 11 September attacks, the Enron and Worldcom scandals and the Iraq War. To what extent would you say trading on the Malta Stock Exchange has been affected by these world events? How would you explain the fact that the local market hasn’t reacted in the same way?
I wouldn’t say that the local market hasn’t reacted in the same way, in the sense that it had not reacted directly to these incidents. The local market is, of course, very much a local market. Thereby what happens in New York or London, for example, does not have a direct impact on the local market per se, but it does have an impact on investor psychology. This is really what we’ve seen in Malta. We have seen a decrease and part of the decrease can be attributed to a cascading psychological effect.
There are other reasons why the market has declined. There was a period two to three years ago when the market was rising, but like any other market it reached a certain level and started to level off again.
Again there’s the psychology of the market and then there are other factors that also affect the market. For example, over recent months there have been the elections, the EU question and the perceptions of the economy. If you take all these factors together, they have an effect on the market, an indirect effect, but an effect.
It is true that the market does not respond as quickly as it should to positive or negative news about listed companies. We get announcements that a company is doing this or that and their financial statements, but we don’t see the market reacting as quickly as it should, if it reacts at all. However, I have to say that over the past few years we have been seeing more of a reaction, which is encouraging.
One factor at play may be that shareholders in listed companies lack the feeling of involvement or a sense of belonging to that company, which perhaps explains why they don’t react so quickly themselves. This is still not within our nature as a nation, whereas if you go to New York the first thing a taxi driver speaks about is what’s happening on the NYSE. There’s this frame of mind, whereas this is still not quite as developed here yet. But this is something that takes a generation to change.
I also think a lot of investors go to their financial intermediaries only when it’s time to buy or sell, they don’t actually approach them for advice or for an explanation over a company announcement. There has been a lot of criticism that financial intermediaries don’t explain enough to their clients, but sometimes people need to ask the questions and this is where investor education also helps – in teaching investors to ask the right questions. This is one area we address through our education programmes. This is a two way thing, but investors appear reluctant to ask questions when all they have to do is pick up the phone and ask, perhaps at risk of feeling stupid.
So my advice is to go out there and ask the questions, this is your investment. Don’t wait until there is an issue, a trade, or you have received a dividend cheque and you’re not happy about it.
However, this reluctance is changing, even we as an exchange are receiving more and more questions. People are becoming more aware - at the end of the day this is your money and you have every right to keep track of it.
What advice would you give a company toying with the idea of seeking a listing?
The most important thing when a company decides whether to list or not is that it is purely a business decision and that should be the only reason for seeking a listing.
What is of the utmost important is to know is that there is this opportunity and to consider the opportunity. A lot of companies look at a listing and think it’s extremely complicated, but in real terms if a company takes a very, very good look at itself - at how it wants to operate and why it is interested in a listing, what its plans are for the funds raised are – it should speak to its advisors and above all the competent authorities or the Exchange itself.
It’s very important to carefully consider the option before throwing it out the window and to assess the advantages and disadvantages of a listing. Of course there are also obligations ties into a listing but I have to say that the legislative framework, even for unlisted companies under the Companies Act, involves a lot of obligations with corporate governance issues finding there way even into non-listed companies.
I think what companies really have to do is realise that there is this alternative. Now whether this alternative applies to you is another matter. This applies especially to family-owned companies, many of which are now in their third and fourth generation and there is so much dilution anyway in the shareholding. One of the biggest fears of these companies is losing control, which is not the case because, of course, you choose to list only a percentage of the company.
Yes, being granted a listing takes time – but not as much as one might expect - yes it might mean changes to the way you operate, there is a certain cost involved, there are certain obligations – but from a purely business point of view what we are trying to get through to these companies are the advantages of being listed. These include the fact that – you become much more marketable, it makes you more visible and a wide array of other advantages.
I think what companies need to do is talk to the right people when they are making the decision, even if you don’t talk to the Exchange or the competent authority, there are a lot of people who have a lot of experience and who are in a position to advise - such as financial intermediaries, lawyers and accountants. Over the last ten years in which the Exchange has been operating they have developed a great deal of expertise and of course the operator and the regulator are both always available for information and advice.