How would you assess 2014 for the BSE?
Overall, 2014, especially its second half, was a very complicated period of time in the global and regional arena. Geopolitical and energy market volatility affected many regional economies and national currencies. The Azerbaijan capital market and the economy overall continue to demonstrate stability and resistance to negative external factors. For the Baku Stock Exchange, for instance, it was an outstanding year. Total trading volumes exceeded AZN13 billion, which is a record figure since BSE's inception in 2000. Another highlight was the launch of new private market initiated product lines. It is worth remembering here that, initially, BSE emerged during the privatization processes in the 1990s. A few joint-stock companies along with a brand new investor category sprang up in Azerbaijan as a result of two privatization programs adopted by the government at the time. Over the decade, the number of individual and corporate investors reached almost 100,000 and joint stock companies reached over 2,000. This eventually led to the inception of the BSE. At the initial stage of its development—until about 2008—the BSE was operating under the post-privatization framework. Government securities were responsible for almost 90% of all trading volumes. This period is now over. In 2014, the launch of new financial and capital market tools, such as classic securities, really stood out and marked the year. We also launched market makers supported corporate bonds trading and repo transactions with them, as well as started selling margin-based derivatives—currency and commodities derivatives—and we are currently working on launching foreign securities. This resulted in record figures and the BSE exceeded all the previous years' indicators. Despite the signs of a crisis in the global economy, we expect the BSE to thrive in 2015.
To what extent is an increase in the BSE's turnover because of new products?
New products contributed about 30% to total turnover. Additionally, it is necessary to acknowledge another figure. Traditionally, major government issuances of the Ministry of Finance and the Central Bank of Azerbaijan (CBA) government liabilities accounted for a significant share of the pre-final transactions segment of the BSE. In 2014, its amounts remained comparable to previous years but its share reduced significantly and dropped to less than 50%. It is a positive sign as the private sector is playing a more active role at the BSE.
Corporate securities have increased significantly. What are the reasons behind that?
Compared to the state liabilities, it is still moderate in terms of turnover; however, the growth dynamics are impressive. Over the past 18 months, the amount of corporate bonds in the local market has tripled. On the institutional side, the segment has become more complex as well. The legal and operational framework for both corporate repo and market makers' service was elaborated. Around 12 types of liabilities led to the development of the market makers' services, which, in turn, led to the liquidity of these tools and increased trade on the corporate securities side. The total volume of this trade has still not reached the level of government bonds; however, it is almost comparable now. Currently, Azerbaijani companies are mainly funded by their profits, the capital injections of their shareholders, and traditional bank loans tools. Still, capital markets are becoming more appealing to them. Awareness of new market instruments is rising, which is welcome news for us.
How has the project to create derivatives with National Depository Centre (NDC) and InvestAz developed so far?
By the middle of 2014, we had started trading currency-based derivatives, and commodities-based derivatives were launched in 3Q2014. We are now considering foreign securities-based derivatives. The market has been developing actively; the share of derivatives reached about 25% of the total trading volume of the BSE quickly. NDC is carrying out a post-trading clearing settlement on these transactions. InvestAz is acting as the primary liquidity provider. We aim to develop this market. At the moment, the State Committee for Securities of Azerbaijan (SCS) is developing the legal framework for both mediatory services and margin-based derivatives trading market regulations. This comes down to the drafts of the law for the securities market that is now being finalized and will be submitted for the Parliament's approval later in 2015. We believe that this will boost the development of this particular segment. It is a successful on-going project, and we hope to attract different liquidity providers. The depth and liquidity of this market will increase. The aim of BSE, SCS, and NDC is to provide maximum protection of the participants' interests from systemic and particular risks in this segment.
What is the process required for foreign investors to work with the BSE?
There are no limits for foreign investors to participate in transactions at the BSE securities market in terms of taxes and regulations regarding non-residents' capitals registration and profits repatriation. The NDC is carrying out all of the associated duties regarding non-resident registration. In this sense, the process is as easy for a foreigner as it is for domestic investors. It is enough to choose a broker and a bank to join the market. The preparation will take about five days for non-residents. After opening the relevant accounts at the depositary center, choosing a broker and signing the contracts, a foreign investor can start trading at the securities market. The participation of foreign investors at the capital market is quite liberalized.
The state program for the development of capital markets that was started in 2011 is going on to 2020. How successful has it been so far in streamlining capital markets?
This program is quite elaborate, and comprises legal, administrative, and technological advancement of all the securities market institutions, and embraces an entire decade. To support the program, Azerbaijan signed a credit agreement for the capital market's modernization project with the World Bank. The agreement covers five out of 10 ten years allocated for this state program and comprises such significant sub-projects as the legal framework consolidation and creating a capital market law to place the legislation in line with that of Europe. It also implies revitalization of the operational base of BSE and the NDC. We have just completed one of the tenders within the state program—a contract for purchase and installation of the unified electronic trading and post-trading securities market platform—and all the documents have already been signed. This ambitious project will be realized over 2015 with the Korean Stock Exchange. It will allow us to streamline and optimize transactions and will broaden the horizons for our brokers.
Are there any new initiatives or projects that are being developed at the moment?
There is one special initiative that has just started, which is a listing advisory project. BSE targets local issuers and investors. It is a project to promote and support the development of local market leaders and investors to raise their awareness on IPO listings. We managed to put together the leading audit, brokerage, and legal companies operating in Azerbaijan within the project's framework. They agreed to provide advisory services to local companies over the transition period to become a joint-stock company and to participate at the IPO later on free of charge. Any company that signs an MoU with the BSE can expect complimentary support to be provided, such as brokers, auditors, and legal advisors. In a different country and under different circumstances, such support would require allocating massive funds. We are grateful to our partners and are planning to provide assistance to 20 companies initially. If the project proves to be effective, it will be extended in 2016.
© The Business Year - February 2015