The announcement made by the Malta Stock Exchange and Clearstream on June 10 that both parties intend to offer settlement for local securities is welcome news for the local stockmarket and a development which will offer international investors access to Maltese securities.

Clearstream is a fully-owned subsidiary of Deutsche Börse and is a leading European supplier of post-trading services. Clearstream ensures that cash and securities are promptly and effectively delivered between trading parties. It also manages, safekeeps and administers the securities that it holds on behalf of its customers. Over 300,000 internationally traded bonds, equities and investment funds are currently deposited with Clearstream. Its global network extends across 45 markets. Clearstream offers one of the most comprehensive international securities services, settling more than 250,000 transactions daily.

As an international central securities depository, Clearstream will be in a position to offer settlement of securities listed on the Malta Stock Exchange to international investors. So far, settlement of local investments can only be made via the Central Securities Depository under the auspices of the Malta Stock Exchange. However, many international investors insist on utilising international settlement parties, such as Clearstream, to ensure the safekeeping and effective settlement of their securities.

This development will open up the Maltese stockmarket to a greater pool of international investors who, to date, have shied away from considering local investment opportunities simply due to the lack of an international settlement provider. The only disappointing part of the recent announcement was that the implementation of such a system could take as long as 12 months to finalise. In this respect the MSE should do its utmost to ensure that all technical issues are dealt with as expeditiously as possible to ensure a quicker solution for the benefit of all stakeholders.

The introduction of a reputable international settlement provider had also been mentioned by the College of Stockbrokers in the recent Finance Malta conference in order to gain access to a wider global investor community. This was just one of the necessary developments mentioned to further strengthen the role of the local stockmarket in a fast evolving industry.

Another area which should be high up on the MSE's priority list is developing the MSE as an alternative venue for the listing of funds. While the registration and re-domiciliation of global funds in Malta has been gaining popularity, the same cannot be said for such funds to opt for a listing on the MSE rather than on other exchanges such as Dublin or Luxembourg. This opportunity was mentioned by the chairman of the MSE Arthur Galea Salomone during his recent address to participants at the Finance Malta conference. With the large number of international funds already authorized by the MFSA and the likelihood of this trend continuing, the local stock exchange has an opportunity in this field.

The chairman of the MSE mentioned other international business development opportunities for the Exchange and also delved into some local opportunities. While he acknowledged that the recent spate of local bond offerings is a very positive development especially in the context of an acute and global financial crisis, Dr Galea Salomone aired his disappointment on the low level of interest shown by companies to use the equity market as an alternative source of capital. The MSE chairman, however, opined that "the inherent reluctance to relinquish ownership can and will be overcome". Dr Galea Salomone argued that there should be more "flexibility" in respect of the 'minimum float' requirement.

The current Listing Rules state that a company having its equity listed on a recognised exchange (such as the MSE), must have at least 25 per cent of the equity in public hands. While this is desirable and would help to ensure an adequate amount of shares in public hands, possibly improving the trading activity in such shares, the flexibility aspect is important. The authorities would do well to take into consideration the overall value of a company when contemplating such a threshold. A 15 per cent "free float" in a company valued at say €200 million may be more beneficial to the exchange and public investors alike rather than a 25 per cent offering of a company with a total market value of say only €15 million.

More flexibility in this respect may help attract the larger locally based companies to offer a smaller percentage of their overall equity for public ownership and create a greater possibility of a move towards a stock exchange listing.

Another development that could help the growth in listings could be a revision of the second tier market (the current Alternative Companies List).

The MSE chairman mentioned the possibility of introducing an Exchange Regulated Market which would serve as a fast track listing with less onerous obligations. This should be ideal for start-up companies and SMEs who require funding for their new ventures or business expansion. This would be similar to the Alternative Investment Market (AIM) which was so successful in London. Following the acquisition of the Borsa Italiana by the London Stock Exchange, a similar market has been introduced in Italy. This has started to gain popularity and is also being looked upon as a listing venue by non-Italian companies. A similar 'junior market' in Malta would be ideal for those companies which are considered too small for listing on international exchanges. Dr Galea Salomone did in fact mention that the MSE could be "a point of entry into the EU capital market for issuers outside the EU, utilising the Prospectus Directive to the full".

Another important element in the internationalisation process of the Exchange would be collaboration either in the form of a joint venture or by participating in an alliance of exchanges. Such a development would enable the MSE to register progress on some of its internationalisation initiatives. However this must be seen in the light of the decision taken by the government of Malta to eventually privatise the Exchange. Although this may have been shelved temporarily due to the international financial crises, the time may be ripe to re-activate the process since this situation may be inhibiting progress on a number of other initiatives which the MSE needs to move ahead with for the ultimate benefit of the local financial services industry.

Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, "RFC", is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

© 2010 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

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