None of the 12 entities holding a Category 3 licence from the MFSA have so far applied to become market-makers, which would bring much needed liquidity to the Malta Stock Exchange. However, Bank of Valletta seems to be quite open to the idea, noting, however, that the MSE is not offering any benefits.
The new rules were launched by the MSE on October 1, but out of the three banks and nine financial services providers eligible there is no sign that any will definitely come forward.
To be eligible, the entities must hold a Category 3 licence, meaning they must have an initial capital of €730,000. They must also maintain sufficient own funds to match or exceed their capital resources requirements.
The MSE Bye Law allows locally-licensed entities as well as those licensed by a competent European Economic Area authority with passporting rights.
A number of entities were asked whether they were interested in taking up this role and whether it would be for bonds, equities or government stocks – or all. They were also asked whether they would be interested in only acting as market-makers for specific equities or bonds – including their own where applicable.
HSBC Bank Malta sent a reply which was one step removed from a ‘no comment “HSBC Bank Malta is aware of the new policies issued by the MSE and continues to engage with the MSE on the matter.”
Bank of Valletta, on the other hand, confirmed that they were “evaluating all possible options in this regard”.
“The bank welcomes the launching of these rules which allow for the regulated entry of market making practitioners to the local equity and fixed-interest markets,” a bank spokesman said.
“Having procedures in place is necessary to ensure a level playing field and equips possible participants with the necessary tools to formulate a business case. The bank is currently evaluating all possible options in this regard.
“The Exchange will be retaining the current order driven market and simultaneously introduce the quote driven market on particular securities. The two are different market systems, independent of each other and only used concurrently (hybrid system) in highly liquid securities, such as equities in the FTSE 100 Index, and practically never in the bond markets.
“The bank still needs to assess the impact of such a hybrid system on market-making practitioners, given the illiquid nature of all locally-traded securities. Furthermore the Exchange is not proposing any trade execution benefits to market making practitioners, in the form of liquidity rebates, as would be the norm internationally. Further discussions are therefore required to arrive at an equitable solution. You will appreciate that a market-maker would aim to make money in both rising and falling markets by taking advantage of the spread offered. However, with the tariff structure and the hybrid system proposed, the profitable commercialisation of the activity for market-making practitioners is questionable.”
BoV said it would not rule out acting as market-maker in any category of security as long the operation was a viable one.
“The bank will be interested to act in such equities or bonds in line with our risk assessment on the individual security. It would also dependent on an efficient repo-market for bonds and the introduction of securities lending for equities.”