The past two years have been a milestone period for the Malta Stock Exchange, marking the 20th anniversary since the enactment of the Malta Stock Exchange Act at the end of 1990, establishing a capital market in Malta, marking the appointment of the first governing Council of the new institution in 1991 and marking the 20th anniversary since trading commenced in 1992. It is, therefore, an opportune moment to look back and reflect on what has been achieved throughout the exchange’s short but not uneventful history, and to take a look at what there is in store for the future.

Evolution of the exchange
From its modest beginning 20 years ago, with manual trading taking place on a weekly basis and exclusively in government stocks, the exchange has developed into a fully fledged regulated market, while at the same time also operating a fully dematerialised central securities depository which enables the exchange to provide the whole value chain for transactions in listed financial instruments.

Along the way many changes and developments have taken place: Not least the admission of diverse financial instruments including money market instruments and collective investment schemes; the introduction of daily, electronic remote trading; the establishment of a second tier market; and the corporate restructuring of the exchange into a group of companies which better reflects its core operational structures, providing services to a diversity of users.

Besides operational developments, significant legal and regulatory changes over the past years – including the transfer of supervisory authority in respect of the capital market to the Malta Financial Services Authority and the Listing Authority – have taken place together with the establishment of improved corporate governance and investor protection structures. Not forgetting of course that many of these changes took place within the context of Malta’s accession as a member of the European Union and the changeover of its currency to the euro.

Modest, but mighty
Over the past twenty years the exchange has proved to be an effective means to mobilise capital and has been a source of alternative opportunities for saving and investment. Over €13bn has been raised on the exchange since its inception, with a market turnover of over €4bn and the number of accounts on the depository rising to 250,000. Total market capitalisation (excluding listed Collective Investment Schemes) today stands at over €8bn.

These numbers may seem insignificant   when compared to the capitalisation of listed companies worldwide and against the value of transactions executed globally. However, when considering what the exchange has been to date, principally a domestic, retail market servicing a population of 400,000, there is no doubt that it is fulfilling an important role in the local financial services sector. As expected, throughout these 20 years, both primary and secondary markets have gone through peaks and troughs.

Markets may be bullish or bearish but invariably they should always be fair. While the market, and indeed, the Maltese financial sector proved very resilient – although not immune – to the ongoing global financial turmoil, as anticipated, the record activity registered on the primary market for three successive years, 2008, 2009 and 2010, was not sustained during 2011. Last year saw a dearth of new listings, due in no small part to very stringent listing policies introduced in 2010, which are currently being reviewed, but also, due to the uncertainty caused by the continuing global financial and political upheaval.

Going international
Last year was a very difficult year, particularly on the primary market. However, resilience and confidence continued to characterise the secondary market, notwithstanding adverse developments on the international front. Despite having witnessed some of the sharpest drops in the Share Index in recent years, trading rallied significantly during the latter half of the year to maintain the elevated levels registered during the previous years. The current year has started on a positive note for the market; however, there is no room for complacency. The eruption of the eurozone debt crisis underscores the point that any recovery is still very fragile and there is still a long way to go to restore confidence in capital markets.

As regulatory restraints, external economic woes and international political turmoil conspired to dampen financial markets, it was felt to be the opportune moment to stand back and reassess the exchange’s strategy and developments and to consolidate operational infrastructure. The exchange has, since its inception, striven to create a meaningful niche in the local financial sector, which, judging by the figures quoted above, it has achieved during a relatively short span of 20 years. The exchange has also always been at the forefront when helping develop Malta into an international financial sector, in line with the government’s stated policy to develop the financial sector as the third pillar of the economy by 2015 – a goal which is well on the way to being achieved.

On its part, therefore, the exchange’s future strategy is now clearly focused on attracting international business, both from a market perspective and also in respect of back-office services, which because of the previous focus on the market, remain undervalued and underutilised. Notwithstanding its international focus, the exchange remains very committed to servicing its domestic users which remain a mainstay of its operations, however, it is acknowledged that given the demographics, the local market can only achieve a finite growth, and in order to continue to achieve sustainable growth, it must widen its horizons to attract more international business.

German efficiency
In the light of this, 2011 ushered in the launch of the exchange’s international strategy, with a special focus on achieving connectivity with other markets. Early last year, in fact, the first interoperable link was set up between one of the largest international depositories and the exchange’s depository which also led to the launch of the exchange’s custody business. This has already produced dividends by an increase in cross-border transactions in Maltese securities, as well as participation by international institutional investors in the Maltese market.

During 2011 the exchange also launched a number of major technological upgrades designed to bolster and support its internationalisation strategy, chief among which is a replacement of the current trading system to be supplied by Deutsche Boerse AG, which is expected to go live in June this year. It is intended that this state-of-the-art technology will serve as an effective business enabler, facilitating internationalisation of the market.

The exchange’s efforts to attract a wide scope of international companies to its market has also proved successful, particularly attracting small-to-medium-sized companies to the market primarily as a listing venue and indeed, at the beginning of this year, it has seen the first such listings on our market.

Leading by example
Developing a niche for the exchange is increasingly important if meaningful internationalisation is to be achieved, an objective which in the present circumstances may appear difficult but which the exchange believes is achievable. The exchange is confident that there is great opportunity and potential in synergising with the rapidly developing fund industry in Malta, which is gaining more momentum as funds and venture capital seek highly regulated and stable economies as their domicile.

The exchange also believes, as has already been proven, that other opportunities lie in projecting the exchange as a venue of choice for niche issuers looking for a cost-effective platform which enables them to tap into the European capital market. That fledgling exchange is now an internationally accredited institution and an increasingly important player in what has grown into an unrecognisably transformed financial services sector.

As the sector continues to develop it would indeed be salutary to see: Increased vigilance in selling practices; sustained initiatives to improve financial literacy amongst the investing public; the development of an independent and analytical financial press; a renewed commitment to political consensus in the field of financial services; and a concerted effort to entrench ethics in economic and corporate behaviour.