Offshore stock exchanges – what on earth are they for?

Hugh Fasken peers through a magnifying glass

Financial services is one of the world’s most competitive markets. Why? Because nothing makes money like money. And as the line between ‘offshore’ and ‘onshore’ financial services grows ever thinner, one of the most dynamic areas of offshore finance in recent years has been the formation of ‘offshore’ stock exchanges in jurisdictions such as the Channel Islands, the Cayman Islands, the Bahamas, and Bermuda.

Most major offshore jurisdictions now boast their own stock market; indeed, not to have one is seen as somewhat odd. Most have simply followed the line that if you want to be seen as a leading international financial centre in a highly competitive global marketplace, you need to have a sophisticated, well-run stock market capable of listing equities, funds, and, increasingly, hedge funds and a host of other specialist instruments and financial products. The Channel Islands of Jersey and Guernsey, perhaps the most familiar offshore jurisdictions to British expats, has had a stock market since 1998. It currently has a market cap of £17bn and lists the funds of a number of leading fund managers – funds that would have listed on more established exchanges in Luxembourg, Dublin or London if the Channel Islands stock market did not exist. Hedge funds from Morley and HSBC are listed here, along with more traditional funds from the likes of Lloyds TSB and Brewin Dolphin.

Of course, leading ‘offshore’ jurisdictions such as Dublin and Luxembourg (together they dominate the offshore fund market) have long had stock markets: Luxembourg can trace its back to 1927; Dublin, to 1793. Most of the new breed of offshore exchanges, in contrast, were set up at the end of 1990s, at a time when pressure from the likes of the OECD, World Bank, IMF and G7 for offshore jurisdictions to smarten up their businesses was just starting. Boasting a stock exchange was seen as a way not only to compete for business with the likes of Dublin, Luxembourg, or even Paris or London, but also to show the will and ability to run a successful financial services industry – in other words, to tell the world, “we’re serious about financial services”.

So while Bermuda has had an exchange since 1971 (though it was restructured to make it more attractive for international business in 1992), the Cayman Islands Stock Exchange was set up in 1997, the Channel Islands Stock Exchange Bahamas’ in 1998, and the Bahamas’ in 1999. All have proved very profitable to their respective islands, and made them more attractive as financial hubs. The Cayman Islands Stock Exchange, for instance, was set up to facilitate the islands’ significant mutual fund, hedge fund, and structured finance business. The island boasts over 3,000 mutual funds, making it one of the biggest financial centres in the world. Leading fund houses with a presence on the island include North Star, Schroder, UBS and Willerfunds. The exchange’s market cap currently stands at over US$50bn. Having a stock market has helped the island to prosper very well on the back of the explosion in hedge funds and related products.

In March this year, the Cayman Islands Stock Exchange was granted “recognised stock exchange” status by the UK’s Inland Revenue. This recognition enables companies whose securities are listed on the exchange to take advantage of the quoted eurobond exemption – and, as a result, interest paid on securities listed on the Cayman Islands Stock Exchange can now be paid without deduction of UK tax. Similarly, securities listed on the exchange are now regarded as “qualifying investments”. Most of the securities held directly in UK retail investment such as Individual Savings Accounts (commonly known as ISAs) must be “qualifying investments”, so the Caymans market is in principle now open to a UK investor base. And among the categories of securities a UK personal pension scheme can hold are securities listed or dealt in on a “recognised stock exchange”. Accordingly, Caymans-listed securities can now form part of the investments held by such UK personal pension schemes – a huge boost to the island.

The Bahamas Stock Exchange had a bumper 2003. At the end of the year, the exchange saw its first primary listing of an international equity, the preference shares of Totta & Acores Financing, part of the Totta Group, a Portuguese banking group part of the Santander Central Hispano group. Over the past five years, the exchange’s market capitalisation has soared to over US$44bn. The increase has come mainly from the listing of mutual funds, which remain by far the greater proportion of the listings. The Nomura Multi-Strategy Fund and the Nomura Multi-Strategy Fund 02-10, set up by the investment securities and asset management giant Nomura Group, and Signum Limited, a specialist debt issuer set up by Goldman Sachs, are, says the exchange, examples of its increasing competitive edge.

All of which points to a growing acceptance of – indeed, to a growing role played by – offshore stock exchanges around the world. Certainly, and at least for the foreseeable future, these exchange will remain dwarfed by the world’s main stock markets, namely New York (with its market cap of around $14,000bn), London, Tokyo, Frankfurt, and the pan-European Euronext market, which includes the French, Belgian and Dutch stock markets. But they are getting involved in international finance and trade on unprecedented levels, taking trade away from more traditional exchanges. For expats and expatriate financial services, the result will be more and more Cayman and Bahamas-based funds and products, for instance, and less funds from the likes of Luxembourg and Dublin. As the financial world becomes more competitive, innovation should go up and costs should come down – leading to more efficient, cost-effective products. Good news, then, for expats.