In our first interview of 2011 we spoke with Greg Wojciechowski, President and CEO of the Bermuda Stock Exchange (BSX). The BSX is seeking to raise its profile within the insurance-linked securities (ILS) sector and wants to make Bermuda the domicile of choice for listing of catastrophe bond notes. We asked Greg about the BSX’s role in the ILS market and how he felt it could expand in future.
Tell us about the BSX and its background?
The BSX is an internationally recognized stock exchange with over 800 listed securities and a market capitalization of over $300 billion. The Exchange will celebrate its 40th anniversary next month. The BSX supports local and international business on its fully electronic trading, settlement and depository system. The BSX is a Self Regulatory Organization, supervised by the Bermuda Monetary Authority, which ensures that its regulated brokers and listed issuers meet and comply with the Exchange’s regulations. The Exchange’s clearing, settlement and securities depository acts as a Central Clearing Counterparty (CCP) to ensure that all transactions settle according the market requirements.
What do you see as the BSX’s role in the ILS market?
The BSX sees a natural fit for it to support the continued development of the Insurance Linked Securities asset class. We are focused on providing capital market solutions for this growing and dynamic market and see Bermuda and the BSX as the logical place for further development to occur.
What makes Bermuda a particularly good domicile for prospective ILS issuers?
Bermuda is the third largest specialty insurance market, whose management and staff are located here, and provides sophisticated insurance solutions to global markets. Bermuda-registered insurance entities number over 1400. These companies provide a vast array of insurance solutions. For example, 40% of US Property Catastrophe insurance is provided by Bermuda Class 4 insurers. Bermuda-based insurers provide 25% of the reinsurance cover to the US and EU market and Bermuda entities are globally respected in the captive insurance arena. In addition, Bermuda entities are well known for being efficient payers of claims made on policies written.
What do you think Bermuda and the BSX can offer the ILS market which perhaps other domiciles can’t?
In respect of the ILS market, Bermuda has two of the most crucial components successfully operating at present: The market, which underpins the issues and the BSX. The Exchange senses an opportunity to assist in the further development of the ILS asset class and has the capital market experience and willingness to do so. The ILS market and in particular the Cat Bond market has been operating for many years, but more and more new investor groups are looking at this space as a result of the low correlation between this sector and the broader capital market. Given the recent past turmoil in the financial markets, not to mention some spectacular failures of structured products, investors require that more daylight is shed on the instruments in which they invest, especially if they are managing other investors’ money. It should be noted that while the credit markets were in the process of dislocating during the financial crisis, stock exchanges continued to function providing the last bastion of liquidity in a very challenging time. They also ensured that transactions settled via their clearing entities according to contractual terms.
Investors understand the importance of stock exchanges in ensuring information flow for issuers’ securities and their role in mitigating transaction and settlement risk and they typically reward those listed vehicles with greater asset allocations. It is in this regard that a stock exchange such as the BSX can add significant value through its platforms to provide the ILS space and its investors with an appropriate level of transparency to give them greater comfort in investing. In this way newer market segments/asset classes move to the next level of their development and thus attract greater investment attention.
It is important to note that the exchange platform must be able to provide all aspects of support to the market: listing, price discovery and clearing and settlement. The BSX is a fully operational stock exchange platform and has been so for many years – this we hope will give an added incentive to the market in allowing us to support the further development of this asset class.
How do you think the BSX can broaden its support for the ILS market to more than just listings of vehicles?
Key to the role of stock exchanges is their responsibility to provide platforms that support transparency, price discovery and post-trade services. In most cases a listed issuer will use all aspects of a stock exchange platform, such as what is seen in the equity markets. But exchanges can and do offer a varying level of support to different structures. In the case of insurance linked securities, in the first instance, I would see the BSX being the choice for listing an ILS issue.
Our expanded role could include being the repository for end of day pricing and volume figures, from secondary market trading activity (post initial placement), and their dissemination to the market through the Exchange’s information dissemination mechanisms. As this market is young by comparison, secondary trading activity occurs in an over-the-counter fashion. The BSX could compliment this activity, for example, by providing end of day closing prices to the market which would allow ILS investors to value their positions from a third party independent regulatory source. That would be the first level of support and would add tremendous value to the market.
Of course as the market develops, other aspects of the stock exchanges platform could be used, whether as a trading platform or using the electronic settlement mechanisms. In a December press release, the World Federation of Exchanges, of which the BSX is a full member, said: “The G20 governments and regulators have recommended that central clearing, a key component of regulated exchanges, be adopted by OTC markets to reduce systemic risk.” Perhaps this level of service could be useful to the ILS market in future. That said, let’s walk before we run. The BSX, as I have said, is willing to work with the participants in this market to create and provide additional services that will help the market develop while addressing investors’ needs for additional transparency.
Our thanks go to Greg for his time and insight. We hope our readers find this commentary into the role of the BSX and how it could expand that role to serve the insurance-linked securities market interesting.