Here’s a fascinating development which could have significant ramifications for the market in catastrophe bonds and insurance-linked securities, particularly in the secondary market trade in Rule 144A securitized notes. The Cayman Islands Stock Exchange (CSX) has told us that it is planning to allow full trading and transfer of any listed catastrophe bond or ILS notes using its exchange and clearing technologies and connections.
The trade in and transfer of cat bond and ILS notes has historically been on over-the-counter (OTC) activity, largely facilitated by the trading desks of capital markets players, brokers, investment banks and dedicated ILS asset managers. This works perfectly well except it does mean that pricing of secondary cat bonds can seem a little opaque.
We’ve seen pricing sheets from major brokers and ILS trading desks over the years where bid and ask price guidance for the same cat bond can differ quite a lot between the sheets at times. A central pricing repository is something that would benefit the market from a transparency point of view and this has often been discussed. Having a central place to trade in specific cat bond and ILS notes could have equally wide-reaching benefits such as opening access to the market to more investors, levelling the playing field when it comes to trading commissions, increasing liquidity and potentially even lowering the costs of buying or selling cat bond and ILS notes.
Back in August the CSX signed an agreement with Deutsche Börse to use its XETRA trading platform and that technology is scheduled to go live at the exchange in early 2013. During this integration the CSX realised that the XETRA trading platform would give them everything they’d need to allow any catastrophe bonds or insurance-linked securities which had been listed on the CSX the ability to be traded.
Valia Theodoraki, CEO of the CSX said; “The Cayman Islands Stock Exchange, ‘opening its doors’ to on exchange insurance-linked securities trading with its migration to Xetra, aspires to be a driving force in this field by offering greater pricing transparency and making trading easier for existing and new participants.”
The XETRA system is already widely used, with stock exchanges such as Frankfurt, Ireland, Shanghai and EUREX AG already using it. Around 400 banks and brokerages are also connected to the XETRA system for trading purposes as well. The project to move the CSX onto XETRA gives the Cayman exchange the ability to open up for trading any of the securities it has listed.
Here are a few details of the trading facilities that will be available. ILS and cat bond trades on the exchange will trade ‘flat’ according to the CSX, meaning that the buyer of the bond is not responsible for paying the interest that has accrued since the last payment (accrued interest is normally part of the bond purchase price). The CSX platform will be able to accommodate both on-exchange as well as OTC trades of ILS. The CSX is still determining the optimal trading hours to operate but are hoping to operate at times that will suit traders and concentrate liquidity between European and American markets. There will be no trading fees, according to the CSX, which is sure to help make this initiative attractive to market participants. Clearing wise, trades made on the CSX can be cleared and settled through Clearstream or an acceptable equivalent such as DTC.
Jack Stoffers, Head of IT at the CSX commented; “The XETRA platform gives our members a feature rich trading environment, with simple technical entry requirements for our Brokers, while being able to grow into a sophisticated platform using modern order routing protocols, as the markets grow.”
Nick Small, Head of Listing at the CSX added; “We hope that by offering the option of the complete package including listing and more easily accessible on-exchange trading we can help boost both the secondary and primary markets. The idea is that exchange trading will bring more liquidity and ultimately a deeper pool of investors. ”
Enabling exchange trading of cat bonds and ILS is something that has been discussed many times in the market but as yet hasn’t been attempted anywhere else that we know of. The Bermuda Stock Exchange could likely also make the cat bonds it has listed tradable through the systems they employ, but to date has not done so.
It will be interesting to see how this initiative goes for the CSX. Problems they might face include attracting those who trade in cat bonds and ILS to do so via the exchange rather than via OTC trading desks and the fact that the CSX is not host to every cat bond or ILS meaning that only certain notes could be traded there. The CSX told us they have ILS with a listed market value of $10 billion on the exchange which includes catastrophe bonds from 35 issuers. As long as the CSX can make trading in ILS and cat bonds cheaper, easier, quicker and more attractive to do so via their exchange then we see no reason why this couldn’t take off. It will also be interesting to see how other exchanges and the OTC desks react to this.
We’ll bring you more on this as the CSX’s plans for facilitating exchange trading in cat bonds and ILS move closer to fruition.