Since the beginning of 2017, the Bulgarian Stock Exchange (BSE) has moved significantly closer to the establishment of its long-awaited international segment, which the bourse hopes will contribute to resolving the problem of persistently low liquidity.
The BSE International segment, where financial instruments that have already been admitted to trading on foreign regulated markets will be listed, is designed to provide easier access of Bulgarian investors to foreign stocks.
On January 26, the financial regulator issued an approval the BSE needed to be able to operate a multilateral trading facility (MTF), which is a key precondition for setting up the BSE International segment. MTFs are self-regulated financial trading venues, which serve as an alternative to traditional regulated markets on stock exchanges.
The need for setting up an MTF is based the fact that the majority of foreign exchange-traded companies had been listed long before the EU's Prospectus Directive of 2003. However, if companies do not have prospectuses required by the directive, they can't trade on the BSE's main market, which justifies the need for an MTF.
On February 19, the last condition for setting up BSE International was met, as the Bulgarian Central Depository announced it has completed a joint project with the country's central bank, allowing the depository to settle transactions in euro in the TARGET2 real-time gross settlement system.
The initial deadline for setting up the BSE International segment expected by the stock exchange was September 2017 but the two above-mentioned approvals took longer to obtain than originally envisaged.
The establishment of the new segment is aimed at improving liquidity on the stock exchange in Sofia. The BSE has said the segment will offer large institutional investors, which are already trading in foreign-listed stocks via various channels, a much cheaper way to do so, both in terms of trading charges and settlement.
The segment will comprise between 70 and 80 issues of foreign companies, which will be selected after extensive consultations with large institutional investors and other interested parties, one of the BSE CEOs, Vassil Golemanski, said when the plan for establishing the segment was officially announced.
Low liquidity has long been considered one of the major problems of the Bulgarian Stock Exchange. The global financial crisis only exacerbated the problem, which led to the establishment of a Capital Market Development Council consisting of representatives of regulators and associations of large institutional investors. In November 2016, the Council adopted a Strategy for Development of the Bulgarian Capital Market.
Insufficient liquidity and the lack of instruments in a volume large enough to attract large institutional investors are the most pressing concerns which the BSE is facing, according to the strategy document. To resolve the issues, the parties agreed to work towards improving the quality, quantity and variety of instruments offered on the BSE.
One of the specific measures intended to support the development of the stock exchange in Sofia was to provide local investors with access to foreign markets via the BSE. Consequently, in May 2017, the BSE announced it was planning to set up a BSE International segment. At the time, the BSE also announced it had received approval from the Financial Supervision Commission for changes to its listing and trading rules.
Trading in government bonds off to a slow start
In a bid to further diversify the available instruments on the exchange, on November 1the BSE admitted to trade 20 issues of Bulgarian government securities with a total book value of 5.5 billion levs.
The listing of government securities on the BSE was expected with great interest, as many thought it might attract retail investors, who otherwise have no direct access to such instruments.
However, until the end of 2017 only three transactions in government securities were concluded on the regulated market of the BSE, generating a total turnover of just below 340,000 euro. In January 2018, trade in government bonds slightly picked up and generated a turnover in excess of 1 million euro.
Expat Asset Management's growing family of ETFs
The growing number of Sofia-listed exchange-traded funds (ETFs) of Bulgaria's Expat Asset Management company might also boost liquidity on the BSE.
In August 2016, Expat Asset Management launched its first ETF on the BSE, Expat Bulgaria SOFIX UCITS ETF, which tracks the performance of the BSE's blue-chip SOFIX index through the method of full physical replication. The ETF helped boost liquidity on the BSE as, on the one hand, it attracts serious investor interest, and on the other, it constantly buys and sells shares of blue-chip companies, in order to keep up with the SOFIX rebalancing.
In January and February, Expat Asset Management listed a further eight ETFs on the BSE, each of which tracks the performance of the blue-chip index of one of eight stock exchanges in Central and Eastern Europe, i.e. the bourses of Croatia, the Czech Republic, Greece, Hungary, Poland, Romania, Slovakia and Slovenia. The company also plans to launch a further two ETFs, which will track the blue-chip indices in Macedonia and Serbia.
The ETFs are expected to overcome deficiencies typical for stock exchanges in the region such as lack of liquidity, lack of access, cross-border settlement issues, high execution costs, large spreads, and other technical factors, according to Expat Asset Management.