The question of the need for the Channel Islands Stock Exchange was frequently posed by sceptics in 1997 when it was first announced that a working party had been established to assess the viability of the exchange. In those early days, doubters probably outnumbered enthusiasts by a ratio of at least 2:1. Now, six years later, those same people acknowledge that its establishment has benefited and enhanced the reputation of the Channel Islands as an offshore financial centre.
The intention to establish the exchange was encouraged by the Guernsey Financial Services Commission and by a group of local practitioners with members prepared to invest their own capital to procure its establishment. It has been the ability to attract and involve the local financial community through membership of the exchange that has not only ensured its establishment, but has also sustained its development without recourse to funding from the Channel Islands government.
The Channel Islands Stock Exchange was registered in Guernsey as a ‘company limited by guarantee’, but also with its own share capital. This hybrid structure enabled the exchange in the year 2000 to raise additional capital independently of its membership.
Although the exchange is registered in Guernsey, it represents a genuine pan-Channel Islands initiative, with members and listings derived from Jersey as well as Guernsey.
The introduction of the exchange posed a number of significant regulatory and constitutional issues.
The exchange is regulated by the Guernsey Financial Services Commission as a ‘licensed investment exchange’ under the Protection of Investors (Bailiwick of Guernsey) Law 1987, although it required a specific amendment to be approved by the State of Guernsey in order to enable the commission to extend regulation to an ‘investment exchange’.
As an entity that is regulated by the Guernsey Financial Services Commission, the exchange is expected to: pay an annual fee; prepare and submit an annual compliance review; and report, and generally comply with, the Investment Exchange (Notification) Rules 1998 (as amended) and the Licensees (Financial Resources, Notification, Conduct of Business and Compliance) Rules 1998.
As a regulated entity, the exchange was reviewed by the International Monetary Fund during its recent audit of regulatory functions in Guernsey and Jersey.
Notwithstanding that the exchange is a regulated entity, it is also in its own right a regulator of its members through the enforcement of its membership rules, to which all sponsoring and trading members must adhere. The rules were first formulated in 1998 and were modelled on an amalgam of membership rules drawn from other international exchanges. Membership rules cover both sponsoring members and trading members. For the reasons stated above, one of the unique features of the Channel Islands Stock Exchange is the involvement of practitioners as sponsoring members – so law firms, fund managers, banks and other regulated entities, as well as traditional brokers, can apply for membership as sponsoring members. The involvement of practitioners in the membership and development of the exchange has been of significant benefit to it. Membership of the exchange now stands at 32.
The constitution of the exchange incorporates a board of directors, the members of which, apart from the chief executive of the exchange who is a director ex officio, are elected by the members of the exchange.
The management, operation and regulation of the exchange is vested in the Market Authority, which comprises the chief executive and other members of the executive of the exchange. The Market Authority may at any time on notice or otherwise conduct an inspection to ensure that a member is in compliance with the exchange’s rules, or require the member to furnish the Market Authority with such information as the authority may require within a reasonable period of time and verified in such a manner as the authority may specify. The Market Authority may refer any member to a hearing before the disciplinary committee established by the board of directors, and it is this committee, under powers delegated to it by the board of directors, that has the power to expel or suspend membership of the exchange.
Listing on the exchange is governed by the Listing Rules originally promulgated in 1998, but substantially reviewed and revised over the past two years. In establishing the requirements for listing, the rules differentiate between different categories of securities
– in particular, rules relating to investment funds and corporate debt securities.
The exchange has recently introduced a further category of rules relating to Channel Islands depository receipts. More than 300 securities are now listed on the Channel Islands Stock Exchange Official List, with a market capitalisation in excess of $17bn (£10.07bn). The exchange has attracted listings of non-Channel Islands-registered investment funds, many of which have sought listings on the Channel Islands Stock Exchange in preference to listings in Dublin or Luxembourg. The ability to attract non-Channel Islands-registered investment funds has helped to attract fund administration business into both islands, which might otherwise have been located in other jurisdictions. To this extent, the Channel Islands Stock Exchange is seen as assisting local financial service providers in attracting business into the islands.
The Channel Islands Stock Exchange has not only offered a facility for listing, but also facilities for trading, and in 2002 81.5 million shares were traded through the exchange. The lack of VAT and the lack
of local stamp duties offers attractive opportunities for trading purposes.
At the outset of the establishment of the exchange, the issue of international recognition was considered a major strategic objective. The process of obtaining recognition has proved very laborious, but the momentum for the exchange is now beginning to build, having achieved recognition as a designated offshore securities market under Regulation S for US Securities and Exchange Commission purposes, UK Inland Revenue recognition under Section 841 of the Income and Corporation Taxes Act and, most recently, proposals published by the Financial Services Authority that the Channel Islands Stock Exchange be added to the list of designated investment exchanges. The exchange will rank with Hong Kong and Singapore as being one of the only offshore exchanges to be so designated.
The key to the future of the Channel Islands Stock Exchange lies in its international recognition and the ability to achieve a balance in its style of operation between providing a service to sponsoring members and their listing clients and its regulatory role. Experience to date suggests that the Channel Islands Stock Exchange has achieved that balance, and will continue to develop to achieve its stated objective of being the premier offshore stock exchange in the European timezone.
Peter Harwood is managing partner of Ozannes and a director of the Channel Islands Stock Exchange