| Introduction:
The Evolution of Offshore Stock Exchanges
There is
no such thing as an 'offshore' stock exchange,
in fact, there are just some stock exchanges that are based in low-tax
or 'offshore' jurisdictions, and they don't share any characteristics that
set them apart from 'onshore' stock exchanges, except perhaps their small
size, with Hong Kong, Ireland and Switzerland as exceptions. The Irish
Stock Exchange was indeed until quite recently a subsidiary of the London
Stock Exchange.
Nonetheless,
the group of stock exchanges based in low-tax countries may come to share
a more important characteristic than their 'offshoreness', and that is
survival. 'Offshore' itself has evolved in a Darwinian sense in response
to the ever more inhospitable fiscal and regulatory environment presented
by the high-tax countries, and offshore stock exchanges were an inevitable
development once significant numbers of capital-hungry companies and financial
institutions such as investment funds began to migrate to low-tax regions. |
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| The biggest
single event of this type took place when US fiscal foolishness in the
Sixties gave birth to the Euromarkets almost overnight, and Luxembourg
, which had been quietly minding its own business for hundreds of years
as a Central European backwater, suddenly found itself the jurisdiction
of choice for the listing of Eurobonds, more by being situated in the middle
of a ring of high-tax countries than on account of any particular advantage
it possessed in terms of financial sophistication. Truly it can be said
of Luxembourg that 'Some countries have greatness thrust upon them'. Despite
the enormous value of the bonds listed in Luxembourg, trading in them takes
place elsewhere (in London, predominantly), illustrating the fact
that the key to trading is liquidity. The thousands of mutual funds listed
in Luxembourg are scarcely traded at all, although the arrival of the 'exchange
traded fund' in Europe may begin to change that.
Given that
there is no liquidity to speak of offshore (Hong Kong and Switzerland
being exceptions), it might be thought surprising that stock exchanges
would spring up in such unlikely places as Mauritius or the Bahamas. But
listing in one thing, trading another. Half of the stocks on the Hong Kong
exchange are registered in Bermuda, while being listed and traded in Hong
Kong. |
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| Funds, which
don't need to be traded, need stock exchanges to list on, and are more
interested in achieving that regulatory respectability than in liquidity
- so they list offshore. Most stock exchanges require that a company lists
before it can be traded: it's therefore logical that listing would be close
to liquidity in the case of companies (who want their stocks to be traded)
but not in the case of funds. And that's what we find: that the great majority
of offshore listings are for funds, while only very few companies of any
size have offshore listings. When it does happen, it's usually because
they have alternative methods of tapping liquidity. A good example of this
is insurance companies in Bermuda: they go there for tax reasons, but don't
need to raise money because they are the original capital-raising devices
of all time in themselves.
Enter The
Internet |
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Offshore Resources Gallery
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| If it were
not for the Internet, the pattern of offshore listing we have described
(many funds and lightly-traded instruments such as SPVs, but few large
companies) would probably continue for a long time, since there would be
no development of liquidity away from the existing 'legacy' bourses and
hence no possibility for major capital-hungry companies to give in to the
temptations of offshore.
The Internet
changes the game, as it is changing all aspects of business, in various
ways. First, it has spawned a vast and very rapidly-evolving group of 'ecn's
which are supported by just the same mega-institutions that provide much
of the liquidity currently available in the legacy bourses. Maybe once
upon a time it was true that stock-brokers in their silk hats or bowlers
provided liquidity to stock markets, but that day is long past. In London
it went out with Big Bang, when the US bulge-bracket banks bought out the
old City partnerships in short order; and similar changes have taken place
elsewhere.
Nowadays, Merrill
Lynch and Goldman Sachs and their peers provide the bulk of LSE liquidity.
What will happen then, when the ecn's in which they are shareholders (and
to which they can transfer their legacy trading at the drop of a silk hat). |
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to provide European and then global trading in a frictionless electronic
market-place with integrated back offices (straight through trading)?
It will be at a price that no legacy exchange can hope to match.
The answer
is obvious, and only those legacy exchanges will survive which manage
to be bought out by an ECN, or turn themselves into one. The LSE
has just hammered the lid of its coffin almost shut by spurning OM;
it will be only the first of many exchanges to make such an error, compounded
in spades by the stunning short-sightedness of the UK Government
in not abolishing stamp duty on share-trading.
The second
major effect of the Internet is:
to make back
offices and, indeed, for that matter, front offices highly portable. |
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Offshore
Resources Gallery
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| Don't be deceived
by the temporary setback the ecn's are experiencing as consumers adjust
to electronic trading and legacy financial institutions use their fat to
compete with starving and under-capitalised newcomers. This is a passing
fad, and in time the cheapness of e-trading will blow away all other business
models. Once that has happened, and large companies see the great majority
of their trading (and capital-raising) done on the 'Net, do you suppose
they will continue to list in New York, London or Zurich, with all the
attendant costs and regulatory hassles. Why would they? They will list
in the cheapest, reasonably well-regulated place where there is a professional
support mechanism that guarantees probity and transparency and is consistent
with access to liquidity.
Enter The
OECD
From that point
of the argument onwards, things become hazier, because it is unknowable,
for instance, whether an ecn might develop a cyber-regulatory structure
which would permit virtual listing, doing away with all territory-based
stock exchanges. National jealousies will probably prevent that happening
in the short or medium term, because it requires international agreement
to accept the validity of non-national law, and however much progress has
been made in developing over-arching trade law through the WTO, complete
globalisation of law is still a very long way in the future. Ask Pascal
Lamy and Larry Summers about it.
But here are
the offshore stock exchanges already in place to welcome new customers.
They are cheap, they are warm and sunny, they don't pay tax, they have
acceptable regulatory structures, and, Lo! and Behold! here comes the
OECD to make them even more acceptable to the world's tax policemen.
After the major cleaning-up exercises of 2000 and 2001, there will
be a set of offshore jurisdictions whose regimes are as good as or better
than the antiquated, inbred and above all expensive regimes we find in
the high-tax countries. It is wonderfully ironic that the OECD,
in an attempt to head off competition from offshore, is in fact forcing
the jurisdictions to position themselves to capture all the rich countries'
business when the time comes.
Perhaps this
is a little extreme; but you can see the possibilities. Countries such
as Bermuda, Ireland, Jersey, Cyprus (maybe), Hong Kong (already) and Mauritius
are cleaning themselves up for what could be a glittering future. At
present, it has to be said, the offshore stock exchanges don't see the
future any more clearly than their onshore ancestors, the only exception
perhaps being Bermuda, which is steaming ahead with a series of alliances
with ecn's. Bermuda is also one of the better-regulated jurisdictions;
but it has some disadvantages such as a somewhat introverted view of itself
and wrong labour policies which will stunt the development of adequate
reservoirs of precious IT and technological skill-sets. Hong Kong would
be the rational choice among existing low-tax stock markets on which to
build a hybrid ecn/legacy trading market; but there are many difficulties,
including its inscrutable owners in Beijing, its own rather backward level
of technology, and, again, skill shortages. Anyway, it's much too soon
to predict which exchanges will come out on top. The next section reviews
twelve offshore jurisdictions which have stock exchanges.
The Jurisdictions
With Stock Exchanges
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