Vision of a common stock exchange

In spite of the present situation in capital markets all over the world, and especially with regard to the problems in Russia, the present advantages of the Baltic markets cannot be denied.

They have a significant growth potential due to the still on-going public privatization process, solid economic growth and expanding export capacity of leading Baltic blue-chips.
The Baltic markets have efficient and inexpensive trading, clearing and settlement. They all are in compliance with the recommendations of the G-30. Baltic markets offer cross-border custody opportunities.

Furthermore, there is also an adequate transparency and efficient real time information provided by all stock exchanges. And last but not least - new instruments are available for portfolio management such as OTC derivatives.

The Baltic stock markets function in compliance with national legislation and their own Rules and Regulations and Enforcement notes. Each of them is supervised by a respective market regulator - the independent Securities market Commissions in Latvia and Lithuania and the Securities Board in Estonia. The stock exchanges in their turn execute a supervisory function over their members and listed companies.

There are presently 10 companies included in the Official list of the Riga Stock Exchange, 8 companies in the Main list of the Tallinn Stock Exchange and 7 companies in the Official list of the Lithuanian National Stock Exchange. All officially listed companies comply with the EU stock exchange listing directive.

All three stock exchanges have a size comparable to the economies of the respective countries but that might not be sufficient for long-term sustainable development. Therefore the discussion about a closer cooperation between the Baltic capital markets has started and visions of future developments have been expressed.

One of them suggests that a closer cooperation would lead to the Baltic capital market integration and in future to a joint Baltic stock exchange in whatever form it may be.
As the first step towards cooperation the information sharing agreement between the Riga Stock Exchange and the Tallinn Stock Exchange was signed this spring. It covers exchange of information on cross-listed companies and cross-members.

The next step should obviously be exchange of real-time data-feeds and an order routing possibility for cross-members. Cross border trading is already possible due to the cooperation agreement between the Estonian Central Depository and the Latvian Central Depository.

The Joint Baltic Stock Exchange may be based on a common Main list, including shares from the Official lists of the respective exchanges. This cooperation can be modeled on the Euro NM partnership between European exchanges.

Presently there are 25 such companies in the Baltics but their number will undoubtedly increase as a result of privatization of Ventspils Nafta (Ventspils Oil), Latvijas Kugnieciba (Latvian Shipping Company), Lattelekom, Latvenergo, Latvijas Gaze (Latvian Gas), Latvijas Krajbanka (Latvian Savings Bank) and others adding more than $1.2 billion to the present Latvian market value.

However, the creation of the Joint Baltic Stock Exchange is not without its thorns. Divergence of legal systems, trading models, listing criteria, capital adequacy of member firms, issuer's information disclosure requirements have to be taken into account. Also the Guarantee fund structure differs from country to country, as well as the extent of the authority of the securities market regulatory agencies.

But all the above mentioned should not serve as a disincentive for closer Baltic cooperation. There are already projects that can be implemented and will serve as benchmarks for further integration, such as the success of the real-time market information among the stock exchanges and ensuring coordination of regulatory activities for the cross members and cross issuers. A uniform application of IAS is also essential for creating common standards in the Baltics.

The most difficult task might be agreement on a common trading system and a common market model. And this is not only a technical problem. Subsequently, the new trading system has to be linked to local depositories for clearing and settlement.

A vision of the Joint Baltic Stock Exchange is a favorable medium term solution. In the long term, and here I am speaking of a period of more than five years, the Baltics will have to form alliances with neighboring markets, most probably with the Nordic neighbors.

(Uldis Cerps is the president of the Riga Stock Exchange.)