Interview with Mr. Timothy Bennett | Astana International Exchange

Thursday, 20 August 2020


FEAS holds an interview with the CEO of Astana International Exchange Mr. Timothy Bennett. Ms. Armenuhy Hovakimyan, FEAS Deputy Secretary General spoke with Mr. Bennett about AIX’s main key strategic initiatives, traded instruments, how COVID-19 affects the market and more.  

Armenuhy: Hi, this is FEASTalks and I am Armenuhy Hovakimyan, Deputy Secretary General of the Federation of Euro-Asian Stock Exchanges. FEASTalks is a series of interviews with FEAS Members and FEAS friends. Today I am virtually visiting Kazakhstan, Nur-Sultan where FEAS member Astana International Exchange is located. Established in 2017 as one of the pillars of the Astana International Financial Center, AIX operates within an internationally recognized regulatory framework with the mission to develop the public equity and debt markets in Kazakhstan and not only – the Central Asia Region. My guest today is a CEO of Astana International Exchange, Mr. Timothy Bennett.

Mr Bennett, thanks for joining me.

Timothy: You are very welcome and thank you for the opportunity.

Armenuhy: Let’s go straight to the strategic things. What are the key strategic initiatives Astana International Exchange is working on at this moment?

Timothy: You know, a bit of background is helpful when we talk about this. So we were, as you said, were formed in 2017. And we’ve got two sets of challenges.

Firstly, obviously a new exchange. So we’ve been building out the platform or the infrastructure. But also it’s not like we’re a new exchange in the developed markets. We’re a new exchange and very underdeveloped capital market. So over the past three years, we’ve been working on those two things.

You know, the first building out our exchange platform, which is, of course, technology and operations and the regulatory infrastructure plus our organization to support that. But then, of course, we need to develop the market. Now, one of the initiatives that the Kazakh government was the privatization program. So over the past 12 or 18 months, we’ve been fortunate that that program has progressed as we look forward into a different economic environment than obviously the state privatization program, which largely involves oil and gas businesses, the airline and other businesses which have been badly affected by the economic recession, is unlikely to proceed as planned.

So our focus is on two areas. One is around private sector businesses. How do we encourage in a marketplace which is traditionally not predisposed to public companies? How do we encourage private businesses to invest? And then secondly, how do we develop the retail investor base? And one of the things we’ve seen around the world coming out of the covid-19 crisis has been a resurgence of retail investor interest in the equities market.

And obviously it’s a good opportunity for us here as well in order to develop that. So one of the things we are doing is thinking about how we can launch a range of exchange-traded products, which will enable retail investors to easily access both domestic and global equity opportunities.

Armenuhy: Let’s go to the instruments’ part. Within these two years, what are the most active instruments traded in your exchange and have they changed during the last months connected with the pandemic?

Timothy: Actually, it has been very similar in a very micro what we’re seeing globally. So when they actually saw our first listing was Kazatomprom, which is the world’s largest uranium producer. The government has sold a significant chunk of that and done to so the last couple of years. So there’s a lot of liquidity in that. It’s co-listed on LSE and it is so unique to Kazakhstan and globally. So there’s always a lot of interest there.

Secondly, the largest bank Halyk listed last year and we see lots of activity there as well. It’s obviously like a lot of banks been impacted by the change in the economic environment. Still good activity. And then finally, Polynetal, a gold miner, largely gold miner, with both Russian and Kazakh assets.

And again, it’s the same with gold stocks all around the world. A lot of interest in those at the moment. So equity trading volumes have gone up. No surprise there. We’ve also had a couple of recent public debt issues, US dollars with relatively high yields and there’s been a lot of trading activities and those as well. And again, you know, we see globally a lot of public debt issuance and particular interest to investors with an attractive view.

Armenuhy: So, to support the ecosystem of Kazakh and regional businesses to raise capital, AIX has established a dedicated Regional Equity Market Segment, which can develop greater interest from foreign and regional investors. What is AIX’s next step towards developing strong and sustainable markets?

Timothy: As I said at the beginning, so when we were established, our goal was to develop a world-class exchange infrastructure, and part of that was a regulatory environment which was modelled on the law of the U.K. So, why was that decision made? Well, there are two reasons. One is a lot of the larger Kazakh businesses had either been listed on LSE or for the privatization program given their size wee also listed on LSE.

We also, of course, wanted to adopt the regulatory environment, which is familiar to global investors. What we find in smaller markets around the world now is, of course, the costs of regulation and compliance are going up.

And therefore you need an environment which as much as possible reduces the market entry costs for either brokers or institutional investors. So our market rules are very much based around what we would say in terms of in the standard of premium segment.

Two years down on the track and what you see is, of course, that actually a lot of the business, as I talked about before, the private sector businesses, which largely only have a Kazakh footprint have a need for capital. But the listing requirement to keep the premium segment of LSE is complex and costly for those issuers. It’s not to say that we don’t want investors to be protected. Obviously, we’re very conscious of the fact that we develop a new market.

You need to build trust. But we’ve developed this regional equity market segment with a simple set of rules for companies to more easily comply. And actually, I think our disclosure requirements will make disclosures that companies make both in that list and the ongoing disclosures much more understandable for investors.

So we’ve simplified things down. We had our first cross-listing under those rules, our BCC, one of the largest banks in the country. And we hope this is a lever to encourage, as I said, small, mid-sized businesses to raise some capital and to generate interest in the market from retail investors, but also provide that capital to growth for either of their shareholders or those businesses.

You need to build trust. But we’ve developed this regional equity market segment with a simple set of rules for companies to more easily comply.

Armenuhy: Good. So not only the trading part as a stock exchange, but you are also dealing within the AIFC there is also a CSD: Astana International Exchange Central Securities Depository, which is incorporated under the acting law of AIFC, and responsible for daily cash and securities settlement. Recently, you are having an international partnership within AIX CSD, would you, please, bring some details about these partnerships.

Timothy: Yeah, so, again, when we think about what we’re trying to build here, there are some underlying principles that are important. One is, we need to be the global standard in terms of our infrastructure, at least for small and mid-sized exchange in a kind of way as Nasdaq or LSA or Hong Kong. But we need to be industry standard. So in terms of our trading infrastructure, you know, with the Nasdaq matching engine, we have standard protocols. So that lowers the cost of brokers connect.

And we’ve been quite successful and attracting a number of both local or a large number of local, but also some offshore brokers as members and clearly both those brokers and institutional investors more sure want a post-trade infrastructure. So we’ve built a CSD to enable easy connectivity for global custodian banks as well as local custodians, of course, either as part of a broker relationship or an omnibus account or otherwise. So one of the missing pieces in the puzzle for us has been a global custodian bank that serves frontier and emerging markets.

And Raiffeisen joined a month or so ago after pretty long due diligence process on us. And I would say one of the two premier custodian’s in frontier and emerging markets. So they see the potential. We’ve been working with them for quite some time and we look forward to a long and fruitful relationship with them. But now we’ve done that. So combined both try and impose trade plus the regulatory environment we kind of finished this build. And now we’ve got this platform that is low cost to connect to and we have from an issuer perspective, the ability to mobilize institutions around the world to invest in Kazakhstan.

So we’ve built a CSD to enable easy connectivity for global custodian banks as well as local custodians, of course, either as part of a broker relationship or an omnibus account or otherwise.

About the large institutions around the world to invest in Kazakhstan. The real focus, of course, is getting companies to list. And as I said before, the Regional Equity Market segment is a part of that. But we need to push much harder on companies to raise either debt, which is obviously more interesting at the moment, or equity going forward to help grow their businesses

Armenuhy: So, yeah, the complex view of this. You are covering the whole trading cycle. Let’s come back to the technology. On a global scale, AIX brought one of the best technologies to the market, but how the country is adapting to these new technologies for the local market. What new trends are there in the local, Kazakh market?

Timothy: So, the short answer to that question is very well. You know, Kazakhstan is technologically very advanced and certainly in terms of the infrastructure and the physical or cloud-based infrastructure that we use, you know, so there’s no challenges with that. How we use that technology? We are innovative and that’s more interesting, but also more challenging for our local brokers and for local investors.

So, for example, you know, things are relatively common in other markets, such as margin trading, securities borrowing and lending, and should, you know, at the facility to do multi-currency settlement. All of these are new to the markets. And we’ve been lucky. You know, you start from a blank sheet of paper. You can think about what you’re going to do. You can build these things quite quickly, much harder to do when you have an existing infrastructure.

Our task is less about building that technology, but is educating the brokers on the use of that technology. Even the fixed protocol, a number of brokers need to use that. So we’ve got a way to go in terms of ensuring that the local ecosystem can connect to that technology and use it productively. We’re getting there quite quickly. And, of course, in all of these things I mentioned actually make it more efficient and more cost-effective for brokers to connect with us and trade with us, but also provide them with some additional revenue opportunities for their customers.

You know, you start from a blank sheet of paper. You can think about what you’re going to do. You can build these things quite quickly, much harder to do when you have an existing infrastructure.

Armenuhy: Great! Good luck with these all initiatives that you have now.

Coming back to the pandemic and all the challenges that have been caused by this pandemic. Today’s world is facing several challenges. And one of this is work from home and the environment change. How are you encouraging your employees to stay positive in these difficult times?

Timothy: Yeah, it’s a challenge. Kazakhstan has effectively been through two lockdowns. The first period, which was the end of March through mid-May, I think there was an excitement to a certain extent or a newness to working from home. You know, we had daily updates. We had social events on Zoom and people felt pretty connected to the organization. And I think part of that was a reasonably defined period.

You could see the cases going down and you could say an endpoint. When we entered the second lockdown or quarantine period at the end of June, I think the fatigue starts to set in. Depending on people’s personal circumstances, if they’re living with their family or friends or they’re in a small apartment, it’s actually quite difficult. So our focus during this timeframe has been to ensure that we can have as many people in our offices as safe.

Obviously doing that by a socially responsible way, by testing people on a regular basis. But we found that people need that connectivity and that engagement with both the other people they work with, but also with the business. So we’re getting through that. The quarantine period ended in Kazakhstan at the beginning of this week. So now, I wouldn’t say life is back to normal, but, we are starting to rebuild the team atmosphere that we need.

It’ll take a while, however, I think, before we’re back to the normal in terms of engaging with our customers and other stakeholders. I do think going forward that those interactions will be much more online than they will be face to face. Kazakhstan stands a long way from anywhere anyhow. So in a lot of ways, it’s good for us. We know what kind of level the playing field, but we spent quite a time thinking about how we engage with our customers on an online format because of different presentation skills, to be much more prepared, have a much shorter interactions with people. And quite frankly, quite a lot of tenacity to spend all day in front of Zoom or conference calls.

So we got to think about how we might ensure that we’re up to that going forward over the next couple of months.

Armenuhy: Yes, the same is here.

Timothy (smiling):  I’m sure you’ve got the same challenges.

Armenuhy: Yes, the same, but it is always good to share as all of us are a part of this. We are now used to these challenges but in your personal opinion, what is the next challenge? What would be after Covid?

Timothy: Yeah, look, I think, there’s a very broad set of questions here for our industry and I’ll take a very high-level view of this. And I really don’t have any answers. But if we reflect on what we’ve seen over the last six months or so, we’ll see over the next years we are going to see an enormous amount of government borrowing, which will need to be at some point repaid by the next generation. For larger countries, that’s less of an issue. But certainly for smaller countries, this is a burden on future generations. So at the same time, we’ve seen asset prices, particularly equities. It’s true, I would imagine, over time with property as well, is increasing rapidly.

So, you know, we’ve seen this remarkable rebound on world markets as interest rates declined. And so, the current, particularly older generations are relatively wealthy, have been advantaged to a certain extent, and the younger generations have been disadvantaged and will be just as bound by the time back. And you had the third component to this. If we think about the industries or the sectors that are going to be most impacted by the economic recession or depression we’re going through, we’ll go through. These will be the relatively low paid workers.

So, I think this exacerbates the inequality, both generational and within a generation that we’ve seen growing over the last 5 to 10 years. This is the big challenge. And, as I said, I don’t really have any solution for that. There are some things that are promising that have come out of covid-19, like it or not, in relation to Robinhood. But certainly we have seen a significant amount of increase in retail investor, local and global capital markets.

If we think about the industries or the sectors that are going to be most impacted by the economic recession or depression we’re going through, we’ll go through. These will be the relatively low paid workers.

That’s been a good thing. One of our missions here is to ensure that we can create wealth for the next generation. And participation in equity markets, in particular, is part of that.

The second thing, of course, which has been a theme for. Sometime, but I think, again, we will be challenged by picocuries ESG. Kazakhstan’s large oil and gas producer, I think they will be a resurgence or continue to increase in interest in ESG type investments.

Again, because we’ve got a younger generation who for a lot of good reasons, feel that they have been disadvantaged by both actions around climate change, but also to say that the increased cost of borrowing through the pandemic. So these are some very thorny issues. And I suspect that exchanges or capital market operators, regulators, those involved in local markets will need to start dealing with these over the next 12 to 18 months, because one of the things that is critical for this economic recovery is confidence in the financial sector and these elements that we need to bring together to continue to ensure that we’ve got that confidence.

Armenuhy: Thank you, Mr Bennett. This was FEASTalks and the CEO of Astana International Exchange, Timothy Bennett. Thanks!

Timothy: Thank you very much!