CEO of Qatar Exchange discusses the bourse

Formerly known as the Doha Securities Market, Qatarís Doha-based stock exchange, the Qatar Exchange (QE), was formed in 2009, when an agreement was signed between Qatar Exchange and the New York Stock Exchange (NYSE) Euronext to develop the existing exchange into amore regionally wider and more international exchange. Since then, Qatar Exchange has evolved into one of the most accomplished in the region, regularly outperforming its equivalents in the Gulf Cooperation Council (GCC).

You are originally from The Netherlands, so how did you come to be CEO of the QE?

When the partnership was signed between the State of Qatar and NYSE Euronext and as a consequence the Doha Securities Market became Qatar Exchange, part of the agreements was that NYSE Euronext would also be involved in the management of the Qatar Exchange. That was to be the direct trigger for me to work in Doha. Before that I had worked many years in the New York Stock Exchange Euronext, mainly in European branches, such as Paris and Amsterdam covering almost all areas of an exchange operation.

The bourse has evolved quite rapidly over the last few years or even in the last year with all of the new initiatives that have been introduced?

This is true. If you look at the development of Qatar Exchange there are three phases that we identify. The first phase, which we are in the middle of, we call it the reforming of the cash market and the idea is to introduce international best practices to facilitate trading in the cash market. The second phase will be [to] launch the derivatives market if certain conditions are met, including a central counterparty and the third phase will be more international business development, such as developing international initial public offerings (IPO). We are now in the middle of phase one and we are developing in multiple ways. If you look at the market infrastructure, which is what I call it, we introduced a new trading system called the Universal Trading Platform in September 2010. It is not just information technology (IT), it is new trading facilities, such as a closing auction to determine the last price of the day. In the past the closing price was always a volume weighted average and now the closing price is determined by a final closing auction. It is much preferred by people who depend on that closing price. We also enhanced the trading hours, half an hour more in the morning and half an hour more in the afternoon, so that we overlap with the Asian and European markets a bit more. We modified the tick sizes, meaning that it attracts more liquidity into the order book. We introduced the treasury bills (T-bills) in December 2011. And importantly as well we introduced delivery versus payment (DVP), which is related to the way of settlement of the trades. DVP is very important for the international investors, because they need to be comfortable that it is guaranteed that when they buy shares and pay for them, they get their shares at the exact same time. It was also important that we were able to grow the numbers of brokers; traditionally there were seven brokers in the exchange and now we have ten with new brokers joining the exchange such as QNBFS, Ahli Bank and Cb Financial Services.

What is the advantage of having banks operate brokerage services?

More opportunities and more options, and we also believe that the banks would be bringing additional services in terms of asset management and of research and capital commitment, when we need brokers to maintain the market and act as liquidity provider. So those would be the immediate advantages in addition to the services that existing brokers provide. There are a number of very well established brokers, but more brokers that come into the market is generally a positive thing.

Qatar Exchange is often the best performing in the region and one of the best in the world by certain measurement methods. How much do you think that is due the country’s economy itself, or the rapidly evolving and improving exchange?

I think that it is a little bit of both but mainly the economy. As an exchange operator you create an environment that people trust and that people feel comfortable investing in and trusting their money to invest in these companies but it is the companies that offer the real performance. So when we say we are best performing exchange over the last two years, it is about the index development: the performance of the market and the performance of the economy of Qatar and the companies that are listed. In 2010 the index increased by 24 percent, which was a rather steep increase, and in 2011 the index went up 1.12 percent and was the only market in the Arab region with a positive price return.

Who makes up the investor base on the Qatar Exchange?

Around 60 percent is owned by Qatari institutions such as the government and institutional investors; around thirty percent is owned by Qatari individuals, and international investors account for around eight percent. Two percent of that is international retail and six percent of that is foreign institutions. These figures relate to share ownership. If you look at the composition of the trading, the composition of this is slightly different, the international investors are much more active, as they count for a third of the daily turnover

How are the top performing companies determined?

There are a couple of things that you can look at. One criteria is dividends yield. The average dividend yield of the market as a whole is quite high. If you compare the average dividend yield to the rate on bank deposits, it is more than double, about four or five percent currently which is very, very good. There are companies with more, companies with less –and you can rank companies based on that. You can also look at the total returns, which is price change plus the dividend and there again, the performance is very good. If you look at the companies at the top of any of these criteria, it is quite diverse so there is not a general denominator, it is not just financial sector companies, it is not just construction companies – there is a good mix of companies, which is positive for the market.

How evolved is the new QE Venture market that is being set up by Qatar Exchange for the SME market and how do companies qualify and enter this?

The market is ready. In January we had a workshop, where we explained the rules as to how to access the market and how to trade in the market. Following that we have been engaging with potential listing candidates, and we are still working with them. It is not an easy process for any company to take the decision to list in an exchange and become a publicly traded company.

For the actual launch of the QE Venture Market we need a number of companies to be ready which will take time, but there is a strong interest. We very much recognise that there is a strong focus in Qatar on the development of SMEs and we think that providing a listing mechanism for SMEs is a very important component for the exchange. The exchange’s primary focus is servicing the local market in terms of raising capital, providing investment opportunity for the local investor and the SME market is clearly part of that objective. The listing requirements for the QE Venture Market are really different from what they are for the main market: the capital requirement is only five million Qatari Riyals and the track record only one year. There are no profit requirements and the free float requirements are slightly different, so it is a lower barrier for entry, and that is what the whole concept of the venture market is.

What are the advantages for companies to be listed and to become part of the exchange and the investment process?

Clearly raising capital is an important reason. It allows companies to grow and to attract capital to support their growth. For the existing shareholders it is clearly a way to diversify their investment, as prior to listing a major part of their capital may be invested in this single company There are other reasons as well, it helps the exposure of those companies; it brands those companies as quality companies, as they need to meet public listing criteria. It also helps those companies to focus on corporate governance issues and for third generation family owned businesses, listing on an exchange can help them in their further growth.

Qatar has yet to be upgraded by MSCI from frontier to emerging market status, due to the country’s 25 percent foreign ownership limits. Do you see this as changing in the near future? Do you think an upgrade will be beneficial?

In general foreign investors can contribute very positively to a market, and one of the reasons why markets open up to foreign investors is that it clearly improves the quality of the market. An upgrade by MSCI would really be beneficial in terms of adding liquidity to the market. Will the market perform without such an upgrade?

Clearly it would, as it has been performing over the last two years. I am comfortable in the knowledge that we have created the market infrastructure that is required by international standards. All of market infrastructure developments required for an MSCI upgrade have been delivered. The remaining issue is the question of foreign ownership limits that apply to foreign investors and which differ from company to company. We have is a floor which says that at least 25 percent of the total free flow market capitalisation is available for foreign investors and individual companies can opt to have a higher percentage. It is therefore up to them to use that possibility or not, subject to regulatory approval.

You have regular forums and company road shows in New York and Europe. Is attracting this kind of foreign investment or interest the main agenda for that?

We invite our listed companies along with us to go to interact with the international investors at the investors meetings, so there is always a general introduction of the Qatar Exchange and then after that it is one-on-one meetings, in which companies interact with analysts, investors to enable the analysts and investors to increase their knowledge of the listed companies.

Does this increase investment?

Yes and no. You don’t see an immediate doubling of the investments by these investors in companies that they meet, but you do see a strong interest of investors in participating in those events. Investors are very keen to meet managers of listed companies and listed companies are very keen to explain their business model and their performance. It doesn’t immediately overnight change the overall turnover in our market, but it is a part of creating awareness and an exchange of information. It is very common for companies to organise it themselves, and as an exchange we are very happy to facilitate this type of activity.

There has also been some talk around the possibility of unifying the exchanges of the GCC in particular, with some pundits for it and some against it?

It is always a possibility, but I think that you need to look into what the consolidation of the exchanges means and what does it bring for the market participants. At the moment each market in the GCC is focused on developing its own market and developing and sorting out its own local issues. There has been an exchange of information with the other exchanges, with the Arab Union of Stock Exchanges and in the OIC. I think that if you look at how the GCC market could develop it would be much more focused on harmonising regulation at first. I think that consolidation of exchange starts with a layer of harmonised regulation, which allows companies to cross list, which allows brokers to come across members without having offices in the other locations. We could do more in mutual recognition in the central depository. If an investor is registering in one of the GCC exchanges, potentially he could be allowed to trade it in the other exchanges, without having to open his own account in the other GCC markets as well. So I think there is a lot that can be done in terms of harmonising and integrating the market before you start to talk about consolidation of exchanges.

What further new initiatives can we expect from the Qatar Exchange?

In December we introduced the treasury bills. Going forward, we would expect to have a bond market, with government bonds and corporate bonds, and we are also working on creating exchange traded funds (ETFs) and REIT’s as potential investments. So what we would expect in the context of the cash market is that we would be able to offer a wider choice of investment opportunities. REIT’s are clearly interesting as they allow investors to participate in the real estate development in Qatar and ETFs will allow people to have easy access into the market, without being obliged to do stock pickings, and to just participate in the development of the Qatar Exchange market which I believe will be a helpful instrument for a lot of the investors as well.

So those are indeed two things that we are developing at the moment. We are working with the regulator to get the regulatory framework done and if that moves smoothly, then hopefully this year we will be able to have those products.

Is there anything else you would like to add?

Well I think it would be good to mention that investing in the exchange is not only available for Qataris, but it is also available for foreign investors, including the residents in the country. We get a lot of questions about this and also on how people can open accounts and get involved in the process.

So basically is it the same process?

It is the same process, but slightly different from what people might be used to in their home domestic markets. The big difference is the fact that the exchange is also the central depository of shares and every shareholder needs to be registered within the exchange. So to be able to trade on the market you need to open an account with the exchange on top of having an account with the brokers. We have improved the account opening process. In the past you had to come to the exchange physically, but now you can open the exchange account through some of the QE licensed brokerage firms. It has become much easier for any resident to invest. With the performance of the market and the growth of the economy the potential is clearly there.