The Amman Stock Exchange (ASE) entered 2014 with renewed momentum on the back of the higher trading values and volumes of the previous year. With the ASE Index more buoyant than at any time since 2011, there is a sense that interest in the exchange as a source of capital and destination for investment is returning. However, with intense competition from regional exchanges, Jordan’s stock market faces numerous challenges if it is to build on this incipient recovery, and therefore the question of legal and regulatory reform has taken on greater prominence.
While the ASE is relatively young by global standards, equity trading had been taking place in Jordan for more than 80 years. Jordanians began to buy and sell shares in companies such as Arab Bank, Jordan Tobacco and Cigarettes, and Jordan Electric Power in the early 1930s, although trading took place across a number of non-specialised offices rather than a centralised exchange. Seeking to address the challenges of investor protection and fair pricing, successive governments investigated the possibility of creating a formal market, but it was not until the 1970s, by which time the growth of the national economy and the sheer volume of equity trading made it a priority, that the Central Bank of Jordan (CBJ) began to conduct intensive studies on the subject. The result of this process was the creation of the Amman Financial Market (AFM), which, governed by new legislation passed in 1976, opened its doors to the investment community on January 1, 1978.
Since that time Jordan’s stock exchange has undergone a continuous process of development that has seen the introduction of electronic trading, settlement and clearance systems and the establishment of an increasingly comprehensive regulatory regime. The most significant change in this regard came in 1997, when a new law resulted in a complete restructuring of the financial market. Under the Temporary Securities Law No. 23 the old AFM was divided into three institutions: the ASE; the Securities Depository Centre (SDC), charged with ensuring the safe registration and transfer of securities; and the Jordan Securities Commission (JSC), which plays a supervisory role, regulating and monitoring the activities and operations of market participants. This wholesale structural development has allowed for a rapid expansion of trading activity over recent decades, with market capitalisation rising from JD286m ($404m) in 1978 to JD18.31bn ($25.86bn) by August 2014.
Jordan’s lack of energy resources has resulted in a more diverse economy than many of its regional peers, and this is reflected in the structure of the ASE. As of August 2014, 237 companies had listed on the exchange, making the ASE a regional leader in terms of the total number of listed companies. Listings are divided into three main classifications, each of which is further divided into a number of subsectors. The financial classification is composed of banks, insurance, diversified financial services and real estate. The services classification includes health care, education, hotels and tourism, transport, technology and communication, media, utilities and energy, and commercial services. The industrial classification covers pharmaceuticals and medical industries, chemicals, paper and cardboard industries, printing and packaging, food and beverages, tobacco and cigarettes, mining and extraction industries, engineering and construction, electrical industries, textiles, leather and clothing, and glass and ceramics.
As well as the categorical divisions, companies listed on the ASE are filtered by a three-tier system, the definitions for which date back to a structural change implemented in 2012. Under this new regime, companies listed on the first market are obliged to post positive earnings before tax for two consecutive years out of the last three at a minimum rate of 5% of capital, while new entrants must have already spent one year on the second market. The total equity of first market firms cannot be less than their paid-up capital, which must be at least JD5m ($7.06m), with a free float that is not less than 10% for any company with paid-up capital of under JD50m ($70.6m). At the time of implementation, 55 firms were able to meet the criteria needed to obtain first market status.
The criteria governing the second market are less stringent. Companies wishing to obtain second market status must have spent at least a year on the third market, the net shareholders’ equity in the firm must not be less than 50% of its paid-up capital and the percentage of the free float should be at least 5% for companies with a paid-up capital of less than JD10m ($14.13m). Firms that do not meet the requirements for either the first or second market, including businesses that fail to make full disclosure of their financial results on time, are placed in the third market. As a result of the new system, investors are better able to focus their attention on companies that meet their risk appetite, while firms are incentivised to improve their performance and level of corporate governance.
The Debt Market
As well as its standard equities products, the ASE is home to a number of fixed-income instruments. The exchange-based debt market in Jordan is dominated by government activity. As of June 2014 some 169 Treasury bonds with tenors of three and five years were listed on the market, as well as nine Treasury bills with tenors of one year. Between them they form the backbone of a government debt programme that has been greatly assisted by a US guarantee of debt issued by the Jordanian state.
The advantageous interest rates that the deal has brought about have safeguarded the future issuance of government debt, ensuring that debt offerings by the state will continue to dominate the ASE bond market for the foreseeable future.
Beyond Treasury offerings, bonds from two public entities are listed on the exchange, the majority of which have tenors of three or five years. Only a single corporate bond is listed on the ASE; issued by Arab International Hotels in 2010, the JD4m ($5.65m) offering has a maturity date of August 2015. Given the yield curve established by government debt offerings, a sound legal and regulatory base, and essential financial infrastructure, the small size of Jordan’s corporate bond market is surprising. The lack of an independent domestic credit rating agency and specific enabling legislation are the two factors most frequently adduced for this phenomenon. Resolving these issues will improve the prospects for Jordan’s primary and secondary corporate debt market, given its wide investor base and relatively developed financial regulatory and institutional framework.
Tracking The Market
Just as the exchange has developed in terms of market capitalisation and listings, so too has the manner in which investors are able to monitor the performance of securities. The first market indices were introduced in 1980 and consisted of a main index and sub-indices for the four listings categories. The main index of that time, known as the ASE Unweighted Index, remains in place to this day, but has since been joined by other tracking instruments. The Market Capitalisation Weighted Price Index was established in 1992 and by 2007 covered 100 stocks. Like the unweighted index, it is calculated according to the latest closing price and published daily, and its constituent companies are chosen from the first and second markets according to their market capitalisation and number of trading days.
The ASE has followed the global trend by which indices are calculated using the market value of the free float shares of companies rather than simply the total number of listed shares for each firm. The ASE Free Float Index created as a result of this decision allows for a more granular evaluation of market performance and, together with the unweighted and weighted indices, represents the principal means of market oversight for investors. As with most exchanges, the ASE has established a revenue stream through the sale of data rights to certified vendors. These include international giants such as Reuters and Bloomberg, as well as local players, such as the Middle East North Africa Financial Network.
The technical infrastructure that underpins exchange activity has also developed since the ASE first adopted electronic trading. The exchange installed the French NSC V2 system in the year 2000, and when that company was purchased by NYSE Euronext the ASE maintained its commitment to the platform, which was also adopted by regional exchanges in Lebanon, Oman and Tunisia.
The current version, NSC V900, was launched in 2009, and its introduction was part of a wholesale improvement of the connections between the ASE, SDC and JSC which included new servers, communication networks, routing systems and fibre-optic networks. The upgrade brought new options for brokers, such as fresh variants of buy and sell orders, as well as an enhanced level of security, most notably in the form of the Central Control Module, which reduces trading risks and errors by verifying whether orders placed in the system fulfil a series of conditions before they are processed.
While the deployment of the NSC V900 platform represented a significant step forward in terms of exchange functionality, the next phase of the bourse’s development promises to bring an even more radical improvement. The ASE is currently preparing for the latest generation platform in the form of Euronext’s UTP-Hybrid system, which is also due to be adopted by Lebanon’s Beirut Stock Exchange, Tunisia’s Bourse de Valeurs Mobiliéres de Tunis and Oman’s Muscat Securities Market. The deal with Euronext includes a 10-year support agreement, and will grant the ASE the ability to offer multi-asset class and multi-currency trading with a low latency performance. The UTP-Hybrid platform is set to be installed by 2016.
The SDC continues to develop technology within its purview. It has operated a delivery versus payment protocol since 2005, making it a relatively early adopter of this industry standard. It has also operated a business continuity site in Amman since 2009, and has more recently established a disaster recovery site in the northern city of Irbid. The SDC is currently in negotiations with the Society for Worldwide Interbank Financial Telecommunication over the introduction of its financial communications network, a development that would also see it connected with other financial institutions worldwide. The centrepiece of the SDC’s technology suite, however, is its proprietary SCORPIO system. Developed with local expertise and introduced in 2004, SCORPIO provides the framework through which the SDC carries out its risk management, registration, and clearing and settlement duties. Enhancing the system is a continuous process within the SDC, and future innovations are likely to include a mobile app that will be made available to clients.
Jordan’s exchange, just like those of its regional counterparts, is exposed to the vicissitudes of the global economy, and its performance over recent years follows a similar track to the other developing exchanges in the Gulf, Levant and North Africa. From 2008 the market showed a decline in value over the following four years, with the ASE Free Float Index falling from 2758.4 to a low of 1957.6 in 2012.
The long-anticipated rebound from the economic downturn has been slow in coming, and most of the factors that contributed to this extended period of quiescence are beyond Jordan’s control. External events have played a large part in hampering the bourse’s recovery from the effects of the global financial crisis. In 2012 the ongoing unrest in several neighbouring countries combined with stubbornly low growth rates in Europe and the US inhibited investor interest. On the domestic front, events such as the interruption of gas supplies from Egypt and a major influx of refugees from Syria also served to depress appetite for risk over the year.
However, in 2013 the main performance indicators showed signs of a renewed interest in the exchange. According to ASE data, the ASE Free Float Index at the close of 2013 showed a 5.5% year-on-year increase, reaching 2065.8 points. The value of traded shares reached JD3bn ($4.24bn) in 2013 compared to the JD2bn ($2.82bn) seen in 2012, while the volume of traded shares increased by 13.5% during the same period, to a total of 2.7bn shares. The share turnover ratio, an important indicator of market activity, grew to reach 38% during 2013, compared to the 33.9% posted for 2012. This incipient recovery has resulted in renewed optimism regarding the ASE’s ability to act as a catalyst for economic growth in the country. Nevertheless, trading values and volumes remain muted in comparison to the pre-crisis era, and many stakeholders feel that Jordan’s capital markets will need to undergo a process of reform if they are to achieve their full potential.
A number of bodies are responsible for the reform process. The primary institutions that supervise and regulate Jordan’s capital market activity are the Council of Ministers, the Higher Ministerial Committee for the Management of the Public Debt, the JSC and the CBJ. The JSC is the principal market supervisor and is also tasked with writing new legislation and regulations concerning capital markets and issuing instructions to the ASE and SDC. The JSC also issues licences to capital market brokers and companies, registers securities and mutual funds, and performs all the other tasks of a contemporary market supervisor and regulator. Its mandate was established by the 1997 Temporary Securities Law No. 23.
The temporary law has remained in place for longer than was originally intended, and is widely considered to be deficient in certain areas. The European Bank for Reconstruction and Development (EBRD) identified a number of weaknesses in a 2013 review of Jordan’s securities legislation, most of which are the result of a lack of legal specificity. For example, the law is unclear on whether a private placement is defined as one in which securities are placed with up to 30 investors or merely offered to up to 30 investors. Similarly, the law states that companies are exempt from issuing a prospectus when offering securities to an investor who is capable of assessing and bearing the investment risks, but does not clearly define the criteria for such a qualified investor. Legal reform also has the potential to breathe life into the currently moribund corporate bond segment. The provisions within the Companies Law that govern corporate debt issuance, for example, require that an assembly is formed to protect the rights of all bondholders, but does not elaborate on its scope of authority or responsibility. A review of the legislation governing Jordan’s capital markets is therefore seen as central to removing investor uncertainty and boosting the long-term growth prospects of the ASE.
In some areas, legislative reform has already been effected, while in others the process is at an early stage. The promulgation of the Islamic Finance Sukuk Law No. 30 of 2012 has expanded the range of debt instruments in Jordan and offers an attractive route to the nation’s debt capital markets for investors wishing to remain in compliance with the precepts of sharia. Islamic bonds can be issued in local or foreign currency by the government, public institutions, Islamic banks and companies, and can be traded on the exchange or over the counter. While the impact of the legislation on the debt market will depend on the efficacy of the implementing regulations currently being developed, the introduction of the new law has been widely welcomed by the investment community. Meanwhile, the EBRD is working with the JSC to reform Jordan’s stock exchange, and to that end has already produced a diagnostic report. Together with the JSC it has produced a wish list of reforms that would benefit the exchange in the future, and it is thought that a memorandum of understanding between the two organisations will be signed in the short term with a view to their implementation.
The question of reform will remain a central concern for the investment community in the short and medium term. While the JSC works to establish a more robust regulatory framework, it is within its power to pursue some straightforward adjustments in the short term that would substantially boost investor confidence. For example, the current corporate governance code, established on Organisation for Economic Cooperation and Development principles, is well regarded but operated on a comply or explain basis, which can allow for an unhealthy degree of manipulation of the system. Applying the corporate governance regime on a mandatory basis would not require a lengthy process of legal formulation, but would have a sizeable impact on compliance.
The effort to reform the market also relates to the principal challenge facing the ASE: liquidity. The global economic crisis has led to a liquidity shortage in exchanges across the region, and competition to attract capital is intense. As levels of transparency, corporate governance and functionality increase in Gulf exchanges in particular, so too does the pressure on the ASE to keep pace. Nevertheless, the uptick in activity in recent years has brought optimism to investors, and the prospects of a further improvement in trading values and volume comes from the positive outlook for the wider economy. Jordan’s 3% GDP growth was up from 2.3% in 2010, and the IMF expects it to reach 3.5% in 2014. While external risks stemming from regional instability remain a concern, the prospect of increased liquidity on the ASE is real.
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