From recent developments in the local corporate bond market and adoption of new technology by the stock exchange to prospects for becoming an exchange of choice across asset classes in the region, Hayk Yeganyan, CEO at Armenia Securities Exchange (AMX), shares insights and provides a look at future plans in an interview with Banks.am.

Mr. Yeganyan, the local bond market has recently grown. What dynamics of growth have you recorded regarding the number of issuers and market members, as well as market value?

In 2014, there were only 13 corporate bonds traded on the exchange whereas now over 80 bonds by 19 issuers are being traded in the market. The main factor affecting this growth is that the Central Bank introduced incentives to support banks, making bonds a more profitable investment than deposits. In 2016, there were 23 corporate bonds with a total market value of AMD29 billion. A year later, the market value surged 238%, with the number of bonds doubling.

The growth continued in 2018 and the corporate bond market value increased by 56% as compared with 2017’s results. This October we observed the market value totaling over AMD180 billion.

Traditionally, banks attract low-interest deposits and loans and then offer loans with much higher interests. To assure depositors that their assets are safe, the Central Bank of Armenia has set minimum reserve requirements.

For bonds, the minimum reserve requirement is much lower when the security is listed. This is why raising capital through debt is a more attractive proposition for banks. The incentives offered by the Central Bank obviously have a positive impact on the market.

How can today’s capital markets contribute to the economic growth of Armenia taking into account the importance of a developed bond market for the health and sustainability of the local financial environment and economy?

Generally, developed capital markets accelerate the economic growth because the money supply flows from savings to the demand for money more easily and quickly.

A business will use money people usually hold in their saving accounts. The broker, a bank in this case, is strictly regulated, which leads to an increase in a bank’s expenses. This adds to the brokerage fee and bank profit and, ultimately, the loan is offered to a business with much higher interest rates.

Besides, the bank often demands tangible assets as collateral while when a business opts for issuing bonds, they pledge their reputation, financial figures and business plan. If those are credible enough, a business will be able to attract investors and possibly raise much more capital than they will do through a loan.

The stock exchange is a platform linking issuer companies and individuals who have savings where the stock exchange and investment banks act as brokers. The brokers’ overhead costs are obviously lower as they are not required to hold minimum reserves.

Issuing bonds to raise capital reduces the cost of capital because a business will have an opportunity to directly attract retail investors, which costs less.

The corporate bond market makes three percent of Armenia’s GDP and its market value is steadily increasing. Now we are working to upgrade the technology that will provide an auction functionality to make placement of bonds easier and, most importantly, this will allow retail investors to directly access the exchange and trade online, cutting red tape.

Armenia Securities Exchange aims to launch a direct market access platform. What are advantages for an investor from a time and control perspective?

DMA will enable investors to place buy and sell orders directly. As AMX is strictly regulated and supervised, its market members are only financial companies licensed by the Central Bank. This is common practice worldwide but there is much to do in the investment firms industry in Armenia.

Suppose you have a bank account without an online banking app and card and whenever you need to make a transaction, you have to go to the bank. The same goes for a broker account – you have it but without a direct access to the trading platform.

Since none of the current market members offers such technology, we have decided to modernize the trading platform used now, and member brokers will be able to leverage our technology to give their clients access to the exchange. We will do it at a much lower price as we believe this will help develop the market, joining forces with brokers.

Without investment banks it is impossible to increase the number of issuances and without a brokerage firm it is useless to speak about secondary liquidity. These processes are tightly interconnected. The new technology will also enable international brokerage firms to connect to Armenia Securities Exchange, opening the market to large foreign investors. We hope to launch the upgraded technology in the second half of next year.

What are other changes planned in the stock exchange?

We intend to replace the auction technology for government bonds and in February 2020 individuals will be able to participate in Gbond auctions directly through dealers. The crowdfunding platform we are working on will give startups an opportunity to raise capital up to one million US dollars. The same platform will also include an investments sub-platform where we will sell European ETFs. These instruments offer good returns and they must become available for Armenian investors.

Where has AMX reached in pursuing its goals?

We have now focused on making the exchange accessible by leveraging new technologies. Simultaneously, we collaborate with well-known foreign exchanges and host their delegates in Armenia.

Another objective is to facilitate cross listings for local companies, allowing them to easily list their securities on European platforms. Russian, Kazakh and other foreign companies will also consider using this opportunity as they cannot list in Europe directly. Listing with us will be easy and less expensive. Once we sign the agreements with our European peers, we will work to become a gateway for regional companies to European capital markets.

Realistically, I cannot say that we aim to become the leading exchange by any standard. Our aim is to find our niche and be number one, for instance, in providing individual investors an opportunity to buy and sell bonds and American ETFs online.

What is left to do is to amend the rules and regulations and ensure accessibility. I believe we will be able to position ourselves well for delivering this service. Kazakhstan has established Astana International Financial Centre to provide the same service but I believe Armenia has more potential.

The current government prioritizes the development of financial sector and capital markets. This helps us feel more confident negotiating with foreign partners. The amendments initiated by the Parliament are another positive signal. A foreign investor looks to work in an interesting and profitable market and when they see a country’s policymakers take steps in this regard, the positive story we tell them becomes more credible.

How important do you think it is to promote the concept of employee stock ownership in Armenia? How can Armenia Securities Exchange and Central Depository of Armenia help in this regard?

Employee stock ownership is an excellent instrument for tech companies. In this respect, Armenia has a comprehensive law on securities that partially regulates the use of this financial instrument. Yet, the major regulation laying down the rules and principles for employee stock ownership is the law on joint-stock companies that I believe needs amendments.

Tech companies that will restructure as open joint-stock companies and issue stock options can then use options as incentives. This will empower employees to be more productive and dedicated because the more developed the company, the higher the stock price.

Issuing employee stock options will have only positive effects on the economy. But the promotion of the concept also requires creating tax incentives for companies. Employee stock ownership is not common practice in Armenia because companies are not well-informed. We plan to hold discussions with them to advance the concept locally.

Gayane Yenokyan
Photos by AMX – Armenia Securities Exchange
English Version by AMX – Armenia Securities Exchange