KASE and AIX merger: Will it Be Possible to Create Single Liquidity Pool in Kazakhstan?

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Qasym-Jomart Toqayev has proposed to unite the stock exchanges of Kazakhstan under one management. He stated this during the annual address to the people. Toqayev noted that the development of the stock market is a priority. Orda asked the companies to share their opinions about the merger. Experts also shared their thoughts.

The Head of State explained his proposal by saying that the functionality of stock exchanges is largely duplicated, and sometimes they compete with each other.

This is excessive for our financial system. In order to increase the capacity and attractiveness of the domestic market, I instruct to work out the issue of combining the potential of these exchanges under a single management, the president said.

Kazakhstan Stock Exchange (KASE) and Astana International Exchange (AIX) are considered the largest in Central Asia.

KASE is to celebrate its thirtieth anniversary this year. It was created in 1993, when the country's national currency was introduced. At the moment, according to the exchange's website, it is the only trading platform in Kazakhstan serving the stock, currency, and monetary markets.

AIX is a younger company that appeared in 2017 as part of the Astana International Financial Center (AIFC).

AIX is guided by the principles of English common law and works in the regulatory environment of the AIFC.  Its shareholders are also the Shanghai Stock Exchange, the Silk Road Fund and NASDAQ (Automated Quotation Service of the National Association of Securities Dealers).

What are the similarities and differences between the two Kazakhstani companies operating in the secondary securities market? And can experts' opinions shed light on the potential of their merger?

There is Potential, But…

According to economist Andrey Chebotarev, the exchanges do duplicate each other’s functions in some ways and compete with one another, but there are specifics worth understanding:

Already now there will be questions about these features and how to combine them. KASE is our old stock exchange, which is not 100% owned by the state represented by the National Bank. It also has a share of the Moscow Stock Exchange, which is 13.10%. It turns out that the Moscow Exchange owns shares of KASE and, accordingly, there is a small risk due to the fact that the Moscow Exchange is owned by the joint stock company National Settlement Depository (NSD), which is now under European sanctions.

Chebotarev also notes that KASE is based on Moscow Exchange's technologies, and AIX - NASDAQ technologies. AIX is also based on the weighted market value of shares of issuers specializing in high-tech.

AIX AIFC exchange is newer, more modern and makes it easier and faster to integrate. The second global difference, which will be very difficult to overcome, is that the companies are located in different jurisdictions. KASE operates in the classical post-Soviet jurisdiction of Kazakhstan, the AIFC operates with English law, in a special jurisdiction created for it. AIX volumes are incomparably smaller, dozens of times. Plus, there are no currency trades on AIX, they all occur exclusively on KASE,  Chebotarev notes.

The economist highlighted that AIFC is located in Astana, whereas KASE is in Almaty. He does not deny the the possible merger's potential, but emphasizes that these companies are different:

How to combine them is not very clear. The unified management, under the control of which the exchanges should work, is also not very clear. They are subject to different regulators. KASE - to the National Bank and the Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market (ARDFM). AIX reports to the AFSA Financial Services Regulatory Committee. That is, they are in different legal systems. They have different laws despite the fact that they are in the same country. 

Chebotarev cites China as an example and the idea, “One country - two systems.” There is China and there is Hong Kong. The economist says that it already works there, but it is not clear how it would work with in Kazakhstan. 

I don't understand yet how it will be and what it will be. It's interesting to hear what regulators will say and then evaluate the pros and cons because now you can think anything, the economist explains.

Meanwhile, regulators, namely the head of the Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market of the ARDFM, Madina Abylkasymova, considers the President's proposal to unite the KASE and AIX exchanges operating in Kazakhstan under a single management to be correct.

It is expedient that these two platforms create a single pool of liquidity. The scheme itself - how to combine them, in what format this unification should take place, we will additionally work out together with the AIFC, says Abylkasymova.
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KASE Plans to Work

KASE answered an Orda.kz journalist question’s Orda.kz briefly:

The Head of State announced an instruction to merge the two exchanges in order to increase the capacity and liquidity of the domestic financial market. The Kazakhstan Stock Exchange plans to work on this process with the involvement of all interested parties.

Also, the company’s PR department did not forget to mention that the exchange remains the second largest in the CIS in terms of trading volume.

According to the results of eight months, the average daily trading volume on KASE is 1.5 trillion tenge, the average daily number of transactions is more than 5.1 thousand. KASE Clearing Center JSC is scheduled to launch by the end of September,  the exchange’s press service reported.

AIFC Ready for Discussion

The Astana International Financial Center explained that they are ready to discuss the matter, as well as to work together to unite the market infrastructure.

One of the most important elements of the country's economic growth is the capital market. A developed capital market allows you to finance good ideas, encourages entrepreneurship, increases the efficiency of resource use, creates new tools for investment – thereby helping entrepreneurs create jobs and improve the well-being of the people. Strong enterprises, more jobs and increased wealth strengthen the tax base, thereby allowing the state to invest in common benefits,  the financial center said.

The press service noted that an effective capital market increases business transparency, improves corporate governance and businesses' social responsibility. This requires good governance and respect for the long-term interests of business citizens and the country.

Market regulation should promote the free movement of money and not break its laws. And the unification of exchanges under a single management will contribute to the creation of a single pool of liquidity and a single market that is understandable for all participants. And this will help attract investment to the country and the region, as well as strengthen the country's status as the largest financial center in Central Asia,  the AIFC said.

The financial center also recalled that the development of the stock market of Kazakhstan and integration with international markets are one of AIFC’s main tasks.

Original Author: Yuri Nizhnynovgorodsky

DISCLAIMER: This is a translated piece. The text has been modified, the content is the same. Please refer to the original article for accuracy.

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