Analysis

This year marks the fifteenth anniversary of organization of exchange trade instrumnets in Azerbaijan. The past years have shown that the economic life as a whole and the exchange business in particular do not stand still constantly evolving. The activity of Baku Interbank Currency Exchange has been subject to swift transformations what has allowed not only to radically change its make-up, but also has given an additional impetus to development of the financial sector.

Successful location at the crossroads of Asia and Europe, presence of a port and development in the country of trading with such valuable commodities as oil, silk, salt, saffron, carpets, silk fabrics and other goods, have played an invaluable role in development of the exchange business in Azerbaijan. So, the first exchange institute on Caucasus and one of the exchange centers of Tsarist Russia has been founded in Baku on July 18 of 1886. Just this day, 122 years ago the charter of the first Baku exchange has been approved. Even after sovetization of Azerbaijan, the question of necessity of functioning of an exchange in Baku was actively discussed in business circles. As a result, on March 28 of 1922 a grand ceremony of opening of Baku exchange again took place in the building of former Caucasian bank. The exchange had to play a huge role in development of the national economy. The primary tasks of Baku exchange were revelation of the demand and supply on all kinds of goods, valuables and foreign currencies that circulated on the markets of Azerbaijan, and regulation of trading operations with local and imported goods and valuables carried out by state and cooperative organizations as well as private entities. Besides that, the exchange collected and published data on the deals concluded, on the situation of the markets and the prices. However, right after turning by the Soviet government of the so-called new economic policy (NEP) and final renounce of market regulation of the economy, Baku exchange has been closed. Only tens years later, in 1990s the «exchange idea» again has lodged in minds of Azerbaijani businessmen. And the practice of licensing of stock exchange activity has literally urged on registration of a series of exchanges in the country. Basically, exchanges were registered in the form of joint-stock companies and were self-regulated financial organizations.
In complex for the country the period of formation of a young government, the understanding of a question on necessity of creation of an organized currency market has appeared in the banking system of Azerbaijan. The initiative of establishment of a currency exchange in the country was undertaken by National Bank of Azerbaijan and the government banks. The constituent assembly took place in June of 1993, and within a month the exchange was registered by Ministry of Justice. So, on July 26 of 1993 National Bank, International Bank of Azerbaijan, Savings Bank, Industrial-Investment Bank, and Agroindustrial Bank founded «Baku Interbank Currency Exchange» CJSC (BICEX). At the very beginning of its activity, BICEX mainly pursued the purpose of formation of an exchange currency market in the country. Expansion of a spectrum of financial services has subsequently predetermined the principle of universality of formation of a financial platform which was taken for a basis of development of a new exchange institution.
Privatization and turning into joint-stock companies of state enterprises in 1996-97 gave impetus to development of the stock market of Azerbaijan. Simultaneously there occurred a necessity of development of new legal framework for operation of the securities market as well as introduction of new exchange technologies. Among the projects realized in this segment of the financial market are development of the regulations on the order of servicing and turnover of issues of state short-term bonds (T-bills) of Ministry of Finance, adoption of the rules for implementation of transactions in the equities market sector of the stock market department of BICEX, and approval of the accounting standards for operations with securities. All these are the evidence of that in the second half of 90s the government paid attention to development of the infrastructure of the financial market. From the point of view of development of the exchange business, not a small interest is represented by the work of the stock market department on investigation of prospects of creation under the exchange of a special listing and supervision committee. Besides, availability of remote access to the universal trading-settlement-depository system of BICEX should be considered among the important factors. The latter became a prototype of the “BEST” information-trading system launched by the exchange in 2001. But as far back as 1998, 17 banks had an access to the trading-settlement system of the exchange by means of the remote terminals connected to this system. In parallel with preparation of the securities of the privatized enterprises for turnover on the exchange, BICEX carried out a quite large-scale work on listing of equities of some banks at the exchange what, in particular, was the first step towards formation of an exchange securities market in Azerbaijan. To estimate how the stock market of the country developed in those years, it is enough to say that the volume of the T-bills primary market in 1998 reached AZN 42.8 mln; the volume of the secondary market of T-bills made AZN 4.3 mln. The volume of transactions on the corporate securities market amounted to AZN 0.14 mln. The gross volume of the state securities market was equivalent to 1.4% of the GDP. And it is against the fact that the BICEX’s license for carrying out stock market operations expired on September 3, 1998. All transactions with securities on BICEX were stopped, and prolongation of the license for carrying out operations with securities became impossible in view of the changed legislation. Despite of it, the activity of the currency exchange did not lost its universal character since BICEX did not restrict its performance to trading on the currency section and started organizing interbank credit auctions and launched an interbank currency market terminal in its electronic trading system.
For the last 10-15 years, the exchange activity worldwide has undergone swift transformations that have changed the appearance of the exchanges. One of those changes was universalization meaning that an exchange organizes trading synchronously on several financial markets such as stock, debt, currency and commodity markets. Universalization is necessary for the exchanges in order to adapt to the modern conditions that were established as a result of globalization of the world economy. Besides, universalization of the exchanges simplifies the operation of investors, banks, brokers and other participants substantially reducing their costs.
Speaking about the motives of universalization of the exchanges, one should look at their past. Exchange tradings, as a rule, were restricted to take place within the exchange building, and unavailability of modern communications means excluded an opportunity of remote access to the exchange. For instance, a broker located in Paris could not participate in trading on New-York Stock Exchange and vice-versa. Such a situation limited the number of trading participants, and the access to tradings on the exchange became a unique privilege. Besides, the exchanges did not have to compete with each other for involving as much as possible participants, even if within the borders of one country. Also, it was inconceivable that the exchange could attract investors and issuers from foreign countries.
The Internet and modern technologies have changed the exchange business enabling to transfer trading to the electronic form. It means that it is not important where the trading participant is located – on the trading floor of the exchange or somewhere else. There occurred the technology of remote access to exchange trading that opened up new vistas for attraction of new market players. New technologies gave birth to new problems – now trading participants obtained an opportunity to choose an exchange on which they would like to make transactions. Moreover, because the exchange activity went beyond the national borders, the exchanges started competing on the international arena. Investors and issuers can go from one exchange to another in search of more favorable market conditions which has the greatest number of participants. Estimating the attractivity of the exchanges, they are guided by the same criteria as clients in other branches of the economy: they estimate the quality, cost and set of the services offered. Under such conditions only that exchange which enables efficient trading with various financial tools within the same system can stand the rivalry. In a word, the rivalry has become the key factor that urged on exchange universalization.
Establishment of universal exchanges became possible and favorable also because this process has an objective basis. All financial markets are interconnected, and their participants for obtaining the maximal profit develop a complex activity strategy simultaneously concluding different kinds of transactions on different segments of the market. It is obvious that it is easier for a trading participant to coordinate its actions within the same exchange. Even in case of crisis phenomena on one of segments of the financial market, under such conditions it is easier to prevent and minimize negative consequences since participants have an opportunity to undertake simultaneous actions on the securities, futures and foreign exchange markets.
Universalizing allows achieving several objectives at once:
 due to minimization of costs, fees collected by the exchange from trading participants reduce;
 due to creation of a integrated trading-settlement system the exchange rules are unified;
 it is more convenient for trading participants to trade gaining an access at once to all markets;
 universalizing allows the exchanges to compensate losses on one segment of the market with profit from another segment, as well as to work out a coordinated strategy of development of all sections and platforms;
 It is easier for regulatory authorities to monitor the markets, and, in particular, to trace suspicious transactions and price manipulations.

In general, it can be stated that the world has entered the process of consolidation of the infrastructural organizations of the financial market and creation of the global exchanges. The NYSE-Euronext merging has already completed, and the NASDAQ-ОМХ alliance is in the process of formation. At the same time, nowadays, young exchanges from the developing countries, many of which were established only in 90s of the last century, are appearing on the global financial arena. New York and other old centers of exchange trading risk conceding their leading role to the exchanges of Hong Kong, Shanghai, Mumbai, Moscow, San Paulo which are confidently achieving the level of the European and US exchanges for their indicators. Such swift changes on the world financial market gave BICEX a reason to search for reliable international partners as well as aiming at investigation of prospects of creation of an exchange alliance in the region.
Introducing advanced technologies of the exchange business in Azerbaijan, BICEX has always adopted positive experience of the foreign partners such as Istanbul Stock Exchange (ISE), Moscow Interbank Currency Exchange (MICEX), Tokyo Stock Exchange, Frankfurt Stock Exchange, Austrian Stock Exchange, London Stock Exchange, and Kazakhstan Stock Exchange (KASE). The exchange has membership in three international associations of exchanges – World Federation of Exchanges (WFE, headquartered in Paris), Federation of Euro-Asian Stock Exchanges (FEAS, headquartered in Istanbul), and International Association of CIS Exchanges. International cooperation gave birth to certain projects such as exchange of information-trading terminals, development of new financial tools, improvement of settlement systems, organization of bilateral visits for training purposes, holding regional forums and meetings of exchange experts. The authority and international relations of BICEX enabled it to sign cooperation agreements and develop partnership with ISE, MICEX, KASE, Bulgarian Stock Exchange, Tbilisi Interbank Currency Exchange (TICEX), and Kishinev Stock Exchange (MoldSE). BICEX experts carefully study the foreign experience including successful experiences of exchanges from the countries comparable to Azerbaijan both in view of economic reforms and the rate of growth of the national economies. Among such countries are Russia and Kazakhstan in which universalization has been achieved by Moscow Interbank Currency Exchange and KASE, respectively. These exchanges show a striking example of coexistence of currency, stock and commodity exchanges within the one exchange institution. It should be noted that due to the experience of development of electronic trading systems and technologies of trading with financial tools that was introduced several years before, BICEX has gained a steady position on the financial market of Azerbaijan. The “BEST” electronic trading system introduced by BICEX, first of all, should be considered as a prototype of a nation-wide exchange trading system which is ready to the challenges of integration of the national economy to the global economy. This integration should take place in some stages one of which is ensuring presence of the financial institutions of Azerbaijan on the markets of other countries, particularly, in the Black Sea-Caspian region states united in the GUAM block. Considering the high degree of political interaction between these countries and also the growing potential of multilateral economic cooperation, we also think that steps towards creation of a Caucasian Universal Exchange (CUE) are opportune. This idea for the first time has been stated in 2003 in the material of the Bulletin of Academy of Sciences of Georgia «Caucasian Universal Exchange: the mechanism of integration of Central Caucasus» published by Azerbaijani Institute of Strategic Researches of Development of Caucasus. As an innovation, the model of creation of such exchange was proposed to the banking communities of Azerbaijan and Georgia in May of 2007 at the 2nd Caucasian International Conference «Banks and Finance» taking place at that time in Tbilisi. The banking communities of Azerbaijan and Georgia were proposed a model of creation of a united regional universal exchange. In our opinion, presence of such exchange will enable the professional participants of the financial market to gain access to all its segments, and the regulatory authorities to pursue a common and coordinated strategy in the field of development of the financial markets of the two countries. It is obvious that consolidation of the several markets within the one exchange favors the interest of investors, issuers and regulatory authorities. Having an opportunity to consistently and interactively alter the situation occurring on different segments of the financial market, monetary authorities and professional market participants will be able to carry out anti-recessionary measures with minimal costs. Such an approach acquires a special relevance on a background of the last summer’s mortgage crisis in the USA and events followed it in the world financial market. In conditions of growing tension in the global financial markets, active usage of the financial tools circulating on the national exchanges can favor overcoming the problems of shocking influence of the global financial crisis on the banking systems of Azerbaijan, Georgia and other GUAM participant countries. Besides that, it will allow to essentially increase liquidity of the financial markets of the two countries and qualitatively serve foreign trading and capital circulation with smaller expenses.
The basis for realization of the plans on integration of the exchange trading systems was a dynamical growth of the financial and banking sectors of Azerbaijan and Georgia. The economies of the two countries are integrated very quickly what is proved by the mega-projects implemented in the field of oil and exportation, the investments of State Oil Company of Azerbaijan in Georgia, penetration of the Azeri banking capital into the Georgian financial market, purchase of a Georgian bank in Azerbaijan. Therefore, the nearest market that Azerbaijan can move towards integration is the financial market of Georgia. The evidence of that is the partnership agreement signed between BICEX and Tbilisi Interbank Currency Exchange (TICEX). Inter-exchange cooperation and the negotiations on the principles of carrying out of electronic trading with foreign currency and money market instruments are going on. However, BICEX has already started rendering consulting support to TICEX in the field of development of electronic trading and settlement systems. Moreover, the parties are investigating the opportunity of unification of the rules on carrying out of trading sessions and plan to study expediency of creation of an integrated or a common interface of the trading-settlement systems. Under the cooperation agreement signed with Tbilisi Interbank Currency Exchange, a joint yearly activity program has been developed. According to this program, by the end of 2008 BICEX and TICEX will prepare proposals on integration of their trading systems. Given that, the question is not creation of one dominating center, but establishment of an integrated trading system which would be capable to simultaneously maintenance in the same interface operations in the national markets of the two exchanges, and enable the operators from one market to carry out transactions on another. With the lapse of time, when the trading systems of the national exchanges of Azerbaijan and Georgia are integrated, the commercial banks will be enabled to maintain liquidity in their countries and carry out cross-border transactions.
Besides TICEX, BICEX is ready to become the partner of other exchanges showing an interest in formation of the integrated financial market within the GUAM block. This year Baku Interbank Currency Exchange has agreed upon cooperation and partnership with Moldavian Stock Exchange (MoldSE). The mutual cooperation agreement provides for a close cooperation of the exchanges aiming to develop the financial markets of Azerbaijan and Moldova. The parties are going to implement an active exchange of the experience in the field of transaction risk management and carry out joint activity on interaction with the international financial organizations. A number of items of the cooperation document signed between BICEX and MoldSE stipulates regular exchange of information on development of the financial markets of the two countries as well as monitoring and research of the various segments of the financial services market including exchange of data on key issuers and investors. Besides, during the negotiations held in the capital of Moldova, the heads of the exchanges supported the idea of exchanging the experience in the field of organization of trading, settlement and information systems. Experience exchange between BICEX and MoldSE in the near future can grow into cooperation projects based on development of the electronic trading systems and the common unified standards. In short-term outlook, Baku Interbank Currency Exchange also considers establishing bilateral cooperation with the Ukrainian exchanges. However, due to absence of the organized currency and money markets and the delayed process of integration of the Ukrainian exchanges, for the present time BICEX is just holding consultations with its Ukrainian colleagues within the international exchange associations and federations such as International Association of CIS Exchanges.
Integration of the financial markets of the GUAM states by means of the national exchanges will give an additional impetus to development of the financial markets of Azerbaijan, Georgia, Moldova and Ukraine, and also speed up integration of the national economies into the global market. In this context, the model of formation of a single regional exchange should also be considered as an institutional basis for integration with the European and world exchanges. In our opinion, the Azeri financial market represented by BICEX is ready to participate in the integration projects in the Black SEA-Caspian region. The basis of such a statement is the fact that the technological advantages of electronic exchange trading gave an additional pulse to development of the financial and corporate sectors. And the highest rates of development of the national economy within the bounds of the region speed up growth of liquidity of the financial market. Liquidity and new peculiarities of the Azeri financial market allow pretending for independent positions at a regional level more and more. Azerbaijan is even more turning into a country claiming for the role of a creditor state. The growing economic power allows treating Baku as a real pretender to the position of the regional financial centre. In case of successful development of its international projects, BICEX is ready to secure for the capital of Azerbaijan the position of the regional financial centre as a part of the global financial market.