NO 229 – MARCH 2012
Investing in long term growth of SMEs

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WFE Focus January 2012
Investing in long term growth of SMEs
Peter Clifford
Deputy Secretary General, WFE

In Europe, it has been noted that if the regions SMEs created one job each, it would solve the unemployment problem.

The quest to finance small and medium-sized exchanges through public markets is of nearly universal concern these days. In Mumbai, both BSE and NSE India are launching platforms for companies in that segment that account for 40 percent of exports. Madhu Kannan , the CEO of BSE, is not alone in considering that “the role of a well-structured SME exchange can play in boosting growth … cannot be over-emphasized.”1

In the United States, new legislation, the ‘JOBS Act’, aims at cutting the red tape and expense for smaller companies going public. Despite the sadly ever-present gridlock in Washington, both political parties see the advantage to back this issue in an election year. In Europe, it has been noted that if the regions SMEs created one job each, it would solve the unemployment problem.

The question is often asked, ‘why aren’t there more initiatives to create SME markets?’. NASDAQ and AIM are some of the examples cited where exchanges have successfully created, developed and branded markets around an SME segment, growth-market potential, or specific listing requirements such as higher corporate governance standards.

As the articles in this month’s edition of Focus explain, finding the right balance is more of an art than a science between the cost and burdens for companies that are listing, the incentives needed for intermediaries to develop this new business, and the disclosure requirements that investors need.

Another aspect of successful markets, less often discussed, is innovation in the design of products and market structures.

Xavier Rolet, the CEO of the London Stock Exchange Group, in discussing the long-standing success of the AIM market, emphasizes the need for transparency and liquidity. “Transparency boosts investor confidence in a company’s ability to deliver returns, whereas liquidity provides comfort in an investor’s ability to trade in and out of an investment.”

Tom Kloet, CEO of TMX Group and Kevan Cowan, President of TSX Markets and Group Head of Equities, add that “building retail interest as the foundation of secondary market liquidity is critical”. Their paper details the three keys to success : the right balance in regulation, a broad spectrum of market participants and the dedication of the exchange to carry out necessary programs and services.

 “Investors need to know that substandard, shady companies are not going to come in and raise a quick buck and then do nothing.” said Ravi Narain, CEO of NSE India in a recent interview. History has shown that if there is perceived to be a race to the bottom on standards, the race is over soon.2

Another aspect of successful markets, in evidence in this issue but less often discussed, is innovation in the design of products and market structures to take one example. In London, the public corporate bond market is being revitalized so small companies can access non-bank debt . Of particular note in the TSX Venture Exchange is the use of reverse take-overs and the creation of Capital Pool Companies (CPC).

‘Job creation is a post-crisis global economy’ was also a theme in a high-level gathering of the Institute for International Finance meeting that preceded the G-20 Summit in Mexico City last month. Representing the WFE was our former Chairman and CBOE Chairman and CEO, William J. Brodsky.

Speaking on a panel concerned with regulatory reform and systemic stability, he noted the surprise of delegates at being reminded of the G-20 assessment of the financial crisis and subsequent focus on reforming the OTC markets. His conclusion : “it is vitally important for the finance ministers to understand the role of exchanges and the interrelation of exchange markets and centralized clearing related to systemic risk.”

'India bourses launch SME platforms' Financial Times FT.COM, 13 March 2012
'India bourses launch SME platforms' Financial Times FT.COM, 13 March 2012
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