CASH
DERIVATIVES
ISLAMIC BFX Core Product Segments
Introduction The Bahrain Financial Exchange (BFX) is the first multi-asset Exchange in the Middle East and will be internationally accessible to trade cash instruments, derivatives, structured products and Sharia-compliant financial instruments for raising capital, managing risk and investing. The BFX will operate within the regulatory framework of the Central Bank of Bahrain and the Exchange incorporates an international standard Training Institute to provide financial training. The BFX is a wholly owned initiative of the Financial Technologies Group (FT Group). With one of the world’s largest exchange networks comprising 10 Exchanges across many different asset classes within Africa, the Middle East, India and South East Asia, FT Group possess unprecedented knowledge of creating markets, unlocking value and proven robust multi-access technology. Underpinning the development of the BFX is an international and local team of significant experience drawn from leading exchanges and financial institutions around the globe.
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Overview Currently, the Middle East regional financial markets are in a development stage and are largely characterised by a number of small exchanges and split liquidity. The BFX will create significant opportunities by pooling this split liquidity and servicing one of the world’s fastest growing and largest areas of financial liquidity.
Located in the Kingdom of Bahrain, the BFX offers the distinct advantage of specialist knowledge of the regional growth markets. Bahrain’s market orientated approach toward becoming a regional and international financial centre has made it home to over 400 licensed financial institutions giving access to the regional liquidity and a deep and diverse financial community.
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Conventional and Islamic Products The BFX has been established and designed to offer market participants the ability to list and trade products in both the conventional and Islamic finance markets. As part of the BFX multi-asset ethos and core values the Exchange will create the widest possible access to financial products, which have been developed to meet the needs of a demanding market. Being based in Bahrain and serving the Middle East and North African markets the BFX is ideally placed to meet market demand for Shariacompliant products and services. The Islamic financial market is currently estimated to have a value of approximately US$1 trillion, and considerable opportunities for growth and innovation exist in this sector. The Exchange will operate two separate platforms, one conventional and one Sharia-compliant, to meet the needs of participants who wish to trade one or both of these markets.
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Mission To initiate and operate a robust, cost-efficient, multi-asset class exchange that is well regulated and transparent, serving the Middle East and North Africa, which is internationally accessible for trading cash instruments, derivatives, structured products and Sharia-compliant financial instruments. Access through the electronic trading platform and the BFX trading floor will allow market participants to utilise the Exchange to raise capital, manage risk and enable investment in a secure environment with central counterparty clearing and settlement. In tandem with the Exchange the BFX Training Institute will pioneer international standard financial training.
Vision The BFX will be the most robust, cost efficient, liquid and transparent multi-asset class exchange in the Middle East and North Africa which is accessed by global users. The Exchange will be the recognised venue for price discovery in the region for the products it will trade which will be driven by the members of the BFX and their clients to meet market conditions and requirements. Through pooling regional liquidity and capital that has previously flowed out of the region to be invested in overseas markets, the BFX will concentrate and retain that liquidity within one market creating a virtuous circle of investment and growth opportunities for the economy. The BFX Training Institute, as an internationally recognised centre of excellence for training in multi-asset finance, will be the venue of choice for training and education in the region and beyond.
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Services The BFX via its multi-asset class value proposition will offer the market participants three distinct services: Members and users of the Exchange will be able to 1) raise capital, 2) manage risk, and 3) invest. This model will afford efficiency by bringing these services on a single platform.
Raise capital The BFX will allow institutions to raise funds, reorganise their financial structure and optimise their cost of capital by providing liquid primary and secondary markets. Companies will be able to conduct initial public offerings (IPOs), dual list and/or use debt instruments such as bonds or Sukuks in order to grow their business. Why raise capital on Exchange? By listing on the BFX, companies can access a deep pool of capital to finance growth or research and development or initiate capital intensive projects. Listing enhances an organisation's public respectability in terms of corporate governance and disclosure standards. This in turn enhances brand image among stakeholders including customers, suppliers, competitors, government agencies and employees. This also means a transparent, robust and real time stock price, which is the foundation for reliable market capitalisation, valuation and ranking.
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Manage risk By trading in derivatives products listed on BFX market participants will be able to offset the risk of price movements by ‘hedging’ so they can decide the extent of the risk they wish to be exposed to. Why use hedging? Hedging is often a misunderstood principle. However, companies that do not utilise hedging are by definition speculating, as they are taking the chance that movements in price will be in their favour. Most companies already manage their risk as they use insurance, which protects them against the unknown. In the same way, hedging using derivatives provides companies the ability to create a degree of certainty in their exposure to price movements.
Investment Investors on the BFX will have access to a broad profile of opportunities providing the ability to spread investments in one market across cash instruments, derivatives, structured products and Sharia-compliant financial instruments. This will give their portfolio a diversified risk profile. Why invest in Exchange traded products? Exchanges have a clearly identified regulatory authority that is neutral and for whom protection of investor interest is the prime importance. Exchanges list standardised products where measuring risk and return is much more transparent. Additionally, investments on Exchanges are highly secure due to central counterparty clearing and settlement. Exchanges also provide high liquidity so that investors can buy or sell as and when their strategy demands at the best transaction cost.
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Products The BFX platform for multi-asset trading will afford market participants the ability to trade multiple asset classes on one market. The asset classes can be split into three main categories of cash instruments, derivatives and Sharia-compliant financial instruments. Cash instruments
Equities, bonds, notes, certificates of deposit, depository receipts, Exchange Traded Funds (ETFs), Exchange Traded Commodities (ETCs), Real Estate Investment Trusts (REITs)
Derivatives
Swaps, futures, options and Swaptions. Underlying can be commodities, currencies, equities, financial instruments or indices
Sharia-compliant financial instruments
Equities, Sukuk, Murabaha, Wakala, Islamic Options, Islamic Repo, Islamic ETFs, Islamic REITs
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Membership The BFX is a Member-to-Member market, which means trading on the Exchange will be conducted through authorised Member companies. The Members of the BFX can then offer products and services to end clients giving them access to risk management and investment solutions. Users can be assured that they are dealing with professional and recognised companies who are fully regulated by the Central Bank of Bahrain (CBB) and adhere to the BFX rules and regulations for the investment protection, risk management and general conduct of their business. Membership is available through four categories each offering varying trading and clearing rights: Trading and Clearing Members (TCM), Trading Members (TM), Clearing Members (CM) and Authorised Remote Members (ARM). Each category of membership infers different levels of access to the market: TCMs have the right to trade and clear business on the BFX for themselves and on behalf of clients TMs have the right to trade on the Exchange for themselves and clients, but do not have access to the clearing system directly. They must clear their trades and those of their clients through a CM. CMs have access to the clearing system for clients but do not have the right to trade on the Exchange. ARMs are not based in the Kingdom of Bahrain and can only solicit business from clients outside the Kingdom of Bahrain. Members do not have access to the clearing systems directly, they must clear their trades and those of their clients through a CM. To find out more about membership visit www.bfx.bh/membership or email membership@bfx.bh
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Market access The BFX’s multi-access, scalable one-to-many technology creates a trading environment that offers a complete ecosystem of end-to-end trading for the financial community, that is not only efficient, but also provides low latency and low cost. The BFX trading platform will be directly accessible by its members and their clients by using order routing technology. Access is provided via the BFX terminals in members' offices, or via independent software vendors (ISVs). Members can give their clients direct trading access through order routing using their own trading systems or through ISVs. The market can also be accessed via the BFX electronic trading floor. Within the BFX offices will be a plug and trade, fully automated electronic trading floor using cutting edge technology from various ISVs which will offer a first class services trading environment to meet the needs of the most demanding users.
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Market structure The BFX structure will incorporate trading, clearing, settlement and depository services. BFX will offer these services as a Self Regulatory Organisation (SRO) operating under the regulatory supervision of the Central Bank of Bahrain (CBB).
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Trading The diagram (on the opposite page) illustrates how trading takes place through members of the BFX and their clients.
Clearing As a trade is executed on the BFX, it enters the clearing and settlement process of BFX Clearing and Depository Corporation (BCDC). BCDC is a fully owned Clearing Corporation of BFX. Each Trading Member (TM) and Authorised Remote Member (ARM) will need to appoint a Clearing Member (CM) that is a Member of BCDC. The CM will be responsible for the clearing and settlement of all trades of the TM and ARM. As a Central Counterparty (CCP) the Clearing Corporation becomes the counterparty to every executed trade and extends a guarantee that all trades will be settled on the due date. The Clearing Corporation is able to take on this risk by adopting an efficient margining process, including deposit of initial margins (sum of money or collateral to be deposited by a firm in favour of the Clearing Corporation) and Mark-to-Market (MTM or Variation) margins to offset any possible losses incurred on positions held by a Member.
Settlement Once the transactions have been cleared on the BCDC, the settlement of net cash obligations can happen. Via the multilateral netting facility offered by the Clearing Corporation, Members benefit from reduced settlement obligations. Each Clearing Member will have an account with one of the Clearing and Settlement Banks appointed by BCDC in order to meet its money obligations or to collect cash on behalf of the Trading Member.
Depository BFX Members trading in cash market instruments, such as bonds and equities, will keep their securities on the books of a depository participant (DP) or custodian that have an account with the BCDC. The BCDC holds BFX eligible securities in electronic form on behalf of (DP) or custodian and its customers. Account holders on the BCDC maintain positions for the purpose of settlement and safekeeping. Other services provided by the BCDC include internal transfers of security holdings between accounts, pledge, payments of dividends, coupons and reimbursements of principal, as well as corporate actions.
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Market regulation The Exchange has a statutory requirement to ensure that business on its markets is conducted in an orderly and transparent manner, providing proper protection to those wishing to raise capital, manage risk and invest. The CBB provides the Exchange with the powers to act as a Self Regulatory Organisation (SRO) and to supervise and regulate the markets it operates. The Exchange and its Clearing Corporation will maintain the integrity of trading and clearing through fair and equitable Business, Clearing and Listing Rules that strike an appropriate balance between interests of issuers, investors and different market participants. While executing its functions as an SRO, the Exchange will ensure the highest standards of fairness and confidentiality and will strive to provide, transparent and efficient markets. The Exchange will make effective and credible use of its self-regulatory tools and implement an effective compliance program to promote best international practices and conduct, mitigate systemic risks and to protect investors
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Market training Located within the BFX, the training institute will offer an extensive course programme to meet the needs of a diverse user profile. These courses cover a wide range of financial markets and associated financial instruments with the objective of introducing market concepts to new users as well as enhancing and refining current knowledge.
The training team at the institute is drawn from the international financial markets and are recognised as being the best in their respective fields. The trainers have been carefully selected to provide the best possible training experience and market expertise. The institute is furnished with state-of-the-art equipment to provide course participants with a relaxed and fully interactive learning experience and will develop the knowledge of users of the Exchange today and provide training for the next generation of financial specialists.
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Contact information Bahrain Financial Exchange BSC (Closed) 12th Floor, East Tower Bahrain Financial Harbour P.O.Box 1936 King Faisal Highway Kingdom of Bahrain T. F. E. W.
+973 1651 1511 +973 1651 1599 info@bfx.bh www.bfx.bh
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This document is published by The Bahrain Financial Exchange BSC (Closed). To the best of the publisher’s knowledge and belief, statements made are correct at the time of going to press. All such statements and all opinions expressed herein are published for the general information of readers but are not to be taken as recommendations of any course of action. The publisher accepts no liability for the accuracy of any statement or representation. The BFX does not seek to distribute any products or services through these documents. For a detailed disclaimer please visit www.bfx.bh