What it means
The exchange was founded in 1971 and is fully electronic, with its own clearing and settlement arrangements. Most of what it lists is wholesale: funds, structured notes, bonds and the securities that pass insurance risk to capital markets.
Insurance-linked securities are the part most worth understanding, because Bermuda is a centre for reinsurance. A catastrophe bond pays the investor a high coupon and, if a defined disaster happens, the principal is used to pay insurance claims instead of being returned.
Listing that bond on a recognised exchange widens the pool of investors allowed to buy it. The reason a listing matters at all is regulatory rather than commercial.
Many pension funds and insurers may only hold securities listed on a recognised exchange, so a listing turns an instrument that some buyers cannot touch into one they can. Daily trading volumes are modest next to the large exchanges, and a listing there should not be read as proof of liquidity.
If an instrument has to be sold in a hurry, the market is usually made privately by dealers rather than on screen. Finance teams meet BSX in fund documentation, treasury investment policies and group structures that include a Bermudian vehicle.
The usual question in an investment policy is whether a given exchange counts as recognised for that purpose, which is a matter for the policy wording and the auditors rather than opinion. Watch the context when you see the three letters.
BSX is also used as a company ticker symbol on United States markets, so a data feed showing BSX may be referring to a listed business rather than to the exchange.
In practice
Real-world examples.
Example
A fund manager launching a closed-end credit fund finds that three of its target pension investors are only permitted to buy listed securities. It takes a BSX listing, which costs a modest annual fee, and the mandates can then be signed.
Example
An insurer wants to transfer part of its hurricane exposure to investors rather than to another insurer. It sets up a Bermudian special purpose vehicle, issues a catastrophe bond, lists it on BSX so pension funds can hold it, and keeps the proceeds in a collateral account.
Example
A corporate treasurer reviewing a cash policy sees that one approved bond is listed only in Bermuda. He checks the policy wording, confirms BSX appears on the list of recognised exchanges his auditors accept, and records the conclusion in the treasury file instead of reopening it every quarter.
Formula
Calculation
There is no formula for an exchange, but the instruments BSX lists are priced with ordinary arithmetic. A catastrophe bond coupon is built as: coupon rate = risk spread + collateral yield. Take an insurance-linked note of $50,000,000 with a risk spread of 6% and collateral earning 2%, giving a coupon of 6% + 2% = 8%, so annual interest is 50,000,000 times 0.08, which is $4,000,000. If a qualifying event uses 40% of the principal to pay claims, investors give up 50,000,000 times 0.40, which is $20,000,000, and the remaining $30,000,000 is returned at maturity. Their outcome over that year is $4,000,000 of interest less $20,000,000 of lost principal, a net loss of $16,000,000.Case study
Seen in the real world.
Lanthorn Re is a fictional Bermudian vehicle created for this illustrative example by an invented regional insurer that wanted protection against a bad storm season. Reinsurance quotes had risen sharply, and the insurer decided to approach capital markets directly.
Lanthorn Re issued a $75,000,000 three year note with a coupon of 9%, listed it on BSX, and held the cash in a collateral account. The listing was what allowed two pension funds to participate, and their money reduced the amount the insurer had to buy from traditional reinsurers.
The illustrative outcome was mixed but instructive. No qualifying storm occurred in the first two years, investors earned $6,750,000 of interest a year, and the insurer had fixed the cost of that layer of protection for three years instead of renegotiating it annually.
Watch out
Common mistakes.
- Assuming a BSX listing implies an active market in the security, when most listings exist to satisfy investor rules rather than to create daily trading.
- Reading the letters BSX in a price feed as the exchange, when they are also used as a company ticker symbol on United States markets.
- Treating a catastrophe bond as an ordinary high yield bond, when the whole principal can be used to pay insurance claims if the defined event happens.
Questions
People also ask.
What does BSX actually list?
Mostly investment funds, bonds, structured notes and insurance-linked securities, with only a small number of local operating companies.
Why would a fund list in Bermuda rather than London or New York?
Because the listing requirements suit wholesale instruments, the cost is lower, and the exchange is recognised by enough regulators to satisfy institutional mandates.
Is a listed security automatically safer?
No, a listing is about disclosure and eligibility, not credit quality, and a listed catastrophe bond can still lose its entire principal.
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