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Message From the Chair

 

This has been an extraordinary couple of years for Iran, and I’ve had the privilege of seeing the major political and economic strides our country has taken from the vantage point of the Securities and Exchange Organization of Iran.
Iran has entered a new and promising period of international commercial, financial and political interaction. As the regulatory and supervisory body of the Iranian capital market, the SEO is at the vanguard of interacting with our foreign friends with an interest in the Iranian capital market, and we feel the impact and possibilities of this new period for our financial markets.
I would like to identify three themes in this message. These themes are quite general and I hope they will give a good framework for thinking about Iran’s capital market and of course Iran itself as a commercial and investment destination. These themes are growth, innovations and engagement.
Talking about growth, it’s very important to note that stability is a key prerequisite for growth in any commercial and investment activity. Iran is a stable country in a chaotic region. There are many reasons for this. We have been a nation for over twenty-five centuries, we have prevailed as a nation over enormous threats in ancient and modern times, our diverse people have lived together as one nation for a hundred generations, and we have developed and relied on institutions from the beginning of our national history. We have also long had governments and statesmen capable of navigating our country through instability around us; we still do today. You will not have to look long at a map to remind yourself that Iran is surrounded by instability. Yet, even in the context of 15 years of wars and chaos on our borders, not only have we maintained our stability, but have made tremendous economic advances.
Now turning to growth in our capital market let me tell you that Iran’s capital market has recently experienced considerable growth. From the implementation day TEDPIX as the main stock index in Iran capital market has increased 21.7 per cent. Even with this growth the PE ratio is about 7.7 which is considerably lower than average of the emerging markets.

Our Sukuk market has shown even more remarkable growth. The total outstanding Sukuk value at the end of 2015 was just $1.8 bn (market rate) while this figure now is about 9 which shows more than four times growth. In terms of the number of outstanding Sukuk there are now 90 Sukuks compared to 47 at the end of 2015 which reveals around 100 percent increase.

Our funds market has also grown significantly. Value of funds increased 8.4 times in 2015 due to many lucrative fixed-income funds. As of today the value of funds is standing at $30 billion.
What is particularly pleasing about this growth is that it has been combined with much innovation. In the last year, we have witnessed a rapid pace of financial innovation in the Iranian capital market. Let me mention some examples of this.
Treasury Sukuks were issued for the first time last year worth about $1.5 bn. This instrument gained so much recognition and attention, so much so that President Rouhani at the end of the one of his Government economic sessions a few months ago referred to their issuance as quote: “a big step and one of the most authentic securities in the country”. The treasury bill issuances as of today is amounted to $2.6 billion.

Another interesting fact was that Government issued Ijarah Sukuk worth $144 million for the first time. Istisna Sukuk was also introduced for the first time worth $144 million.

The SEO developed a market for mortgage-backed securities and published rules covering them broadening the available funding modes. The first batch of mortgage-backed securities worth $100 million were issued in July through Iran Fara Bourse to fund the housing loans of Bank Maskan. The next round is supposed to be $300 million. Work is being done on offshore government debt issuances too.
On the institutional side, the SEO published regulations on credit rating agencies and has begun to issue licenses. We hope this will soon lead to having more credible rating agencies up and running in this country.
The SEO has also introduced a regulatory framework for venture capital funds and licensed the first five of these to improve investments in knowledge-based companies as our dynamic market keeps up with our dynamic entrepreneurs.

I believe the rapid innovation we have witnessed indicates two things. One is the importance we place in Iran on having a knowledge-driven market, so that our growth is intelligent and creative.
The other is the importance we place on having a resilient financial system to support a resistant economy. Resilience and resistance are desirable features for our financial system and economy because they promote sustainable development and reduce our vulnerability to external shocks. These are appropriate features to develop in the largest Islamic financial system in the world.

Now, we are particularly pleased that our growth and innovation have been accompanied by greater engagement with our foreign friends. Let me give you some examples of this.
We’ve developed long-lasting deep relations with a limited number of capital market players. Our constructive relations with our German, Swiss, Korean, Omani, Greek and Turkish capital market players could be seen in that light.
In March this year 8 years after its initial application, the SEO became an associate member of IOSCO, on the way to full membership, as IOSCO welcomed our embrace of international standards with its hospitality. As a consequence of SEO joining IOSCO, our various national exchanges have now been admitted to the World Federation of Exchanges (WFE).
Speaking of exchanges, I should note that our Tehran Stock Exchange is one of the oldest in the Middle East, founded about 50 years ago, and today with a market capitalization of around 100 billion dollars. As we continue developing, I believe in time Iran’s capital market will be seen as combining the longest history in the region with the greatest dynamism and warmest hospitality towards foreign participants. Our other Exchanges, i.e. Iran Fara Bourse with a market cap of about 25 billion dollars and our two commodity exchanges, i.e. Iran Mercantile Exchange and Iran Energy Exchange are also expanding and improving their operations.
In addition, plumbing is underway on a financial level. On a capital market level in particular, plumbing is also taken very seriously through enhancing custodianship arrangements. Prior to having a global custodian operating in Iran SEO & Central Securities Depository of Iran (CSDI) seriously looked into offering an imminent alternative solution to help remove the brokers’ default risk and therefore relieve an important concern of large international investors. According to this model, which is branded as “the Blue Model” large foreign investors will be directly connected to the designated banks for cash settlement with CSDI instead of brokerage houses. The brokers just provide the services as the intermediaries for putting the orders and giving the advisory but the money commitments will be made by the designated banks which are responsible for the settlement with CSDI. The Blue Model was proposed by the CSDI and ratified by the SEO board of directors on 30th of August 2016.
In relation to foreign investors, we are also working on facilitating the currency movement and foreign exchange aspects of portfolio investment, and developing currency hedging instruments, as we realise this is an area of investor need.
Moving on to another long-awaited development, on 15th of November, SEO made IFRS reporting mandatory for all listed banks, financial institutions and insurance companies as well as all listed companies with registered capital of more than 280 million dollars from fiscal years beginning on or after 21 March 2016.  This is of course a dual reporting requirement one in accordance with IFRS and one in accordance with Iran GAAP.
I think all these developments tell you that our country in general is looking forward to significantly greater international commercial and popular engagement. I hope that you will sense for yourself this engagement will and Iran’s stability and calm.
Engagement is interconnected and interrelated with hospitality and openness and I hope these are distinguishing features of Iran’s people. We hear from nearly every foreign visitor who comes to Iran how they have been surprised by the welcome, warmth and hospitality of strangers. As an ancient cross-roads for travel and commerce, we are used to welcoming visitors, and that mentality persists today. You will find our people are curious to know more about visitors, and eager to do what they can to make them feel welcome. As a gatekeeper for foreign capital market investment, the SEO also feels the Iranian instinct of hospitality in our own way. We are here to welcome, guide and support foreign participants in our market, and to help you navigate to success.
Hospitality is about openness to others, sharing with them and preferring association over isolation. I believe the last year has also seen examples of such a mentality.
We hope and expect that Iran’s engagement will be on a win-win basis, as has been frequently articulated by our diplomats. And we are pleased that gatherings like this can contribute to increasing healthy engagement.
In a low interest rate environment, in a close to zero bonds era considering the Iranian capital market products seems a very wise option. If the time was ever ripe for doing so, the time is NOW.
 As the world’s largest Islamic financial system, we also plan to better use the deep knowledge and expertise of our Sharia scholars in developing new Islamic instruments to support our companies and economy.
My purpose in describing to you our plans and priorities is to invite you to look not only at where our markets are, but also at where they are heading. As you think about the potential trajectory of Iran’s market, I encourage you also to look at other countries and their market development. Yes, there will be challenges as domestic markets internationalise and integrate foreign investment on a large scale, and they are not for everyone. But it is because of these challenges that outsize returns are available to those who can carefully manage them. In managing the challenges of participating in the Iranian market, it will be important to be patient, take a long term view, find trusted domestic partners, and form your own conclusions.
So, I would encourage each of you who have not already done so to visit Iran and pursue your own understanding of our country, its people and its opportunities. If you do so, please consider that the hospitality of the SEO will be at your service when you come to Iran.

Best wishes!

Shapour Mohammadi