Bosnia and Herzegovina: Advice on Integrating Stock Exchanges

Bosnia and Herzegovina: Advice on Integrating Stock Exchanges

How does one go about supporting the integration efforts of a country that has four different levels of government and two separate government entities that have been severely divided along political and ethnic lines? A viable answer is to let economic unification soften the degrees of separation and lead the way to other forms of integration. This FIRST Lesson presents what Financial Sector Reform and Strengthening (FIRST) has learned about the essentials of designing and maintaining an integrated local stock market index, with the World Bank acting as a catalyst in helping to unify the economic and financial space across two sub-governments—the Federation of Bosnia and Herzegovina Government and the Republika Srpska Government.

The purpose of the FIRST project was to support the integration of the Bosnia and Herzegovina capital market by developing an integrated stock market index for Banja Luka and the Sarajevo Stock Exchanges that will serve as the benchmark instrument for investors. And while this project was started before the crisis, the project was envisioned as a tool to increase liquidity and depth of the market, and to increase confidence in the financial sector in the country.

As a direct result of this project, on December 1, 2009 the Bosnia and Herzegovina (BiH) Index was launched and has been actively traded since.


In Bosnia and Herzegovina, there are few national-level laws and regulations in existence. There is a national level Government and two very strong Government entity regions (Bosniak/Croat and Serb) with broad constitutional powers limiting powers of national Government in the area of business environment. Because of the political situation, efforts to create a single stock exchange on a national level posed a great challenge, especially in an election year. (National elections will be held in October 2010.)  There were two stock exchange indexes, but no single BiH index. In other words, the market was not integrated, and rules and regulations for cross-trading and cross-fertilization were not aligned.

In view of the future enlargement process within the European Union and the establishment of a direct connection between dynamic capital markets and booming economies, it became a challenge and priority for the two stock exchanges to build up a sustainable and reliable capital market that could offer competitive and innovative financial instruments to local and foreign financial service providers. The timing of the project was such that multiple supporting factors had come together to enable the success of the project. This project came into fruition at a time when both stock exchanges have had significant increases in the number of traded companies and established a certain level of market capitalization. It was also clear to the governments of BiH that domestic and international investors should have a reliable and transparent capital market environment within which to do business.

At the same time, the World Bank, the European Community, and the international community as a whole have striven to increase economic and financial integration as a means to eventually lessen the country’s divisions along political and ethnic lines. All observations showed that the SASE and BLSE had a strong potential for further developing the internal capital markets in BiH, and it was essential that the market integration between these two exchanges proceed accordingly to ensure sufficient financial depth to this market.


In March 2008, Banja Luka (BLSE) and the Sarajevo Stock Exchanges (SASE) jointly sought technical assistance from the World Bank in laying the foundations of a state-of-the-art BiH stock exchange index covering both exchanges as a recognized market benchmark. The project also aimed to contribute to the transparency of capital markets in BiH, and to the process of economic unification and membership in the European Union. Moreover, this would be an important step in gaining further confidence in the financial sector of the country.

The technical assistance request also included developing innovative financial market products, particularly structured products (e.g. certificates, warrants, and exchange-traded funds) and derivatives to benefit the economy. This was an interesting concept and gave FIRST a unique opportunity to contribute to the creation of a single economic space in BiH.

FIRST approved a technical assistance grant in the amount of $238,700 and engaged an advisory firm to undertake this work. The project also benefited from the technical expertise and project supervision of World Bank experts John Pollner and Tarik Sahovic, a task leader on the World Bank side.

FIRST hired a team of consultants who, at the initial stage, conducted an analysis of the capital market in BiH, with a focus on the demand-and-supply factors for securities, trading characteristics, intra-regional investment trends and investor demand in the BiH market, the prerequisites for a common stock index, and the introduction of structured financial products and derivatives as hedging instruments. The report also addressed the institutional and regulatory elements of a medium-term strategy that considered the integration of both exchanges into a single BiH economic space and the requisite regulatory and enforcement framework needed to ensure sound financial disclosure and corporate governance in financial reporting. At this stage, the consultants also presented recommendations to BLSE and SASE management regarding the final structure of the Implementation Handbook for Index Management and Structured Financial Products and a detailed work plan for the project. This was a challenging task, but it was doable since the consulting firm provided top-class expertise, the stock exchanges were fully supportive, and World Bank experts pulled their weight to ensure cooperation and coordination among various institutions.

Based on the initial work and feedback received, the consultants prepared the “Implementation Handbook for Index Management, Data Dissemination, and Structured Financial Products.” This handbook was aimed at the self-regulatory organizations/exchanges and established the indexing methodology and Securities Commission (SEC) market monitoring of the same. The handbook included guidance on index management, a definition of the requirements for structured/derivative products, and data management.

An important component of the project was knowledge transfer to the capital market participants through training. Two workshops were delivered to that end. Workshop I was on the design and implementation of a BiH market index and structured financial products. The target participants of this one-day workshop were 10 employees of SASE and 10 employees of BLSE, who would effectively be involved in establishing the prerequisites for introducing a structured products market in BiH. The workshop was conducted twice: one session at BLSE in Banja Luka and the other session at SASE in Sarajevo. Workshop II covered the same topic, and the target participants of this one-day workshop were 20 selected BiH capital market participants, mainly SASE and BLSE members interested in trading and establishing innovative financial instruments. A section of the workshop specifically covered investor protection as one of the major prerequisites for a safe, reliable, and transparent Bosnian capital market.

During preparation of the final report, the project activities went beyond the terms of reference and what was expected of consultants, as it actually provided design of the index and initiated more concrete steps in the creation of that index. Moreover, talks about the creation of the index were continuing much faster than anticipated. The project contributed to the listing of BLSE and SASE on Thompson-Reuters and closer links with the Vienna Stock Exchange, which resulted in the proposal for an official contract between the Vienna Stock Exchange and SASE and BLSE about creation of a BiH stock index listed on the Vienna Stock exchange. This was a big step forward, as this will help with the creation of a single economic space and a unified capital market in BiH.

Lessons Learned

No. 1. Use an integrated common data feed or a global data vendor to gather price data.

The following prerequisites are essential for the establishment of an emerging market index, from our experience in working in a country with two distinctive stock exchanges:

  • Data availability
  • Main index features

- Methodology

- Currency denomination

- ISIN code

- Compatibility with international standards

  • Index calculation, management, and distribution

To be able to create a representative country index covering one or more exchanges in one country, it was necessary to have a single source for gathering the price data for the calculation. Only through this source could investors obtain data about a company, thus ensuring that the data for a particular company would be transparent and accurate. The FIRST consultants advised the two exchanges of the importance of having a single vendor, which could  be an integrated common data-feed for all exchanges in a country or a global data vendor (i.e. Thompson-Reuters, Bloomberg) distributing the price information in real time. For consistency reasons, the exchanges determined that the best way to gather the data for calculation would be from a global data vendor. Global data vendors convert the individual formats of data from each marketplace into an international/global format that offers a transparent and consistent basis for any index calculation. Furthermore, the unique data format perfectly enables traders to hedge any potential index-linked financial instruments.

In terms of methodology, an index would need to be calculated and distributed in real time, following a transparent methodology in line with international standards. It is of great relevance that the index tracks the effective free float of the companies included in order that it can be used as a basis for structured products and for standardized derivatives on a mid- to long-term perspective.

No. 2. Calculate and publish euro- and dollar-denominated versions of the index.

In addition to having the BiH index denominated in the local currency, the consultants recommended that the index be calculated and published in euro- and dollar-denominated versions. In this way, the international investors would have the possibility to invest in index-linked financial instruments without currency exposure.

No. 3. Assign primary identification numbers to each share included in the index.

For index calculation and management, it is essential that each share included in the index have a primary identification number/key (e.g. ISIN, SEDOL, local code). However, before the project started, there was no institution within BiH that was entrusted to assign ISIN codes to exchange-traded shares.  The FIRST project managed to ensure that this code was obtained through work of consultants and their knowledge and network of relevant players in the global market.

No. 4. Include only the most-traded companies in the index.

Limiting the index to the most-traded companies enables sponsors of structured products to create and hedge index-linked financial instruments at reasonable costs and without putting pressure on the market in situations where they need to create or redeem high volumes due to market developments or index adjustments. The maximum weight of a company in the case of the BiH index is 20 percent, which is more or less applicable in other emerging markets and which would be in line with Undertakings for Collective Investment in Transferable Securities (UCITSIII) rules. Investment funds or exchange-traded funds providers could use the index as a basis for passively or actively managed funds (see box).

A Note on Index Calculation

In terms of index calculation, management, and distribution, stock exchange(s) can decide to implement, calculate, and publish the index on its own or by one of them. Alternatively, the exchanges can mandate by agreement a third party that is considered capable and representative enough to perform, on their behalf, the calculation, dissemination, and any other index-related activities at an international level as a neutral partner. This is particularly helpful in the case of weak local exchanges and strong regional exchanges that can improve the liquidity and visibility of the index.  The calculation and distribution agent (either one of the exchanges or a third party) should fulfill the following non-exhaustive list of main requirements: more than 10 years of experience in the international index business:

  • technical capabilities to calculate and distribute an index in real time
  • in-depth knowledge and experience regarding the calculation and distribution of country or regional indices covering respective capital markets (in this case, markets in central and southern Europe)
  • capability to distribute the index to the most relevant international data vendors and a current network of data vendors
  • expertise and experience in branding indices
  • an existing licensee network for emerging market indices, especially for Central and Eastern Europe and Southeast Europe indices in the case of BiH, as well as a representative network of potential clients for licensing the index
  • capability to promote the index worldwide
  • to avoid conflicts of interest, evidence that the designated calculation agent is neither a client nor a member of the stock exchanges in question (if two stock exchanges are in question).


Market participants are already observing outcomes for the FIRST project , including the benefits of the training, which prepared both the exchanges and market participants for further development and expansion of the stock exchanges’ offer. The exchanges now have the right level of knowledge for index design and management, data dissemination, and structured financial instruments. On December 1, 2009 the BiH Index was launched and has been actively traded since.