E

Securities Markets in Eurasia
Since the collapse of their Communist regimes, Central Asian countries have
been heading rapidly toward a market economy and have made considerable
efforts to establish a functioning market infrastructure. However, the regions
securities markets remain small-scale and underdeveloped. Building up well
functioning securities markets will be essential to vitalising their economies.
Securities
Markets
in Eurasia
This publication contains an overview of securities markets in the region and

selected country reports prepared for the OECD Conference on Financial Sector
Development in the Central Asian countries, Azerbaijan and Mongolia held in
April 2004. It provides comprehensive data and analyses of securities markets in
the region, updated to April 2005, addressing specifically:
Effective measures to develop securities markets and infrastructure, especially
the role of institutional investors and clearing and settlement systems.
Building investor confidence.
Regulation and supervision of securities markets.
This volume is part of the OECDs ongoing co-operation with non-member
economies around the world.
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Securities Markets
in Eurasia
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
ORGANISATION FOR ECONOMIC CO-OPERATION

AND DEVELOPMENT
The OECD is a unique forum where the governments of 30 democracies work together to
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the forefront of efforts to understand and to help governments respond to new developments and
concerns, such as corporate governance, the information economy and the challenges of an
ageing population. The Organisation provides a setting where governments can compare policy
experiences, seek answers to common problems, identify good practice and work to co-ordinate
domestic and international policies.
The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic,
Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea,
Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic,
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This work is published on the responsibility of the Secretary-General of the OECD. The
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OECD 2005
No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to
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FOREWORD
Since the collapse of the communist regime, the Central Asian countries, Azerbaijan and
Mongolia have been rapidly heading toward a market economy. These countries have made
considerable efforts to establish a well-functioning market infrastructure, with the support of
international financial institutions. Compared to the size of the banking sector, however, securities
markets in the region are typically small in scale and still underdeveloped. Building up well
The OECD has been providing a forum for policy makers and experts from both the Central
Asian region and OECD countries to exchange their policy views and experiences of the topics
relevant to the financial sector development since 1995. Within this framework, the OECD
Conference on Financial Sector Development in the Central Asian Countries, Azerbaijan and
Mongolia focused on the securities market development in the region. The Conference was held at the
OECD Center for Private Sector Development in Istanbul on 29-30 April 2004 in cooperation with the
Turkish International Cooperation Agency (TICA). It was organised by the Outreach Unit for
Financial Sector Reform, the OECD Directorate for Financial and Enterprise Affairs, under the aegis
of the Committee on Financial Markets and the Centre for Co-operation with Non-Members, with
sponsorship from the Government of Japan.
This publication was prepared by Mr. Shigehiro Shinozaki, Administrator of the Directorate for
Financial and Enterprise Affairs, together with policy makers and experts from Azerbaijan,
Kazakhstan, the Kyrgyz Republic, Mongolia, Tajikistan and Uzbekistan. It contains a summary of the
discussions and reports prepared for the Conference updated to April 2005.
SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005
TABLE OF CONTENTS
Part I Analytical Report

Chapter 1
Summary of the OECD Conference on Financial Sector Development

in the Central Asian Countries ...................................................................................... 9
Introduction......................................................................................................................................... 9
1. Overview of Securities Markets in the Region ............................................................................... 9
2. Effective Measures to Develop Securities Markets and Infrastructure......................................... 12
3. Investors Confidence Building .................................................................................................... 16
4. Regulation of Securities Markets.................................................................................................. 17
5. Supervision of Securities Markets ................................................................................................ 19
Conclusion ........................................................................................................................................ 21
Chapter 2
Potential for Securities Markets in the Central Asian Countries,

Azerbaijan and Mongolia
by Shigehiro Shinozaki................................................................................................... 27
Introduction....................................................................................................................................... 27
1. Macroeconomic Performance ....................................................................................................... 27
2. Market Structure ........................................................................................................................... 28
3. Market Performance...................................................................................................................... 33
4. Regulatory and Supervisory Structures for Securities Markets .................................................... 36
5. Some Thoughts ............................................................................................................................. 37
Conclusion ........................................................................................................................................ 41
Chapter 3
Financial Markets and Institutional Investors in Central Asia

by Toshiharu Kitamura ................................................................................................... 53
1. Capital markets in emerging economies ....................................................................................... 53

2. Features of financial markets in Central Asia............................................................................... 54
3. Investors for Central Asian capital markets.................................................................................. 57
4. Government bond market as basis of debt/capital market infrastructure...................................... 58
Part II Country Studies
Chapter 4
Securities Market in the Republic of Azerbaijan

by Gunduz Mammadov .................................................................................................. 65
Chapter 5
Supervision of the Securities Market in the Republic of Kazakhstan

by Gulmira Kapenova..................................................................................................... 69
Chapter 6
The Further Development and Reliable Operations of the Securities Market

in Kyrgyz Republic
by Jury Svistov ............................................................................................................... 83
Chapter 7
The Development of Institutional Investors and Pension Funds in Kyrgyzstan

by Kubatbek Alymbekov ................................................................................................ 89
Chapter 8
The Origin and Development of the Securities Market in Mongolia

by Sodnomtseren Gundenbal .......................................................................................... 95
Chapter 9
Securities Market Development in Mongolia

by D. Dorligsuren and J.Bolormaa ............................................................................... 101
Chapter 10 Securities Market in the Republic of Tajikistan

by Nazullo Abibullaev.................................................................................................. 105
Chapter 11 Securities Market in Uzbekistan
by Sunat Bekenov ......................................................................................................... 113
Chapter 12 Uzbekistan Corporate Securities Markets Infrastructure:
View through the prism of the New Recommendations of the Group of Thirty
by Timur Yadgarov....................................................................................................... 127
133
Part I
ANALYTICAL REPORT
Chapter 1
SUMMARY OF THE OECD CONFERENCE ON FINANCIAL SECTOR DEVELOPMENT
IN THE CENTRAL ASIAN COUNTRIES
Introduction
Since the collapse of the communist regime, the Central Asian countries1, Azerbaijan and Mongolia
have been rapidly heading toward a market economy. They have made considerable efforts to
establish a well-functioning market infrastructure, accepting the support of International Financial
Institutions (IFIs), and have tackled financial sector reforms with trial and error. However, as
compared to the size of the banking sector, the securities markets in the region are typically small in
scale and are still underdeveloped, especially in terms of liquidity.
Against this backdrop, the Sixth Conference on Financial Sector Development in the Central Asian
countries, Azerbaijan and Mongolia considered the securities market development in the region,
addressing five main issues: 1) an overview of securities markets in the region, reviewing the progress
to date; 2) effective measures to develop securities markets and infrastructure, which focused on the
role of institutional investors and clearing and settlement systems; 3) building investor confidence; 4)
regulation; and 5) supervision of securities markets.
The conference was held at the OECD Center for Private Sector Development in Istanbul on 29-30
April 2004 in cooperation with the Turkish International Cooperation Agency (TICA). This event was
organised by the Outreach Unit for Financial Sector Reform of the Directorate for Financial and
Enterprise Affairs of the OECD, under the aegis of the Centre for Co-operation with Non-members
program, with sponsorship from the Japanese government.
The conference was attended by around 40 participants who were policy makers and experts from 7
non-member countries (Azerbaijan, Kazakhstan, Kyrgyz Republic, Mongolia, Russia, Tajikistan and
Uzbekistan), 6 member countries (France, Germany, Hungary, Japan, Poland and Turkey) and 2
international organisations (EBRD and IOSCO). Mr. Gerrit de Marez Oyens, former Secretary
General of FIBV (currently the World Federation of Exchanges), moderated this conference.
Before starting the session, the chairman introduced the notion of a fully functioning market,
mentioning six key elements: 1) price discovery mechanism; 2) competition as the best driver of
convergence of the markets; 3) trading capability (technology); 4) quality (level of clients
satisfaction) rather than size; 5) importance of judging liquidity on order book rather than on
transactions; and 6) competitive advantages for the client.
1. Overview of Securities Markets in the Region
Although the first half of the 1990s was a time of deep recession for the Central Asian economies,
their macroeconomic performances have been gradually improved. Currently, those economies have
been growing at different speeds, with particularly rapid growth seen in Kazakhstan (real GDP

This summary was prepared by Shigehiro Shinozaki, Administrator of the Directorate for Financial and Enterprise Affairs,
OECD
growth: 9% in 2003). Also, their inflation rates have moderately decreased (under 16%) as compared
to the hyperinflation during the first half of the 1990s. However, there still seem to be huge income
gaps and high poverty ratio in the region.
The securities markets in the region basically involve three common characteristics. Firstly, these
countries have had relatively advanced market infrastructures from the beginning, thanks to the
support of IFIs. Concretely, they have had relatively sophisticated electronic trading systems
(computer assisted order routing and execution systems) and central depository systems except for
Tajikistan and Turkmenistan. It will be worth noting that only in Uzbekistan does there exist an
electronic OTC trading system for small investors (ELSIS-SAVDO). Secondly, participation in the
markets is not broad (limited market participants). There are almost no foreign investors in the region
and it seems that the markets still have been used as means of reducing the national budget deficit
through the privatisation process. The small number of listed companies in the region may make
investors hesitant to participate in the Central Asian markets actively. Thirdly, the markets in the
region still offer a narrow range of securities products and still depend heavily on short-term securities
products. Short-term government bonds (basically 3-9 months in maturity) are the flagship products
in the region. Particularly in Kazakhstan, the repo market has developed rapidly. Equities and
corporate bonds are still minor products in the region. Derivative markets exist in Kazakhstan and
Azerbaijan but are very restricted.
Stock market capitalisation in the region is very small in scale (7.8% of GDP in Kazakhstan and less
than 3.7% in the other countries in 2003) and growing at a slow pace. The central Asian markets can
be classified into two groups: active and inactive secondary markets. The secondary markets in
Kazakhstan and Kyrgyz Republic are relatively active but the most actively traded instruments are
short-term government bonds. By contrast, those in the other countries are quite inactive as compared
to the primary markets. Securing stable liquidity of corporate securities will be one of the issues to be
improved in the region.
Taking account of the market conditions in the region, three key factors for successful development of
the securities market were noted: 1) mobilising individual savings in order to create active secondary
markets for corporate securities; 2) encouraging the development of institutional investors such as
pension funds and privatisation investment funds (PIFs) in order to enhance market liquidity and
trading volume; and 3) attracting foreign investors to enhance market capitalisation. To this end, it
was pointed out that improving corporate governance would be a high priority in order to build up
investors confidence and that making the best of their existing advantages such as the electronic
trading technology might be effective for those countries to reach the high-yield markets.
Examples of well-functioning trading schemes in two advanced markets were introduced: 1) cotrading linkage between the Australian Stock exchange (ASX) and the Singapore Exchange Limited
(SGX) and 2) consolidated stock markets in Euronext, mentioning their merits; i.e. 1) cost reduction
(cost efficiency); 2) high quality service for investors (speedy dealings, diversified investment
portfolios, etc.); and 3) the potential increase in liquidity. The advanced technology basically
contributes to bringing those merits. Taking account of the existing advantage in the Central Asian
region, as a possibility, it was mentioned that a cross-access trading system among the Central Asian
region (i.e. the consolidation of stock exchanges in the region) might be a key factor to vitalise the
securities markets in the region.
From the target countries, Uzbekistan and Azerbaijan reviewed their current situation of securities
markets and reform efforts to date.
10
Uzbekistan
The securities market in Uzbekistan basically comprises 1) on-exchange market by the Republican
Stock Exchange Tashkent with 12 branch offices; 2) off-exchange market by ELSIS-SAVDO
with over 20 order reception offices, which started in 2000; 3) two depository systems (the Central
Depository and the second-tier depositories); and 4) a clearing and settlement agency ELSISClearing. Government bonds are traded in the Currency Exchange. Dealing in corporate bonds
started in 2002. The trading volume of equities, corporate and government bonds has been growing in
Uzbekistan SUM2 (total 110.4 billion SUM in 2003). Until 2002, the volume of transactions in the
secondary market had exceeded that in the primary market, but in 2003 the primary market recorded a
big increase due to the accelerated privatisation process and surpassed the secondary market in total
dealing volume.
Regulatory and supervisory bodies for the securities market consist of three organisations: 1) The
Center for Coordination and Control of the Securities Market (the Center); 2) the Ministry of Finance;
and 3) the Central Bank. The Center is an authorised state regulatory body in the securities market in
Uzbekistan. The government securities market is regulated and supervised by the Ministry of Finance
and the Central Bank. There was a question as to whether or not there was any intention to adopt a
single regulator for the securities market. The answer from an Uzbek participant was that moving to a
single regulator would be premature because the privatisation scheme had yet to be completed.
The privatisation process in Uzbekistan can be divided into three stages: 1) privatisation of SMEs in
1992-93, 95% of which did not have a legal entity status; 2) a wide-scale privatisation in 1994-96,
forming real property-owners; and 3) privatisation of industrial giants (e.g. subsidiary enterprises of
fuel and energy complex) since 1998. The privatisation revenue accounted for 55.1% of GDP in 2003.
In 2003, new measures of selling government equities were enforced, which encouraged selling low
profitable and economically non-wealthy government equities at lower price than nominal price.
Some progress can be found in the securities market in Uzbekistan: 1) The Center for Corporate
Management was created in 2003; 2) the minimum standard of authorised capital of joint-stock
company was established in February 2003 (USD 50,000); 3) taxation on the profits from privatised
shares (dividends and capital gains) is exempted during 5 years; 4) trust business is gradually
transferred from the government to the professional management companies on the competitive basis
in 2003-04; 5) rules on managing investment funds (assets and shares) held by trust companies were
enforced; 6) share trading of the joint stock company must be carried out only via the stock exchange
and the recognised OTC market (government resolution in April 2003); 7) government mid-term
bonds (1.5 to 5 years in maturity) will be issued in 2004; 8) corporate bonds have been issued since
2002 in the range not to exceed the authorised capital stock (President Decree in March 2002); and 9)
free convertibility on current accounts was enforced in October 2003 according to the memorandum
with IMF.
Azerbaijan
The securities market in Azerbaijan has been created and developed through the privatisation process
as in the other CIS countries. Privatisation of the medium- and large-scale companies started in 1997.
Privatisation vouchers were provided to all citizens of Azerbaijan under the State Program of
Privatisation in 1995-98, which gave each Azerbaijani the right to buy privatised shares (initial
issuance of 7.5 millions vouchers). Also, privatisation options were issued only for foreign
investors under the President Decree on State Privatisation Options, which also gave foreign investors
the right to buy privatised shares (currently about 18 millions options have been circulated).
11
The securities market in Azerbaijan is still in an early stage of the development. The Baku Stock
Exchange was established in 2000, before which the Baku Interbank Currency Exchange (BBVB) had
partially dealt with securities trading and services3. Currently there are no listed companies but 251
pre-listed companies4 are traded in the Baku Stock Exchange. The most actively traded instruments
are short-term government bonds (3-9 months in maturity). Dealing in corporate bonds started in
January 2004 (currently only in the primary market). The trading volume of equities and government
bonds has been gradually growing but the secondary market is quite inactive and volatile in
Azerbaijan.
The State Committee for Securities was established in 1998 as a single regulator for the securities
market in Azerbaijan, which has promoted the program of developing the equity market, licensing
professional market participants, with more than 70 normative acts on the securities market.
Azerbaijan has currently three depositories under the Presidential Decree on National Depository
System: 1) the National Depository Center (NDC)5; 2) the Baku Stock Exchange (holding a license for
depository); and 3) the Partner Investment Ltd. (private company). There is no difference in basic
functions among them but only NDC is allowed to register the newly privatised companies according
to the second program of privatisation. NDC holds 250,000 depot accounts of individuals and
companies, which volume of deals has been increasing.
As for the privatisation option, there was a skeptical opinion expressed by a participant of the meeting
about the function of this instrument, considering the situation to be difficult for foreign investors to
get adequate market information. Against this, it was explained that the privatisation options were
provided to facilitate the participation of foreign investors in the privatisation process. The lack of
information and investors confidence is still a big issue to be resolved in Azerbaijan.
2. Effective Measures to Develop Securities Markets and Infrastructure
Before starting this session, TICA discussed the current situation of SME finance in Central Asia,
stressing the importance of SME finance to vitalise their economies. TICA raised many problems to
be solved: e.g. lack of transparency, lack of enough money to establish the market infrastructure, lack
of entrepreneurship, taxation and banking sector reform, etc.
In this session, the role of institutional investors to activate the securities markets in the region and the
clearing and settlement systems to facilitate the smooth trading of securities were discussed.
Institutional Investors
Institutional investors have contributed to the growth of financial markets, the improvement of
liquidity and the development of market infrastructure. In the institutional savings area, pension funds
and collective investment schemes have the dominant status in many Anglo-Saxon countries while life
insurance companies tend to be dominant in the emerging Asian countries. Particularly, the assets of
collective investment schemes have been growing most rapidly in the OECD countries (average
annual growth rate during 1990-99: 20%) as compared to pension funds and insurance companies.
There are some important factors underlying the growth of institutional savings: 1) financial sector
competition, shifting from bank finance to capital market finance; 2) need for retirement savings,
questioning long-term viability of public pensions; and 3) strengthened legislative and regulatory
regimes (deregulation of the financial sector).
Some motivations can be seen behind the efforts to promote institutional investors: e.g. pension
systems are desired to shift from public pay-as-you-go systems into private funding schemes to secure
12
increased retirement income for an ageing population in some countries (a successful example is the
pension reform in Chile). The specific strategies of institutional investors may differ across types of
institutions and countries: e.g. risk-averse strategies, passive investment (indexing) strategies, etc.
Market liquidity, where price discovery mechanism functions, is most important for institutional
investors. However, a supportive securities market infrastructure is indispensable for them to operate
efficiently: i.e. legal framework, financial accounting system, regulatory and supervisory framework,
clearing and settlement systems, and microstructure for trading securities. Institutional investors can
function as owners (holders of equity) and monitors of firms, which have the potential to contribute to
building the effective corporate governance.
Four general factors to foster the securities market were raised: 1) build funded pension schemes (payas-you-go systems have serious limitations); 2) build a strong legal and institutional framework for
collective investment schemes; 3) develop robust regulatory structures for other institutional investors;
and 4) encourage the establishment of foreign institutions. Regarding this first factor, there was an
opinion expressed by a participant of the meeting that the pension fund scheme managed by the
government was still necessary for the Central Asian countries to foster development of their securities
market.
The financial channel of banks and capital markets was discussed, which differs across countries.
According to the statistics a participant presented, the equity market was dominant in the United States
while the banking sector was the major financial channel in many Asian countries (except for
Malaysia and Philippines) during 1997-2000. The financial channel between saver-lenders and
borrowers can be placed into two streams: 1) indirect finance via financial intermediaries (banks) and
2) direct finance via capital markets. In many Central Asian countries, there is almost no direct
finance stream, in particular because many of households have been keeping their savings under the
mattress (i.e. hoarded savings such as USD). Only the central bank, foreign financial institutions or
large-scale companies have provided savings to the market. Except for Kazakhstan, the domestic
currency does not work as a savings vehicle. It is circulated just as a means of exchange. It was
pointed out that it would be difficult for investors to expect effective monetary policy in the region at
this moment.
The financial markets in Central Asia are characterised by three basic barriers: 1) lack of financial
intermediation (little mobilisation of domestic savings via financial intermediation, only short-term
operating mechanisms for surplus money from banks and state-owned companies); 2) limited variety
of participants, which results in shallow financial markets; and 3) stagnancy of stock markets without
transparency. These are also barriers for foreign institutional investors to enter the markets. Foreign
institutional investors seem to be quite anxious to see positive outcomes from their investments in the
Central Asian region because of many uncertainties about future economic performance in the region:
e.g. only a few countries in the region are exposed to the international agreements such as IMF Article
8 status (Kazakhstan, Kyrgyz Republic and Uzbekistan) and WTO membership (Kyrgyz Republic and
Mongolia). It was pointed out that promoting regional economic co-operation in Central Asia would
be necessary to overcome these barriers.
Two types of institutional investors will be significant for the financial prospects in the Central Asian
region: 1) pension funds and 2) life insurance companies. Regarding the former, Kazakhstan has
successfully introduced private pension funds. For the latter, however, more time will be needed for
the public to understand insurance.
Representing the target countries, Kyrgyz Republic explained and discussed the current situation
surrounding institutional investors. Kyrgyz Republic has recognised that the privately funded pension
13
scheme, which brings long-term money to the market, is a driving-force to develop the secondary
market, looking back on the successful pension reforms in Chile. Currently there is only one private
pension fund in Kyrgyz Republic but its activity is quite opaque and not supervised: i.e. no
information and no laws and regulations on its activity. A bill on private pension funds was once
rejected and now has been reworked. In order to develop the privately funded pension scheme in
Kyrgyz Republic, some important measures were raised: 1) favourable tax treatment (tax exemptions
in the limited term); 2) penalties for the infringement of rules; 3) legislation on fund management and
on free transfer of personal accounts among different funds; and 4) disclosure of information for
investors.
In many Central Asian countries, the priority is in the development of domestic institutional investors,
which would ultimately result in active domestic investments in the country. To remove the barriers
causing a stagnant investment process, a participant from Kyrgyz Republic stressed the necessity of
some measures: 1) accelerate the development of compulsory forms of insurance with tighter
supervision and transparency; 2) conduct the two-step pension fund reform (first step: establish a
compulsory pay-as-you-go system; second step: establish a funded pension system, modelled on the
reform in Kazakhstan); 3) establish a system to secure sound cash flows into banks and capital markets
by legislative ways; 4) introduce a deposit insurance system to channel individually hoarded savings
(USD) into banks; 5) increase professional participants in the government bond market (encourage
easy access to the government bond market); and 6) provide domestic investors with highly reliable
financial instruments denominated in foreign currency with higher credit ratings than the sovereign
rating in order to restore investors confidence.
Clearing and Settlement System
An effective clearing and settlement system requires; 1) full automation and STP (straight-through
processing) with international standards; 2) delivery versus payment (DVP); 3) well founded, clear,
transparent legal basis; 4) well designed governance balancing the interests of the public, shareholders
and users; 5) well managed operational risks, contingency systems, stand-by disaster recovery
systems; 6) protection of customer assets; 7) securities lending and borrowing; 8) efficient crossborder settlement links; and 9) evaluation of the set up of a central counterparty.
Turkey has retained the top position in the Emerging Markets Settlement Index provided by GSCS
Benchmarks6 for consecutive seven years (98.5% in 2001), where Takasbank (Istanbul Stock
Exchange (ISE) Settlement and Custody Bank Inc.) plays an important role as; 1) a central securities
depository with customer based custody presented by the interactive voice response system Alo
Takas and the internet service TakasNet; 2) a clearing and settlement institution for ISE with a
central counterparty (without settlement guarantee) and RTGS (real time gross settlement); 3) an
institution dealing with money market for ISE members (the only example all over the world); 4) an
official custodian for pension and mutual funds; and 5) national numbering agency providing ISIN
(International Securities Identification Number) for securities issued in Turkey (ANNA7 member).
Takasbank provides a bridge between capital market and banking sector in Turkey. Its operation is
quite efficient with real-time connection to brokerage houses8, ISE, the Central Bank and the Capital
Markets Board. Dematerialisation is planned to start by mid-2004 and to be finalised by 2007
(preliminarily, the Central Registry Institution was established in September 2001). Takasbank is also
planning to be a Clearing House for the Futures and Options Exchange in Izmir.
14
Uzbekistan explained the progress of its corporate securities market and clearing and settlement
system implementing the recommendations of the Group of Thirty. Main points are as follows:
x
Dematerialisation: Most of the documents among stock exchange, clearing house, central
depository and custodians have been circulated in electronic form since August 2002. A new
law on electronic documentation turnover has been approved by the Parliament recently.
Harmonisation between messaging standards and communication protocols: Uzbekistan is in

an early stage of implementing ISO standards. Technical assistance will be needed.
Reference data standards: A new website (www.uzsecurities.com) regarding the securities

market in Uzbekistan was established by regulatory bodies in September 2003.
Synchronisation between different clearing and settlement systems and foreign exchange
systems: Major restrictions on national currency conversion were removed in 2003 but some
issues to be solved exist: e.g. regulatory framework of conversion operations for foreign
investors in the domestic securities market, regulations of cross-border securities transfers,
cross-border linkages with foreign depositories, etc.
Automation and standardisation of institutional trade matching/asset servicing processes and

wide use of central counterparty: Implementation of a central counterparty on the Central
Depository is necessary to develop the securities market in Uzbekistan.
Financial integrity, disclosure and risk management in the clearing and settlement services:
The Central Depositorys activity is in the permissive level of transparency paying attention
to the risk monitoring and control issues but market participants due diligence is
questionable.
DVP: DVP settlement has been working since the clearing house was established in 1998.
The clearing and settlement system is stable and currently no serious problems. However, it
will not be compatible with an active secondary market.
Effective business continuity and disaster recovery planning: The Central Depository
prepares the Remote Disaster Recovery Center (RDRC) in case of emergency but training
for evacuation is insufficient.
Assessment of enforceability of contracts: mutual efforts of all market professionals will be

indispensable to solve the problems of legal due diligence and risk management.
Legal certainty over the rights to securities or collateral: The Civil Code, the law on
depository activity on securities market and other regulations provide legal certainty over the
rights to securities but collateral ownership is not enough developed in the legislation.
Valuation and closeout netting arrangements: Implementation of the central counterparty

concept is necessary. There are no regulations on closeout netting and valuations.
Fair access to clearing and settlement networks: Currently, only professionals holding local
licenses and registration are accessible to the networks (websites and physical reports).
15
Stakeholder interests: Stakeholders can defend their interests by creating the Professional
Supervisory Board with power to decide important changes in their activities.
Consistent regulation and oversight of clearing and settlement service providers: Unifying all
legislative documents into one Code will be a possibility.
In Mongolia, according to the Law on Securities Market, the Securities Clearing Settlement and
Central Depository House (SCSCDH) was separated from the Mongolian Stock Exchange and given
an independent status in October 2003. SCSCDH has adopted DVP settlement for all securities
transactions (T+1 for shares and T+0 for bonds). 1.2 billion shares including un-traded state-owned
companies shares were stored there in 20039. SCSCDH has three-tier accounts in its central
depository system: 1) client account (citizen and companies); 2) segregated account; and 3) pledged
account. Currently, 450,000 clients have opened their accounts in SCSCDH, which information is
only available to broker/dealers.
The pros and cons of providing information regarding corporate actions and making the best use of
client account records stored in the Central Depository were discussed. Poland expressed the con
view because of 1) very time-consuming, complicated and costly procedures (the Central Depository
has no client account and cannot identify share owners) and 2) limited demands of such information
(issuers wanted such information but investors seemed not to need that). Turkey used to provide
corporate action announcements but stopped the service because the standardised information on the
website or annual report was considered to be enough for investors. By contrast, Uzbekistan
expressed a pro view but explained that it would take long time to unify all opening accounts in the
Central Depository.
3. Investors Confidence Building
Securing transparency in the market is indispensable for building investors confidence, which helps to
attract more investors to the market. In this context, the corporate governance in Eurasia including the
Central Asian region was surveyed, which can be characterised by five basic problems: 1) the long
period of central planning and recent statehood for most countries, consisting of weak legal
framework/enforcement, low shareholders awareness, no fiduciary culture of the board and weak
accounting practices; 2) mass privatisation program, which dispersed ownership structure but a large
portion of enterprises remain un-restructured, where the exploitation of minority shareholders is a
crucial problem; 3) significant state ownership, accompanied by excessive government intervention to
companies management, confusion of regulatory and ownership function, and corruption; 4) delayed
development of the capital market, which means no effective market for corporate control, limited
share trading, low liquidity, and weak market pressure to enhance corporate governance; and 5)
structural problem of banking sector, characterised by state influence over bank lending behaviour and
poor monitoring and credit assessment function.
To improve the corporate governance in the Central Asian region, six reforms should be implemented
as follows:
16
Raise awareness of the value of good corporate governance among shareholders, companies
and other stakeholders, through training of shareholders and technical assistance, for
example.
Strengthen the legal framework for minority shareholder protection and ensure its
enforcement.
Improve the role of government as shareholders, refraining from excessive intervention in

day-to-day operations of businesses.
Converge with international standards and practices for accounting, audit and non-financial
disclosure to enhance transparency.
Improve the function of boards of directors, promoting the director-accountability

mechanism.
Facilitate financial sector development (banking sector and capital market), which means
that robust financial markets will contribute to enhancing corporate governance by market
force in the long run.
Building a reliable market system for investors is indispensable to develop the securities market,
which is a critical matter not yet to be achieved in many Central Asian countries. In Kyrgyz Republic,
information disclosed by market participants is quite limited and their infringements of laws and
regulations are frequent. As a result, the State Commission on the Securities Market (SCSM) revoked
12 licenses and suspended 10 licenses of market participants in 2002-03. To improve this situation,
SCSM is currently working on a draft bill for protecting investors rights and interests in the securities
market, which includes the requirements (standards) of information disclosure. Also, lack of market
specialists is a crucial issue in Kyrgyz Republic. It will be significant for the government to provide
educational (training) programs for market participants. In addition, it was mentioned that the
integration of securities markets in the Central Asian region would be an important step to vitalise
their markets.
Corporate Government Sector Assessment Project (CGSAP) is an important initiative in the EBRD,
which is an objective assessment of countries existing laws and regulations related to corporate
governance by means of the checklist based on the OECD principles. Under the checklist, countries
are rated into five categories: 1) very high, 2) high, 3) medium, 4) low and 5) very low compliance.
According to this rating system, Kazakhstan was categorised into high compliance, Kyrgyz Republic
and Uzbekistan into medium compliance, Turkmenistan into low compliance, and Azerbaijan and
Tajikistan into very low compliance in 2003. From the results, except for Kazakhstan, there exist
some common problems in the region: e.g. outdated laws, inadequate disclosure requirements, poor
financial reporting standards, insider trading/conflict of interest deals, etc. Key elements to improve
corporate governance practice will be; 1) establishing sound regulatory framework; 2) fostering
culture change through training and raising awareness; and 3) ensuring accountability through proper
institutional design and rigorous enforcement.
There was a question raised as to why Azerbaijan was still in very low compliance with corporate
governance. In response to this, Azerbaijan explained its recent progress: i.e. 1) enforcing a new Civil
Code in December 200310; 2) adopting new normative acts on the securities market in 2004; and 3)
preparing more than 20 legislative bills in order to harmonise with the European standards of
corporate governance. This is considered a positive sign for Azerbaijan to move onto the upper
compliance category in the EBRD assessment.
4. Regulation of Securities Markets
The regulatory structures for securities markets in the region can be placed into two types in terms of
the number of regulators: single regulator and plural regulators. In the Central Asian region, some
countries have a single regulator for the securities market and others have plural regulators.
Azerbaijan, Mongolia and Tajikistan have the single regulatory structure for the securities market,
though they are in an infant framework of regulation. In Azerbaijan, the State Committee for
17
Securities is responsible for regulating and supervising the securities market as a single regulator. In
Mongolia, the Securities and Exchange Commission (MSEC) takes the same role. In Tajikistan, the
newly established Securities and Foreign Investment Office under the Ministry of Finance is expected
to function as a single regulator for the securities market.
By contrast, Kazakhstan, Uzbekistan and Kyrgyz Republic have plural regulatory structures for the
securities market. In Kazakhstan, the newly established Agency on Regulation and Supervision of
Financial Market and Financial Organisations regulates and supervises the whole financial sector
including activities of the securities market as a consolidated supervisor but the Ministry of Finance
and the NBK still hold the status of regulators in the field of government securities. In Uzbekistan, the
Center regulates and supervises the securities market while the Securities and Financial Markets
Department of the Ministry of Finance manages and controls laws and regulations related to the
securities market. In the government securities market, both the Ministry of Finance and the Central
Bank take a role of regulator and supervisor. In Kyrgyz Republic, similarly, SCSM regulates and
supervises the securities market while the Ministry of Finance and the National Bank take responsible
for regulating the government securities market.
Each stock exchange in the region, except for Azerbaijan, works as an autonomous organisation
setting its own rules for the securities market. In Kazakhstan and Uzbekistan, some associations that
consist of market participants such as fund management companies and registrars have their own rules
as independent SROs11.
IOSCO, as an international standard setter, is expected to help the emerging market economies attract
foreign investors to the region by encouraging the convergence and standardisation in regulations.
From the Central Asian region, four countries (Kazakhstan, Kyrgyz Republic, Uzbekistan and
Mongolia) currently hold IOSCO membership status. IOSCO has several standards and principles on
specific issues of securities regulations (e.g. 30 Principles of Securities Regulations) and has currently
promoted the Multilateral Memorandum of Understanding (MoU) for sharing the information
regarding banks, brokerage and client identification records among signatories. So far 24 IOSCO
members have signed this MoU.
In Uzbekistan, the legal framework for the securities market has already been established, though
some laws still need to be improved according to the IOSCO Principles (e.g. the Law on joint-stock
companies and protection of shareholders rights). In 2003, the Center newly adopted five regulations
regarding 1) information disclosure of joint-stock companies, 2) securities issued by commercial
banks, 3) licensing professional activities, 4) the OTC market and 5) activities of investment
companies. The last provision includes the minimum capital requirement for investment companies.
The government resolution about measures to develop the secondary market, approved in 2003, is a
key decision to vitalise the Uzbek securities market, which obligates investors to trade securities only
via the stock exchange and the recognised OTC market (ELSIS-SAVDO). As a result, unrecognised
off-exchange trading has been sharply reduced.
The Uzbek legislation allows foreign investors to trade securities as domestic investors do, but they
are required to carry out the transactions by hard currency and to fulfil obligations to modernise the
companies they purchase. According to the agreement with the World Bank, Uzbekistan is currently
working on the creation of two integrated systems for developing the market infrastructure: 1)
electronic information system regarding market participants and 2) electronic monitoring and control
system over the market activities.
Following the Uzbek legislation, the Center has frequently conducted on-site inspections but still
plenty of infringements of laws and regulations have been confirmed. In 2003, the Center revoked 2
18
licenses, fined 3 firms (total over 2 million SUM) and warned 9 firms to eliminate the infringements.
The total damage to investors benefits is estimated to be more than 576.8 million SUM.
According to the presentation made by a Polish participant, Poland has successfully implemented
financial sector reforms and improved its capital market through the effective regulations since 1991.
The Polish market was created by administrative means and has been quite well-operated. There are
three core government policies in this backdrop: 1) promoting dematerialisation or electronic trading;
2) creating high disclosure standards for investors; and 3) trading securities only through the regulated
market. The evolution of the Polish capital market can be divided into four stages: 1) dormant market
from the end of 1990 to the beginning of 1992; 2) manipulated market in 1992; 3) speculative market
from 1993 to the beginning of 1996; and 4) mature market from 1996 to the present. In the first stage,
investors were not interested in the capital market at all12, but in the second stage, they actively
participated in the market, influenced the prices and determined the short-term trend on the market, by
which, however, liquidity still remained low. In the third stage, the market was dominated by
speculation. The Warsaw Stock Exchange (WSE) recorded an unbelievable rise of stock price (WIG
(price index)=20,00013) in the beginning of 1994. At that time, trading orders placed on the WSE
were higher than on Wall Street. Currently, the Polish market is in the mature stage with high
turnover, transparency and a stable political structure. From its experience, Poland stressed that key
factors to successful development of capital market would be to create regulations first and then
market (proactive regulations); i.e. the regulated market would always win in the long-term as
compared to the market where regulations were not imposed.
5. Supervision of Securities Markets
Firstly, possible models of the institutional arrangements for supervision of the financial sector were
discussed, focusing on single versus multiple supervisors for financial sectors.
In the typical multiple supervisory schemes, financial supervisors separately supervise their respective
financial sectors, targeting specialised service providers, where the supervisory frameworks of
banking, insurance, pension funds and securities market respectively exist. Their supervisory
approaches are different: 1) bank supervision limits the risk of bank insolvency with a view toward
ensuring the stability of the system, focusing on the asset side of the balance sheet to ensure a proper
valuation of those assets based on consolidated reports of income and condition; 2) insurance
supervision tests the soundness of individual insurers to ensure the protection of policyholders,
focusing on the liability side of insurers balance sheets; and 3) securities supervision focuses on the
protection of investors, via disclosure, rules relating to capital and internal controls, Chinese walls
and conduct of business and trading considerations.
The financial sectors before the 1980s were characterised by 1) segmentation by product determined
by national rules (e.g. separate supervision between banking and capital market in Japan); 2)
geographic limits on operations (e.g. limitations by States in the U.S.); 3) strict regulation of activities
(interest rate controls, credit allocation guidelines, limits on product innovation, etc.); 4) limits on
foreign participation and discriminatory treatment of foreign institutions; and 5) controls of capital
movements. However, the 1980s and the 1990s were the times of 1) disintermediation (from banks to
capital markets); 2) liberalisation of exchange controls with deregulation; 3) globalised trading and
portfolio investment; 4) financial innovation (e.g. derivatives, off-balance sheet activities and
securitization (MBS/ABS)); 5) growth of offshore financial markets (Euromarkets); and 6) the
single European financial market (in 1992).
The current financial sector is characterized by market-driven convergence among financial systems,
which results in 1) removing the separation between banking and capital market; 2) encouraging the
19
institutionalisation of savings (e.g. pension funds and collective investment schemes); 3) competition
among trading systems; 4) convergence among similar products (e.g. term loans vs. bonds / collective
investment schemes vs. defined contribution pension schemes) and 5) increasing larger and more
complex institutions. The recent deregulated environment has caused the new supervisory paradigm, a
new way of market based financial supervision, where the objectives of regulation focus on
minimizing systemic instability, securing fair and transparent markets (consumer protection) and
avoiding government bailouts. In this context, supervision is more decentralised, increasing the
responsibility for risk management by each financial institution, with the reliance on market discipline
and flexibility to changes in both the business practices of regulated entities and the structures of the
financial systems.
The supervisory approach of financial groups is two-fold: 1) solo or solo plus approach (multiple
supervision), which focuses on individual entities and is designed to protect customers and creditors of
a regulated entity from monetary losses and delays; and 2) consolidated approach (single
supervision), which focuses on the top tier of the financial groups and covers all members that provide
financial services (e.g. the U.K. is a pioneer of unified supervision). It was mentioned that which
approach is best should be considered in terms of the efficiency of a supervisory regime (cost
effectiveness, transparency and accountability) and the regional or country-specific characteristics.
According to the statistics regarding the institutional profile of financial supervision in a sample of
123 countries, single agency (single supervision) accounted for 18% (4% of which were central banks)
of the total supervisory institutions while separate agencies (multiple supervision) dominated 82%
(48% of which were agencies for banking) of the total in 1999. Many emerging economies still have
multiple supervisory schemes. Taking account of the fact that supervision requires sector specific
skills, it was pointed out that the emerging markets should learn respective supervisory techniques first
and then consider how to combine different institutional frameworks of supervision.
Kazakhstan has successfully moved to a single (unified) supervision, which started to develop in 2001
when the National Securities Commission was unified to NBK. In 2004, the Agency on Regulation
and Supervision of Financial Market and Financial Organisations (the Agency) was established, by
means of separating the Financial Supervision Department from NBK, in order to create an
independent and effective system of consolidated supervision of financial markets. The Agency is
expected to increase the protection of investors rights and interests and to recover the trust in the
national financial system14. The main tasks of the Agency are to regulate and supervise the whole
financial sectors covering the securities market, banking activities, accumulated pension funds and
insurance operations.
In Kazakhstan, the major legislative reform on the securities market was conducted in mid-2003,
namely 1) the Law on Securities Market, which unified the large number of subordinate normative
acts; 2) the Law on Joint-Stock Companies, which specified the minimum standard of authorised
capital of joint-stock company (no less than KZT45.95 million or USD328,000); and 3) the Law on
State Regulation and Supervision of Financial Market and Financial Organisations, which created the
Agency. The draft bill on investment funds is currently being assessed by the Parliament. For
effective supervision, the Agency makes the best of the information obtained through licensing and the
reports regularly and additionally submitted by the market participants. On-site inspections are also
periodically conducted according to the approved quarterly plans15.
Kazakhstan is currently working on the financial sector reform to be completed by 2006, which aims
at further introducing the international standards of financial market regulations: e.g. 1) the Basel
principles for banking supervision; 2) the IAIS standards for insurance supervision; and 3) the IOSCO
principles for securities market supervision.
20
From the OECD members, the Hungarian case was introduced as a good example of the consolidated
approach to financial supervision. The financial market in Hungary is quite open to both domestic
and foreign investors, where the financial groups and products are cross-sectoral. Single supervisor
has well contributed to maintaining this market condition. The Hungarian Financial Supervisory
Authority (HFSA) was established in April 2000 as a single supervisory authority of the financial
markets, which unified three financial institutions: 1) insurance supervision; 2) banking and capital
market supervision and 3) pension fund supervision. Financial supervision before the establishment of
HFSA was fragmented and ineffective due to 1) the divergent level of operational independence of
each financial institution, 2) different approaches to off-site and on-site inspections and 3) poor and
slow supervisory cooperation among financial institutions. The consolidated supervision of HFSA has
made out the synergy effects by means of integrating all available market information into one
supervisory authority (electronic transaction reporting system) and grouping all supervisory
knowledge at one place. The missions of HFSA are to 1) facilitate smooth market operation while
protecting consumers, 2) maintain investors confidence in the financial market, 3) secure
transparency in the market and 4) reduce financial crimes. It was stressed that the cooperation with all
financial institutions would be more important because the unified supervisory authority could not be
perfect.
Conclusion
After a participant from Russia explained its market condition (much restricted and small market with
no central depository), the 2-day discussions of the conference were summarised and commented on
by the chairman. Main remarks were as follows:
x
Fostering institutional investors such as pension funds and insurance companies is important
for the Central Asian region to vitalise their markets.
Their clearing and settlement systems (C&S) are still posing problems. They need to
increase energy to develop a system tailored to their market infrastructures, including a
central depository, cross-border C&S facilities and a central counterparty arrangement.
The Central Asian region has a long way to go to adopt modern corporate governance
principles. For young markets, this is essential for making the market understood, especially
by foreign investors. Proper insolvency arrangements are equally of importance.
Regulating markets in line with international standards facilitates the understanding of

markets and initiating investment activities.
The worst regulation is regulation that is incident driven. Crises are unavoidable in dynamic
markets, but should be analysed as to the underlying drivers and not cause the regulation
machinery to produce irrational corrective measures.
The conference was successfully concluded and very much appreciated by all participants
from viewpoints of frank and open discussions covering the wide range of issues of securities markets
in the region. Mr. Oyens skilfully incited all participants to take an active part in the program
contributing to its success. After the conference, almost all target countries strongly requested us to
launch the annual OECD meeting focusing on the securities market development in the Central Asian
region as a series. The Secretariat is positively considering this offer and planning to organise the
annual roundtable on securities market development in the region.
21
NOTES
Kazakhstan, Uzbekistan, Kyrgyz Republic, Tajikistan and Turkmenistan
The trading volume of equities in 2003 decreased in USD due to the exchange rate.
BBVBs license for activities in the securities market expired in September 1998.
Pre-listed companies do not fully satisfy the listing requirements in the Baku Stock Exchange but their
shares are allowed to be traded.
National Depository Center was established in 1997 as a closed joint stock company, all of which
shares the State Committee for Securities holds.
GSCS Benchmarks is an institution measuring operational performance of the international securities

industry.
ANNA: Association of National Numbering Agencies
The Takasbank Electronic Transfer System (TETS) enables brokerage houses to transfer securities in
and out of the Takasbank system in real-time connection with the Central Banks EFT system.
In Mongolia, the volume of equity trading was 8.1 million shares in 2003.
10
The Law on Joint-Stock Companies and the Law on Securities were replaced with the Civil Code on
23 December 2003.
11
Kazakhstan: Kazakhstan Association of Registry Holders, Association of Assets Managers, etc. Uzbekistan:
National Association of Investment Institutes (founded in 2000)
12
In the dormant stage, the market had no stock index, only 5 listed companies in the beginning, 1 transaction per
week and quite low liquidity.
13
The base date for the WIG Index is 16 April 1991. The index base value is 1000 points.
14
To create the Agency, the Law on State Regulation and Supervision of Financial Market and Financial
Organisations was adopted in July 2003 and came into force in January 2004.
15
The duration of an inspection does not exceed 30 days.
22
Annex
Sixth OECD Conference on Financial Sector Development in the Central Asian Countries,
Azerbaijan and Mongolia
29-30 April 2004, Istanbul
Agenda
Day 1: Thursday 29th April
09:30-10:00
Introductory Session: Opening Remarks
Welcome and introductory remarks by Mr. Gerrit H. De Marez Oyens, Former Secretary General,
International Federation of Stock Exchanges (F.I.B.V.) / World Federation of Exchanges
Session 1: Overview of Securities Markets in the Region
After the collapse of the communist regime, the Central Asian countries as well as Azerbaijan and
Mongolia have been rapidly heading towards a market economy. They have made considerable efforts
to establish the appropriate market infrastructure in co-operation with IFIs, such as the IMF, and have
vigorously continued with financial sector reform. They all have established securities markets, but as
compared to the progress in the banking sector, the development of securities markets seems to have
lagged behind. The securities markets in the region are typically small in scale and are still
underdeveloped in terms of liquidity and the functioning of the secondary market. In this session,
selected target countries are expected to review the current situation of their securities markets and their
reform efforts to date. Also to be discussed are the progress of their privatisation schemes and the
challenges to date, as securities markets have been created as part of the privatisation process in the
region1.
What is the current situation of securities markets in the region? What are the notable efforts
of reforms to date?
What progress has been made with privatisation schemes in the region? What are the
challenges to date? How effectively should privatisation schemes be used to vitalise the
market?
10:00-11:00
11:20-12:00
Presentations:
Mr. Shigehiro Shinozaki, OECD Secretariat
Mr. Sunat Bekenov, Senior Economist, Securities and Financial Markets Department,
Ministry of Finance, Uzbekistan
Mr. Gunduz Mammadov, First Deputy Chairman, State Committee for Securities, Azerbaijan
General discussion
Session 2: Effective Measures to Develop Securities Markets and Infrastructure
Securities markets have the pivotal role of securing sustainable economic growth in a country. Market
structures in the advanced economies are diverse (e.g., demutualization of stock exchanges and cross1 Kazakhstan has initiated Blue Chip Program since 1997, under which the government sells out its shares of promising
companies (oil and gas industries) to the market, and Uzbekistan has privatised state assets through Privatisation
Investment Funds (PIFs) since 1996. PIFs are invested in corporate shares and then sold at the market through the
management companies.
23
border alliances) and have accelerated to integrate the international market. Against this background,
institutional investors bring ample funds to the markets and appropriate clearing and settlement systems
bring the safety and efficiency of securities trading to investors, which in turn encourages the
development of securities markets. This session will focus on institutional investors (Part A) and the
clearing and settlement system (Part B), considering what should be done to establish a sound market
place. How can strategies to develop the securities market be formulated within the banking sector,
corporate bond market and equity market to achieve the optimal development of the financial sector as
a whole and ensuring its stability, will be discussed.
Part A: Institutional Investors
Institutional investors such as pension funds are key players in the securities markets of most developed
economies. The large size of their asset holdings has given them tremendous financial clout. In turn,
their trading and investment activities contribute to the growth and development of securities markets.
Attracting institutional investors will result in further activating the market. Some Central Asian
countries are currently tackling pension fund reform which should help support the further development
of their capital markets in order to vitalise the market. In Part A, the role of foreign investors in the
market will be discussed. In addition, how to establish an effective domestic institutional investor base
will be addressed.
What is the role of foreign investors in the market?
What is the best way to establish an effective domestic institutional investors base?
14:00-15:20
Presentations:
Mr. Stephen Lumpkin, OECD Secretariat
Mr. Kubatbek Alymbekov, Chief of the Chui Regional Division, State Commission on the
Securities Market, Kyrgyz Republic
Mr. Toshiharu Kitamura, Professor, Waseda University, Japan
General discussion
Part B: Clearing and Settlement System
As part of the technological infrastructure needed for smooth securities trading, the introduction of
appropriate clearing and settlement systems is indispensable. Some Central Asian countries have
successfully made use of the central depository system to secure efficient and safe transactions. In Part
B, the clearing and settlement systems in target countries will be reviewed. As well, the prerequisites of
a fully developed system and how it could be achieved will be discussed.
What is the current situation of clearing and settlement systems in the region?
What is the most promising clearing and settlement system from the investors point of view?
How could it be achieved in practice?
15:40-17:00 Presentations:
Mr. Emin Catana, General Manager, The ISE Settlement and Custody Bank, Turkey
Mr. Timur Yadgarov, Senior Lecturer, Tashkent Institute of Finance, Uzbekistan
Ms. Bolormaa Jalbaa, Officer, Mongolian Stock Exchange
General discussion
2 The Hungarian Financial Supervisory Authority is a single market regulator in Hungary.

3 The National Bank of Kazakhstan (NBK) took over the function of the National Securities Commission in 2001. However,
the Financial Supervision Department was separated from NBK as the Agency on Regulation and Supervision of Financial
Market and Financial Organisations in 2004 in order to regulate and supervise overall financial sector including the
securities market.
24
Day 2: Friday 30th April,

Session 3: Investors Confidence Building
Securing transparency in the market is indispensable for building investors confidence, and thereby
attracting more investors to the market. In this context, good corporate governance is important for a
healthy and active market. In the Central Asian countries, one of the obstacles to progress for the
growth and development of the securities markets is the lack of transparency in the market. Due to
weak corporate governance, investors confidence in the market seems to be low. In this session,
selected target countries are expected to give a review of their efforts in this regard. The OECD
principles of corporate governance and relevant recent developments will also be discussed.
What should be done to effectively build investors confidence in the region?
Are there serious obstacles to implementing strong corporate governance principles in the
region?
09:30-10:50
Presentations:
Mr. Masaaki Kaizuka, OECD Secretariat
Mr. Jury Svistov, Deputy Chairman, State Commission on the Securities Market, Kyrgyz
Republic
Mr. Hsianmin Chen, EBRD
General discussion (20 minutes)
Session 4: Regulation of Securities Markets
The development of a well-functioning securities market cannot be achieved without an appropriate

supporting infrastructure, such as a proper legal and regulatory framework and technological
infrastructure. This session will discuss legal and regulatory frameworks in OECD and target countries,
as well as the applicability of international standards of regulations to the region. For example, IOSCO
has provided 30 principles of securities regulations, e.g., protecting investors, ensuring
fair/efficient/transparent markets, and reducing systemic risks. Some Central Asian countries are
members of IOSCO. Although one standard does not fit all cases, we will hear from a selected target
country who will give their assessment of the regulatory scheme and its progress according to the
international standards. Furthermore, some transition economies have successfully implemented
financial sector reforms and improved their securities markets through effective regulation. The
experience from a selected transition economy (Poland) will be shared.
What are the latest developments regarding market regulations in the region?
Are regulations suitable to coexist with the development of the market? What are the lessons
from advanced market economies?
To what extent are international standards of regulations effectively applicable to target
countries, taking into account their market conditions?
Mr. Dogan Cansizlar, Chairman, IOSCO Emerging Markets Committee
Mr. Bakhodir Atakhanov, Leading Specialist, The Centre for Coordination and Control of
Securities Market, Uzbekistan
Mr. Miroslaw Kachniewski, Secretary, Polish Securities and Exchange Commission
General discussion
Session 5: Supervision of Securities Markets
In order to secure a well-functioning market, it is indispensable to enforce regulations effectively. This
session will discuss supervisory structures and techniques in OECD and target countries, including the
25
enforceability of regulations. In particular, integrated regulators are becoming widespread in advanced

market economies. Among transition economies, Hungary has an integrated market regulator and can
serve as a good example of the consolidated approach to financial supervision2. In Central Asian
countries, a relatively large country such as Kazakhstan has adopted consolidated supervision3 while a
smaller country such as Kyrgyz Republic still maintains separate supervision. In this session, the
structure of vertical delegation of powers among regulators, stock exchanges and the self-regulatory
organisations will be also discussed.
How can supervisory structures and techniques be made effective to secure the enforcement of
regulations?
How promising is the structure of vertical delegation of powers among regulators, stock
exchanges and the self-regulatory organisations?
Mr. John Thompson, OECD Secretariat
Ms. Gulmira Kapenova, Chief Specialist, Agency on Regulation and Supervision of Financial
Market and Financial Organisations, Kazakhstan
Mr. Daniel Mrz, Special Advisor for Capital Markets, Hungarian Financial Supervisory
Authority
General discussion
16:10-17:00
Concluding Session: Future Works

Summary of the discussion by the Chairman
Closing Remarks
26
Chapter 2
POTENTIAL FOR SECURITIES MARKETS IN THE CENTRAL ASIAN COUNTRIES,
AZERBAIJAN AND MONGOLIA
by
Shigehiro Shinozaki
Introduction
The Central Asian countries, Azerbaijan and Mongolia have gradually developed their securities
markets with their banking sector reforms after the collapse of the communist regime. Although the
market infrastructure in the region has been moderately developed with the support of international
organisations, however, their securities markets are typically small in scale and still have the
weaknesses. The objective of this paper is to review current conditions of securities markets in the
region and to assess their market potential compared to one another and to the advanced countries.
This paper is based on the Market Survey conducted in 2004, where six countries were targeted;
Azerbaijan, Kazakhstan, the Kyrgyz Republic, Mongolia, Tajikistan and Uzbekistan. Because of the
lack of comprehensive financial data, Turkmenistan is little covered in this study. Currently, there is
substantially no securities market in Turkmenistan, although a law related to the securities market was
adopted in 1993. Only the Commodity and Raw Materials Exchange exists in Turkmenistan.
In this paper, four basic fields were examined to assess the market potential in the region: 1)
macroeconomic performance; 2) market structure; 3) market performance; and 4) regulatory and
supervisory structure for the securities market.
1. Macroeconomic Performance
Since the dissolution of the Soviet Union in December 1991, most of Central Asian countries have
moved from planned economies that basically supplied raw materials to market based economies at
different speeds. Although gross domestic products (GDP) in the region are quite small in scale as
compared to the advanced countries, their real GDP growth (3-10% in 2004) has exceeded both the
estimated EU average (2.3% in 2004) and the OECD average (3.4% in 2004) as shown in Figure 1.
Particularly rapid growth is seen in Azerbaijan and Kazakhstan (10% and 9% in 2004 respectively).
In Kazakhstan, it seemed to be backed by active exports and booming oil revenues.
Almost all study countries faced severely negative economic shocks immediately after their
independence. The first half of the 1990s was a time of deep recession for them, which was caused by
abruptly cutting off the resource flows within a single economic unit. Then, the macroeconomic
performance in the region gradually improved in the second half of the 1990s but the Russian crisis in
1998 had a negative economic impact. Subsequently, the events of September 11th brought some
inflows of economic aid into some of them due to their geographical importance. Currently, all study
countries have been growing at different speeds.

Administrator, Directorate for Financial and Enterprise Affairs, OECD
27
Figure 1: Real GDP Growth Rate
30
%
EU
20
OECD
10
Azerbaijan
0
1991
-10
Kazakhstan
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
-20
Kyrgyz Rep.
Mongolia
Tajikistan
Turkmenistan
-30
Uzbekistan
-40
(Source) EBRD Transition Report 2004, OECD Economic Outlook VOL.2004/1 No.75, Economist Intelligence Unit (Mongolia: country reports 1996-2005)
In addition to the moderate economic growth in study countries, consumer price inflation also has
been gradually decreasing in the region as compared to the hyper-inflation during the first half of the
1990s as shown in Figure 2 (5-12% in 2004). However, inflation rates in the region still remain high
as compared to the advanced countries (EU: 2% in 2004). Furthermore, there is the fact that huge
income gaps and high poverty rates still exist in the region. This disparity may have a negative impact
on the development of securities markets in respective countries. It will be more important to mobilise
individual money effectively through the securities markets.
Figure 2: Inflation Rate
%
10000
EU
Azerbaijan
1000
Kazakhstan
Kyrgyz Rep.
100
Mongolia
Tajikistan
10
Turkmenistan
Uzbekistan
1
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004 Year
(Source) EBRD Transition Report 2004, Economist Intelligence Unit (Mongolia: country reports 1996-2005)
2. Market Structure
From the data collected through the Market Survey, three basic characteristics of the securities markets
in the region were identified, though there were some differences country by country.
First, study countries have had relatively well-organised market infrastructures from the beginning by
accepting the support of international financial institutions such as the World Bank and the IMF.
More concretely, except for Tajikistan, they have relatively sophisticated electronic trading systems;
28
i.e., computer assisted order routing and execution systems, which enable investors to place buy- or
sell-orders electronically. In Kazakhstan, more than 90% of the total trades have been conducted
through the Electronic Trading System of KASE. In the Kyrgyz Republic, the electronic trading
system BTS handles all transactions from trading to clearing and settlement, separated from the
Kyrgyz Stock Exchange. This system started in 2000 but currently there is no listing procedures in the
BTS. In Azerbaijan, the Russian company INIST built the electronic trading system inside of the
Baku Stock Exchange. There are 30 electronic trading booths for brokers. In Mongolia, all trades are
conducted via the MSE Pure-Order Driven System, which started in 1995. Only in Uzbekistan, an
electronic OTC trading system for small investors exists, which is called ELSIS-SAVDO and started
in 2000. Also, most of the countries have adopted a central depository system except for Tajikistan,
but in Tajikistan, a law on central depository exists.
Second, market participants are still restricted in study countries. To begin with, the securities markets
in the region have been developed as part of the privatisation process. In many cases, the markets
have been used as means of reducing the national budget deficit. Also governments tend to focus on
developing domestic investors rather than attracting foreign investors, as a priority. Therefore, there
are almost no foreign investors in their securities markets at this moment.
The structure of the intermediaries of securities markets varies country by country. In Azerbaijan,
banks have mainly participated in the securities market as brokers and dealers. By contrast,
particularly in Uzbekistan, many securities firms and fund management companies have actively
participated in the market as intermediaries.
The companies listed on the stock exchanges are still quite small in scale, which number is less than
70 companies on average except for Mongolia as indicated in Figure 3. The Mongolian Stock
Exchange currently has 402 listed companies but even this number is less than one fifth of the New
York Stock Exchange (2308 in 2003), the Tokyo Stock Exchange (2206) and the London Stock
Exchange (2692). The listed companies in the region were basically transformed from state-owned
companies to joint stock companies in the process of privatisation.
Figure 3: Number of Listed Companies at the end-of-year
Number
1000
430
418
410
400
403
402
Kazakhs tan (KAS E )

Kyrgyz R ep. (KS E )
100
50
18
10
62
17
10
5
2
68
23
15
5
50
33
24
20
25
22
69
30
Mongolia (MS E )
18
T ajikis tan (CS E )
6
Uzbekis tan (T S E )
1
1998
1999
2000
2001
2002
2003
Year
(Source) OECD Market Survey 2004
Lastly, securities markets in the region still have a narrow range of products and still heavily depend
on short-term securities products. Short-term government bonds, basically 3 to 9 months in maturity,
are flagship products in the region. In Mongolia, very short-term T-bonds with a maturity of 14 days
are actively circulated. Particularly in Kazakhstan, the repurchase agreement or REPO market has
been rapidly developed. Equities and corporate bonds are still minor products in study countries. In
29
Tajikistan, there is no corporate bond market at present. The derivative market exists in Azerbaijan
and Kazakhstan but this market is very restricted, where the only available product is futures and the
transaction volume is quite limited.
Table 1: Major Products

Equity
- Common stock
- Preferred stock
Corporate Bond
- Short-term bond
(3-, 6-month)
- Long-term bond
(up to 5 years)
Government Bond
- Short-term T-bill
(3-, 6-, 9-month)
Derivatives
- Futures (only in
2001)
- Common stock
(A-, B-listing,
OTC)
- Preferred stock
- State Block of
Shares
(SBS)
- Corporate bond
- IFO bond
- Undelivered 6
month futures on
the rate
USD/KZT and
EURO/USD
- Common stock
- Preferred stock
- Short-term bond
- Long-term bond
(1 to 3 years)
- Common stock
- Short-term bond
(6-month, 1 year)
- Municipal bond
- T-bond (MAOKO)
- Short-term T-bill
(MEKKAM)
- Mid-term T-bill
(MEOKAM)
- Long-term T-bill
(MEAKAM)
- Indexed T-bill
(MEIKAM)
-Eurobond
- Short-term T-bill
(3-, 6-, 9-month)
- Long-term T-bill
(5 to 15 years)
- Short-term T-bond
(14 days)
- Mid-term T-bill
(3 years)
- T-bill (up to 1
year)
- Financial Ministry
bond (2 issues; 20year)
- National Bank
bond
(short-term)
n/a,
- State short-term
bond
(6-, 9-, 12-month)
- State mid-term
bond
(1.5 year & 5-year)
Azerbaijan
Kazakhstan
Kyrgyz Republic
Mongolia
Tajikistan
Turkmenistan
Uzbekistan a
- Shares in stateowned and private

companies
- Registered and
bearer common and
preferred stock
n/a,
n/a,
- Common and
preferred stock,
traded freely both
for UZC and USD
n/a,
- Corporate bond,
traded freely.
(3-, 6-, 9-month &
1.5 year)
Others
- REPO on T-bill
- Promissory Note
- Privatisation
checks
- Privatisation
options
- REPO
- Promissory Note
- Foreign Exchange
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,

(Note) a State short-term bonds are traded on the Currency Exchange from 1996. State mid-term bonds are to be issued from April 2004.
The following Figures 4 to 9 illustrate the trading, clearing and settlement schemes of securities
markets in study countries, where three features are identified: 1) electronic trading is a major
instrument of securities trading; 2) central depository system that contributes to an effective DVP
(delivery versus payment) is a standard in their market infrastructures; and 3) domestic institutional
investors such as pension funds and insurance companies account for a large portion of investors,
which is the same trend as in the advanced countries.
30
Figure 4: Trading, Clearing and Settlement Scheme in Azerbaijan

Investors
Intermediaries
Trading System
Domestic
Investors
Brokers/
Dealers
BSE
- Insurance
companies: 20.0%
- Banks: 73.0%
(2003)
- Banks: 20
- Others: 4
(securities firms)
(2003)
- Established in 2000
- "Pre-listed" companies
securities are traded.
- Equities/Bonds
(Corporate bonds started
from 1 Jan. 2004)
- Derivatives (futures)
Clearing & Settlement System

Clearinghouse
National Depository Center

(NDC)
- Depository & registrar licence
BSE
Partner Investment Co. Ltd.

Electronic Trading
System INIST
- 30 booths for brokers
Foreign
Investors
- 0.1% of the total
Corp. securities: T+N

Govt. securities: T+N
Figure 5: Trading, Clearing and Settlement Scheme in Kazakhstan

Investors
Intermediaries
Trading System
Domestic
Investors
Brokers/
Dealers
KASE
- Pension Funds:
20.5%
- Banks: 13.7%
(2003)
- Banks: 29
- Others: 27
(securities firms)
(2003)
Electronic Trading
System of KASE
- Equities/Bonds
- Derivatives
- Over 90% of trades

Central Securities
Depository
(CSD)
Custodians: 10
Corp. securities: T+0/T+N (<3 days)

Govt. securities: T+0
Floor trading
- Less than 10%
Foreign
Investors
(Future plan)
Internet Trading
Foreign exchange
Kazakhstan Interbank
Settlement Center
(KISC)
Settlement
in KZT
Figure 6: Trading, Clearing and Settlement Scheme in Kyrgyz Republic

Investors
Intermediaries
Trading System
Domestic
Investors
Brokers/
Dealers
KSE
- Equities/Corporate bonds
- Only floor trading
Central Depository CJ
- 21 Banks
- 10 Insurance
companies
- 1 Pension Fund
- 5 PIFs
(2003)
(No Foreign
Investors)
- Banks: 7
- Others: 26
(securities firms)
(2003)
(non-electronic trading system)
- Located in Bishkek
National Bank
- Government bonds

Stock Trade System (BTS)

- Electronic trading system (trading, clearing & settlement)
- Independent CJSC from KSE (no listing procedures)
- Located in Osh city
- Started from 2000
31
Figure 7: Trading, Clearing and Settlement Scheme in Mongolia

Investors
Intermediaries
Trading System
Domestic
Investors
Brokers/
Dealers
MSE
Securities Clearing House & Central

Depository
- Individuals
99.86%
- Banks: 0.01%
(2003)
- No banks
- Others: 26
(securities firms)
(2003)
- Equities/Bonds
- All trades are conducted
via MSE Pure-Order
Driven System
(electronic trading
system)
MSE Pure-Order
Driven System
- started from 1995
Foreign
Investors
- 0.03% of the total
- Established in Oct. 2003

- State-owned limited liability company
- Fully computerised
Shares: T+1
Bonds: T+0
Figure 8: Trading, Clearing and Settlement Scheme in Tajikistan

Investors
Intermediaries
Domestic
Investors
(No Brokers/
Dealers)
- No institutional
investors such
as insurance
companies and
pension funds
- Law exists.
(Government
Decree on broker
and dealer activity
on the securities
market)
Trading System
CSE
(No clearing & settlement institution)
- Established in 1994
- No securities trading
- Law exists.
at present
(Government Decree on the Central Depository)
- Listed companies exist
: 30 (2003)
(Future plan)
New Tajik Stock Exchange
- MOF plans to transform CSE into a new stock exchange.
National Property Exchange

- Equities (privatised JSC) / no corporate bonds
Ministry of Finance / National Bank
- Government bonds
(No Foreign
Investors)
Figure 9: Trading, Clearing and Settlement Scheme in Uzbekistan

Investors
Intermediaries
Trading System
Domestic
Investors
Brokers/
Dealers
TSE
- PIFs: 2.1%
- Banks: 9.3%
(2003)
- 77% of the total
- Banks: 6
- Others: 101
(securities firms)
(2003)
Elsis-Clearing
SettlementClearing
House
- Equities/Bonds
- 12 branches
32
State Central
Securities Depository
(UzSCSD)
- First level depository
Electronic links
Foreign
Investors
- 23% of the total
Small
Investors
Second-tier Depositories
- 32 depositories
ELSIS-SAVDO
- Electronic OTC trading
- Over 20 offices
- Started from 2000

3. Market Performance
As indicated in Figure 10, stock market capitalisation in study countries is quite small in scale as
compared to the advanced countries. The ratio of stock market capitalisation to GDP is roughly over
70% in advanced market countries (the New York Stock Exchange (NYSE) and the London Stock
Exchange (LSE): more than 100%; the Tokyo Stock Exchange (TSE): around 70% in 2003).
However, even in Kazakhstan, the largest market in the Central Asian region, the stock market
capitalisation accounts for only 8% of GDP. Those in the remaining countries account for less than
4% of GDP. This means that securities markets in the region are still in an early stage of the
development.
Figure 10: Market Capitalisation as % of GDP
1000
%
U.S .A. (NYS E )
U.K. (L S E )
100
Japan (T S E )
Azerbaijan
10
Kazakhs tan
Kyrgyz R ep.
Mongolia
Uzbekis tan
0
1998
1999
2000
2001
2002
2003 Year
(Source) EBRD Transition Report 2003, World Federation of Exchanges, Economist Intelligence Unit, OECD Market Survey 2004
Also, Figure 11 shows that the trading volume of equities, corporate bonds and government bonds in
study countries is volatile and quite small in scale, ranging from USD 14 million to 3,400 million in
2003. As a whole, corporate securities markets such as equities and corporate bonds are limited and
underdeveloped in the region, though some of the countries have developed their equity markets.
Instead, short-term government bonds have dominated the securities markets. Particularly, REPO
transactions are quite active in Kazakhstan. This means that the securities markets have taken an
important role of the government short-term fund-raising. In other words, the long-term corporate
securities market does not work well.
33
Figure 11: Trading Volume: US$ million

US$ millio n
140
US$ millio n
40000
Azerbaijan
Kazakhstan
35000
120
Equities
Equities
80
To tal
30000
To tal
100
25000
Co rpo rate Bo nds
Co rpo rate Bo nds
Go vernment Bo nds
20000
Go vernment Bo nds
60
Others
40
REP O
15000
Others
10000
20
5000
0
0
1998
1999
US$ millio n
45
2000
2001
2002
2003
Year
1998
1999
US$ millio n
45
Kyrgyz Republic
40
2000
2001
2002
2003
Year
Mongolia
40
35
35
To tal
30
To tal
Equities
25
Co rpo rate Bo nds

Go vernment Bo nds
20
30
Equities
25
Co rpo rate Bo nds
20
Go vernment Bo nds
Others
Others
15
15
10
10
5
0
0
1998
1999
US$ millio n
200
2000
2001
2002
2003
Year
1998
1999
US$ millio n
700
Tajikistan
2000
2001
2002
2003
Year
Uzbekistan
180
600
160
To tal
140
To tal
500
Equities
120
Co rpo rate Bo nds
Equities
400
Co rpo rate Bo nds
100
Go vernment Bo nds
300
80
Go vernment Bo nds
Others
60
Others
200
40
100
20
0
1998
1999
2000
2001
2002
2003
Year
0
1998
1999
2000
2001
2002
2003
Year
From Figure 12, securities markets in study countries can be classified into two groups: active and
inactive secondary market. The secondary markets in Kazakhstan and the Kyrgyz Republic are
relatively active, but as mentioned earlier, the most actively traded instruments are short-term
government bonds. In Uzbekistan, the secondary market turnover fell below the primary market
turnover in 2003 but it is the opposite trend in domestic currency (Som). By contrast, the secondary
markets in Azerbaijan, Mongolia and Tajikistan are quite inactive. Even in the primary markets, the
issuing volume is volatile. It is critically important for those countries to secure the stable liquidity of
corporate securities to develop their securities markets.
34
Figure 12: Primary and Secondary Market Turnover: US$ million

US$ millio n
US$ millio n
Azerbaijan
400
350
P rimary market
300
Sec o ndary market
Kazakhstan
3500
250
3000
P rimary market
2500
Sec o ndary market
2000
200
1500
150
100
1000
50
500
0
1998
1999
US$ millio n
2001
2002
2003 Year
1998
1999
2000
US$ millio n
Kyrgyz Republic
30
25
2000
P rimary market
40
Primary market
Sec o ndary market
35
Sec o ndary market
30
15
25
20
10
15
2002
2003 Year
2002
2003 Year
Mongolia
45
20
2001
10
0
1998
1999
US$ millio n
2000
2001
2002
2003 Year
1999
2000
US$ millio n
Tajikistan
200
180
160
140
120
100
80
60
40
20
0
1998
2001
Uzbekistan
350
300
P rimary market
P rimary market
Sec o ndary market
250
Sec o ndary market
200
150
100
50
0
1998
1999
2000
2001
2002
2003 Year
1998
1999
2000
2001
2002
2003 Year
Table 2 shows the stock price movements, which illustrate the volatility of stock markets in the region.
Kazakhstan, Uzbekistan, the Kyrgyz Republic and Mongolia have their own stock price indices. In
Mongolia, stock prices are relatively moving higher than the other countries.
Table 2: Stock Price Movement (end-of-year)
Kazakhstan
Uzbekistan
Kyrgyz
Republic
Tajikistan
Turkmenistan
Azerbaijan
Mongolia
Name of
index
KASE_Shares
TASIX a
KSE Index
n/a,
n/a,
n/a,
TOP-20 b
1998
1999
2000
2001
2002
2003
Base-date (=100)
n/a,
88.3
n/a,
78.6
106.0
85.1
104.5
114.2
140.2
136.2
142.4
131.9
12 July 2000
1 January 2000
122.0
84.6
70.1
56.8
59.6
68.8
November 1996
n/a,
n/a,
n/a,
235.0
n/a,
n/a,
n/a,
255.7
n/a,
n/a,
n/a,
469.9
n/a,
n/a,
n/a,
814.0
n/a,
n/a,
n/a,
933.9
n/a,
n/a,
n/a,
895.9
n/a,
n/a,
n/a,
28 August 1995

(Notes) a TASIX: Tashkent Aggregate Securities Index. TASIX in 1998 and 1999 is recalculated based on 1 January 2000.
b
In Mongolia, price index was named as TOP-75 between year1995 and year2002.
35
The securities market performance in study countries can be summarised as follows: 1) stock market
capitalisation in the region is of a quite small scale and growing at quite slow pace; 2) short-term
government bonds have still dominated the securities markets in the region; and 3) the corporate
securities markets are underdeveloped in those countries (small scale and low liquidity).
4. Regulatory and Supervisory Structures for Securities Markets
The regulatory and supervisory structures for securities markets in the region can be placed into two types
in terms of the number of regulators: single regulator and plural regulators (see Table3). In Tajikistan, the
Securities and Foreign Investment Office was established under the Ministry of Finance, which is to
function as a single regulator in the Tajikistan securities market. In Azerbaijan and Mongolia, the State
Committee for Securities (SCS) and the Securities and Exchange Commission (MSEC) are respectively
responsible for regulating and supervising their securities markets as a single regulator.
By contrast, in Kazakhstan, the Financial Supervision Authority (FSA) was separated from the
National Bank of Kazakhstan (NBK), in order to regulate the securities market, banking activities,
accumulated pension funds and insurance operations. In parallel with that, the Ministry of Finance
and the NBK still hold the status of regulators in the field of government securities.
Similar to Kazakhstan, Uzbekistan and the Kyrgyz Republic have the plural regulatory and
supervisory structures for the securities markets. That is to say, in Uzbekistan, the Center for
Coordination and Control of the Securities Market, so-called the Center, supervises the securities
market while the Securities and Financial Markets Department of the Ministry of Finance manages
and controls laws and regulations related to the securities market. In the government securities
market, the Ministry of Finance and the Central Bank take a role of regulator and supervisor. In the
Kyrgyz Republic, the State Commission on the Securities Market mainly regulates and supervises the
securities market while the Ministry of Finance and the National Bank take responsible for the
regulations and supervision of government securities.
Table 3: Single and Plural Regulators
Single Regulator
Tajikistan:
Ministry of Finance (MOF)
(Securities and Foreign Investment Office)
Azerbaijan:
State Committee for Securities (SCS)
Mongolia:
Mongolian Securities & Exchange
Commission (MSEC)
Plural Regulators
Kazakhstan:
Financial Supervision Authority (FSA)
, MOF & National Bank of Kazakhstan (NBK)
Uzbekistan:
The Center for Coordination and Control of
the securities Market (CSM),
MOF & Central Bank (CB)
Kyrgyz Republic:
State Commission on the Securities Market
(SCSM), MOF & National Bank (NB)
Table 4 shows the classification from a viewpoint of the SRO (self-regulated organisation) function.
According to the Market Survey, each stock exchange in the region, except for Azerbaijan, works as a
self-regulated organisation holding its own rules of the securities market. In Kazakhstan and
Uzbekistan, some associations that consist of market participants such as fund management companies
and registrars have their own rules as independent SROs.
36
Table 4: SRO (self-regulated organisation) function

SRO
Kazakhstan: KASE
Uzbekistan: TSE
Kyrgyz Republic: KSE
Tajikistan: CSE
Mongolia: MSE
No SRO
Azerbaijan: BSE
Independent SRO
Kazakhstan:
- Association of Financiers
- Association of Assets Managers
- Kazakhstan Association of Registry Holders
Uzbekistan:
- National Association of Investment Institution
5. Some Thoughts
To encourage the development of securities markets in study countries, it will be beneficial to consider
strengths, weaknesses, opportunities and threats (SWOT) in respective markets. Table 5 shows the
SWOT analysis of the targeted markets.
As for the strengths, as mentioned earlier, each country has a relatively well-organised market
infrastructure such as a sophisticated electronic trading system and central depository system (except
for Tajikistan). However, as weaknesses, stock market capitalisations in those countries are quite
small in scale as compared to the advanced market countries (world top 5 stock exchanges such as
NYSE, NASDAQ, TSE, LSE and Euronext) and market participants are also quite limited. There are
few foreign investors and very small scale of listed companies. Short-term government bonds (REPO
transactions in Kazakhstan) have dominated the securities markets in the region and the liquidity of
corporate securities is quite low. The range of securities products is also narrow. The derivative
markets in the region are underdeveloped.
As for the external environment, economic conditions in study countries have been gradually
improved. GDP has been growing moderately with decreasing inflation rates but at different speeds
country by country. There may be some market opportunities in the process of privatisation. The total
population of over 63 million in this region can become potential investors. However, addressing the
still remaining income gaps and high poverty rates in the region should be given high priority. Also,
the remaining state-owned companies and the laws and regulations regarding excessive protection of
domestic investors can be a barrier to development of the securities market in the region.
Taking these facts into consideration, the following three factors may be a key for the successful
development of securities markets in study countries.
First, those countries need to consider the way to mobilise individual savings in order to create active
secondary market of corporate securities. The appropriate government support measures (state
policies, e.g., financial education for market participants) will be necessary in this context.
Second, making the best of institutional investors such as pension funds and privatisation investment
funds (PIFs) will well contribute to enhancing the market liquidity and the trading volume.
Third, attracting foreign investors will also help to enhance the market capitalisation.
37
Table 5: SWOT Analysis of the Central Asian markets

Strengths
Weaknesses
Opportuniti
es
Threats
Strengths
Weaknesses
Opportuniti
es
Threats
Azerbaijan
- Relatively advanced market
infrastructure
--Sophisticated electronic trading
system
(INIST system, but no remote
trading)
--Central depository system
Kazakhstan
infrastructure
system
(Electronic Trading System of
KASE)
Kyrgyz Rep.
- Partially advanced market
infrastructure
--Consolidated electronic trading
system
(BTS) exists, but there is no
electronic trading system in KSE.
- Low level of market capitalisation

- Still restricted market participants
(little foreign investors)
(small scale of listed companies)
- Heavily depending on short-tem govt.
bonds
- Derivatives: very restricted
- Low liquidity
- Moderately growing economy
- Privatisation scheme
- Population: 8.3 m (2003)

bonds & REPO
- Derivatives: very restricted

- Restricted market participants
(no foreign investors)

(booming oil revenues)
Still
remaining
state-owned
companies
- Laws and regulations
- Globalisation
Tajikistan
n/a,

- Still remaining state-owned

companies
- Globalisation
Mongolia
infrastructure
system
(MSE Pure-Order Driven System)
- Depending on short-tem govt. bonds
- Low liquidity

- Still remaining state-owned
companies
- Globalisation

- No securities trading in stock
exchange
(off exchange market)
bonds
- Low liquidity
- Low transparency
- State-owned companies (dominant
status)
- Globalisation
Still
remaining
state-owned
companies
- Globalisation
Uzbekistan
infrastructure
system
--E-trading (OTC): Elsis-Savdo
- Low liquidity (volatile by year)
- Low transparency
- Double land locked situation
Still
remaining
state-owned
companies
- Globalisation
Besides, it will be crucial to improve corporate governance in order to build up investors confidence
to the securities markets in the region. In addition, making the best of the existing advantages such as
the electronic trading technology may be effective for those countries to reach the high-yield markets.
Hereby, a question comes out: Is there the possibility of consolidation of stock exchanges in the
Central Asian region?
In this regard, the following two cases in advanced markets would be the good examples for the wellfunctioning trading schemes: (1) ASX-SGX Co-trading linkage and (2) the consolidated stock markets
in Euronext.
38
(1) Case 1: ASX-SGX Co-trading linkage

Only one successful case of co-trading is ASX (the Australian Stock Exchange)-SGX (the Singapore
Exchange Limited) linkage for the present. This electronic linkage allows investors in Australia and
Singapore to co-trade the selected stocks (the most liquid and best-known stocks on each
exchange1) in each others market directly, through brokers in their own countries, whenever
respective markets are open. The benefits of co-trading system will be to reduce transaction costs and
to enhance service quality for investors (e.g., speedy dealings and diversified investment portfolios).
This system is well received by investors from both markets. In fact, the number of stocks available
for co-trading is currently over 100 stocks in respective markets in response to growing market
demand. According to the ASX, The main feature is that it allows domestic investors to order
purchases and sales of foreign listed stocks in almost the same environment as they deal with domestic
stocks. This is the core concept of co-trading system. (see Figure 13)
(2) Case 2: Euronext
Euronext is the world-first cross-border exchange established by mergers of four exchanges
(Amsterdam, Brussels, Paris and Lisbon), which provides comprehensive services for cash and
derivative markets, from trading to clearing and settlement2. Its equity trading via electronic central
order book recorded the largest volume in Europe, EUR 1,570 billion in 2002.
In cash markets, Euronext has traded all listed stocks via a single trading platform NSC, which is
owned by the AtosEuronext3 and fully automated platform that allows members either to route their
customers orders electronically or to enter orders manually from computers installed on their
premises which are linked to the trading system in Euronext.
NSC has a central order book for each stock, matches buy and sell orders electronically, and then
transmits trade reports to members in real-time. Currently, over 15 stock exchanges on 4 continents4
have adopted this NSC system for cash and derivative e-trading5.
For clearing, Euronext has made use of a single electronic clearing platform Clearing 21 under a
single set of market rules (except for Lisbon; to be determined), which was developed by the Chicago
Mercantile Exchange and the New York Mercantile Exchange and is operated by Clearnet in Europe.
Clearing 21 is the only tool that can clear both cash and derivative products in real time with a central
guarantee. The settlement is currently done by each marketplace through Euroclear and BXS-CIK but,
if the system is integrated, all transactions will be settled through Euroclear and CRESTCo (a UKbased organisation).
Currently, Euronext has signed cross-membership and cross-trading agreements with the Swiss Stock
Exchange in 1999, the Luxembourg Stock Exchange in 2000, the Helsinki Stock Exchange in 2001
and the Warsaw Stock Exchange in 2002, which allows Euronext members to access and trade stocks
listed on other exchanges, and vice-versa. (see Figure 14)
39
Figure 13: Co-trading and Settlement Scheme
Australian Market
Singaporean Market
FIX Trading Session
FIX Trading Session
FIX Market Data Session
FMP
FIX Market Data Session
(ASX FIX Client)
LMP
Buy order
FMP
(SGX FIX Client)
LMP
InterMarket
(ASX FIX Server)
Buy order
(SGX FIX Server)
Network
WAN
100
Stocks
ASX-PD (SPV)
SGX-PD (SPV)
ASX World Link
SGXLink
(Trading Network)
(Trading Network)
Sell order
Buy order
Sell order
Buy order
Buy order
Sell order
100
Stocks
Sell order
Buy order
Buy order
Sell order
CLOB
SEATS
Investor A
ASX
Broker
Matching of
buy & sell order
Investor B
SGX
Broker
Matching of
buy & sell order
Sell order
[SESOPS]
[SGXAccess]
T+2
Buy order
FDI
ASX CHESS
A$
SGX CDP
SG$
SG$ or A$
Investor Bs account
Investor As account
A$
Dividends (A$) / Capital gains
FDI
FDI
Dividends (SG$ or A$) / Capital gains

Appointment
T+3
Australian Custodian
(Notes)
40
ASX World Link

SEATS
CHESS
SGXLink
SESOPS
SGXAccess
CLOB
FMP
LMP
FIX
FDI
Trading scheme
Settlement scheme
ASX Portal Dealer (ASX-PD) for international securities (Special Purpose Vehicle: SPV)
Stock Exchange Automated Trading System
Clearing House Electronic Subregister System
SGX Portal Dealer (SGX-PD) for multilateral cross-border trading (SPV)
Singapore Exchange Securities Order Processing System (proprietary trading terminal)
Securities trading platform
The Central Limit Order Book (screen-based computerized trading system)
Foreign Market Proxy (outbound transaction)
Local Market Proxy (inbound transaction)
Financial information exchange messaging protocol
Foreign Depository Interest
Figure 14: Trading, Clearing and Settlement Scheme in Euronext
Trading System
Clearing System
Cash products
Trading
Participants
(Brokers)
NSC
Derivatives
LIFE CONNECT
Settlement System
marketplaces
Euroclear France / Euroclear Bank
Paris
BXS-CIK
Brussels
Euroclear Netherlands
Amsterdam
Clearing 21
(cash &
derivatives)
Own clearing & settlement system
Lisbon
What are the benefits of a co-trading scheme between ASX and SGX and a cross trading scheme in
Euronext? In this regard, three major points can be raised: 1) reducing the transaction costs (cost
efficiency); 2) enhancing the service quality for investors (e.g., speedy dealings, diversified investment
portfolios and customer-oriented services (because the co-trading system provides investors with the
same environment as trading in domestic markets)); and 3) increasing order flows (i.e., increasing
liquidity). Those benefits are all backed by the advanced technology.
Conclusion
To sum up, securities markets in study countries are small in scale and still remain inactive as a whole.
Corporate securities markets are in a very infant stage of the development. The best practice towards a
well functioning securities market in the region will be to establish a mechanism to further mobilise
individual savings to the market. To this end, financial education for market participants is
indispensable, which responsibility is mainly in the government.
Taking account of the existing advantage in the Central Asian region, i.e., relatively sophisticated
electronic trading technology in the region, the establishment of a cross access trading system such as
the above-mentioned co-trading scheme among study countries (i.e., the consolidation of stock
exchanges in the region) may be a key factor to vitalise the securities markets in the Central Asian
countries, Azerbaijan and Mongolia, as a possibility.
41
NOTES
Selection of co-traded stocks is based on criteria such as share price index, liquidity and market
capitalisation.
Services for cash (equities and bonds) markets: Amsterdam, Brussels, Paris and Lisbon, and for
derivative markets: UK (but operational level).
AtosEuronext is a 50/50 joint venture between Euronext and ATOS-Origin (European IT services
company).
Chicago, Sao Paulo, Mexico, Toronto, Tunis, Singapore, etc.
In derivative markets, a single electronic trading platform LIFE CONNECT is used at

Euronext.
42
REFERENCES
ASX World Link, ASX World Link brochure, Sydney

ATOSEURONEXT, NSC brochure
AUSTRALIAN STOCK EXCHANGE (2002-2003), ASX Report to Shareholders 2002/2003 and
website (http://www.asx.com.au), Sydney
BAKU STOCK EXCHANGE, website (http://www.bse.az), Baku
EURONEXT (2002), Annual Report 2002 and website (http://www.euronext.com)
EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT (EBRD) (2003-2004),
Transition Report 2003-2004, London
FEDERATION OF EUROPEAN SECURITIES EXCHANGES (FESE), website (http://www.fese.be),
Brussels
KAZAKHSTAN STOCK EXCHANGE, Annual Report 1998-2002 and website (http://www.kase.kz),
Almaty
KYRGYZ STOCK EXCHANGE, website (http://www.kse.kg), Bishkek
OECD, June 2004, Economic Outlook Volume 2004/1 No. 75, Paris
OECD (2004), Country Notes in Azerbaijan, Kazakhstan, Mongolia, Tajikistan and Uzbekistan,
conference materials, 6th OECD Conference on Financial Sector Development in the Central
Asian countries, Azerbaijan and Mongolia, Istanbul
SGXLink, SGXLink brochure, Singapore
SINGAPORE EXCHANGE LIMITED, website (http://www.sgx.com), Singapore
SHINOZAKI, S (2004), Market Survey in Kazakhstan, Uzbekistan, Kyrgyz Republic, Tajikistan,
Azerbaijan and Mongolia, OECD research, Paris
THE ECONOMIST INTELLIGENCE UNIT (1996-2005), Country Reports of Kazakhstan,
Uzbekistan, Kyrgyz Republic, Tajikistan, Turkmenistan, Azerbaijan and Mongolia, London
World Federation of Exchanges (1998-2003), statistics, Market Capitalisation of Shares of Domestic
Companies
43
Annex
FINDINGS FROM THE MARKET SURVEY IN THE CENTRAL ASIAN COUNTRIES,
AZERBAIJAN AND MONGOLIA
1. Market Structure
(1) Basic Structure
Stock Exchange
Kazakhstan
Uzbekistan
Kyrgyz
Republic
Tajikistan
Turkmenistan
Azerbaijan
Kazakhstan Stock
Exchange (KASE)
Toshkent Republican
Stock Exchange (TSE)
Legal
form
JSC
CJSC
SRO
Yes
Yes
(stateowned)
Electronic
Trading System
Clearing & Settlement

Institution
Electronic Trading
System of KASE
1. Central Securities
Depository
- Started from
1997
2. Kazakhstan
Interbank Settlement
Center
ELSIS-SAVDO
- CJSC (stateowned)
- E-trading for
small investors
- Started from
2000
RSC
1. The State Central

Securities
Depository
(UzSCSD): first
level
2. Second tier
depositories: 32
3. Elsis-Clearing
company
CJSC
1. Central Depository
CJ
CJSC
2. Stock Trade System

(BTS)
CJSC
n/a,
n/a,
(stateowned)
n/a,
CJSC
Yes
2. Stock Trade System

(BTS)
CJSC
No
JSC
Yes
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
Baku Stock Exchange

(BSE)
CJSC
No
INIST
- Trading network
provided by
Russian
company
INIST
1.National Depository
Center (NDC)
CJSC
2. Baku Stock
Exchange (BSE)
3. Partner Investment
CJSC
Independent
SRO
1. Financial
Supervision
Authority
1.
2. Ministry of
Finance
2.
3. National Bank
of Kazakhstan
3.
1. The Center for

Coordination and
Control of the
Securities
Market (CSM)
Association
of
Financiers
Association
of Assets
Managers
Kazakhstan
Association
of Registry
Holders
National
Association
of Investment
Institution
- NGO
Co.
Ltd.
LLC
2. Ministry of
Finance
(Securities and
Financial
Markets
Department)
1. State
Commission on
the Securities
Market (SCSM)
2. Ministry of
Finance
- only for govt.
securities market
3. National Bank
- only for govt.
securities market
Ministry of
Finance
(Securities and
Foreign Investment
Office)
n/a,
State Committee
for Securities
(SCS)
MSE Pure-Order
Mongolian
Securities Clearing
(stateDriven System
Securities &
House & Central
owned)
- Started from
Exchange
Depository
1995
Commission
(Note) CJSC: Closed Joint Stock Company, RSC: Republican State Company, LLC: Limited Liability Company, SRO: Self Regulated Organisation
Mongolia
Mongolian Stock
Exchange (MSE)
JSC
Yes
n/a,
Regulator /
Supervisor
n/a,
1. Kyrgyz Stock
Exchange (KSE)
Central Stock
Exchange of
Tajikistan (CSE)1
Stock Trade
System (BTS)
Legal
form
JSC
n/a,
n/a,
n/a,
n/a,
n/a,
(stateowned)
1 In Tajikistan, CSE was established in 1994 but there is no securities trading in CSE so far. Currently MOF has planned to transform CSE
into the new Tajik Stock Exchange.
44
(2) Number of Listed Companies at the end-of-year

1998
Kazakhstan (KASE)
Domestic company
Foreign company
Uzbekistan (TSE)
Domestic company
Foreign company
Kyrgyz Republic (KSE)
Domestic company
Foreign company
Tajikistan (CSE)1
Domestic company
Foreign company
Turkmenistan
Azerbaijan (BSE) 2
Domestic company
Foreign company
Mongolia (MSE)
Domestic company
Foreign company
1999
18
18
0
2
2
0
50
50
0
5
5
0
n/a,
n/a,
n/a,
n/a,
430
430
0
2000
17
17
0
2
2
0
62
62
0
10
10
0
n/a,
n/a,
n/a,
n/a,
418
418
0
2001
23
23
0
5
5
0
68
67
1
15
15
0
n/a,
n/a,
n/a,
n/a,
410
410
0
2002
33
33
0
6
6
0
24
24
0
20
20
0
n/a,
n/a,
n/a,
n/a,
400
400
0
2003
50
50
0
6
6
0
22
22
0
25
25
0
n/a,
n/a,
n/a,
n/a,
403
403
0
69
69
0
6
6
0
18
18
0
30
30
0
n/a,
n/a,
n/a,
n/a,
402
402
0
(3) Number of Intermediaries at the end-of-year

1998
Kazakhstan
Broker/dealer
Bank
Others
Fund management company3
Custodian
Uzbekistan
Broker/dealer
Bank
Others
Fund management company
Custodian
Kyrgyz Republic
Broker/dealer4
Bank
Others
Custodian
Tajikistan5
Broker/dealer
Bank
Others
Custodian
Turkmenistan
Azerbaijan
Broker/dealer
Bank
Others
Custodian
1999
2000
2001
2002
2003
73
28
45
8
9
58
26
32
7
11
51
25
26
7
12
51
23
28
8
11
50
23
27
9
10
56
29
27
10
10
163
4
159
n/a,
0
139
5
134
n/a,
0
114
2
112
n/a,
0
90
3
87
n/a,
0
92
4
88
n/a,
0
107
6
101
39
0
29/13
n/a,
n/a,
4
0
30/16
n/a,
n/a,
6
0
25/16
n/a,
n/a,
10
0
23/20
n/a,
n/a,
9
0
21/20
n/a,
n/a,
9
0
17/16
7
26
10
0
0
0
0
0
0
n/a,
0
0
0
0
0
n/a,
0
0
0
0
0
n/a,
0
0
0
0
0
n/a,
0
0
0
0
0
n/a,
0
0
0
0
0
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
15
14
1
0
0
24
22
2
0
0
21
20
1
0
0
24
20
4
0
0
1 In Tajikistan, the data is based on the rating of their trading performance in the secondary market.
2 In Azerbaijan, BSE was established in 2000. No listed companies so far but pre-listed companies (251) are traded.
3 Pension Assets Management Company (PAMC)
4 Some companies work as a broker and a dealer simultaneously. Therefore, simply adding two figures may be duplicated.
5 The Decree of the Government of the Republic of Tajikistan has specified the provisions on broker and dealer activity on the securities
market and on the central depository. At present, the Specialised Registrar in the Ministry of Finance is responsible for the custody and
technical services and for the registration of securities transactions and share transfers. No specialised intermediaries (brokers/dealers)
have yet to be registered.
45
1998
1999
Mongolia
Broker/dealer
Bank
Others
Custodian
41
0
41
15
0
2000
41
0
41
16
0
2001
42
0
42
16
0
2002
42
0
42
16
0
2003
34
0
34
2
0
26
0
26
1
0
(4) Investors Structure in 2003

(Unit: %)
Domestic investors
Individuals
Insurance
company
Banks
Pension
Fund
PIFs
Foreign
investors
Others
Total
Kazakhstan1
n/a,
65.8
13.7
0.0
20.5
0.0
0.0
n/a,
100.0
Uzbekistan
77.3
6.8
9.3
0.1
n/a,
2.1
59.0
22.8
100.0
100.0
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
0.0
100.0
Kyrgyz Republic2
3
Tajikistan
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
100.0
Turkmenistan
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
100.0
99.9
2.0
73.0
20.0
0.0
0.0
5.0
0.1
100.0
99.97
99.86
0.01
0.00
0.00
0.00
0.10
0.03
100.0
Azerbaijan4
Mongolia
(5) Issuers Structure in 2003

(Unit: %)
Kazakhstan
Uzbekistan
Kyrgyz Republic5
Tajikistan6
Turkmenistan
Azerbaijan
Mongolia
Open Joint Stock Company

State-owned
100.0
0.0
90.2
66.9
80.8
n/a,
n/a,
n/a,
n/a,
n/a,
0.0
0.0
100.0
83.1
Closed Joint Stock Company

State-owned
0.0
0.0
9.8
0.9
19.2
n/a,
n/a,
n/a,
n/a,
n/a,
100.0
0.0
0.0
0.0
Private
100.0
23.3
n/a,
n/a,
n/a,
0.0
16.9
Total
Private
0.0
8.8
n/a,
n/a,
n/a,
100.0
0.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
2. Market Performance
(1) Market Capitalisation at the end-of-year
(Unit: US$ million, %)
1998
Value
Kazakhstan
Uzbekistan
Kyrgyz Republic7
Tajikistan
Turkmenistan
Azerbaijan
Mongolia
1834.9
n/a,
9.1
n/a,
n/a,
n/a,
39.8
1999
% of
GDP
8.2
2.1
0.8
n/a,
n/a,
n/a,
4.4
Value
2263.2
n/a,
3.9
n/a,
n/a,
n/a,
32.1
2000
% of
GDP
15.5
1.9
0.4
n/a,
n/a,
n/a,
3.9
Value
1342.3
31.9
3.8
n/a,
n/a,
n/a,
36.9
2001
% of
GDP
7.5
1.0
0.3
n/a,
n/a,
n/a,
4.0
Value
1203.5
27.9
4.7
n/a,
n/a,
32.3
37.5
2002
% of
GDP
5.6
0.6
0.3
n/a,
n/a,
0.6
3.7
Value
1341.0
31.2
23.2
n/a,
n/a,
20.9
31.9
2003
% of
GDP
5.6
0.4
1.4
n/a,
n/a,
0.3
2.9
Value
2424.6
14.0
30.7
n/a,
n/a,
46.7
42.4
% of
GDP
7.8
0.2
1.7
n/a,
n/a,
0.6
3.7
(Source) EBRD Transition Report 2003 and OECD research
1 Foreign Investors exist in Kazakhstan but no statistics. Only data for domestic investors is described.
2 There is no statistics. Domestic investors include 21 banks, 10 insurance companies, 1 pension fund and 5 PIFs. No foreign investors.
3 There is no statistics. Insurance companies and pension funds do not participate in the securities market.
4 There is no official data. Those figures are roughly estimated by BSE.
5 State-owned companies: less than 200; Private company: more than 1300
6 In Tajikistan, private joint stock companies accounted for 0.2% of the total.
7 Since 2002, the state-owned shares are included into the total amount of shares.
46
(2) Trade Value and Volume

(Unit: US$ million, million shares/lots)
Kazakhstan
Equity
Corporate
bond
Government
bond
REPO
Others
Uzbekistan
Equity
Corporate
bond
Government
bond1
Others
Kyrgyz
Republic
Equity2
Corporate
bond
Government
bond3
Others
Tajikistan4
Equity
Corporate
bond
Government
bond
Others
Turkmenistan
Azerbaijan5
Equity
Corporate
bond
Government
bond
Others
Mongolia
Equity
Corporate
bond
Government
bond
Others
1998
Value Volume
1540.3
163.6
26.2
3.7
n/a,
n/a,
201.1
n/a,
1313.0
519.1
67.5
1999
Value Volume
3545.2
555.5
25.8
7.9
2000
Value Volume
5081.1
2226.0
71.0
32.7
48.8
0.7
2001
Value
Volume
10244.7
4669.3
147.4
72.1
168.4
20.6
2002
Value
Volume
24643.4
9265.5
341.6
69.4
262.0
111.2
2003
Value
Volume
33799.1 44480.0
421.1
993.2
5.4
6.9
604.2
19417.1
159.9
893.5
467.5
1164.0
1112.6
1536.3
990.2
1951.1
1470.3
2378.0
2006.6
n/a,
n/a,
n/a,
n/a,
434.4
2186.1
603.1
88.3
73.2
n/a,
n/a,
n/a,
1987.0
1810.3
253.2
72.4
1080.0
n/a,
n/a,
n/a,
5903.9
2488.7
146.3
61.9
3586.4
n/a,
n/a,
n/a,
18274.2
3814.5
111.1
55.0
7614.6
n/a,
n/a,
n/a,
21523.6
8872.2
116.1
54.9
22063.1
n/a,
n/a,
n/a,
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.6
n/a,
12.1
n/a,
451.6
n/a,
514.8
n/a,
180.9
n/a,
84.3
n/a,
54.5
n/a,
49.1
n/a,
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
32.3
4.2
12.9
10.3
34.2
173.0
40.4
83.7
41.6
42.5
14.2
48.8
1.6
4.2
5.4
10.3
22.6
173.0
17.8
83.7
21.9
42.4
10.9
48.8
0.0
0.0
0.0
0.0
0.0
0.0
1.1
0.0
2.0
0.1
0.7
0.0
30.7
n/a,
7.5
n/a,
11.6
n/a,
21.5
n/a,
17.7
n/a,
2.6
n/a,
n/a,
38.8
38.5
n/a,
n/a,
n/a,
n/a,
173.6
172.6
n/a,
n/a,
n/a,
n/a,
4.7
3.8
n/a,
n/a,
n/a,
n/a,
75.9
5.7
n/a,
n/a,
n/a,
n/a,
44.7
7.3
n/a,
n/a,
n/a,
n/a,
65.7
5.4
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
0.3
n/a,
1.0
n/a,
0.9
n/a,
70.2
n/a,
37.4
n/a,
60.2
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
40.1
n/a,
n/a,
n/a,
0.2
n/a,
n/a,
n/a,
101.8
0.9
n/a,
n/a,
0.7
0.2
n/a,
n/a,
107.5
0.7
n/a,
n/a,
0.8
0.3
n/a,
n/a,
123.7
3.4
n/a,
n/a,
2.8
2.2
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
39.6
0.2
100.2
0.5
105.9
0.5
109.9
0.5
n/a,
11.9
11.9
n/a,
33.1
33.1
n/a,
3.1
3.1
n/a,
21.4
21.4
0.5
12.9
2.7
0.0
35.5
35.4
0.7
30.6
1.6
0.0
16.3
15.9
0.8
40.9
1.2
0.0
10.6
9.8
10.4
21.7
0.8
0.0
8.5
8.1
0.0
0.0
0.0
0.0
0.0
0.0
1.1
0.1
2.6
0.3
2.3
0.2
0.0
0.0
0.0
0.0
10.2
0.1
27.9
0.3
37.1
0.5
18.6
0.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1 Government bonds are circulated in Uzbek Republican Currency Exchange.

2 Since 1999, all trades with corporate securities have been conducted through KSE according to the requirements of the law. Therefore, the total value and
volume of Equity include trades with both the listed companies securities and the securities related to the unlisted financial institutions.
3 Value of government bonds issued. All trades with government bonds are conducted by the National Bank of Kyrgyz Republic.
4 Off-exchange market. No corporate bonds and others (not issued). Exchange rates (TJS/a US$): 0.8(1998); 1.2(1999); 1.8(2000); 2.4(2001); 2.8(2002);
3.1(2003) * EBRD Transition Report 2003 (1998-2002) & Economist Intelligence Unit (2003)
5 In Azerbaijan (BSE), trading of corporate bonds started from January 2004.
47
(3) Major Products
Kazakhstan
Uzbekistan1
Kyrgyz Republic
Tajikistan
Turkmenistan
Equity
- Common stock
(A-, B-listing,
OTC)
- Preferred stock
- State Block of
Shares
(SBS)
Corporate Bond
- Corporate bond
- IFO bond
- Common and
preferred stock,
traded freely both
for UZC and USD
- Corporate bond,
traded freely.
(3-, 6-, 9-month &
1.5 year)
- Common stock
- Preferred stock
- Short-term bond
- Long-term bond
(1 to 3 years)
- Shares in stateowned and private

companies
- Registered and
bearer common
and preferred stock
n/a,
n/a,
- Common stock
- Preferred stock
n/a,
- Short-term bond
(3-, 6-month)
- Long-term bond
(up to 5 years)
- Common stock
- Short-term bond
(6-month, 1 year)
Azerbaijan
Mongolia
Government Bond
- Municipal bond
- T-bond (MAOKO)
- Short-term T-bill
(MEKKAM)
- Mid-term T-bill
(MEOKAM)
- Long-term T-bill
(MEAKAM)
- Indexed T-bill
(MEIKAM)
-Eurobond
- State short-term
bond
(6-, 9-, 12-month)
- State mid-term
bond
(1.5 year & 5-year)
- Short-term T-bill
(3-, 6-, 9-month)
- Long-term T-bill
(5 to 15 years)
- T-bill (up to 1
year)
- Financial Ministry
bond (2 issues; 20year)
- National Bank
bond
(short-term)
n/a,
- Short-term T-bill
(3-, 6-, 9-month)
- Short-term T-bond
(14 days)
- Mid-term T-bill
(3 years)
Derivatives
Undelivered 6
month futures on
the
rate
USD/KZT
and
EURO/USD
Others
- REPO
- Promissory Note
- Foreign Exchange
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
- Futures (only in
2001)
n/a,
- REPO on T-bill
- Promissory Note
Privatisation
checks
Privatisation
options
n/a,
n/a,
1 State short-term bonds are traded on the Currency Exchange from 1996. State mid-term bonds are to be issued from April 2004.
48
(4) Primary and Secondary Market Turnover

1998
Kazakhstan
Equity
Corporate bond
Government bond
Uzbekistan1
Equity
Corporate bond
Government bond
Kyrgyz Republic2
Equity
Corporate bond
Government bond
Tajikistan3
Equity
Corporate bond
Government bond
Turkmenistan
Azerbaijan4
Equity
Corporate bond
Government bond
Mongolia
Equity
Corporate bond
Government bond
1999
2000
Primary
Secondary
Primary
Secondary
n/a,
n/a,
n/a,
n/a,
210.5
29.9
0.0
180.6
0.0
0.0
0.0
n/a,
38.8
38.5
n/a,
0.3
n/a,
n/a,
n/a,
n/a,
n/a,
0.0
0.0
0.0
0.0
227.3
26.2
n/a,
201.1
273.5
2.5
0.0
271.0
14.6
1.6
0.0
13.0
0.0
0.0
n/a,
0.0
n/a,
n/a,
n/a,
n/a,
n/a,
11.9
11.9
0.0
0.0
7.0
n/a,
n/a,
7.0
255.4
23.8
0.0
231.6
4.2
4.2
0.0
n/a,
173.7
172.7
n/a,
1.0
n/a,
n/a,
n/a,
n/a,
n/a,
0.0
0.0
0.0
0.0
917.7
25.8
5.4
886.5
286.9
3.7
0.0
283.2
15.4
1.2
0.0
14.2
0.0
0.0
n/a,
0.0
n/a,
n/a,
n/a,
n/a,
n/a,
3.1
3.1
0.0
0.0
Primary
23.3
0.0
18.8
4.5
74.3
14.4
0.0
59.9
19.3
19.3
0.0
n/a,
4.7
3.8
n/a,
0.9
n/a,
111.8
60.7
0.0
51.1
10.1
0.0
0.0
10.1
2001
Secondary
1260.4
70.9
30.0
1159.5
122.9
1.9
0.0
121.0
7.0
3.2
0.0
3.8
0.0
0.0
n/a,
0.0
n/a,
0.0
0.0
n/a,
0.0
2.7
2.7
0.0
0.0
Primary
Secondary
85.1
0.7
46.1
38.3
35.7
10.4
0.0
25.3
11.1
10.2
0.9
n/a,
75.9
5.7
n/a,
70.2
n/a,
330.1
152.1
1.5
176.5
29.0
0.0
1.1
27.9
(Unit: US$ million)

2003
2002
Primary
1767.1
146.3
122.6
1498.2
60.6
1.6
0.0
59.0
12.9
7.5
0.2
5.2
0.6
0.6
n/a,
0.0
n/a,
32.3
32.3
n/a,
0.01
1.7
1.6
0.1
0.0
54.7
16.1
17.2
21.4
38.0
16.8
0.7
20.5
7.5
5.7
1.8
n/a,
44.8
7.4
n/a,
37.4
n/a,
372.4
251.0
2.5
118.9
39.7
0.0
2.6
37.1
Secondary
Primary
2500.0
325.5
244.8
1929.7
60.8
25.1
1.7
34.0
25.7
16.2
0.2
9.3
0.0
0.0
n/a,
0.0
n/a,
22.8
20.9
n/a,
1.9
1.2
1.2
0.0
0.0
127.6
7.6
88.7
31.3
89.5
55.4
12.1
22.0
3.6
3.4
0.2
n/a,
65.7
5.4
n/a,
60.2
n/a,
223.9
44.7
3.2
176.0
20.9
0.0
2.3
18.6
Secondary
3275.5
413.4
515.4
2346.7
62.8
21.4
7.0
34.4
20.4
7.5
0.4
12.5
0.0
0.0
n/a,
0.0
n/a,
52.8
46.7
n/a,
6.1
1.0
0.8
0.2
0.0
(5) Stock Price Movement (end-of-year)

Kazakhstan
Uzbekistan
Kyrgyz Republic
Tajikistan
Turkmenistan
Azerbaijan
Mongolia
Name of index
KASE_Shares
TASIX5
KSE Index
n/a,
n/a,
n/a,
6
TOP-20
1998
n/a,
88.3
122.0
n/a,
n/a,
n/a,
235.0
1999
n/a,
78.6
84.6
n/a,
n/a,
n/a,
255.7
2000
106.0
85.1
70.1
n/a,
n/a,
n/a,
469.9
2001
104.5
114.2
56.8
n/a,
n/a,
n/a,
814.0
2002
140.2
136.2
59.6
n/a,
n/a,
n/a,
933.9
2003
142.4
131.9
68.8
n/a,
n/a,
n/a,
895.9
Base-date (=100)
12 July 2000
1 January 2000
November 1996
n/a,
n/a,
n/a,
28 August 1995
(6) Electronic Trading Value and Volume

1998
Value
Volume
Kazakhstan
Electronic
Trading System
of KASE7
Uzbekistan
ELSIS-SAVDO
Kyrgyz Republic
BTS
Tajikistan
(no e-trading)
Turkmenistan
Azerbaijan
INIST
Mongolia
MSE Pure-Order
Driven System8
1999
Value
Volume
2000
Value
Volume
2001
Value
Volume
(Unit: US$ thousand, thousand shares)

2002
2003
Value
Volume
Value
Volume
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
1853.5
12933
1977.9
5508
575.2
1444
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
11924.6
33073.2
3053.3
21446.7
12858.2
35531.4
30560.6
16340.7
40907.4
10620.4
21708.7
8540.9
1 In Uzbekistan, OTC trading is included in Equity. OTC trading in 2003: 35.2 out of 55.4 (primary); 8.6 out of 21.4 (secondary)
2 There are both primary and secondary markets in government bond (conducted by the National Bank). No available information for govt. bonds.
3 Off-exchange market.
4 In Azerbaijan, OTC trading is included in Equity.
5 TASIX: Tashkent Aggregate Securities Index. TASIX in 1998 and 1999 is recalculated based on 1 January 2000.
6 In Mongolia, price index was named as TOP-75 between year1995 and year2002.
7 Over 90% of trades are conducted via computers outside of KASE.
8 All trades are conducted via MSE Pure-Order Driven System.
49
3. Regulations and Supervision

(1) Regulations
Enacted
Date
Enforced
Date
Publicly
Disclosed
1. Law on State Regulation and Supervision of Financial Market

04.07.2003 01.01.2004
and Financial Organisations
10.07.2003
2. Joint-Stock Companies Act
13.05.2003 13.05.2003
16.05.2003
3. Securities Market Act
02.07.2003 02.07.2003
10.07.2003
Title
Kazakhstan
Laws
n/a,
Regulations
Uzbekistan
Laws
n/a,
n/a,
Notes
n/a,
1. On de-etatisation and privatisation
19.11.1991 19.11.1991
19.11.1991
2. On securities and stock exchange
02.09.1993 02.09.1993
02.09.1993
3. On mechanism of functioning of securities market
25.04.1996 25.04.1996
25.04.1996
4. On joint stock companies and protection of shareholder rights
26.04.1996 26.04.1996
26.04.1996
5. On depository activities securities market
29.08.1998 29.08.1998
29.08.1998
6. On exchanges and exchange activities
29.08.2001 29.08.2001
29.08.2001
7. On protection of investor rights on securities market
30.08.2001 30.08.2001
30.08.2001
8. On foreign exchange relation
11.12.2003 11.12.2003
11.12.2003
12.06.1995 12.06.1995
12.06.1995
07.09.1995 07.09.1995
07.09.1995
83-1164
83-1270
26.03.1996
83-1414
04.03.1998
83-1939
24.01.2003
83-3202
Regulations 1. On measures to speed up privatisation of state enterprises and

develop securities market
2. On additional measures to develop securities market
3. On creation of the Center for coordination and control over

function of securities market under the State Property 26.03.1996 26.03.1996
Committee of the Republic of Uzbekistan
4. On measures for further development of equity market and
04.03.1998 04.03.1998
support of corporations, created on the basic of state property
5. On measures for cardinal improvement of the share and of
24.01.2003 24.01.2003
private sector in the economy of the Uzbekistan
And other regulations
Kyrgyz
Laws
Republic
1. The Law of the Kyrgyz Republic "On joint stock companies"
27.03.2003 08.04.2003
08.04.2003
2. The Law of the Kyrgyz Republic "On the securities market"
24.06.1998 21.07.1998
21.07.1998
3. The Law of the Kyrgyz Republic "On the investment funds"
20.02.2003 26.04.2003
26.04.2003
Regulations 1. Activity on maintaining a Security Holder Registry

2. Activities and Organization of Trading in the Securities Market
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
3. KSE Stock Exchange Trading Rules (Stock Exchange Charter)
15.08.2003 22.09.2003
Yes
4. KSE Rules of Securities Listing and Delisting
31.07.2003 01.09.2003
Yes
1. Law of the Republic of Tajikistan "on joint-stock companies"
23.12.1991 23.12.1991
23.12.1991
2. Law on "securities and stock exchanges"
10.03.1992 10.03.1992
10.03.1992
5. Others
Tajikistan
Laws
3. Law on "foreign investment in the Republic of Tajikistan"
1991
1991
No.337
Amended in 1996 & 1997
1991
Regulations (Acts of the Ministry of Finance)
Turkmenistan
Law/Reg.
1. On licensing of professional activity related to securities and 20.04.1993 20.04.1993

stock exchanges
20.04.1993 No.9/1-2
2. On registration of prospectuses for the issue of securities
12.02.2004 12.02.2004
12.02.2004 No.1-CB
3. On reporting the results of securities issues
02.02.2004 02.02.2004
02.02.2004 No.2-CB
n/a,
n/a,
n/a,
n/a,

Azerbaijan
Laws
1. The Civil Code of the Republic of Azerbaijan
28.12.1999 25.08.2000
05.01.2000 30.11.1999

-1Q
3. The Law of Azerbaijan Republic On Protection of investors 16.06.2000 21.10.2000
rights on the securities market
-IQ

2. The Law of Azerbaijan Republic On investment funds
50
Yes
The Law on Joint-Stock

Companies and the Law on
Securities were replaced
with the Civil Code on
23.12.03.
Yes
Yes
Title
Regulations
1.The regulation about issue and registration of the emission

securities in Azerbaijan Republic
2.The rules of state registration of pawn operations
3. The rules of issuing, circulating and redemption of state
privatization options
4.The rules of participation of the foreign physical and juridical
persons on the securities market of Azerbaijan Republic
5. The standards of depository activity
6. The standards of conducting the register of securities owners
7. The regulation about deposit certificates of credit institutions
8. The rules of activity of self-regulating organizations on
securities market
9. The standards of insurance on the securities market of
Azerbaijan Republic
10. The rules of advertisement on the securities market
11. The regulation on organizing and activity of stock exchanges
in Azerbaijan Republic and on requirements to stock exchange
rules
12. Rules of issue and circulation of corporative bonds on the
territory of Republic of Azerbaijan
13. The regulation on issue, accommodation and circulation of
state short-term bonds
14. The rules of determination of the mutual obligations (clearing)
15. The rules of circulation of foreign emitents securities in
Republic of Azerbaijan
16. The rules of issue and circulation of the treasury bills
17. The rules of issue, registration and circulation of shares of
joint-stock companies, created after transformation from state
enterprises
18. The rules of elimination the offences and protection of the
investors rights on the securities market of Republic of
Azerbaijan
19. The rules of circulation of futures in Azerbaijan Republic
Enacted
Enforced
Date
Date
04.11.1999 04.11.1999

03.01.2000 03.01.2000

17.01.2000 17.01.2000

09.02.2000 09.02.2000

10.02.2000 10.02.2000

10.02.2000 10.02.2000

13.02.2000 13.02.2000

22.03.2000 22.03.2000

24.03.2000 24.03.2000

10.05.2000 10.05.2000

18.05.2000 18.05.2000

26.05.2000 26.05.2000

28.08.2000 28.08.2000

29.08.2000 29.08.2000

06.09.2000 06.09.2000

19.09.2000 19.09.2000

29.09.2000 29.09.2000

22.11.2000 22.11.2000

08.01.200.

08.01.200.

20. Temporary rules of REPO/BACK-REPO operations with state

07.02.2001 07.02.2001
short-term bonds of the National Bank of Republic of

Azerbaijan
21. The rules of issue, accommodation and circulation of short04.06.2001 04.06.2001

term notes of the National Bank of Azerbaijan Republic
17.01.2002 17.01.2002
22. The regulation about pawn security

23. The Regulation about rules of conclusion of buy-sell deals

26.07.2002 26.07.2002
with securities

24. Standards of investment securities emission during the
06.11.2002 06.11.2002
transformation of commercial organizations

25. The rules of issue of the speciality certificates for professional 27.11.2002 27.11.2002
activity on the securities market

04.08.2003 04.08.2003
26. Regulations on implementation of the broker activity

27. Regulations on implementation of the dealer activity

12.08.2003 12.08.2003

28. Regulations on presenting of accountancy by the professional 30.12.2003 30.12.2003

participants of the securities market

29. Regulations on maintains of the measures by the professional
participants of the securities market in an effort of prevention of 09.03.2004 09.03.2004
5

dirty money laundry and financing of terrorism in the securities
market
Mongolia
Laws
Publicly
Disclosed
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
1. Securities and Exchange law
12.12.2002 01.07.2003
27.12.2002
2. Company law
02.07.1999 12.07.1999
12.07.1999
27.11.2003 28.11.2003
28.11.2003 Revised
2. Listing rule
27.11.2003 28.11.2003
28.11.2003 Revised
3. Membership regulation
27.11.2003 28.11.2003
28.11.2003 Revised
4. Market Surveillance
27.11.2003 28.11.2003
28.11.2003 Revised
Regulations 1. Securities trading rule
Notes
51
(2) Supervision
Kazakhstan
On-site inspection
Off-site inspection
Uzbekistan
Frequency
Number of Illegal
(annual)
Transactions
n/a,
n/a,
n/a,
n/a,
(2001) 916
5056
(2002) 765
5404
(2003) 492
3754
On-site inspection
apx. 350
n/a,
Off-site inspection
apx. 1500
n/a,
On-site inspection
Off-site inspection
n/a,
n/a,
On-/Off-site inspection
Kyrgyz Republic
Tajikistan
Methods
Financial and other statements examination, on-site inspections, data

comparison
Inspection of stock companies and securities market professional
participants
Monitoring and revealing reports from stock companies and securities
market professional participants
There is no on-site or off-site inspection so far under the existing laws.
Turkmenistan
Azerbaijan
Mongolia
On-/Off-site inspection
On-site inspection
251 during
2002/2003
n/a,
Off-site inspection
n/a,
n/a,
The Ascertainment of the violations based on applications of the investors
(shareholders), execution of the administrative sanctions and disciplines.
According the Law on securities of Republic of Azerbaijan and
Administrative Code.
According the Law on securities of Republic of Azerbaijan and
Administrative Code.
On-site inspection
n/a,
n/a,
n/a,
Off-site inspection
n/a,
n/a,
n/a,
DATA CONTRIBUTORS
Kazakhstan
Kazakhstan Stock Exchange
Uzbekistan
Ministry of Finance of the Republic of Uzbekistan

The Center for Coordination and Control of the Securities Market
Kyrgyz Republic
Securities Commission of Kyrgyz Republic

Kyrgyz Stock Exchange
Ministry of Finance
Tajikistan
Securities and Foreign Investment Office, Ministry of Finance of the Republic of Tajikistan
Azerbaijan
State Committee for Securities

National Depository Center
Baku Stock Exchange
Mongolia
Mongolian Stock Exchange

Mongolian Securities and Exchange Commission
52
Chapter 3
FINANCIAL MARKETS AND INSTITUTIONAL INVESTORS IN CENTRAL ASIA
by
Toshiharu Kitamura*
1. Capital markets in emerging economies
The international financial markets1 have recently swayed widely due to a variety of unexpected
problems such as the September 11, 2001 terrorism, a series of corporate scandals represented by
Enron and WorldCom and, most recently, the Argentine collapse. Accordingly, the local bond markets
in emerging economies in East Asia, Latin America and Eastern Europe have been exposed to sharply
increased emerging market spreads2, which amounted to more or less 1000 basis points in late 2001
and in the second half of 2002, now declining to 500 to 600 basis points.3 During the period between
2001 and 2003, the feast or famine pattern of emerging markets has become apparent. During the
same period, the financial markets in Central Asia seem to have almost slipped into geo-economic
oblivion.
In recent years, the argument for the establishment of bond markets has gathered momentum in
emerging economies. As for the mechanism for bond issuance in relation to emerging economies, two
types are most discussed: one is to use the already established foreign and international markets such
as the eurobond market in London and the other is to develop immature local debt markets in
emerging economies. (Many such local markets have barely endured the adverse effects of crises,
notably the 1994/5 Mexican crisis, 1996/7 East Asian crisis and 1998 Russian crisis.) The former has
not been so attractive recently, because foreign bond issuance by governments and corporations in
emerging markets has often been opportunistic sporadic and limited to only a few naturalresources-oriented large corporations and lacking in evolutionary spillover effects for other
economic sectors.
On the other hand, the latter, the development of bond markets, has been strongly advocated for four
reasons:
1.
the development of a government bond market will contribute to the formation of multilayered financial channels by realigning the excessive dependence on bank financing;
2.
by enhancing efficient and effective trading and settlement in bond transactions, bond
markets also provide the groundwork for a balanced financial market in general;
3.
by realigning the financial intermediary mechanism and mobilizing domestic savings, bond
markets help make the macro economy less vulnerable to malfunction of either bank
financing or market financing and even to contagion from international financial crises; and
4.
the diversified financial channels will ultimately offer a broader menu of tailored financial
instruments to both fund providers (depositors and investors) and fund raisers (corporations
Professor, Waseda University, Japan
53
and other borrowers), thus, providing small- and medium-sized enterprises (SMEs) easier
access to financial resources. The open market financing is expected to help improve
corporate transparency and corporate governance.
In this context, stock and bond markets have become increasingly important topics since the 1990s in
transitional and emerging economies. They were expected to rectify the difficult situation arising from
collapsing command economies and emerging market economies. The financial crises in the 1990s
have also accelerated the efforts to reform financial systems. The most recent discussion on
developing government bond markets in Eastern Europe and Central Asia (April 2003 in Istanbul) also
focused on this direction. 4
Like Latin America and Eastern Europe, the recent economic arguments in East Asia, in particular in
the Association of Southeast Asian Nations (ASEAN), have increasingly focused on bond markets.5
On the one hand, the bond markets in East Asia have been relatively dominated by sovereign bonds6
and still remain immature in many parts of Asia. On the other hand, however, recent East Asian
emphasis has already turned toward corporate bonds and away from government bonds. East Asia
(including Southeast Asia but excluding Japan) account for 45 percent of recent international bond
issues in international bond markets as compared with Latin Americas 26 percent and Eastern
Europes 14 percent. 7 These shares could be interpreted as indicating somewhat the degree of
development of regional bond markets.)
From 1997 to 2000 the bank loan markets in major ASEAN countries shrank whereas the corporate
bond markets grew. This may imply that, against the backdrop of high domestic savings, the growing
government bond markets ignited the development of corporate bond markets thus signaling a
departure from excessive dependence on bank financing and toward open market financing. In
addition, the growing government bond markets were reported to have contributed to fostering
benchmark yield curves and to laying the groundwork for an effective bond settlement mechanism.
2. Features of financial markets in Central Asia
The financial markets in Central Asia seem to be characterized by the three basic barriers.
1. For one, due to the functional lack of financial intermediation, the major role of those financial
markets is to provide only a short-term operation mechanism for surplus or idle funds of banks and
state-owned enterprises (SOEs). There is little room for domestic savings to be mobilized for financial
intermediation between fund providers and raisers. Local currencies are busily functioning as a
medium of exchange rather than as a store of value, having practically no financial market roles. In
other words, domestic savings are not in local currencies but in hard currencies and are privately
hoarded (under mattresses) or expatriated (as capital flight) to foreign financial institutions.
In most countries in Central Asia, financial markets have failed to mobilize domestic savings for
industrial and productive activities. In Uzbekistan, proceeds arising from privatization of state
enterprises were planned to be concentrated in the Business Fund for financial intermediation in
1995, but little information is available on how those funds have been managed. In Kazakhstan, a
National Fund, which now contains over US$2 billion of oil money, was established in 2000 for the
purpose of mobilizing fiscal surplus for long-term financial intermediation, but the rules governing
contributions to and investments from the fund remain broad, leaving latitude for short-term budgetary
operations. Also in Kazakhstan, a Capital Amnesty program was implemented temporarily in 2001,
attracting nearly US$500 million into the domestic financial system ERWK IURP WKH UHSDWULDWLRQ RI
54
capital flight and the reintroduction of mattress money. These schemes, regarded as forced savings,
might have been effective but seem to be temporary in nature.
In Central Asia, except for the so-called directed credits, no effective and lasting financial mechanism
has been deeply rooted yet.8 In these circumstances, even the banking sector are not well informed
about the contents of corporate activities, implying information discontinuation between the corporate
sector and the financial markets. This is most likely to remain a crucial barrier to the start of a
successful bond market, particularly private corporate bond market in the region.
2. Also hindering the development of financial markets in Central Asia is the limited variety of
participants, made up mostly of banks and a small number of non-bank financial institutions. The
closed-loop financial markets, coupled with overbearing guidelines of monetary authorities, have
resulted in a shallowness of financial markets. The shallowness has been aggravated by a low turnover
ratio of short-term government securities that form the mainstream of the financial markets.9 In
essence, financial markets in the region function practically the same way money markets do in
Organization for Economic Cooperation and Development (OECD) countries, but the market size is
not comparable. In addition, the variety of financial instruments is limited. A bond or note with a
maturity of over one year is very rare in the region. The first issuance of treasury bills in the region
was that of the Kyrgyz Republic in1993, followed by that of Kazakhstan in 1994, and those of
Uzbekistan and Turkmenistan in 1996. In some countries the maturity of the treasury bills has been
extended to one year, but short-term treasury bills still predominate, leaving the long-term market
untapped.
The financial markets in the region have the following basic framework: central bank refinancing rates
determined mainly by inflation considerations, lending interest rates determined mainly by directedcredit considerations, and treasury bill interest rates kept considerably low due to fiscal burden
considerations. These peculiarities as well as the small market size have deterred other potential
market participants from entering the financial markets.
Meanwhile, the hyper-inflation that overwhelmed Central Asia around 1993, and the ensuing
UHOHQWOHVV SULFH ULVH KDYH DGYHUVHO\ FKDQJHG KRZ SHRSOH VDYH FKDQJLQJ IURP ORFDO FXUUHQFLHV WR
durable goods, real assets or hard currencies. Kazakhstans experience in price stabilization, deposit
insurance and capital amnesty suggests some scope for returning savings to the banking system. If this
takes place widely, it may stimulate financial markets through the banking channel. However,
changing sleeping savings into long-term investment in bonds will not be easy, mainly because
securities themselves are not familiar to people in Central Asia, but also partly because little policy
consideration has been given to issues such as the smooth functioning of secondary markets and
investor protection within them.
3. The third main obstacle to the development of financial markets in the region is the rather
rudimental and dormant nature of its stock markets. Following the intensified corporate privatization
in the region, stock exchanges began to appear 8]EHNLVWDQ .\UJ\] 5HSXEOLF DQG
Kazakhstan (1997). Like Eastern Europe, where stock exchanges, though small in size, became
suddenly buoyant in the wake of the collapse of the command economies, the stock exchanges in
Central Asia attracted much attention around 1995. Experiences in other countries also supported the
view that stock exchanges could precede bond markets; for instance, Hong Kong, Malaysia, and
Thailand witnessed thriving stock exchanges in the 1960s, partly because the economic framework
originating from the colonial period favored private corporate environments and partly because fiscal
deficits were constrained and reduced the need for government bond markets.
55
But the lack of transparency in procedures and transactions in Central Asia in the latter half of the
1990s proved troublesome to potential domestic public investors and the viability of quoted
enterprises became questionable in the eyes of foreign investors. Thus, currently, the stock exchanges
in the region appear to focus mainly on mergers and acquisitions (M&A) rather than liquidity, and
even M&A deals seem to be made outside the stock exchange.
As referred to earlier, over the last few years investors have become highly cautious about stock
transactions the collapse of the pre-2000 information and communication technology (ICT) bubble;
the rapid change in business, brought on by technological innovation; and numerous corporate
problems have caused public investors to be skeptical about corporate governance practices even
certified by underwriters, rating institutions, corporate analysts and others.
In contrast, over the same period, Central and Eastern European countries, including Russia, witnessed
long-awaited recovery of confidence. This has been strengthened by political stability, a series of
economic reforms and the confidence gained through the high prices their energy resources were
commanding.10 On the one hand, the improved situation has led to a continuous boom in their
financial markets, especially the Russian stock market. On the other hand, however, the upward trend
of financial markets tends to conceal such regulatory issues as price rigging, insider transactions, and
maneuvering through hidden-hand behaviors.11
There is no denying that the recent developments in Central and Eastern Europe have helped to
improve the opinions about the economic prospects of countries in Central Asia. But it is also true that
foreign investment bankers and financiers with broad international perspective on energy- and
resource-oriented industries and telecommunications industries, are remaining vigilant in monitoring
regional developments, and have thus far found little to get excited about. Taken altogether, the
general performance of the stock exchanges in the region remains boring and stagnant, inviting little
attention from investors in general.
The following table chronicles the financial markets in the region.
Table 1: Financial progress in Central Asia
1993 and before
Kazakh
Banking law
tenge
Kyrgyz
1991:Banking
laws
som
Treasury bills
1991:Banking
law
Tajik
Turk
Uzbek.
Russia
Azer
1992:Banking
law
manat
Securities law
Treasury bills
New ruble
(old ruble zone
collapsed)
1992:manat
Privatization
1994
1995
Ttreasury
bills
1996
1997
Sovereign
eurobond
Stock
exchange
1998
Large-scale
privatization
Treasury
system
reformed
New
banking
law
Sovereign
eurobond
Corporate
eurobond
Financial
crisis
Banking law
Treasury bills
Voucher
privatization
1999
Municipal
bond and
corporate
bond
2000 and later

2001:
Capital
amnesty
Stock
exchange
Tajik
ruble
Privatization
program
Treasury bills
sum
Stock
exchange
Treasury bills
Banking law
Securities
law
somni
Sources: EBRD, Transition Report (2002); individual countries information.
56
3. Investors for Central Asian capital markets

Little has been discussed on the problem of institutionalization of investors,12 because no indigenous
portfolio investor, either corporate or individual, has existed in Central Asia. Two types of institutional
investors,13 however, will be crucial to the financial prospects in the region: domestic and foreign.
Pension funds, either public or private, are most likely to be promising domestic institutional
investors. Private pension funds already show some early signs of becoming increasingly significant in
Kazakhstans local financial markets,14 but practically nothing else has been seen anywhere else in the
region. Given the current regional circumstances, the interrelationship among inflation, real assets and
pension funds holds the key if inflation is contained and accompanied by socioeconomic political
stability, the social tendency will be to favor contractual (or contract-based) savings, but if inflation
remains high and unstable, the anomalous practices in saving will continue. The regions experiences
up through 1993 imply that any financial turbulence is most likely to tempt people into hard currencies
or real assets.
Life insurance companies, another type of long-term contractual savings institutions, will not likely
contribute to the successful formation of financial markets, at least for the time being, because more
time is needed for the general public to understand insurance. In many parts of the region, even the
banking services are not well trusted by the general public, because of their poor quality and
reliability. In these circumstances, where deposit-service is poorly managed, a rapid approach to
savings creation and asset management through the long-term life insurance business will likely
confuse peoples understanding of financial services.
Foreign pension funds and other contractual savings institutions, which are conservative in nature, will
remain cautious about the financial markets in the region. Already, many of them have been
victimized by the 1998 Russian financial crisis. They are the least likely to participate in portfolio
investment in the region. Before their interest is piqued, they will have to see positive outcomes from
various foreign corporations foreign direct investment (FDI) in the region. Many of them feel that the
economic barriers between advanced and transitional economies could be best dispelled through the
introduction of FDI in countries with sound economic and social policies. The ability of countries in
Central Asia to absorb, adapt and respond to FDI will be carefully appraised as a barometer of
successful economic transition.
Many factors that might be insignificant in the minds of the regions residents, may be very important
to most foreign investors in the region. Such factors are deeply rooted in geopolitical and geoeconomic settings and are crucial determinants in the minds of conservative foreign investors. Across
nearly the entire region, the transition to market economy has been dominated by relics of the former
command economy. Government intervention into everyday affairs may not be disconcerting locally,
but it is beyond the imagination of investors in advanced countries.
In addition to these common factors are individual ones. In Kazakhstan, the gap between the oil sector
and the non-oil sector is so large that general economic policies are always accompanied by
uncertainties. In Uzbekistan, the recent foreign exchange reform has brought its economy into accord
with IMF Article 8, which requires that there should be no restriction on current account payments;
but the international community still perceives some insecure economic management, which may
create unpredictable elements.. In Turkmenistan, activity in every sector other than natural gas remains
irregular or even self-defeating. The Kyrgyz Republic and Tajikistan are so economically remote from
the advanced markets that foreign financial institutions and investors are oblivious of business
opportunities there. To crown it all, Central Asia lacks a tie that unites countries and promotes
economic cooperation and benefits.
57
At the same time, an increasing number of fund managers who invest in emerging countries now take
the view that the Central European countries have shown sustained economic resilience despite serious
economic problems in the EU for the last couple of years and that EU candidate (in particular) and
other Eastern European countries are already within reach of stable and sustainable economic
prosperity.15 They also see that those countries economic successes have brought spillover effects to
neighboring regions that used to be part of the former Soviet Union. In these circumstances, the most
risk-taking of investment companies may be watching vigilantly for portfolio investment chances in
Central Asia.16
Still, the previously mentioned crises in Mexico, Asia, Russia and Argentina are indicative of the
impact that risk-taking investment companies could have on Central Asia. Perhaps the most likely
scenario is that signs of economic success and willingness to endure the pains of reform will trigger
some risk-taking turbulence, and not until after that turbulence subsides can a steady inflow of
portfolio investment be expected.
To avoid the scenario of Central Asia falling into financial turbulence similar to that around 1993, a
domestic capital market framework has to be set up whereby domestic savings can be mobilized
through secure channels of financial intermediation. At the same time, the region must consolidate
financial intermediation through the banking sector and must address its opaque inward-looking and
shallow financial market structure and its dormant stock exchanges. It will require more expertise,
which will be discussed below. The regions deficiency in basic capital market settings, will attract
neither domestic nor foreign financial resources through open market channels.
4. Government bond market as basis of debt/capital market infrastructure
In this section, government bonds are assumed to be the most reliable financial instruments in
domestic financial markets. On this basis, the development of the government bond market is expected
to lay the groundwork of financial market functions (e.g. interest-maturity relation, liquidity,
settlement efficiency, tax treatment, risk management) upon which to evolve various financial
transactions. In fact, experiences in advanced countries and some emerging economies show that this
policy approach has led to efficient and effective capital markets. In this context, seven marketIRVWHULQJVHWWLQJVZLOOEHGLVFXVVHG VHWWLQJVWKDWDOVRKDSSHQWREHFRQFHUQVRILQVWLWXWLRQDOLQYHVWRUV
regarding Central Asia.17
1. The government bond market forms the backbone of most fixed income markets and,
together with the banking financial intermediation, contributes to the development of a multilayered financial system.18 In this sense, the government bond market is an essential part of
financial reforms. So far, however, Central Asian policy discussions have focused mainly on
short-term government debt management and little consideration has been paid to how the
financial markets will compensate when the government borrowing from the banking sector
is scaled down. Similarly, little attention has been paid to a gradual lengthening of debt
maturity and to the creation of a benchmark yield curve.
2. The above will have to be addressed in conjunction with efforts to build a diversified base of
LQYHVWRUV IURP GRPHVWLF LQYHVWRUV ERWK LQGLYLGXDO DQG LQVWLWXWLRQDO WR LQWHUQDWLRQDO
investors. For this purpose, more attention to the nurturing of primary dealers in domestic
financial markets is required. Also, other countries experiences, in particular, those of
Singapore and Malaysia in the 1970s and of Chile in the 1980s, imply that funding schemes
based on public pension systems may provide an effective part of the investor base. Such
58
schemes are likely to act as stabilizers in the financial markets, owing to their buy and hold
nature and their emphasis on corporate monitoring.
3. The performance of financial markets in Central Asia has been characterized by low turnover
ratios for treasury bills. Consideration must be given to policy that will stimulate primary
GHDOHUVDQGRWKHULQWHUPHGLDULHVWRIRVWHUVHFRQGDU\PDUNHWV VHFRQGDU\PDUNHWVZLWKVHFXUe
and efficient trading and settlement systems. In order to get a high degree of liquidity
expertise, young staffers should be trained (hands-on) in financial markets in advanced
countries.
4. Also needed is policy on the establishment of an effective regulatory system aimed at
restricting illegal, fraudulent, improper or foul transactions in the markets. The regulatory
system will monitor the issuers of securities, sovereign19 and other issuers; the central bank
(as government agent), primary dealers and other intermediaries; and end-investors. Their
contact must be close, but arms-length, in order to facilitate smooth market transactions.
5. Taxation of financial transactions has also significant implications for and impacts on the
markets, but its effects differGHSHQGLQJRQWD[DWLRQFLUFXPVWDQFHV IRUH[DPSOHZKHWKHURU
not end-beneficiaries of financial instruments can be easily identified, or whether or not a
withholding tax can be imposed at the source of interest and dividend payments from
financial institutions. Experience shows that only good communication between market
participants and tax authorities will lead to effective solutions.
6. The evolution from a government bond focus to a diversified market focus will have to
include policy consideration related to rating institutions, corporate analysts and accounting
and auditing bodies in order to ensure the quality of information. Stock exchanges vary
widely DIIHFWHGE\FRXQWU\-specific and business-specific information that, in some cases,
is judged quite subjectively. Bond markets, on the other hand, are so closely tied across
national boundaries through interest-rate spreads reflecting specific risks and so on, that highquality pricing information, both credible and logically deductive, is strongly needed.
7. Once a credible government (sovereign) bond market has been established, its mechanism
will be extended to a variety of fixed-income financial instruments (most importantly those of
the corporate bond market for financial intermediation purposes), to more sophisticated
instruments such as structured bonds and securitized bank loans for medium-sized
corporations, and to futures and derivatives markets.20 These debt instruments will
complement the equity products in a stock exchange, producing a wide range of financial
instruments in specific segments of financial markets. It should, however, be kept in mind
that stock exchanges are dependent on the development of corporate business environments.
It should be stressed here again that the government bond market is an essential part of financial
infrastructure. The government bond market provides diversification in type of financial channels,
which will ultimately result in a broader menu of tailored financial instruments between fund-surplus
and fund-deficit units (including small- and medium-sized enterprises). The development of a bond
market for debt financing must go hand in hand with that of a stock exchange for equity financing.
Viable and productive business activities on the fund raising side are a basic prerequisite for financial
benefits on the fund providing side. In this sense, the formation of financial markets is not an ultimate
target but it is merely an intermediate target.
59
The financial market development in Central Asia is depicted below.

Figure 1: Structure of financial markets in Central Asia
issuers
securitized loans
structured bond
OECD countries
private
corporate
Russia
Kazakh
sovereign
municipal
central govt.
Uzbek
Kyrgyz
Turkmen
Tajik
Short-end
Types of markets
equity
medium
hybrid
long-term
derivatives
In many emerging economies, banks have dominated financial markets. This situation is likely to
continue in the near future, partly because the banking sector has captured many quality clients and is
not ready to release them. Another contributing factor is that regulatory environments have been
mostly based on banking activities, a typical example being the concentration of rules regarding lender
of last resort. Essentially, this is the situation in Central Asia. Soon after the collapse of the former
Soviet Union, a two-tier banking system was quickly introduced, though the engine of the new system
started off poorly. Even so, the banking sector has been in the public eye and thus people understand
the functions of bankingdeposit taking, loan making, and funds transfer. Problems underlying the
present Central Asian banking system are procedural inefficiency and credibility gap. However, the
system will continue to improve as it gains increased exposure to the modern banking services of
advanced countries.
The banking channel alone, however, is not sufficient. Economic environments now change faster,
because of revolutionary developments in information and communications technologies,
technological impacts on business models, extensive social and political renovations, and the
disappearance of time and geographical constraint. Diverse assessments emerge incessantly and
sometimes alternately, affecting peoples financial judgment. Such assessments are more functional in
an open market framework than in a bank-centered framework. There is good reason that the most
modern environments promote open financial markets and expect institutional investors to play a
significant role.
It should be noted that before the Second World War, bond markets existed in various capacities in
Central Europe, Latin America, and East Asia PDQ\RIWKHPUHODWHGWRSUDFWLFDOEXVLQHVVGXULQJWKH
colonial period. Central Asia, on the other hand, has no such history; and when this difference is
considered in the context of Central Asias slower economic development, the argument in favor of
government bond markets is all the more strengthened.
60
NOTES
Although many papers on this subject emphasize capital markets, referring either in general to securities
markets or in specific to bond markets, stock markets and hybrid securities markets (hybrid here
meaning a mixture of debt with equity capital), this paper focuses on financial markets, comprised as
follows: (1) bank loan markets, which wed fund providers with fund raisers; (2) debt markets that are
composed of money markets for short-term financial transactions and bond markets for medium- and long-term
financial transactions; (3) capital markets that are composed of stock market and hybrid securities markets, and (4)
derivatives markets.
Defined as emerging-economy-oriented bonds redemption yields minus the 5-year US government bond yield,
whereas the corporate spread is often defined as BBB-ranked corporate bonds redemption yields minus the 10-year
government bond yield. In this paper, emerging markets are not strictly defined, partly because available
databases definitions differ. Broadly, economies with low-to-middle income per capita but open to the international
economy and making efforts to improve and grow themselves are regarded here as emerging economies. See also the
International Finance Corporations Emerging Markets Data Base. Unfortunately no conventional database has
recognized any Central Asian country as an emerging economy yet.
For more arguments, see William Witherells presentation at the Fifth Annual OECD-World Bank Bond Market
Forum, June 2003, Washington, D.C. (www.worldbank.org/wbi/banking/capmarkets/oecdwb5/agenda.html)
Almost all the related major issues and practical matters are described in Developing Government Bond Markets: A
Handbook (World Bank/International Monetary Fund [2002]), on which recent discussions seem to be based. The
OECD/World Bank Bond Market Workshop in June 2003 in Washington, D.C. considered basically the same issues.
In 2002, the bond market issue was referred to by Thailands prime minister, Thaksin Shinawatra. He pointed out a
particular model, which was immediately supported by Asian financial leaders in 2003, resulting in the agreement on
the Asian Bond Fund (ABF). In the ABF scheme, member central banks of the Executives Meeting of East AsiaPacific Central Banks (EMEAP) make collective investments in U.S. dollar denominated sovereign or quasisovereign bonds issued in countries belonging to the ASEAN.
In Malaysia, which among ASEAN members is fairly advanced, private corporate bonds accounted for a high
proportion of the sovereign bond and private bond total in 2000 and 2001 (in the 5565 percent range). Over the
same period, the proportion was around 40 percent in Korea, 15 percent in Singapore, 10 percent in Hong-Kong and
3 percent in China. (Sources. Bank for International Settlements, International Banking and Financial Market
Developments; individual countries statistics for 20002002).
If advanced countries are included, North America accounted for 41percent, Europe, the Middle East and Africa for
53 percent, Asia-Pacific for 4 percent, and Latin America for 2 percent. (Source. The IFR TOP 250 Borrowers 2002).
Even so, Kazakhstan seems to have made steady progress in bank intermediation following the introduction of
deposit insurance, tightened banking supervision and corporate financial restructuring. It was also reported that
private pension funds became increasingly significant participants in the local financial markets. (Source. EBRD,
Transition Report 2001, pp. 2425.)
Little information is available on transactions of government securities markets, though there remains good scope for
repo-transactions for open market operations. It was reported that, compared with OECD member countries,
financial markets in Eastern Europe are still dominated by banks and that there is a big difference in turnover ratios
in government securities between OECD countries and emerging markets. For details, see Clemente del Valle and
Mueen Batlay Regional Snapshot of Government Bond Markets of Eastern Europe and Central AsiaA Framework,
first presented in a regional workshop held by the World Bank and IMF in Istanbul (April 2003).
10
The sharp depreciation of the Russian ruble -soon after the financial crisis in 1998 has brought unexpected economic
benefits to Russia, which seems to have enjoyed improvements under the new government.
61
11
Beneath the financial markets, there lie such crucial pro-blems as short-sighted interests (focusing exclusively on
businesses in the limelight) and expanding regional and income imbalances.
12
Here institutionalization means the tendency toward gradual domination of financial markets by institutional
investors, as compared with individual investors.
13
Institutional investor is defined as a corporate-type investor with large amounts to invest; typified by investment
companies, collective investment funds (mutual funds, investment trust and unit trusts), insurance companies,
pension funds, investment banks and endowment funds (funds donated to an institution or group such as a university,
museum, hospital, or foundation as a source of income to be used for a specific purpose). The institutional investors
account for a majority of the overall volume of financial market transactions, but as opposed to individual investors,
they are covered by fewer protective regulations because they are assumed to be more knowledgeable and better able
to protect themselves.
14
See footnote 8.
15
For example, see RZB Group, Strategy East (4th quarter 2003).
16
Before 1998, Mr. George Soros appeared to have interest in Central Asia only for benevolent purposes, but not for
investment purposes.
17
The author owes credit for some of the following arguments to the World Bank/IMF, Developing Government Bond
Market: A Handbook (2002).
18
Usually the public sector, particularly the central government, is a non-RSSRUWXQLVWLFLVVXHU WKDWLVDFRQVWDQW
LVVXHU RIWUHDVXU\ELOOVDQGJRYHUQPHQWQRWHVERQGVLQFRQWUDVWWRORFDOJRYHUQPHQWVDQGSULYDWHVHFWRULVVXHUVZKR
are opportunistic issuers.
19
Sovereign bonds are those issued by central and local governments and their affiliations.
20
The order of the seven arguments just enumerated could be thought of as a sequencing process for securities markets.
62
Part II
COUNTRY STUDIES
63
Chapter 4
SECURITIES MARKET IN THE REPUBLIC OF AZERBAIJAN
by
Gunduz Mammadov
1. Macroeconomic characteristics
Azerbaijan, as the other countries in transition, is included in the wide processes of economic
development. Azerbaijan, passing through phase of the general economic growth, has entered the
second phase of the economic development, where the main direction is the effective financial market
formation. This is the basis of the countrys institutional reforms. The increasing significance of
financial market development is connected to such conditions, through which it will become possible
to promote an increase in direct foreign investments, and the usage of the internal savings at the same
time.
Macroeconomic Indicators
(Unit: million USD)
Gross Domestic Product (GDP)
2000
2001
2002
2003
2004
5285.7
5720.6
6246.1
7.139.2
8.528
Compared with the same period of previous year (%)
111.1
109.9
110.6
111.2
110.2
Consumer price index compared with the same
101.8
101.5
102.8
102.2
106.7
120.2
126.7
121.2
121.4
126.2
54.1
24.4
22.1
8.5
20.2
+319.3
+613.9
+481.6
+191.8
+75.7
Exchange rate AZM/USD (av.)
4464
4646
4853
4910
4913
Volume of deposits and savings (end-year)
n/a,
n/a,
465.1
621.6
1031.02
period of previous year (%)

Nominal average monthly wage compared with the
same period if previous year (%)
Budget deficit
Saldo of trade balance
Population
8141.4 thousand (est. 2002)
2. Market overview
The main issuers are the privatized companies. A substantial proportion of stock issued also belongs to
the banks. In 2003, the significant growth of insurance companies issues took place in the market: 4
insurance companies registered in the SCS 7 issues with the total volume of USD 2.14 million.
First Deputy Chairman, State Committee for Securities, Azerbaijan
65
Stocks Issues
(Unit: million USD)
Privatization
Year
Banks
Others
Number of
Volume of
Number of
Volume of
Number of
Volume of
issues
issues
issues
issues
issues
issues
2000
73
57.1
16
9.8
16
24.2
2001
181
146.3
11
3.8
2.0
2002
129
184.6
38
26.5
39.9
2003
58
9.7
13
14.1
20
20.9
2004
10
4.5
34
62.9
16
26.3
The majority of the deals in the securities market are conducted at the OTC market. But due to the
efforts that SCS undertakes in 2004 one could see the essential growth in the volume of the trades
conducted at the stock exchange.
Stocks - Secondary Market
(Unit: million USD)
2001
2002
2003
2004
Baku Stock Exchange
0.93
0.82
3.45
1.2
OTC
31.4
20.1
43.2
51.4
The corporate bonds issue still carries a fragmental character. But taking into consideration the wide
perspectives of the borrowing market in Azerbaijan, this financial instrument is considered to be very
well spread.
Corporate Bond Issues
(Unit: million USD)
Year
Number of issues
Volume of issues
2000
1.65
2001
0.79
2002
2.5
2003
1.2
2004
14
18.2
The main instruments traded at the market are T-bonds. In spite of the fact that the interest rate is
rapidly falling, the interest in this instrument still remains almost constant.
T-Bonds
(Unit: million USD)
2001
2002
2003
2004
Issues
125.9
119.5
100.8
16.3
Primary market
100.6
104.1
92.7
16.1
n/a,
1.9
6.1
1.3
Secondary market
66
3. Clearing and settlement system

The State program of privatization of the state ownership in Azerbaijan Republic in 1995-1998
provided for the concept of the National Depository Center. According to the State Program, the
Depository Center was formed as the depository and the registrar at the same time.
In order to improve the depository system and its activities, the Degree of the President of the
Azerbaijan Republic as of May 14-th 1997 adopted the regulations "On the National Depository
System" and "On the Rules of keeping the registry of the shareholders of the joint-stock companies
created during the privatization of the state firms and specialized check investment funds". By the
regulation on "National Depository System" the creation of the National Depository Center was
stipulated.
On 18th September 1997, the National Depository Center was created. The National Property
Committee was acting as a holder and founder of the block of shares of the National Depository
Center. The shares of NDC were handed over to the State Committee for Securities under auspices of
the President of Azerbaijan (SCS) after its creation. As a result, NDC was anew founded by the State
Committee for Securities on 8th September 1999 and passed the national registration on 17th
September 1999.
The National Depository Center has a license on depository and registrar activities given by the SCS.
According to all above-mentioned regulations, the National Depository Center is the state organization
which plays the main role in the national depository system, engaging the depository activity and
keeping the records on depositories, which are included in the depository system and supervising their
activities.
avoid counterpart risks, the clearing on securities transactions is carried out on DVP (delivery
versus payment) basis with initial depositing the traded securities at the special account at the National
Depository Center or the Baku Stock Exchange.
4. Regulatory and supervisory structure
The State Committee for Securities under auspices of the President of Azerbaijan Republic (SCS) was
created in 1998 by the Decree of the President of the Azerbaijan Republic. 75 employees are
employed in this organization, which regulates and supervises the securities market.
The SCS registers the securities offered to the public and is responsible for the regulation and
supervision of the entire process. The SCS has the authority and responsibility to supervise both the
organization and the operation of the stock exchanges. Furthermore, the SCS undertakes the
responsibility for the completion of the regulatory framework and the establishment of the necessary
mechanism for the further improvement of efficiency of the stock exchange and the secondary
markets.
The intermediary institutions need to obtain a license from the SCS in order to be able to deal in the
securities transactions. The SCS determines the minimum conditions for granting a license. In case of
ignorance and misuse of intermediary or due to weaknesses in the financial condition of the institution,
the SCS is entitled to invalidate the operating license on a temporary and/or permanent basis.
In order to foster the development of the securities market in Azerbaijan, the SCS constantly
undertakes all necessary measures. Up to date, the SCS adopted more than 70 legal acts, which
67
provide for regulating and developing the particular aspects of the securities market, protection of the
rights of securities investors, corporate governance principles, disclosure procedures and overall
formation of the organized securities market in Azerbaijan.
The major parameter of the effectiveness of the reforms conducted at the securities market is their
sequence. By the year 2002 when the SCS evidenced the substantial growth in the number and
volume of the transactions with the stocks, the indispensability of broker and dealer companies
involvement in these processes became obvious. Therefore, in July 2002, a new regulation was
adopted by the SCS. Before this document was put into force, almost all transactions have been
carried out via the notaries. The document having kept this right for the transaction counterparties
made this way ineffective and taking too much time. The broker and dealer companies were given the
rights to act on behalf of their customers or counterparties at the depositories and registrars.
Therefore, because of another measures after the adoption of this document, up to this moment, almost
all transactions at the secondary market are conducted via the broker and dealer companies.
In March 2004, new amendments to the Civil Code of the Azerbaijan Republic were brought into
force. This document actually replaced the Law on the joint-stock companies and the Law on the
securities. The new Civil Code opened a qualitatively new stage in the countrys securities market
regulation, marking the transition from the securities market formation to its further development.
5. Corporate governance
The special attention in the new Civil Code is paid to the corporate governance principles. In addition
to the information expressly required by the standard prospectus form, the corporation must also
provide further information necessary to make the statements complete and not misleading the
solicitation to the public to purchase shares, which is affected by means of a circular. The circular
consists of concise information, mostly related to sale conditions and financial statements. The Code
also provides for the better transparency of the joint-stock companies, protecting the rights of the
minor shareholders, what gives them the right to obtain maximum information on the activities of the
company.
On a yearly basis, joint-stock companies have to pass through an audit carried out by one of the
officially licensed in Azerbaijan independent companies (including big five) and publicly disclose
the results of the audit.
According to the new regulations of SCS all joint-stock companies must provide transparency of their
activities by disclosing the annual statement in mass-media and presenting it to the SCS.
There is also new normative act of the SCS concerning the use of insider information, which forces all
insiders to let public know in advance about their intention to buy or sell their securities so that SCS
can follow up this transaction and check if it is fraud or not.
The Administrative Code provides for the penalties for the non-observance of the corporate
governance principles. For instance, in 2004, 104 joint-stock companies and the management of these
companies were fined for a total amount USD 25 thousand.
68
Chapter 5
SUPERVISION OF THE SECURITIES MARKET IN THE REPUBLIC OF KAZAKHSTAN
by
Gulmira Kapenova
1. Creation of the unified supervisory body over the activities of participants of the financial
market
Since year 2001, the new system of state regulation of activities of financial institutions in Kazakhstan
has started to develop. This system envisages unification of all supervisory and regulatory bodies in
the financial market into one specialized agency.
The development and approval of legislative environment for the functioning of such state agency of
consolidated supervision on the financial market is now almost completed. On 4th July 2003, the Law of
the Republic of Kazakhstan On State Regulation and Supervision of Financial Market and Financial
Organizations was adopted. This Law establishes that regulation and supervision of the financial
market and financial organizations will be exercised by a single authorized agency to be nominated by
the President of the Republic of Kazakhstan. The law enters in force on 1st January 2004.
The main purpose of reforming the system of state regulation of the financial market is the creation of
an independent and effective system of consolidated supervision and regulation of financial market in
order (1) to increase the level of protection of rights and interests of consumers of the financial
services, (2) to form stable and effective infrastructure of domestic financial market, and (3) to
increase trust to the national financial system.
2. Current state agency in charge of regulation and supervision of the financial market
Currently, it is the National Bank of the Republic of Kazakhstan that is the state agency of the
Republic of Kazakhstan, which exercises state regulation of the financial market and which is directly
subordinate and accountable to the President of the Republic of Kazakhstan.
The main tasks of the National Bank of Kazakhstan include:
1) ensuring internal and external stability of the national currency of the Republic of Kazakhstan;
2) development and enforcement of the state policy in the area of money circulation, credit
arrangements, money transfers between banks and their clients, and foreign currency relations,
which contribute to the attainment of goals of economic development of Kazakhstan and its
integration into the international economy;
3) state regulation of banking activities;
4) state regulation of the securities market;
5) state regulation and control over the activities of the accumulative pension funds; and
6) state regulation of insurance operations.

Chief Specialist, Department of Strategy and Analysis, Financial Supervision Authority of Kazakhstan
69
The bodies of the National Bank of Kazakhstan are the Management Board and the Board of Directors
(Directorate). The supreme body of the National Bank of Kazakhstan is the Management Board. The
Board of Directors represents the body of operative management of the National Bank.
Currently, the Department of Financial Supervision, which is incorporated into the structure of the
National Bank, supervises the activities of all the segments of Kazakhstans financial market: banking,
pension, securities, and insurance.
Main tasks of the National Bank of Kazakhstan as of the agency of state regulation of the securities
market include:
1) state regulation of relations arising in the securities market;
2) protection of rights and lawful interests of investors in the securities market;
3) imposition of requirements binding on the participants of the securities market;
4) supervision over the activities of professional participants of the securities market, their selfregulating organizations, organizers of securities trade and other entities, whose activities in
the securities market is carried out based on licenses or permissions; and
5) organization of educational system directed towards ensuring professional level of individuals
as qualified specialists on the securities market.
3. Legislation of the Republic of Kazakhstan on securities market and joint-stock companies
The middle of 2003 was marked by enactment of major legislative acts regulating relations in the
securities market Joint-Stock Companies Act and Securities Market Act.
The new Joint-Stock Companies Act dated May 13, 2003:
70
eliminated the outdated division of joint-stock companies into types (open and closed), since
in practice, legal and organizational form of a joint-stock company did not correspond to the
nature of its activity. According to the economic theory, a joint-stock company is the one,
which securities are freely circulated in the market. The following situation has developed in
Kazakhstan: 33 per cents out of total number of joint-stock companies with effective securities
issues as of September 1, 2003 are represented by closed joint-stock companies, which stocks
were placed among a certain number of persons and were not circulating in the secondary
securities market. Besides, the old law had limited stockholders rights to dispose of stocks
held by them. Management system in closed joint-stock companies was not different from the
one established for limited liability companies either.
increased the size of minimal authorized capital of joint-stock companies up to 50,000

monthly index factors (one MIF is equal to KZT 872, which makes KZT 43,600,000 or USD
294,595, USD 1 = KZT 148). Enlargement of joint-stock companies will contribute to the
transparency of their activities and will increase market attractiveness of stocks, which will let
joint-stock companies to attract additional internal and external investments in order to
develop their activities.
excluded the ways of placing stocks, whether closed, open, or private. During the period of
effectiveness of the old Law "On Joint-Stock Companies" dated July 10, 1998, 43 per cent of
all open joint-stock companies had placed them openly.
kept the definition of "nominal value" only when stocks are placed among founders. Nonfounders (outside investors) will purchase stocks at the placement price, that is, at the market
price, which will influence the effectiveness of the joint-stock company.
foresaw replacement of auditing commission that was outdated and not completely usable in
terms of its controlling functions with so-called internal audit service, which now has to be
permanently active and independent from the executive body. Employees of the internal audit
service shall be elected by the general meeting of stockholders and shall directly report to the
Board of Directors.
Former Republic of Kazakhstan Acts about Securities Market and Securities transaction registration in
the Republic of Kazakhstan that entered into force in March 1997, are now outdated and do not go
along with the pace of development of the Kazakhstan economy in general and of securities market in
particular. It was necessary to develop new and improved law on securities market, which, in addition
would (1) include norms on registration of contracts involving securities (in a separate law), and (2)
unify general provisions of the large number of subordinate normative acts effective at that moment.
The new Securities Market Act dated July 2, 2003:
x
specifies the functions of the state authorized agency, including the issues of liberalization of
admittance of securities of foreign issuers on the territory of the Republic of Kazakhstan.
changed (simplified) norms that govern conditions and procedure of state registration of the
issuance of various types of securities and broadened and put in details the contents of
documents to be submitted by the issuers.
sets the procedure of designating legal entities with a status of financial agency and the
conditions of issuance of agency bonds. The Law also provides for the particularities of the
issuance and circulation of mortgage bonds, the functions of representatives of holders of
secured bonds and the actions thereof related with control over the property, which serves as
security of issuance of such obligations.
defines and establishes general order of circulation of secondary securities on the territory of
Kazakhstan as well as the order of issuance and placement of Kazakhstan deposit receipts.
sets conditions for the further improvement of the systems of licensing of and supervision over
financial organizations on the securities market and the creation of conditions for fair
competition between them.
governs the registration of contracts involving securities by the registrars and nominal holders
and new principles of nominal holding based on strict double-level system of nominal holding,
reflection of the data of securities of nominal holders of the second level within the system of
nominal holder of the first level, - the Central Depository of Securities.
for the time established basic rules of revelation and prevention of fraud on the securities
market as well as rules concerning manipulation of prices and insider contracts on the market.
established norms, which define the extent of information to be unveiled by the authorized
state agency, issuers and organizations, which represent the infrastructure of the securities
market.
71
4. Self-regulation in the securities market of the Republic of Kazakhstan

Despite the fact that the creation of two-tier system of regulation of activities of professional
participants of the securities market in Kazakhstan by means of self-regulating entities was more than
once mentioned in various official programmatic documents as of the main directions of the
development of securities market, self-regulation of the activities of professional participants of the
securities market in Kazakhstan is still underdeveloped. Presently, there are two such self-regulating
entities in Kazakhstan: (1) Kazakhstan Association of Registry Holders, which unites almost all
registrars in Kazakhstan, and (2) Association of Assets Managers, whose members are being
companies dealing with pension assets management, custody banks and pension funds.
5. Classification of methods and procedures of supervision
The system of certain procedures, methods, rules of regulation, and supervisory relations, which are
shaped in the securities market, can be classified according to:
Entities of regulation, activities of which are to be regulated and supervised, and which are
represented by organizations engaged in entrepreneurial activity in the securities market
x
professional participants of the securities market, that is legal entities, which work in the form of
joint-stock companies and which are licensed to work in the securities market (clauses 1.1-1.7);
organizations licensed to work in the securities market, such as organizers of trades (stock
exchange and quoting agency of the off-exchange securities market); and
organizations that have permits to operate in the securities market, such as self-regulating
entities in the securities market and educational centers dealing with training of qualified
specialists of the securities market;
1) Organizations involved in keeping registers of securities holders ("registrars"). Registrar is a

professional participant of the securities market, who forms, keeps and maintains the system of
registers of securities holders.
2) Central Depository of Securities (CD). The Central Depository is a professional participant of the
securities market which registers contracts with financial instruments, registers and confirms the
depositors' (their clients) rights as to the financial instruments, dematerializes and stores financial
instruments, issued in documentary form including clearing of contracts with financial instruments
between depositors as well as maintenance of system of registers of securities' holders provided there
is a relevant license.
3) Custodians ("CUS"). A custodian is a professional participant of the securities market, which
registers financial instruments and money of the clients and confirms the rights thereto, maintains
documentary financial instruments of clients and is responsible for their safety.
4) Brokers/dealers. A broker is a professional participant of the securities market, who concludes
transactions with issued securities and other financial instruments under assignment of, at the cost of
and in the interests of the client. A dealer is a professional participant of the securities market, who
concludes transactions with issued securities and other financial instruments in its interests and at its
own cost by means of placing quotations at the organized securities market and/or by means of
publishing them in mass media.
72
5) Transfer agents (TA). A transfer agent is a professional participant of the securities market, who
renders services on purchase and transfer of documents (information) between clients.
6) Organizations that manage investment portfolios (IPM).
7) Companies that manage pension assets (PAMC) and managers of investment portfolios are
professional participants of the securities market which, on their own behalf and in the interests and at
the cost of a client carries out activities of managing the object of civil rights.
8) An trades' organizer is a stock exchange and quoting entity of an off-exchange securities market
(Kazakhstan Stock Exchange KASE). Stock exchange is a legal entity created in the form of
joint-stock company and dealing with organizational and technical support of trades by means of
holding them using trade systems of the organizer. Quoting entity of the off-exchange securities
market is a legal entity created in the form of a joint-stock company and dealing with organizational
and technical support of trades by means of utilization and maintenance of the system of quotation
exchange between clients of the organizer of trades.
9) Self-regulating organizations (SRO) of the securities market are legal entities created by
professional participants of the securities market in the form of associations (unions) with the purpose
of establishing uniform rules and standards of operation in the securities market.
The sources of information
The Department of Financial Supervision, when exercising supervisory functions, utilizes information
on a permanent basis that is received:
x
in the process of licensing of a commercial entity;
in the course of exercising current control over the activities and subjects of regulation of the
securities market, by means of regular reports and additional information (described in Section
"Types of reporting for the entities of the securities market (SM)"); and
during check-ups of activities of the SM entity (described in Section "Checking up the

activities of the SM licensed participants").
The following are the additional sources of information on the activities of SM entities used by the
department of financial supervision:
x
any mass media legalized in accordance with the legislation of the Republic of Kazakhstan;
information submitted by potential and existing issuers of securities and investors; and
other official sources.
Certain components and procedures that are subject to permanent control (described in Section
Components, methods, and procedures of supervision over the activities of the SM entities)
It is necessary to point out that various types of licensed participants of the securities market of the
Republic of Kazakhstan are applied with very similar and uniform principles and standards of
supervision, most important of which are shown in the table below.
73
Requirements to the licensee of the securities market

Requirement
Formation of the
authorized and own
capital
Prudential norms and
criteria of financial
stability
Organizational structure
Qualified specialists
Software
Daily reporting
Weekly reporting
Monthly reporting
Quarterly reporting
Annual reporting
Annual external audit
Subjects of regulation of the SM

Custody Brokers/
TA
PAMC
Dealers
+/+
+/+
+/+
+/+
Registrars
CD
+/+
+/-
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
IPM
KASE
SRO
+/+
+/-
-/-
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
-
6. Types of reporting of the licensed participants of the securities market

Professional SM participants submit reports summarizing their activities, which are subject to checkup according to the principle of consecution, where the data of submitted reports and data of previous
reports are analyzed and compared, and to cross-checkup of the compliance of data of submitted
reports with the data of reports of other participants of the securities market.
Below are the types of reporting of the SM licensed participants:
1) Daily electronic reporting, to be submitted by custodians with regard to the registration and
keeping of pension assets in custody, in view of each separate serviced accumulative pension
fund, namely reports on movement of pension assets; accrued and paid commission
remunerations; structure of pension assets; movement of pension assets in view of each
separate foreign currency.
2) Weekly reporting, to be submitted by:
74
registrars on the registered operations of transfer of securities;
brokers/dealers on the contracts concluded in off-exchange securities market with nonstate securities; and by brokers/dealers who are being nominal holders - the reports must
be submitted for registered operations of transfer of securities;
the stock exchange upon the results of trade of non-state securities;
banks-custodians, with regard to activities, related to the registration and keeping of

pension assets in custody, in view of each separate working day of the week and each
separate serviced accumulative pension fund, namely reports on movement of pension
assets; accrued and paid commission remunerations; structure of pension assets;
movement of pension assets in view of each separate foreign currency; and
organizations that carry out investment management of pension assets for the activity
related to the allocation of pension assets and their assessment, in view of each separate
working day of the week, namely reports on the cost of net pension assets; structure of
pension assets in view of each separate serviced accumulative pension fund; concluded
transaction on investment of pension and own assets; structure of own assets; calculation
of prudential norms and financial reporting.
3) Monthly reporting, to be submitted by:
x
brokers/dealers with summary data on non-performed and performed contracts with

securities;
the stock exchange, summarizing the activity on organizing trades with securities,
including data on concluded transactions within the trade system, members of the KASE,
securities, included into trade lists, and financial reporting;
banks-custodians, with regard to activities, related to the registration and keeping of

pension assets in custody, namely summarized monthly reports on movement of pension
assets; accrued and paid commission remunerations; structure of pension assets;
movement of pension assets in view of each separate foreign currency; and
organizations that carry out investment management of pension assets for the activity
related to the allocation of pension assets and their assessment, namely reports on the
cost of "net" pension assets; structure of pension assets in view of each separate serviced
accumulative pension fund; concluded transaction of investment of pension and own
assets; structure of own assets; calculation of prudential norms and balance sheet.
4) Quarterly reporting, to be submitted by all SM entities, summarizing the results of their

activities, excluding companies managing pension assets and the stock exchange. Namely the
following reports are submitted by:
x registrars: reports on serviced issues of securities, number of transactions with certain
securities, leftovers of securities on the accounts of nominal holders;
x Central Depository: reports on all transactions on transfer of securities and on those
securities that are nominally held by its depositors;
x bank-custodians: reports on all concluded transactions on transfer of securities and on
securities that are in nominal holding;
x brokers/dealers: reports on all concluded transactions involving securities and securities
found in nominal holding; and
x self-regulating organizations: reports on all conducted measures in accordance with main
goals and tasks and in accordance with annual internal plan of activities submitted to the
authorized body as well as information on members of SRO, member of the Board of SRO
and officers of the executive body of SRO.
7. Check-ups of the activities of the participants of securities market
The SM entities are checked by the Department of Inspection and can be scheduled (conducted in
accordance with the approved quarterly plan) and unscheduled and conducted due to the following:
1) violation of securities market legislation is revealed in the course of examining the reporting
of the SM entities;
2) complaint on the actions of a securities market entity is received; and
3) other state bodies require it.
75
The check-ups are conducted at the whereabouts of SM entities or by means of requesting copies of
necessary documents. Duration of one check-up does not normally exceed thirty days.
Check-ups at the whereabouts of SM entities are, in fact, the most complete and accurate sources of
information about the activities of securities market participants. The main purpose of conducting
check-ups is to determine compliance of the real state of business of an entity with the requirements of
legislation of the Republic of Kazakhstan and with the data submitted by an entity during licensing
process and the data in reporting. Namely the following is checked:
1) general organization of business and documents management;
2) presence of internal documents that govern the procedure for carrying out activities in the
securities market and that establish organizational structure of the licensed SM entity;
3) availability of facilities, soft- and hardware ensuring proper and uninterrupted professional
activity in the securities market;
4) presence of minimal number of specialists, who possess relevant qualification certificates and
documents, which prove their labor relations with the SM entity checked;
5) contents of logs of registration, clients accounts, other registration matters that are needed to
be conducted by the licensed entity, as well as their authenticity and compliance with the
legislation of Kazakhstan pertaining to the securities market;
6) originals of clients orders and instructions, contracts with counterparts of the licensed SM
entity as well as its own internal (investment) decisions, which serve as a basis for any
operations or transactions associated with activities in the securities market;
7) safety of keeping of primary documentation and registration logs of the licensed entity as well
as the regularity of archiving of the mentioned documentation submitted in the electronic
format;
8) authenticity and compliance of the procedure of preparation, registration and maintenance of
the daily calculations of own capital as well as the criteria of financial stability and of
prudential norms;
9) book-keeping policy and compliance of basic principles and rules of accounting with the
requirements of legislation of the Republic of Kazakhstan on accounting and book-keeping;
10) presence of financial investments and other assets, the value of which is reflected in submitted
financial statements, by means of checking original excerpts of registry holders, nominal
holders, which confirm the property rights to securities or the originals of documents
confirming their acquisition, legality of their usage as well as correctness of reflection in
balance sheets; and
11) incoming and outgoing documentation of the licensed SM entity, its registration in view of
compliance of all aspects of its activity with the legislation of the Republic of Kazakhstan.
After the completion of check-up, a "check-up act" is prepared within five days, which is to be signed
by the members of controlling commission and sent to the entity that was checked.
The checked entity either signs the check-up act or officially (in writing) objects thereto. Based on the
objection, a comparative table is drawn up (contents of the act and objections thereto), in which
commentaries and clarifications of the members of the controlling commission as to the violations
discovered, are produced.
76
The check-up act and, when present, the comparative table, is submitted to the administration of the
National Bank of the Republic of Kazakhstan for a decision on further steps with regard to the entity
checked or of the officers thereof.
Further operation of the securities market entity with regard to elimination of violations found in the
course of a check-up, is controlled by a supervising specialist from the Department of Monitoring and
Prudential Regulation of the Department of Financial Supervision.
8. Components, methods and procedures of supervision of activity of regulated entities of the

securities market
The system of supervision over activity of SM participants may be divided into separate components
of the control over:
1) compliance of general organization of business of a SM participant, activity procedure for its
activity in the securities market and its internal documents management system with the
requirements of the legislation of the Republic of Kazakhstan on securities market and internal
rules of regulated entities of securities market agreed upon with the authorized agency;
2) operations of participants of SM. Transactions carried out by participants of SM are checked
with respect to their compliance with the requirements of legislation of the Republic of
Kazakhstan on securities market;
3) SM participants staff. Supervision of compliance of qualification of SM participants staff
with the qualification requirements. This includes supervision over availability:
x of statutory minimum of specialists with relevant qualification certificates issued by
authorized agency, which may be of the following three categories: (1) for the right to
conclude transactions; (2) for the right of registration and execution of transactions in the
securities market; and (3) for the right of management of investment portfolio, in the staff
of a SM participant;
x of qualification certificates of relevant category with officials and other employees
participating in conclusion, performance, registration and recording of transaction with the
securities, execution of other operations associated with the licensed activities in the
securities market (except for the technical transactions);
x of consents of the Qualification Commission of the authorized agency given to the
managers, including chief accountants of the licensees to their appointment/election.
Candidatures for the managerial positions get approved in order to determine their
professional aptitude. It is mandatory for all the licensees;
4) financial statements data of SM participants. Balance sheet with an explanatory note must be
presented weekly by PAMC, monthly by the stock exchange, and quarterly by other SM
participants (except for SRO). These SM participants upon expiry of an accounting year must
present financial statements, auditors report confirming the data of the financial statements for
the past fiscal year;
5) compliance of value and procedure of calculation financial stability factors and prudential
standards of SM participants with requirements established by the normative and legal acts on
the securities market:
x financial stability criteria established for brokers/dealers: adequacy of owned capital and
absolute liquidity of assets;
77
x financial stability criteria established for registrars: adequacy of own capital and absolute
liquidity of assets;
x banks-custodians must comply with the requirements established by the National Bank of
the Republic of Kazakhstan in the Rules on prudential standards for the second tier banks;
x prudential norms established for the PAMC are the following: adequacy of own capital,
profitability of the pension assets, investment of own funds to non-current assets or
inventories, amount of reserve capital depending on the amount of the pension assets that
are under investment management of the PAMC, investments at cost of own assets,
investments into non-governmental securities of one issuer, in deposits in one second tier
bank;
x Central Depository of securities must meet the requirements on minimum amount of own
capital calculated in accordance with the accounting rules as well as reserve and insurance
capitals;
x stock exchange should comply with the requirement on minimum amount of own capital
calculated in accordance with the accounting rules;
6) availability of material, technical, software and other facilities of SM participants that ensure
uninterrupted performance by them of the main activity on transactions with the securities,
their registration or effective performance of such activities with the securities, as well as their
compliance with requirements of the effective legislation of the Republic of Kazakhstan.
9. Development of the Securities Market
The concept of development of financial sector of the Republic of Kazakhstan for the period till 2006
approved by the Enactment of the Government of the Republic of Kazakhstan in July of 2003
established that, measures on further introduction of international standards of regulation of certain
segments of the financial market, such as principles of the Basel Committee for the banking system,
requirements of the International Association of Insurance Supervision (IAIS) for the insurance
market, principles of regulation of securities market of the International Organization of Securities
Commission (IOSCO) will be continued for the purposes of improvement of mechanisms and
procedures of supervision over the financial market. Apart from that certain standards and directives
of the European Union on the issues of prudential regulation of the financial market participants will
be gradually adapted for the purpose of formation of healthy and complete infrastructure of the
financial market.
The following are the main directions of development of the securities market:
1) development of domestic institutional investors;
2) extension of possibilities for investments;
3) improvement of mechanism of protection of rights and interest of investors;
4) elaboration and implementation of principles of risks management in the securities market;
and
5) development and upgrade of technical infrastructure of the securities market.
78
Development of domestic institutional investors

Main task here is development and realization of the potential of domestic institutional investors as
main entities of mobilization and redistribution of vacant resources into the real sector of economy.
Currently only PAMC are the large institutional investors in Kazakhstan, whilst there is not a single
investment fund operating as of today, and the second tier banks, which have concentrated sufficient
volume of resources, and insurance organizations due to the weak development of the insurance
market have not fully realized their potential of the institutional investors.
In this connection one of the priority tasks of development of the securities market is improvement of
mechanisms of attraction of savings of the population (non-professional investors) through collective
forms of investments. Efforts of the state will be mainly aimed at development of investment funds as
the main form of voluntary attraction of savings of the small non-professional investors and at
investment of such funds into the equity market instruments. Adoption of the new law "On
Investment Funds" and improvement of the normative base of the organizations conducting the
activity on securities portfolio management will promote realization of such task. This will also raise
the effectiveness of investment of assets of legal entities and qualified investors individuals.
It is assumed that any organizations licensed to manage investment portfolios, except for insurance
(reinsurance) organizations, will be able to manage investment funds for the purpose of boosting
development of collective investment schemes. Such companies will be able to use the networks of
transfer-agents in the securities market or their settlements departments, if it is a bank that manages the
investments portfolio, in order to distribute participatory interests or shares of investment funds. Such
a scheme will allow using all possible resources for people at large to participate in investment
programs. Optimization of taxation of incomes of investment funds depositors will be another
important direction of development of the forms of collective investments. Measures on
implementation of such optimization will be taken in the course of elaboration of the draft of new law
"On Investment Funds". At the same time Investment Funds of Kazakhstan (IFK) was created for
realization of the state investment policy. Key activities of IFK are reflected in the Strategy of
Industrial and Innovational Development till the year 2015.
Extension of possibilities for investments
Formation of comprehensive list of attractive financial instruments is one of the priorities for
development of domestic securities market. The principal goal of this direction is the creation of
conditions for appearance and establishment of the new financial instruments, which will favor
investor's ability to reallocate credit risks by means of diversification of investments, and as for the
enterprises-issuers new sources of borrowings that are a relatively cheap alternative to bank credits.
Today, one can observe heavy deficit of attractive financial instruments of the securities market, which
was caused by constant growth of investment potential of domestic institutional investors. Another
factor entailing the deficit of instruments attractive for institutional investors is high level of affiliation
of financial market participants with the principal issuers of the official "A" list of Kazakhstan Stock
Exchange, particularly with regards to the shares issued by the financial organizations, mostly by
banks. Thus, the organizations performing investments management of pension assets for the
purposes of diversification of the investment portfolios of accumulative pension funds are forced to
mostly place available pension assets in foreign markets.
Realization of this goal requires implementation of a system of procedures and measures aimed at the
following:
79
increase of investment attractiveness of Kazakhstan shares and bonds within which a special
consideration will be given to observance of corporate management standards, reinforcement
of principles of protection of rights and interests of minor shareholders, payment discipline at
the joint-stock companies and transparency of their activity; and
development of debt securities market, as part of which measures stimulating emergence of

new types of bonds (agency or mortgage bonds) and new instruments of monetary market
(commercial papers and deposit certificates) will be implemented.
Launch of market of agency bonds will allow the financial agencies to perform an effective borrowing
policy during realization of the state investment policy. Establishment of this instrument will by
promoted by preferential taxation, authorization of purchase of agency bonds at the expense of the
pension assets of accumulative pension funds and assets of insurance (reinsurance) organizations,
admission to refinancing by the National Bank as well as inclusion of agency bonds into the rank of
liquid assets for calculation of prudential standards and financial stability factors of the financial
institutions. These measures will stimulate establishment of the agency bonds as attractive marketable
instruments and will increase their competitiveness against corporate bonds.
Launch of market of convertible deposit certificates will promote occurrence of a new source for
borrowings for the second tier banks and increase of their deposit base, while flexibility of terms and
procedure for payment of interest thereon will promote marketability of this instrument;
x
development of the derivative securities and financial instruments market, within which
measures stimulating occurrence and establishment of Kazakhstan depositary receipts,
derivative instruments on debt securities, hedging instruments of interest and foreign currency
exposures, contract instruments will be continued.
Development of market of hedging instruments of interest and foreign currency risks will promote risk
reduction of both institutional investors and enterprises participants of export-import transactions.
Occurrence of derivative contract instruments with base assets for the goods will promote risk
deduction of foreign trade transactions against variation of prices.
Improvement of mechanism of protection of rights and interests of investors
Constant improvement of the system of protection of rights and interests of investors is required as the
securities market gets developed, new financial institutions and instruments occur and new
technologies develop. The level of protection of rights and interests of shareholders in the Republic of
Kazakhstan deserved the rate of the European Bank for Reconstruction and Development of
"sufficient comprehensive protection" in 2000.
Realization of this trend requires step-by-step introduction of the following measures:
x
80
transition to the international standards of disclosure of information in the securities market,

which will be implemented on the basis of adaptation of the European Union Directives On
Disclosure of Information in Kazakhstan, particularly, during the listing procedure in the
organized market, in the offering prospectus, regular statements of the listing companies and
information about major holders. The principal measure aimed at increase of informative
transparency of Kazakhstan securities market will be creation of centralized systems for
disclosure of information on activities of the joint-stock companies (including introduction of
mandatory disclosure of information by all the participants of the financial market and jointstock companies). Another material step in this direction will certainly be transition by all the
economic entities of the Republic of Kazakhstan to the international standards of financial
reporting in 2003-2004 which will ensure completeness, lucidity and authenticity of the
disclosed information for investors;
x
improvement of regulation of the licensed SM entities. This measure contemplates introduction

of prudential regulation with regard to the licensed entities of the securities market, which are
the main intermediates of investment process. At the same time there will be gradual adaptation
of certain standards of financial stability, professional ethics and procedures of cooperation with
the clients to comply with the European Union Directives requirements. The mentioned
measures besides increase of level of investors protection will facilitate lucidity of the domestic
market which is one of the conditions for upgrade of the development level of securities market;
encouragement of bona fide competition in the securities market. Within this issue measures on
adaptation of the norms of European Union Directives on issues of inside trade and abusive acts
in the securities market will be taken. Moreover, such preventive measures as enhancement of
transparency level of stock auction, disclosure of information on conflict of interests and
activation of business of the market-makers in the securities market will be stimulated; and
measures to ensure preservation of assets of institutional investors besides the package of

aforementioned measures, will include constant improvement of listing requirements including
that on differentiation of issuers as per economy sectors, increase of level of diversification of
their investment portfolios and establishment of insurance risks in the securities market.
Elaboration and implementation of principles of risks management in the securities market.

With regard to risks management in the securities market, it should be noted that in the legislation of
the Republic of Kazakhstan besides the following general requirements to the professional participants
of the securities market on:
x
availability of certain minimum of the qualified specialists;
compliance with the prudential standards and financial stability criteria;
compliance with the requirements on organizational structure, availability of separate sructural

subdivisions for each type of activity carried out in the securities market;
availability of software-hardware, means of communication and other property enabling

uninterrupted and high-grade servicing of the clients;
annual auditing of financial and economic activity;
there are no any specific standards purposed for risks management or favoring their mitigation, like
exposure hedging.
Participants of securities market and the authorized body of the Republic of Kazakhstan still have to
work on elaboration of rules of risks management, which would identify and limit fraud and
manipulations in the securities market, including with the use of the inside information, as well as the
activity of the securities market participants that is in conflict with the principles of commercial ethics.
It is expected that as both insurance and securities markets keep developing further in the Republic of
Kazakhstan, insurance of transactions with securities and exposure hedging of activity of different
categories of professional equity market participants will be also duly developed apart from creation of
special systems of risks management in the equity market. Experience of insurance organizations
from the countries with advanced financial systems that deal with insurance of participants of
securities market would be very useful for Kazakhstan at this stage.
81
Development and improvement of technical infrastructure of the securities market.

Development of technical infrastructure of the securities market will be mainly aimed at improvement
of current infrastructure, establishment of its certain components and enhancement of the procedure
for interaction with the foreign securities market participants.
The following are the primary tasks of the development of technical infrastructure of the national
securities market:
82
Ensuring full access for the citizens of the Republic of Kazakhstan living in different regions
of the country to the services of financial institutions. Development of transfer-agents
network in the securities market will be required for that in the nearest future. After such a
network is sufficiently formed, the states actions will be aimed at upgrading the quality of the
intermediary services rendered by the transfer-agents;
Increasing reliability and enhancing informational systems of all the entities of the technical
infrastructure, first of all those of the Kazakhstan Stock Exchange, Central Depository and
independent registrars. Requirements to operation of the technical systems of all the entities
of the technical infrastructure will be increased and normative and legal base on the procedural
and methodological issues of accounting of new financial instruments and transactions
therewith will be elaborated as part of this task;
Increasing the level of protection of the rights certified with the securities by means of
establishment of a diversified organization (with branches in all the oblast centers and largest
cities of an oblast level) on the base of he Central Depository in the years 2004-2005, which will
perform functions of a central depository, registrar and payment agent in the securities market;
Development of procedures for interaction of domestic market technical infrastructure entities

with the entities of the foreign states securities markets, for instance on the issues of mutual
acknowledgement of licenses and opening of nominal holders accounts for non-residents;
Expansion of the list of operations of broker and dealer organizations of the securities market
and, at the same time, increasing of the level of their capitalization including the access to the
exchange market.
Chapter 6
THE FURTHER DEVELOPMENT AND RELIABLE OPERATIONS OF THE SECURITIES
MARKET IN KYRGYZ REPUBLIC
by
Jury Svistov
Winning investors confidence so that they invest money in securities and keeping and consolidating
that confidence are the main tasks of any professional activity on the stock market.
We all know that a small failure in the mechanism for attracting investor capital to the stock market
can cause major problems and financial loss for all participants in securities trading. Regarding the
competent government body, even a tiny negative event affecting investors capital takes a heavy toll,
sometimes lasting many years, on the reputation and image, not only of the body that regulates the
securities market, but also of the government. Harm to investors interests can seriously damage the
reputation of the whole country in terms of its attractiveness for investors, as well as cause social
disturbances and instability.
A national securities market founded with its corresponding infrastructure and legislation in a short
space of time, with the coincidental aim of promoting the development of a market economy in our
country, unfortunately cannot be a reliable guarantor of the interests and rights of stock-market
investors.
It is clear that to establish a system for attracting investor capital through securities, we need more
time and financial inflows, particularly for work with the population, who in the future must become
active domestic investors.
The work and measures that must be accomplished to improve confidence among stock-market
investors include: improving corporate governance; achieving transparency of securities market
operation; improving regulation of securities issuance; developing market infrastructure and financial
instruments; improving investment conditions and protecting the rights of investors; strengthening and
broadening international cooperation on issues relating to stock-market development.
In this regard, active work is under way in Kyrgyzstan on creating an adequate system to protect
investors interests. The implementation of such a system should boost the confidence of all investors,
be they large companies, the general public or institutional investors, both domestic and foreign.
The State Commission on the Securities Market of the Government of the Republic of Kyrgyzstan,
which my colleagues and I represent at this conference, has drafted a special bill "on the protection of
the rights and legal interests of investors on the securities market". In our view, the adoption of this
law will address many legal aspects that were not covered in previous legislation, such as the
introduction of reliable mechanisms to protect the rights and interests of stock-market investors. In
addition to existing legal requirements, the bill defines the main requirements in terms of disclosure of
information, the obligations of professional participants in the securities market, public companies,
Vice Chairman, State Commission on Securities Market, Kyrgyz Republic
83
public sale of securities, price manipulation, insider trading, and the role and powers of the
government body for the protection of investors rights.
The rapid adoption in our country of this law and its proper implementation will make it possible to
establish a reliable system of instruments and mechanisms to prevent fraud involving the capital and
securities of investors and to stop illegal activity on the stock market. This is directly linked to the
prevention of strife, which can, in the largest events, easily escalate into social upheaval.
Given that consolidation of the financial system is one of the most important tasks for any
government, since steady economic growth requires the mobilisation of the necessary financial
resources, every effort must be made to raise the confidence of domestic and foreign investors in the
securities market.
To achieve this, we must:
x
ensure transparency on the securities market;
define the regulation of public and private issuers of securities;
establish a segment of first-class financial instruments on the securities market;
provide a reliable system for registration of securities ownership;
establish unified standards for the sale of securities;
broaden the range of financial instruments available on the securities market;
popularise securities among potential investors;
create the conditions for attracting the resources of institutional investors on the securities
market;
develop the potential of the competent government body on the securities market;
integrate the national stock market into the capital markets of Central Asia and other countries.
Achieving transparency in the securities market requires transparency in the activity of market
participants and access to information about the securities market. This is a necessary condition for
market development, since transparent activity on the stock market and access to information can help
reduce risks, which makes it possible to make appropriate investment decisions and raise investor
confidence in the market.
Currently in Kyrgyzstan transparency in activity on the securities market is achieved through
disclosure of necessary information by market participants, according to the methods established by
the legislation, i.e. the compulsory publication of information required by law, the presentation of
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contained therein.
An important part of the work of the competent securities body consists in monitoring and supervision
of the activity of professional securities market participants and securities issuers.
Unfortunately, disclosure levels remain low some issuers and professional market participants fail to
present the necessary accounts, while others do not comply with the rules on content and presentation
or do not disclose significant facts. Consequently, for repeated infringement of the legislation on the
presentation of accounts to the competent body, in 2002-2003 the State Commission on the Securities
84
Market revoked the licences of 12 professional participants, suspended the licences of 10 professional
participants, and warned a number of other professional participants. In 2003, 57% of the fines applied
by the State Commission on the Securities Market for infringement of the legislation on securities
were for infringements of the rules on the presentation of accounts, and 5% were for infringement of
the right of investors to receive full and objective information about securities.
The competent body must tighten measures for enforcing compliance by securities issuers and
professional participants with the legislation on the presentation of accounts, and improve the quality
of analysis of accounts presented by market participants. Regarding the presentation of quarterly
accounts by public issuers, we are about to draft interim financial accounting rules, in strict
compliance with international standards of financial accounting. This will tighten the disclosure
requirements for professional securities market participants.
To achieve this, it is essential to design a programme of measures to raise the standards of disclosure
and the transparency of information on the securities market, including:
x
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participants in the securities market;
implementation of an effective system for the collection and dissemination of information

subject to disclosure, i.e. an information centre (where any interested person may consult
information about issuers, professional participants and other information about the securities
market);
cooperation of information agencies, the media, consultancies and professional participants in

the securities market to circulate information subject to disclosure to particular groups of
investors;
fulfilment of legal disclosure requirements.
With the development of information technology, we are working on disseminating information via
the Internet and e-mail. This can be a valuable way to provide advice to unqualified market investors.
The law "on joint-stock companies" adopted a year ago divided securities issuers into two categories,
public and private, to facilitate their regulation. In accordance with the existing legislation, public
issuers are companies that sell securities to the public or whose securities are held by 500 or more
owners. In accordance with the abovementioned law, work is under way to establish separate
requirements for public and private issuers tightening requirements for public issuers and
simplifying them for private issuers. Until now, the requirements for public and private issuers were
identical. For example, all issuers had to publish annual financial accounts.
Tightening the requirements for public issuers is necessary to avoid various negative consequences for
investors, since public issuers raise capital by selling their securities publicly to an unlimited number
of people.
Today the priority of the supervisory work of the competent body on the securities market is to
strengthen control of public issuers. In this regard, the requirements on public and private issuers will
be defined in relation to:
x
the issue and sale of the issuer's securities,
the disclosure of information,
supervision.
85
Standards for the issue of securities will be defined for public and private issuers, including stringent
requirements on prospectuses for securities issues by public issuers, and the repeal of the requirement
for private issuers to register prospectuses. The sale of securities of private issuers should be allowed
outside the trading places run by the organisers of trade on the securities market.
Requirements on the disclosure of the necessary information by public issuers will be established,
providing for the presence of a department or person at the issuers, responsible for the disclosure of
information about its activity. For private companies work will be conducted to simplify disclosure
requirements, with the exception of companies subject to disclosure requirements under the special
law of the Republic of Kyrgyzstan (commercial banks, insurance companies, etc.).
In addition, the whole policy of regulation of issuer activity is being reconsidered in the sense of
easing the regulation of private issuers and strengthening the supervision of public issuers. The
competent government body on the securities market will conduct audits of public issuers. Special
requirements for the audit of public companies will be established and the requirements regarding
indicators of financial-economic activity and disclosure of information by issuers of listed securities
will be tightened.
Regarding the listing of securities, the government must be able to establish minimum requirements
for organisers of trade on the securities market. It is important to improve the responsibility of
organisers of trade on the securities market for the listing of securities. This creates double supervision
of issuers of listed securities by the government and by the organiser of trade, which will lead to a
higher status for listed securities.
With a view to protecting protect stock-market investors, measures will be taken to improve standards
and rules for the activity of professional participants in the securities market. Requirements for
indicators of the financial-economic activity of professional participants must be raised. Rules must
also be drafted on brokers' advice to their clients, which will include the compulsory disclosure by
brokers to all potential investors of the information contained in the prospectus for securities issues, as
well as information about the risks associated with securities. The rules must also provide for the
compulsory recommendation of brokers for the provision of securities to investors.
When these measures are implemented, investors will be able to make appropriate investment
decisions, which in turn will avoid various negative consequences. They should also prevent
untransparent and risky companies from raising capital from unqualified investors.
Considering that a reliable system for registration of securities ownership is one of the necessary
conditions for a stable and attractive national stock market and for investors' confidence in the
securities market, a registration system must be developed in order to minimise the risk of infringing
investors' rights.
In this regard, we intend to conduct work to complete the legislation and adopt measures to raise
standards of activity of professional participants in the securities market, particularly registrars. These
measures include: a policy to ensure the reliability of registrars and their independence from issuers;
stricter requirements regarding the minimum amount of registrars' own funds; minimum requirements
on the composition and structure of registrars' assets; a requirement for registrars to keep compulsory
duplicates of information about securities ownership off their premises; compulsory insurance of risks
of the accounting system for those keeping registers of securities owners; a minimum amount of
compulsory insurance and a list of the risks insured (technical failure, errors or illegal action by staff,
damage to the issuer, etc.).
86
The other important area of work on building investor confidence in securities is the popularisation of
the securities market. Efforts in this area will not only attract new participants to the stock market, but
also protect them from possible errors and risks.
The stock exchange can be popularised through work in the following two main areas:
x
information and education,
training.
Information and education on the securities market will be achieved by the systematic disclosure of
information about the securities market by market participants the government and professional
securities market participants. It is important to look at ways to disseminate information about the
stock market through the media. Information on the development of the securities market can be
provided through close cooperation with the media and by organising seminars and conferences on
market issues, including the rights and obligations of investors, investment risks and the activity of
securities market participants.
Cooperation with the media must be regular with the aim of providing frequent information on the
abovementioned issues, the activity of the government body (drafting regulations, enforcing
compliance by issuers and professional participants with the legislation governing the securities
market, the results of audits of issuers and professional participants in the securities market, etc.), and
the current situation on the stock market. Timely and full information for investors about the securities
market of Kyrgyzstan should also be posted on the official website of the State Commission on the
Securities Market.
The development of the securities market and its increasing complexity requires an organised process
of drafting new frameworks and constant raising of the qualifications of the main participants (issuers,
dealers, brokers, analysts, etc.). Training is key to popularising the securities market. This mainly
consists in preparing market specialists and raising their professional standards.
In addition, given the content of the regulations governing securities market issues, there is a need for
educational seminars on issues related to market operation. In this regard, the government body,
together with educational facilities, needs to draft educational programmes to train securities market
specialists that encompass all the regulatory issues of stock market operation.
The popularisation of the stock market is one of the main conditions for further market development.
It is also a complex task, because it requires significant financing. We therefore need to design a
programme that provides for the achievement of all the main aspects of popularising the securities
market, including financing.
Starting last year, as part of the project on strengthening corporate governance, the State Commission
on the Securities Market, together with experts from the Asian Development Bank, started work on
strengthening the capacity of the State Commission on the Securities Market to build public
confidence in the capital market.
An important step for the further development of the Kyrgyz stock market is its integration with other
regions, first of all with other Central Asian countries. The stock markets of these countries are
currently at different stages of development some have fairly developed markets with large reserves
of investment capital; whereas infrastructure is only just developing in others. The integration of the
stock markets of the Central Asian countries will spur their development, and which will enable the
87
Kyrgyz market to attract investment through a broader investor base and through the provision of
services on the markets of other countries.
Given that consolidation of the financial system is one of the most important tasks for any
government, since steady economic growth requires the mobilisation of the necessary financial
resources, every effort must be made to raise investor confidence in the securities market.
To achieve this, we must first remove barriers preventing issuers, professional participants and other
participants on the Kyrgyz market from operating on foreign securities markets; increase their
attractiveness for foreign investors, by raising the quality of their investor services; and improve the
activity and lower the risk of securities market operators.
We must also draft and enact unified principles and rules for the regulation of the activity of
professional participants in the securities markets of Central Asia, which provide for:
x
access to professional activity on securities markets;
unified principles of activity on the organised securities market (system of listing and
disclosure, organisation of trading and supervision of securities transactions);
reliable registration of securities ownership.
an unified approach to creating a system of disclosure by participants on the securities market;
more accessible ways to exchange of information between securities market regulators in

Central Asian countries.
To achieve these aims, the State Commission on the Securities Market:

x
has initiated work on harmonisation of legislation with the competent bodies on securities
market regulation in the Central Asian republics;
is making propositions to hold meetings and consultations with the competent bodies on
securities market regulation in the Central Asian republics on a regular basis, with the aim of
providing effective cooperation.
An important aspect of integration is cooperation between our governments on the supervision of the
activity of professional participants in the securities market.
As you have gathered from this paper, nothing extraordinary is happening in Kyrgyzstan to build
investor confidence in securities. This is quite true, because to tackle this issue, we have chosen the
path, already approved by many countries, of painstaking, intensive and consistent work, which,
unfortunately, has been paved not only with successes, but also with errors and losses. In almost 13
years of the independence of Kyrgyzstan and the existence of our stock market, we have realised this,
which I think is already an achievement. I wish you all every success on the paths you choose to win
the hearts of investors.
88
Chapter 7
THE DEVELOPMENT OF INSTITUTIONAL INVESTORS
AND PENSION FUNDS IN KYRGYZSTAN
by
Kubatbek Alymbekov
The attractiveness of Kyrgyzstan for investors has always been considered from the point of view of
foreign investment. For more than a decade now, our republic has dreamed of a shower of foreign
investment. And for good reasons only foreign investors have the wherewithal to bring in large
volumes of capital, new technology and modern management methods. However, in this paper, I
would like to look first at the development of domestic investment. The reason for this is that a large
and liquid domestic capital market is very important for foreign investors.
What is the main function of the stock market in the economy? As we all know, it is to direct available
cash and savings temporarily into the economy. If this function is well served, the economy will be
efficient. What is the source of our domestic investment problems? Why is the investment process
moving so slowly? Companies are unable to attract capital, because there is not enough money on the
market. And investors are not investing, because there are no suitable financial instruments on the
market, i.e. there is nowhere for them to invest their money. This is a vicious circle.
Institutional investors banks, insurance companies and investment funds must be the foundation
for the development of domestic investment. Institutional investment is based on the confidence of
depositors and customers, and that confidence must not be breached. The activity of institutional
investors must therefore be subject to strict government regulation and operate with maximum
transparency towards customers and depositors. There must also be a readily comprehensible system
of evaluation of institutional investors' activity. In my view, the legislation (the law "on the securities
market") should include a definition of the term "institutional investor" and set forth a general
regulation. For example, institutional investors must be public companies with transparent corporate
management. The law should also define the requisite information about the institutional investor's
activity that must be made available to its clients. It should be made a legal requirement to disclose
that information not only to clients, but also to the general public. There is no place for commercial
secrets here.
The possibilities of the existing redistributive state pension system in the Kyrgyz Republic, under
which today's workers pay for the current generation of pensioners through deductions from their
wages, are practically exhausted. For objective economic reasons and because of the increase in the
number of pensioners, pension payments exceed collectible pension revenue. Under current
conditions, it is practically impossible to substantially increase the flow of contributions into the state
pension system. To counter this shortfall and bring relative stability to the pension system, the
government can artificially limit the size of pensions or raise the retirement age. But this policy will
impoverish pensioners and exacerbate social tensions.
Head of the Chui Division, State Commission on Securities Market, Kyrgyz Republic
89
In other countries, state pension schemes are supplemented by other benefits. Participation in the state
pension system is compulsory for all working citizens. Participation in the supplementary pension
system is voluntary and is funded by contributions from the same citizens or employers. Each worker
has a personal pension account, in which he or she accumulates capital for his or her future pension.
In developed countries, non-state pension funds (hereafter NPFs) are active participants in the
financial market. Like other collective investors, they collect resources from individual depositors and
use them for portfolio investment. NPFs role on the securities market differs from that of investment
funds in that they make more conservative investments, since their main purpose is to preserve and
increase the pension savings of the population and, therefore, to minimise risk for depositors and
members.
As collective investors, NPFs have an impact on the development of the secondary securities market.
By nature, NPFs deal in "long money" on the financial market. Banks and financial corporations make
their investments on shorter terms. Working with "long money" implies a long period of capital
accumulation, a conservative investment policy, a need to protect the rights and interests of fund
members (future pensioners) and to offer a trustworthy investment.
For example, in 1981 Chile, where the state pension system was costing 2% of GDP, switched to a
completely private system. Several large government-supervised pension funds were formed with a
strict asset management policy. Local corporations sold more than USD 5 billion worth of bonds with
a maturity of 27 years to these private pension funds, thus creating one of the few long-term bond
markets in Latin America. In 1994 private pension funds collected more than USD 20 billion, or
around half of Chiles GDP. Investment by pension funds substantially boosted the development of
Chiles stock market.
We can also call to mind the positive experience of Kazakhstan, which embarked on pension reform in
1997. Pension funds in Kazakhstan have already opened pension accounts for four million people and
now compete with commercial banks on the government bond market. The aggregate assets of Kazakh
NPFs currently amount to around USD 500 million. The accumulated resources are almost all used to
finance the governments budget deficit. Competition with commercial banks and the fact that NPF
money is "long" lower the yield on government bonds and, consequently, interest rates. In addition, by
attracting the resources of the population, NPFs commit them to a long-term investment, which also
helps reduce inflation.
To date in the Kyrgyz Republic, there is no legislation regulating the activity of NPFs. This raises the
danger of the appearance of commercial entities calling themselves pension funds. There is currently
only one non-state pension fund in Kyrgyzstan that collects resources for the purpose of paying
pensions. However, its activity is untransparent and unsupervised. There is no information about now
the collected resources are used, how risky the investments are or how the interests of depositors are
protected. In accordance with international practice, NPFs may only invest in safe, highly liquid
instruments, such as government bonds, blue-chip stocks and bank deposits.
A bill "on non-government pension funds", rejected by the Zhogorku Kenesh, is currently being
reworked. It was already based on a previously rejected bill, which had been criticised by the
government securities commission and other bodies. In particular, it did not provide for a mechanism
of investor protection and did not set any restrictions on the types of investment permitted.
To ensure that pension reform in Kyrgyzstan does not exacerbate social tension, but rather spurs
national development, it is essential to take into account the provisions of the already adopted law "on
investment funds" for the revision of the bill "on non-government pension funds".
90
Obviously NPFs can only emerge and develop if the necessary contributions are made to them
alongside contributions to the state pension fund.
One of the most important factors influencing the development of NPFs is tax treatment. In the USA,
companies deduct contributions to licensed pension funds from their taxable profit, in the same way as
they deduct wages. Income on the investment is not liable for company tax during the contribution
period. Fund members are exempt from paying income tax on their pension contributions for the
whole contribution period, i.e. until they start receiving their pensions. To avoid creating a loophole
for tax avoidance, limits must be placed on these tax exemptions in both personal accounts and
professional pension funds. In the USA, contributions to personal accounts of up to USD 2,000 per
year are exempt from tax, on condition that the depositor does not belong to a corporate pension fund.
Members of corporate funds may invest USD 2,000 and more with higher tax exemptions. Corporate
funds may accept pension contributions up to USD 200,000 per year. In practice, only a few funds
come close to this high limit.
Penalties must be provided for infringement of pension fund rules. If a companys contributions to an
NPF are deductible from its taxable profit and workers contributions to their personal accounts are not
liable for income tax, then the penalty for infringement of the pension system rules could be to make
these contributions liable for income tax for workers and to company tax for employers.
The crucial requirement for funds to manage their assets exclusively for the purpose of paying the
pensions of their members and their beneficiaries should be set forth in law. In the USA, this rule is
deemed to have been broken if the fund uses its assets for any other purpose.
It is also necessary to provide transparent information for investors. They must be entitled by law to
receive the funds rules, statements showing their personal accounts in the fund with the set
contributions or a calculation of the amount of the pension in the fund with the set payments,
notification about changes to the fund, and guarantees that the funds rules will not become less
favourable for participants.
The legislation must also enable consumers to choose funds freely. In the USA, fund members (in the
case of individual funded schemes) can transfer their personal accounts (regardless of the amount) to a
different fund, whose conditions they prefer, without losing the tax exemption and without incurring
any tax penalty. They will incur a tax penalty, however, if they decide to take their money out of
pension insurance all together before reaching retirement age.
In the interests of future pensioners, it is important to avoid conflicts of interest and unsupervised use
of NPFs resources by ensuring that companies are assisted in the management of fund assets by an
independent specialised depository that conducts separate custody and account-keeping of pension
savings and by establishing cross-supervision, as was done for investment funds.
For the successful development of a non-state pension system, NPFs must publish their financial
accounts at regular intervals and provide these to government regulatory bodies. This ensures
transparency in investment decisions and their supervision, and enhances depositor confidence in
NPFs.
Whether non-state pension funds become fully-fledged participants in the stock market and resolve
part of the problem of pensions for citizens depends largely on how the legislation regulating their
activity protects the rights and interests of fund members (future pensions), and ensures the
trustworthiness of deposits in NPFs.
91
It is time to remove barriers to the investment process and to spur its development. There are two ways
to channel available financial resources into investment: directive and voluntary.
The directive method is highly effective, particularly at the stage of development of domestic
investment, because it can rapidly raise large volumes of resources for investment. In this regard,
Kyrgyzstan should take the following measures:
1) Accelerate the development of compulsory forms of insurance. These protect society from
risks and raise financial resources for investment. However, the introduction of compulsory
forms of insurance must be accompanied by tighter supervision of insurance companies and
their investment activity and by increased transparency on the insurance market.
2) Conduct work on transition to a compulsory pay-as-you-go pension system. The current
system in Kyrgyzstan is a non-market system of social insurance, funded by tax revenues. A
switch to a pay-as-you-go system will generate financial savings, which can be invested in the
economy, giving people a genuine incentive to make pension contributions. A second stage
must be transition to a funded pension system. For this we require the assistance of
international donors and consultants we already need an international pension reform
project. The experience of Kazakhstan, where pension reform has given the stock market a
colossal spur, is an obvious example for us. Pension funds in Kazakhstan have already
accumulated more than USD 1 billion, and under their influence even a part of that country's
foreign debt has been converted into domestic debt.
3) Channel basic capital flows into the banking system by law. It is time to enhance the
transparency of payments in Kyrgyzstan. Huge amounts of money flow out of banks and
therefore do not participate in the investment process, while banks suffer from inadequate
financial resources. If cash payments between companies are prohibited, this money would
flow into banks and, within a short period, we could expect to see a revival on the government
and corporate bond markets. Cash kept on company premises could already be put to work on
the national financial market through the banking system. The conditions for such a reform are
already in place in the republic: there is a banking system with a government bank and a
powerful international bank, the Kyrgyz Investment Credit Bank.
The second way to channel capital into the investment process is voluntary and therefore more
complex.
It is well known that the most popular investment vehicle today is the dollar. Dollars are lying around
in stockings, under pillows and in safety deposit boxes. That money is not working in the economy. It
is not working because there are no good investment instruments. Our investment funds are
underdeveloped because of a lack of appropriate investment vehicles on the market. We need to give
serious thought to broadening the range of available financial instruments. On the bank deposit
market, there is a need to introduce deposit insurance.
The government should vary the types of government paper by issuing new bonds through the Kyrgyz
stock exchange and bonds denominated in foreign currency. Government bonds must be made more
accessible by increasing the number of professional participants in the GTB market. The fact that for a
long period interest rates on deposits were lower than GTBs highlights the shortcomings of the
National Bank's system for trading in GTBs, which excluded the vast majority of investors and
provided little information for the public and organisations. To distribute GTBs, the National Bank
relies on commercial banks, giving them the status of primary dealers and the right to provide
brokerage services in GTBs. But there is an obvious conflict of interests with commercial banks' retail
92
banking business, because they promote their own investment product, i.e. bank deposits, in priority,
even if these are less attractive in terms of return and reliability. For similar action, a broker on the
stock market would have lost his licence long ago.
A dangerous trend is developing in Kyrgyzstan: citizens are keeping large amounts in dollars in
commercial banks, but in safety deposit boxes in vaults rather than in accounts. We must restore
domestic investors confidence, which is very difficult to do after the financial pyramid and slew of
bank failures. We must therefore offer domestic investors highly reliable financial instruments,
denominated in foreign currency, with a credit rating higher than Kyrgyzstans sovereign rating, which
incidentally does not exist. We must simplify and alleviate the procedures for the admission onto the
stock market of foreign securities that have a certain credit rating by international agencies. This will
fill the stock market with high-class financial instruments. This might be called capital export, but it is
also a way to bring the resources of domestic investors out of the shadow economy, to offer investors
experience and skill in investing, to develop stock-market infrastructure and to broaden the range of
financial instruments.
Simplified admission of foreign securities is also an important step in the integration of Kyrgyzstan
into the international capital market. Following the example of Turkey, our republic can become a part
of the global stock market. To achieve this goal, we must give consideration to the possibility of
creating offshore transit investment funds to attract foreign investment, and an international stock
market on which securities from any issuers and governments can be acquired and held. This is a
future prospect, but the task nearer to hand is to enable foreign investors to invest in the stock markets
of Central Asia and the CIS directly from Kyrgyzstan.
We must bear in mind that it is not enough to provide investors with a broad range of financial
instruments; they must have information and knowledge about how to invest. We must protect
investors from default and bankruptcy. Let us take the example of commercial banks: depositors do
not have relevant, operational information about banks financial situation, only specialists can
understand and analyse the information. The failure of a clutch of banks compromised the whole
banking system and revealed the vulnerability of depositors owing to a lack of genuine, relevant
information. Investors must have access to operational information that is as useful as possible. In
addition, investors need a simple, independent evaluation of the risks associated with different
financial instruments. This is particularly true in Kyrgyzstan, where most investors have a poor grasp
of financial analysis and accounting. There are many issues to be resolved regarding the insurance
market, bank deposits and bonds. Citizens almost blindly buy policies from insurance companies that
have a dangerous investment policy. Investors acquire bonds from issuers whose balance sheets
conceal potential default. Depositors take their money to the bank nearest to home, or buy on the basis
of promised high returns and advertising claims. Government regulators of issuers and institutional
investors must give consideration to the disclosure of information, to making information accessible
and understandable for ordinary citizens, and to establishing independent rating services. Issues about
disclosures must be resolved in the legislation.
The experience of Kazakhstan has shown that the development of domestic institutional investors can
substantially increase the volumes of domestic investment. The symbiosis between a strong banking
system and a pay-as-you-go pension system created a large, liquid stock market in that republic, which
has begun to attract individual and corporate investors. The stock market now plays a role in the
economy. Similarly in Kyrgyzstan, there is considerable potential for the development of a securities
market through the development of pension funds.
93
Chapter 8
THE ORIGIN AND DEVELOPMENT OF THE SECURITIES MARKET IN MONGOLIA
by
Sodnomtseren Gundenbal
The government of Mongolia has taken the measures in sequential order to transfer to the market
economy. In this framework, the government of Mongolia has been developing the securities market
for the first time in history.
The private property of citizen was fully accepted and defined by amending the constitution in 1990
and the Civil law in December of 1990.
In 1991, the law of economic entity was amended and the law of privatization was approved. In order to
implement these laws, the Property Privatization Commission of the government and local
administrations were established. Also, many documents such as administrative unit1 allocation, rules of
the Property Privatization Commission, rules for estimation of industrial property, rules for distributing
and using vouchers, and common rules for organizing and holding auctions were approved.
The resolution of the government on establishment of stock exchange, which is the main condition to
set up and develop the securities market in Mongolia, was composed on 18th January 1991 and the
stock exchange charter was followed. Moreover, broker companies were established in all provinces.
Evaluation and property counting were made on 1st July 1991 in the presence of representatives of the
state owned factories to be privatized.
Allocation of voucher to all citizens of Mongolia was planned to be done within two years starting
from 20th July 1991 to 31st August 1993 in order to enable them to get the shares of state owned
factories to be privatized. The term was extended once until 31st December 1994 by the government.
Taking into account the income and savings of population, basic situation and principles of transition
to the market economy, the population settlement in the local area and features of running economy,
the Parliament decided to distribute privatization voucher by free of charge and allocated vouchers
worth MNT 10,000 (about USD 300 in rate at that time) to each citizen.
On the other hand, 476 state-owned enterprises were re-organized into shareholding companies, their
property was valued and the number of stocks was fixed by dividing the nominal price of stock in 100
tugrugs.
The first trade to privatize the state owned factories by voucher was held on 7th February 1992 in the
stock exchange. According to the guidance and management of the Property Privatization
Commission, citizens selected themselves in which company they would invest by voucher and what
stocks they would be interested in purchasing, and then they ordered to the broker companies and
became shareholders of the company of their choice.

1
Chairman, Mongolian Securities and Exchange Commission

The administration unit of Mongolia is divided into 21 provinces. Provinces are divided into soums.
95
In other words, people who got the voucher purchased the stocks of a shareholding company and
became investors of the company.
The campaign of property warranty by 1989.9 thousand vouchers, allocated to the citizens and
investment companies, was held from 1992 to June 1995. Therefore, this period was called the first
market action of securities.
The privatization was made by the way of getting the vouchers and giving the livestock to the herders
of the partnership, which run livestock and agriculture, comparing with total amount of all family
members vouchers and allocating directly some property of state owned enterprises, which run
agriculture and animal husbandry, and other enterprises to the workers of the above mentioned
organizations by corresponding to the price of voucher.
The citizen who privatized directly the property by vouchers did not become a shareholder of any
shareholding company. But the right to purchase stocks of any company was open in the next stage of
the privatization.
In September 1994, the Parliament (Great Khural) of Mongolia approved the Securities law and the
Securities Commission was established for the purpose of coordinating and monitoring the Securities
market. Also, the Commission rules were approved by the Mongolian Parliament.
Since then, the Securities Commission has organized such activities including providing the
preparation work of the secondary market, drafting and following the rules and regulations related to
the coordination of the securities market, selecting the individual and organizations to carry out the
professional activity in the market, licensing and attesting.
On 28th August 1996, the first trade on the secondary market was held. Since this period, the
securities market has begun to develop with the real meanings in Mongolia.
On 1st January 2003, over 1 billion securities of 409 shareholding companies were registered in the
stock exchange and the Securities Commission.
At present, there is one stock exchange and 34 broker and dealer companies are operating.
In 2002, the securities are worth MNT 46 billion (USD 42 million) were sold through the stock
exchange.
Announce of Securities traded in the Mongolian Stock Exchange in 2002
No
Types of securities
Stocks
2
3
negotiations
Number of
securities sold
/thous/psc/
Amount of circulation /million MNT/

Total amount
1,373.0
Percentage
14,795
9,842.9
Government bonds
125
465.0
41,690.7
90.6
Corporate bonds
204
310.1
2,958.0
6.4
15,124
10,541.6
46,021.7
TOTAL
96
Number of
(USD 1.2 mil.)
3.0
According to the table, the stock circulation occupies 3 percent of the total circulation; government
bonds: 90.6 percent and corporate bonds: 6.4 percent.
The law of securities market was renovated by the Mongolian parliament on 12th December 2002 and
the new law was passed. At present, this law has been adhered.
According to the article No.1.1 of this law, the main purpose is to issue, register, save, purchase, trade
bonds in the securities market, and transfer the owner right verified by it, to deliver the information on
securities to the investors, to defend the investors right and to coordinate the relations in connection
with controlling and monitoring the professional organizations activities that issue bonds and
participate in the securities market.
Introducing and promoting the new law to the public, securities providers, securities owners and
organizations, which run the activities in the securities market, and adhering to the provision of the
Law, are the main goal of the Securities Commission of the Government and professional
organizations.
The Securities Commission pays special attention to implement the Law.
1. The consultants worked in the Securities Commission and the stock exchange for three
months and provided their comments, recommendations and suggestions to the draft of the
securities market law.
2. The Commission pursued the direction to strengthen the legal responsibilities, eliminate the
encountered difficulties while implementing the previous law, and improve the system of
responsibilities.
3. The Commission paid attention to clarification of the duties and objectives of the securities
issuers and professional organizations who participated in the securities market, and also their
obligations toward the Securities Commission, the stock exchange and other related
organizations.
4. The Commission agreed to set up the trading organizations in an alternative form.
5. The Commission defined and increased the equity fund in order to upgrade the requirement
that was imposed on securities professional organizations and raised the duties and
responsibilities of shareholders, clients and securities issuers.
6. With the purpose of defending the right of securities owners, the requirement to insure the
property and to establish a risk foundation by professional organizations was reflected in the
Law.
7. Delivery of information about reports, which shows the result of operation to the securities
owners and the clarification of obligations of securities providers in front of securities
owners, was confirmed legally by the Law.
In order to implement the Law, the Securities Commission has carried out the following activities in
2003 to promote and implement the securities market law.
97
A. Promotion of the law:

1. Used the Mongolian National Radio and TV as the main means to promote the Law.
2. Organized a training-seminar for the staff of shareholding companies and the securities
issuers.
3. Over 130 participants including brokers, dealers and employees of the stock exchange
attended the seminar on promotion of the securities market law and relevant rules/regulations.
105 employees who passed the exams successfully have been granted the qualified certificate
to run professional activities in the securities market.
4. Published the securities market law and relevant rules/regulations as a special brochure and
distributed to the staff of the stock exchange and securities issuing companies, which run the
professional activities.
B. In connection with the approval of new securities market law, the previous rules and regulations
were reviewed and renovated according to the law. For example:
1. Rules of the Securities Commission / Order No. 14 dated on 21st February 2003 of Securities
Commission
2. Rules of State Monitoring Inspector of Securities circulation
3. Rules on empowering and attesting the experts to carry out the activities in the securities
market
4. Rules on preparation of additional clarification to the financial statements of securities
providers and professional organizations
5. Rules on receiving and registering announcements of securities owners.
6. Rules on activity to be held in the securities market by owners of internal securities
information
7. Rules on tender proposition and conclusion / Order No.20 dated on 21st March 2003
8. Rules on purchasing, selling and registering securities
9. Instructions on recording and filing dealer tasks, reservation contracts and registering in the
broker and dealers companies of securities
10. Rules on receiving and implementing clients orders / Order No.33 dated on 25th April 2003
of Securities Commission
11. Rules on registering and granting the permission of securities to offer to the public, making
the amendments and eliminating from registration and advertising
12. Rules on publishing a summary of financial statement of shareholding companies and
delivering information to the public / Order No.33 dated on 25th April 2003 of Securities
Commission
98
13. Rules on ethical standards for the staff of Securities Commission / Order No.46 dated on 6th
June 2003 of Securities Commission
14. Rules on coordinating the activities of investment foundation
15. Rules on receiving information and statements of securities circulation from the professional
organizations that participate in the securities market
16. Rules on establishment of a foundation that protects clients from possible risks, and definition
of the least amount of floating assets of professional organizations that participate in the
securities market / Order No.59 dated on 6th June 2003 of Securities Commission
17. Rules on controlling the dividend distribution / Order No.65 dated on 18th September 2003 of
Securities Commission
Starting from 1996, supplying and selling government bonds in a great amount have occupied the
significant portion of the securities market, which aims to overcome the budget capital deficit.
Besides, the companies have been supplying and selling their corporate bonds since 2002. This
activity has become an important step in developing the securities market in Mongolia.
In the future, there is a tendency to increase the amount of bond trading through provided and sold by
local and capital city administration. However, most of companies stocks were centralized to owners
who have the same interest. Therefore, the amount of stock sales and securities trading decreased.
Monetary free circulation is floating to the commercial banks because the saving interest rate of
commercial banks is relatively higher.
The confidence in securities is not so high because the promotion is insufficient and the public do not
understand the importance of the securities. Companies and enterprises lack initiatives and
experiences to create capital resources for renovating their technology and expanding their production
by issuing securities when there are insufficient financial resources and accumulation. Thus, the
requirement to learn from the experience of other countries and develop the securities market is
increasing. Moreover, lower interest rate of bank loans, less budget deficit and stabilization of the
macroeconomic level of Mongolia are required further.
Therefore, our goals are to improve the legal environment to coordinate the securities market, involve
the free remainder of social insurance capital to the securities market and develop the securities
products guaranteed by loans of the immovable property.
Thus, it is necessary to pay more attention to learning from the experiences of international
organizations and taking measures that aimed at developing the securities market in Mongolia.
99
Chapter 9
SECURITIES MARKET DEVELOPMENT IN MONGOLIA
by
D. Dorligsuren and J.Bolormaa
1. Market overview
On 18th January 1991, the Mongolian Stock Exchange (MSE) was established for the purpose of
privatization of state-owned enterprises and organizing securities to be traded further.
So far, a total 476 state organizations have been transformed into private companies (fully or partly
privatized). As a result, 48% of the population (over 1.1 million individuals) became stockholders
during February 1992 to August 1995, which developed the primary market in Mongolia.
With respect to the secondary market, stock trading started on 28 August 1995, when the MSE took an
important role in activating the stock market and gave an opportunity for citizens to trade their stocks
via brokerage firms.
Mongolia is currently in the process of developing a modern trading market structure and regulatory
system for its emerging securities market that will attractive to both Mongolian and foreign investors.
The Government is also taking a number of steps to strengthen state-owned stock trading, to improve
the regulatory framework of the Mongolian capital market and to protect public investors and
shareholders.
Mongolian Stock Exchanges main indices
Indices
1 Listed companies
Market capitalization
2
(USD million)
Trading value
3
(USD million)
Traded volume
4
(million)
5
Bond trading value
(USD million)
- Government bond
- Corporate bond
1995
474
1996
458
1997
436
1998
430
1999
418
2000
410
2001
400
2002
403
2003
402
2004
395
27.1
25.9
53.2
39.8
32.1
36.9
37.5
31.9
42.4
24.7
1.8
6.0
15.0
11.9
3.1
2.7
1.6
1.2
0.8
0.5
6.8
24.8
33.7
33.1
21.4
35.1
15.9
9.8
8.1
9.1
n/a,
n/a,
0.20
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
n/a,
10.15
n/a,
27.9
1.09
37.1
2.62
18.6
2.55
10.3
2.29
88.9
152.9
360.1
235
255.7
469.9
814.0
933.9
895.9
585.7
TOP 75 index
Stock market liquidity has fallen substantially. Share trading value at the MSE had increased to USD
15 million until 1997, and then fell sharply to USD 3.1 million in 1999 and USD 0.5 million in 2004.
Market capitalization in 2004 averaged approximately USD 24.7 million, which was approximately

D. Dorligsuren is a former CEO of the Mongolian Stock Exchange.

J.Bolormaa is a research speciealist of the Mongolian Stock Exchange.
101
1.6 % of GDP. The equity market in 2004 diminished by one-thirty of that in 1997. There are many
reasons for this. Firstly, the completion of privatization process based on providing vauchers caused
the adverse effect on the equity turnover. That is to say, it caused the high ownership-concentration of
stocks (inactive trading) and the significant decrease in the supply and demand of stocks. Listed
companies have kept their stocks, which resulted in the inactive secondary market in Mongolia. To
date, 476 listed companies have decreased to about 395 because of mergers and acquisitions and
voluntary de-listings, 67 of which continue to be partly owned by the State and the remaining 328
listed companies have been fully owned by private stockholders. Secondly, the government policy for
privatization method was changed in 1996. The government has preferred the auction method of
privatization. Since 1995, many of the original stockholders have sold out their stocks. In addition,
since 1996, the government has continued the privatization process by selling down its stakes in partly
privatized companies by auctions run by the State Property Committee. It reduced new issuance of
shares by the government through the MSE. During 1997-2004, the State Property Committee traded
56.8 million state shares at the MSE and amounted to USD 2.7 billion. This caused serious fall of
trading volume and value of shares in the MSE. Thirdly, a generally unfavorable market environment
caused by high interest rates, low level of household savings, high inflation and unemployment rates
and the weakness of financial sector development, negatively influenced the activity of the equity
market in Mongolia.
The debt securities market is in rather better condition than the equity market. Until November 2000,
the government had issued its bonds directly to banks. Recently, the government has begun issuing its
bonds by auctions via the MSE. The auctions have well contributed to increasing competition in the
issuance market of government bonds, but most of the bonds have been placed with domestic banks.
So far, there is little interest in this market for other investors. Also, there is little liquidity of
government bonds. Those products are typically short-term maturity (less than 6 months). Therefore,
the government bonds yield cannot be expected beyond such very short-term maturity.
Since 2001, one of construction companies Barilga corporation has been stating to issue its
corporate bonds, which amounted to USD 4.4 million at the MSE.
The increasing bond issuance has partly compensated for the decline of the share trading value.
Government bonds in 2004 reached USD 10.3 million and corporate bonds amounted to USD 2.3
million. In 2004, the bond trading accounted for 96 % of the total securities market turnover in the
MSE, against the share trading did for 100 % in 1999. In this background, there were the need to
compensate for the national budget deficits and the high gaps between deposit and lending rates in
commercial banks.
The privatization of state-owned enterprises through investment vouchers had a negative influence on
the development of the stock market in Mongolia. Firstly, the public tended to lose the confidence to
the stock market. Shareholders were not able to recognize the value of shares and did not understand
that the dividend is one of sources of fixed income for them, which seemed to lead many clients to
much less confidence to the market. Secondly, stock market experts and professional organizations in
the field of stock market are scarece in Mongolia.
2. Securities Clearing Settlement and Central Depository House
From 1992 until October 2003, the Securities Clearing Settlement and Central Depository House
(SCSCDH) conducted its activities as one of departments of the MSE. In October 2003, it was
reorganized into the Securities Clearing Settlement and Central Depository House as an independent
organisation.
102
The main activities are to settle a transaction based on contract, to record the transfer of owner rights
to others and to deposit stocks.
The SCSCDH adopts the delivery versus payment system for settling all securities transactions. The
settlement of transactions in shares conducted in the stock exchange is effected on the next business
day following the day of transaction (T+1). For bonds, however, the transaction is settled on the same
day as the transaction day (T+0).
Anyone who wants to participate in the stock trading should open an account at the centralized
depository and the transaction in stocks would be settled when the client places cash in the centralized
depository to buy a stock. Therefore, the participant places a payment for stock on the house account
at bank by transferring or paying to the cashier of the house by cash. Based on this account statement,
the transfer officer places the cash on client account at the centralized depository. The participant
should place money before 10:30 of the trading day. All transfers are stopped at 10:30 and a report of
the account is transmitted automatically by a computer network to the trading of MSE. The trading
ends 12:00 and all transactions are transferred to the house by the network program and inspected.
Thus the transaction of a stock and cash is automatically recorded on clients accounts at the
centralized depository by using the computer program on that trading day. The house gives
information of an account record only to broker dealer companies (BDC). When the company
acquires this information, a specialist of the company inspects, receives selling clients application to
take money and delivers it to the house at 9:00-10:00 and 14:00-18:00 within working hours every
day. The transfer officer inspects the completeness of a document, makes this transfer and deducts
clients money from the account according to his application. If the client receives by cash, money is
paid out to a proxy attorney of the BDC, but if the client receives by transfer, money is transferred
from the SCSCDH account to the client's account.
The BDC presents a report on money delivered to the client in 3-business days since the company
received cash, to the SCSCDH.
Consent to settle
BDC executes
customer orders
Securities Clearing
Settlement and Central
Depository House
Transaction statement
Transaction
BDC executes
customer orders
Transaction
Executes orders
Cash
transfer
Executes orders
Stocks
Cash
Stocks
Stock trading
Customers with buy

order
Customers with sell

order
103
In this case, the client can not buy shares by borrowing. Therefore, the transaction is accompanied
with relatively low risk. The SCSCDH monitors that the BDC distributes cash to every client who has
sold stocks.
SCSCDH activities are regulated by the regulations on clearing settlement activities and are
undertaken according to internationally accepted standards (e.g. IOSCO).
The function of the Depository
The function of the depository is regulated by regulations on depository functions. The SCSCDH
amends a depository record to deduct it from the depository and to amend the volume or value of
stocks, and deposits the stocks in the depository based on the SEC orders. When the stocks are sold
by means of the non-exchange trading, state owned shares are traded by closed auction. When the
stocks are presented, donated or inherited, the house shall transfer the owners rights according to
relevant regulations and the SEC orders.
Cash and stocks are deposited on the clients account at the SCSCDH depository. In this case, the
stocks are issued by non-physical form. At the end of 2004, total 2.02 billion shares held by 395
companies were deposited at the central depository of SCSCDH.
The SCSCDH has an electronic form of recording titles of securities that are held in an account to
represent the holding securities. The agent holding the accounts normally provides a statement of
ownership concerning this electronic form of record to the beneficiary from time to time.
The dematerialization of securities and their transfer by book entry within the central depository have
many benefits: e.g., lowering the costs associated with securities settlement; improving the speed and
efficiency of settlement; increasing the transparency and transfer arrangements.
104
Chapter 10
SECURITIES MARKET IN THE REPUBLIC OF TAJIKISTAN
by
Nazullo Abibullaev
The Republic of Tajikistan became an independent state in 1991 following the collapse of the Soviet
Union. The country subsequently experienced a period of civil war and internal strife. Basic stability
was restored only in 1997 after the Agreement on Peaceful Settlement was signed between the
government of Tajikistan and the United Tajik Opposition, and a coalition government was formed.
The processes of reconciliation and peacekeeping have been developing satisfactorily. The
government is actively strengthening democracy and is working to establish a functioning market
economy.
After independence, the economy of Tajikistan was faced with various problems, typical of countries
in transition to a market economy: low level of incomes and savings; weak market institutions; an
incomplete tax system; and ineffectual economic structures. With the collapse of the Soviet Union,
Tajikistan lost its traditional export markets and import sources, and budget transfers from Moscow.
The republics level of economic development deteriorated sharply: over the period 1991-1996,
production volumes fell to 33.1% of their 1991 level; in 1997 GDP was down by more than 60% on
1991; and the standard of living fell sharply.
Signs of economic recovery appeared only in 1997 and 1998, when official statistics put GDP growth
at 1.7% and 5.3% respectively. This modest rise was a consequence of the end of the war and the
restoration of basic economic stability. However, the Russian financial crisis in the last quarter of
1998 negatively impacted the economy of Tajikistan. In 1999 GDP rose by only 3.7%. In the
following years, growth was more significant (8.3% in 2000, 10.2% in 2001 and 9.1% in 2002),
although it only concerns a narrow section of economic activity.
In a short period of time, the country has made progress on macroeconomic stabilisation, reducing the
budget deficit, inflation, and stabilising the exchange rate.
In 1999 the Tax Code of the Republic of Tajikistan was enacted. Amendments to the code are planned
with a view to improving the tax and customs system and will be submitted to the government in late
2003. In 2000 we switched to a new budget classification, in line with international standards.
In 2001 the law "on the Treasury" was passed and the transition to a treasury system of budget
execution finalised. In the same year the first Government Budget of the Republic of Tajikistan was
adopted for the medium-term period to 2003.
Deputy Minister, Ministry of Finance, Tajikistan
105
The next important stage in financial reform was the adoption in 2002 of the law "on government
finances of the Republic of Tajikistan" and a medium-term expenditure framework, on the basis of
which the government budget was drafted and approved in 2003.
Tajikistan has embarked on an active process of institutional reform, and market infrastructure is
developing. The necessary legal basis for the development of a market economy has been established
and the system of economic management is being reformed. Much has been done to liberalise foreign
trade and open the economy. Consistent steps are being taken to join the World Trade Organisation.
Tajikistan is working closely with the International Monetary Fund, the World Bank and other
competent financial institutions to familiarise itself with international standards, rules and procedures
in the economic sphere.
The results achieved thus far are still far from satisfactory in terms of providing an acceptable standard
of living for the population, 80% of which lives below the poverty line. The government of Tajikistan
has made poverty reduction the priority of its social policy. A Poverty Reduction Strategy Paper was
drafted on the basis of broad community participation involving all constituents of the population, and
approved by parliament.
Since the introduction of the Economic Reform Programme in Tajikistan, the trend has been towards
macroeconomic stabilisation and economic growth.
Steady GDP growth has been achieved in all sectors of the national economy, the exchange rate has
been stabilised, and tax and budget performance criteria have been observed.
As a result of the governments constant work on foreign debt, much has been achieved to reschedule
Tajikistans debt to creditor countries on more favourable terms. Foreign debt and debt-service
payments are made on time and in full.
The structure of the economy has changed little over the past decade. The biggest sector is agriculture.
Cotton is one of the most important segments of the national economy in terms of employment and
export earnings. In 2002 the cotton harvest reached 515,000 tonnes, a 13.7% increase on 2001.
1998
1999
2000
2001
2002
Population (000s)
6001.3
6126.7
6250
6375
6441
GDP at prices in the corresponding years (TJS mil.)
1025.2
1345
1806.7
2512.1
3344.5
5.3
3.7
8.3
10.2
9.1
145.4
149.4
159.6
165.5
189.3
Inflation
2.7
30.1
60.6
12.5
14.5
Wages (annual increase as a %)
84.9
26.6
34.1
55.2
29.1
Government budget revenue (TJS million)
180.4
249.8
251.7
367
538.9
Government budget expenditure (TJS million)
178.7
236.4
257.1
366.5
518.9
1.7
13.4
-5.4
0.5
20
Total foreign trade (USD million)
1307.6
1351.8
1459.3
1333.9
1453.9
Exports (USD million)
596.6
688.7
784.3
651.5
736
Imports (USD million)
711
663.1
675
687.5
717.9
Official exchange rate per USD
0.78
1.24
1.83
2.4
2.76
Real GDP growth as a %

Per capita GDP (USD)
Deficit (TJS million)
106
Industrial production is concentrated in four main sectors: electricity generation; metals, in particular
aluminium; textiles and clothing; and agri-food. The biggest industrial enterprise in Tajikistan is the
DG$= DOXPLQLXP VPHOWHU LQ 7XUVXQ]DGH :LWK D FDSDFLW\ RI WRQQHV WKH SODQW SURGXFHG
309,000 tonnes of aluminium in 2002. The plant accounts for up to half of Tajikistans export revenue
and consumes around 40% of the electricity generated in the country.
In the first nine months of 2003 real GDP increased by 7.9% on the same period in the previous year.
Performance criteria were observed in the tax and budget spheres. Through tight control of
expenditure, revenue exceeded targets, which made it possible to adopt an additional budget and meet
all foreign debt obligations in 2003. Inflation was 8.6% in the first nine months of the same year.
Structural reform under the IMF-supported programme continues to focus on the banking sector,
energy and agriculture.
Regarding the banking sector, special attention will be devoted in 2004 to the completion of
restructuring or the closure of Agroinvestbank, and the closure or merger with other banks of banks
that do not meet economic standards.
In the energy sector effort will focus on further reducing quasi-budget transactions and improving
payment discipline by consumers and producers of energy. This will require the installation of gas
meters; an increase in collection rates; a strict policy of cutting off the gas of consumers who
repeatedly fail to pay on time; and an external audit of Tajikgas.
In the agricultural sector, efforts will be concentrated on expanding and completing the farm
privatisation process. In support of this goal, the registration process for land share certificates will be
simplified. Cooperation will also be broadened between the State Land Reform Committee and nongovernmental organisations to ensure transparency and equity in the farm privatisation process.
2. Brief overview of the formation and development of a securities market in the Republic of
Tajikistan
Since gaining independence in 1991, the Republic of Tajikistan has experienced unprecedented
economic difficulties. To name but a few: deregulation of a financial sector ill-equipped for the new
realities of the market economy; a large fiscal deficit resulting from the end of centralised budget
transfers; and runaway inflation. In the light of this situation, it became urgent to set up a subdivision
of the Ministry of Finance that could effectively steer economic reform. The Securities and Foreign
Investment Office was formed within the Ministry of Finance.
The offices role as the supervisory and regulatory body for the securities market is to ensure
government regulation and to create a favourable investment climate with a view to attracting all
forms of foreign investment and to creating a financial market as a key component of the countrys
future market-oriented financial system.
After the transformation of state-owned enterprises into joint-stock companies and their privatisation,
the main task for the developing securities market is the redistribution of investment resources to the
productive sector and raising the capitalisation of the newly-formed capital market in the Republic of
Tajikistan.
The development of a securities market, as an integral part of the new structure of the economy, means
creating an effective mechanism for the attraction of foreign investment and the accumulation and
107
rational redistribution of capital between economic sectors and their managing bodies in the Republic
of Tajikistan.
The main laws that form the legal basis for the securities market in the Republic of Tajikistan are: the
law "on securities and stock markets" adopted on 10 March 1992, the law "on joint-stock companies"
of 23 December 1991, the law "on the privatisation of state-owned property", the law "on foreign
investment in the Republic of Tajikistan"; Ministry of Finance regulations ("on professional
participants in the securities market", "on the issue of securities", "on the central depository", "on
broker-dealer activity on the securities market", etc.); and the National Programme for the
Development of the Securities Market of 19 June 2000.
Work is under way in the following areas:
x
Further development of the regulatory and legal basis for the securities market;
Drafting plans to transform the Central Stock Exchange into the new Tajik Stock Exchange, in
which the Ministry of Finance will have a stake and corresponding founder-member status.
This decision should significantly advance the start of trading in listed shares of joint-stock
companies, initially by potential domestic investors, and later attract foreign capital into the
ownership structure of Tajik companies;
Attraction of foreign investors primarily onto the government bond market (government
treasury bills) and fully using the potential of the National Bank of Tajikistan to distribute
government bonds through commercial banks.
Raising the return on government bonds. Putting a stop to the practice of constantly cancelling
obligations on earlier debt, which has significantly undermined the populations confidence in
bonds;
Drafting the programme to strengthen the national currency through securities and foreign
investment, as a non-inflationary way to raise capital.
Drafting the legal basis for the taxation of income from securities and securities transactions,
and the introduction of tax breaks to attract investors;
Compiling a list of the existing laws and regulations on the securities market and drafting new
ones;
Initiating tangible measures to organise a secondary market in corporate securities;
Drafting the technical and economic basis for joint-stock companies under investment
projects;
Seeking resources and learning from the experience of developed countries (internships,
courses);
Seeking foreign assistance (technical, grants, etc.).
We are currently working on the following issues:

x
Defining the role and function of the government in the securities market,
Creating favourable conditions for professional and investment activity,
Raising the effectiveness of market infrastructure.
108
The development of all aspects of the securities market is crucial to the future success of the
infrastructure of the national financial market. It will enhance the accessibility and liquidity of market
instruments; corporate restructuring in the productive sector through the issuance and listing of
corporate securities (company shares); and the inflow of urgently needed working capital to revive
national industry. An objective and transparent valuation mechanism on the capital market is needed
to attract foreign portfolio investors.
The Ministry of Finance of the Republic of Tajikistan has accomplished a great deal for the
development of the corporate securities market. More than 1,115 Tajik enterprises have been
transformed into joint-stock companies. The shares of more than 891 of these companies have been
auctioned on the National Property Exchange.
The unified government register of joint-stock companies of the Ministry of Finance contains 1,128
joint-stock companies, of which 626 wholly owned by the state.
At the same time, in accordance with the current legislation of the Ministry of Finance, share issues
were registered for a total amount of TJS 7.3 billion.
In connection with the introduction of the new currency, the somoni, by the Ministry of Finance to
protect the value of savings, to attract the resources of individuals and companies into the budget and
financial sector, and to reduce the budget deficit, new government premium bonds with a maturity of
10 years were issued for a total amount of TJS 3 million.
The total premium amounts to 311,600 somoni.
The further development of the government securities market will enable the effective restructuring of
the system of corporate governance and boost industrial growth.
The securities market will enhance and accelerate the restructuring of the banking sector, allowing
banks to move into a services-based niche and out of purely accounting functions.
The development of the market in government securities is an important focus of our work, because it
is a key way to reduce the fiscal deficit and generate domestic savings.
The issue of government Treasury bills (GTBs) has met with obvious success. Now demand for GTBs
exceeds supply. When the Ministry of Finance first issued GTBs in 1998, demand was low. In 2000,
12 issues of GTBs with a maturity of only 28 days and a yield of 85% raised TJS 464,600. In 2001, 18
auctions of GTBs with a maturity of 91 days and a yield of 40% raised TJS 1,577,800. In the current
year, under the government budget plan of TJS 2,100,000, eight issues of GTBs generated a total of
TJS 1,800,000. The maturity was 182 days and the yield 27%, which is close to the National Banks
refinancing rate. The Ministry of Finance, the issuer of this new instrument of non-inflationary
financing, plans to raise the volume of GTBs by increasing the frequency of issues, lengthening the
maturity and lowering the yield.
In accordance with the Joint Agreement of the Ministry of Finance and the National Bank of
Tajikistan, the Ministry of Finance has developed a long-term Treasury bond certificate with a predetermined annual yield for a total sum of TJS 3 million.
Government Treasury bonds are issued with the aim of borrowing resources from investors to reduce
the national government budget deficit.
109
On 19 June 2000 the government of Tajikistan confirmed the "Programme for the Development of the
Securities Market in the Republic of Tajikistan" drafted by the Minstry of Finance, in accordance with
which we also prepared the provisions adopted by the last government "on the central depository" and
"on broker-dealer activity in the Republic of Tajikistan". The legal and regulatory basis for the
organisation and operation of the securities market is thus being prepared.
A key factor in the formation of a securities market is the participation of foreign investors. To attract
foreign investors requires unified, internationally accepted, stable and transparent rules on our
markets.
Apart from auctions and tenders organised by government bodies, the implementation of the
abovementioned programme, which sets out the strategy for the formation of the market and its
infrastructure, is important for the organisation of the market in government and corporate securities.
The secondary market cannot function without such institutions as a stock exchange, depository,
broker-dealer offices, independent registrars, investment and insurance companies and funds. The
establishment of these structures and their regulatory basis requires an appropriate regulatory body,
which is the newly formed office at the Ministry of Finance.
To maintain and increase the pace of economic growth in Tajikistan, there is an immediate need for a
high level of productive investment and infrastructure building. An effectively functioning securities
market is an important precondition for the mobilisation of domestic savings and the attraction of
foreign capital with the goal of economic growth.
The Republic of Tajikistan is currently working on harmonisation and coordination of securities
market activity within the Commonwealth of Independent States, the Eurasian Economic Community
and the Central Asian Economic Community. We are working actively in this area and very much
hope to benefit from the technical support of international financial institutions for the organisation of
work to accelerate the creation of a securities market in the Republic of Tajikistan.
Privatisation
Privatisation of state-owned enterprises is the first step in market reform. Privatisation is designed to
enhance the effectiveness of companies activity and financial stabilisation, boost employment and
provide the consumer market with quality domestically-produced goods. Over the period from 1991 to
1 January 2003, more than 7,100 state-owned enterprises were privatised, which was 88.4% of the
enterprises slated for privatisation.
Privatisation of state-owned enterprises
State-owned enterprises
1998
1999
2000
2001
2002
3,849
5,387
6,037
6,450
7,080
3,717
5,171
5,739
6,084
6,551
132
216
294
366
529
of which:
small enterprises
medium and large enterprises
Decree No.295 of the Government of the Republic of Tajikistan of 4 July 2002 confirmed the
Strategic Plan for the Privatisation of State-Owned Enterprises in 20022004. The main aim of the
plan is the creation of an effective market system through the acceleration and broadening of the
110
privatisation process, the development of competition, and the formation of a capital market and the
requisite infrastructure.
The pace and timing of privatisation is affected by the current socio-economic situation, the level of
development of the countrys productive assets, and the purchasing power and economic situation of
the population.
The privatisation of small enterprises is now practically complete. These enterprises are concentrated
in trade, public catering and consumer services. The shareholders are almost all medium and large
enterprises. Work is under way on the sale of their shares and the segmentation of large enterprises.
Unit enterprises have been set up in the main sectors of the economy.
One of the main obstacles on the road to privatisation is that many enterprises are unviable and
therefore unattractive to investors. It is essential to identify viable enterprises for their subsequent
privatisation, by conducting special research and analysis of the physical and financial situation of
companies. It is very important to create a favourable climate for the emergence of credit institutions,
which can make loans to companies at the stage of privatisation and for their post-privatisation
development. The participation of foreign investors in privatisation would be expedient, in view of
their know-how and experience in corporate management. Domestic investors lack of experience is
holding back the emergence of fully functioning securities market in Tajikistan.
The Strategic Plan for the Privatisation of State-Owned Enterprises is essential to attain the following
objectives:
x
enhancing the privatisation process and extending it to all spheres of the economy by
removing administrative and legal obstacles;
improving the use of privatisable state-owned enterprises;
protecting the interests of the state in key economic sectors;
significantly increasing the level of government revenue from the privatisation of enterprises
at auctions and tenders;
creating favourable conditions to attract domestic and foreign investment to the privatisation
process.
111
Chapter 11
SECURITIES MARKET IN UZBEKISTAN
by
Sunat Bekenov
1998
1999
2000
2001
2002
24100
24500
24700
25100
25500
Population (thousands)
GDP ( growth, %)
4.3
4.4
3.8
4.5
4.2
Inflation (annual rate (%))
26
26
28
26,6
22,6
Wage level (annual increase rate (%))
n/a,
62.6
10.8
70.3
82.1
Investments, as % of GDP
10.6
10.8
15.9
24.5
19.3
National savings, as % of GDP
9.4
8.5
16.6
17.4
18.2
Budget, as % of GDP
32.2
29.3
28.0
25.6
24.9
Deficit, as % of GDP
-2.17
-1.70
-0.98
-1.0
-0.8
External balances
239.5
125.1
317.3
-1037.3
-424.5
Exchange rate movement
94.8
124.8
237.5
424.0
778.0
2. Market Overview
The securities market in Uzbekistan has a short history and it is being developed rapidly since equity
markets are an important investment infrastructure for any country.
Most dynamic developments of securities market started in 1993, when the government launched
medium & mass privatization and securtisation of the State Owned Enterprises. Government agencies
(Center for Coordination of Securities Market, Ministry of Finance and State Committee of
Privatization) are working hard to improve the Uzbekistans young equity market.
In this short period of time, Uzbekistan securities market has shaped itself up to the modern standards
and it is on the way in acquiring the features inherent to many advanced international stock markets.
The existing conditions of the market can be summarized as follows:
1) Legal framework
9 Laws, 11 Presidential Decrees, 31 Order of Resolutions of the Cabinet of Ministers of the Republic
of Uzbekistan are in place. The given documents define the legal basis of securities market, protection
of market participants rights and interests as well as transparent regulation of their activities.
2) Market Infrastructure

Head of the Securities and Financial Markets Department, Ministry of Finance, Uzbekistan
113
The following have been developed and modernized:

x
On exchange system - Republican Stock Exchange Tashkent is in operation with 12 branches

in the region
Off-exchange market - Electronic OTC Trading System with "Elsis-Savdo" with more than 20
order reception offices
Two depository system, including the Central Depository and more than 25 second-tier
depositories
Clearing-settlement agency "Elsis-Kliring"
More than 30 information analysis, consulting, rating, evaluating and auditing organization
More than 650 investments funds, management and investment companies, broker dealer,
register and other organization
As of October 2000, more than 1300 experts carry out professional activity on the securities
market in Uzbekistan
3) Regulations
The Center of Coordination and Control of Securities Market under the State Committee of Property
Management is an authorized state regulatory body in securities market of Uzbekistan. The regulation
of the market for the government securities is conducted by the same Center jointly with Central Bank
of the Republic of Uzbekistan.
We have attached to this part the illustrations and statistical information about Securities market of
Uzbekistan:
a) The system of the securities market of Uzbekistan is shown in Annex 1 and the classification
of securities in Uzbekistan is shown in Annex 1-a;
b) Corporate Securities market regulatory bodies and participants are illustrated in Annex 2;
c) Trade volume;
Trade volume
Years
1998
1999
2000
2001
2002
Total amounts of transactions (ml. USD)
519.1
603.1
253.2
146.3
111.1
d) Major products (equities, government/corporate bonds, derivatives, etc.; each % of total);
Equities
Government bonds
Corporate bonds
Total
Equities
Government bonds
Corporate bonds
114
1998
1999
67.5
88.3
451.6
514.8
0.0
0.0
519.1
603.1
Each % of total
13.0%
14.6%
87.0%
85.4%
0.0%
0.0%
2000
72.4
180.9
0.0
253.2
2001
61.9
84.3
0.0
146.3
(million USD)
2002
55.0
54.5
1.6
111.1
28.5%
71.42%
0.0%
42.3%
57.6%
0.0%
49.5%
49.0%
1.4%
Government Bonds in 1998-2002 years
Notional Amount (nominal value)

Market Capitalization
Primary market (auction) turnover
- monthly average
- yearly
Secondary market trading
- monthly average
- yearly
Yield Curve (end of year)
1998
452
431.0
1999
514.8
491.2
2000
180.9
170.6
(million USD)
2001
2002
84.3
54.5
79.9
51.3
48.8
585.0
42.3
508.0
16.6
199.1
5.8
69.0
2.3
27.9
65.3
783.1
Dec-98
21.78
55.8
669.2
Dec-99
17.04
23.0
275.8
Dec-00
15.63
7.5
90.5
Dec-01
17.04
5.0
60.0
Dec-02
16.26
e) The size of electronic trading;

Electronic trading in "ELSIS-SAVDO" System in 2000-2002 years
Years
2000
2001
2002
Quantity of transactions
(units)
12,933
5,508
1,444
Total volume of transactions (Thousand USD)

1,853.5
1,977.9
575.2
It is necessary to note that the "ELSIS-SAVDO" System begun to function from 2000.
f) Price movement;
The value of aggregated stock exchange index ASIKS") in Stock Exchange ashkent" from 1998 to
2002 years
1998
1999
2000
2001
2002
88.3
78.6
85.1
114.2
136.2
g) Investors structure is illustrated in Annex 3 (the number of individual and institutional

investors and each % of the total); and
h) Primary and Secondary market;
Primary and secondary corporate securities markets in Uzbekistan in 1999-2002 years
Primary Market
Secondary Market
1999
36.8
49.7
2000
26.1
45.9
2001
28.3
32.8
(million USD)
2002
20.9
32.6
Factors, restraining development of Securities Secondary Market

x
Low liquidity of securities (possibility to quickly turn securities into cash)
Absence of effective system of information disclosure (informing of market participants on

financial situation of issuer)
High price of each transaction
115
Low yield on securities
Relatively law growth of securities rate
Low number of investment intermediaries and other investment institutions
Other factors
3. Privatisation
Brief overview of privatisation in Uzbekistan
Consistent work conducted on privatisation of state property contributed to creation of multi structural
economy in the Republic of Uzbekistan. As a result of this work ownership form of about 130
thousand enterprises, entities and property has been changed, including 77 thousand as legal entities
on basis of which 50 thousand enterprises with different forms of ownership were created. 51,804
units of state property, including 8,249 in 2000, were privatised in form of property, property rights
(on land) and individual entities on exchange, auction and tenders during period of 1992-2000.
Previous years of political and economic independence and Uzbekistans own model of transition to
market relations testify the successful choice of strategic directions of the state policy in forming and
development of class of real property-owners.
At the first stage of economic reforms (1992-1993) the privatisation of state housing fund, small and
medium enterprises of trade, service, local, light and food industries, automobile transport and
construction formed 52,268 owners of trade, consumer services, public catering, consumer
cooperation entities, 95% of which did not have a legal entity status previously.
At the second stage (1994-1996), as a result of a wide-scale privatisation of all branches of industry
(except the basic ones) including agricultural complex the class of real property-owners was formed.
It consisted of 2 million shareholders of privatised enterprises, 3 million owners of personal household
plots, 85 thousand owners of private and small enterprises and 14 thousand of real estate owners.
The critical mass of the new class of real property-owners was created, managerial personnel were
prepared, and the necessary experience for re-organization of large-scale basic enterprises was
accumulated.
Since 1998, the privatisation of industrial giants, subsidiary enterprises of fuel and energy complex,
chemical, metallurgical and machine-building industries is conducted, and starting from 1999 its
carried out with wide attraction of foreign capital.
Privatisation in 2000 is characterized as a stage of individual approach in changing ownership form of
largest, strategic enterprises of the Republics economy with wide attraction of international technical
and financial consultants.
The main attention in the process of privatisation is paid to provide for the most effective utilization of
property, achievement of the best production indicators of privatized entities, wide attraction of
foreign investors to this process and creation of the multi structural economy on the basis of privatized
property.
116
Privatisation revenue
Privatisation revenue (thousandsUSD)

Privatisation revenue (% of GDP)
1998
1999
2000
2001
2002
93,546.0
72, 917.7
60,123.9
54,706.7
56,029.6
0.7%
0.4%
0.4%
0.5%
0.6%
Share of private sector in GDP

1995
2000
2002
Private sector
56.0%
70.2%
73.3%
Public sector
44.0%
29.8%
26.7%
The Program of Privatization of Enterprises in 2003-2004

On 17th April 2003, the Cabinet of Ministers of Uzbekistan adopted Resolution "On the Program of
denationalization and privatization of enterprises in 2003-2004". This decision of the Government was
made in pursuance with the Presidents Decree "On measures to fundamentally increase the private
sectors share and significance in the economy of Uzbekistan" dated 24th January 2003, and for the
purpose of further deepening of the privatization process, sharp reduction of the state share in
authorized funds of enterprises, increasing the investment attractiveness of the objects, and foreign
investors attraction.
For several months the Special Commission on issues of the improvement of privatized enterprises
management has conducted work on inventory and analysis of the enterprises activity with state share
in authorized funds.
On-site survey has covered almost 4,000 enterprises and objects. A critical evaluation was given to
each of the enterprises on technical level and financial condition, its role in development of countrys
economy, expediency of state share retaining, and to what extent the given enterprise is perspective
and attractive for the investors, including foreign investors.
On the basis of this analysis, all surveyed enterprises were divided into the four basic groups by
direction and scale of further privatization.
The first group includes about 1,400 enterprises, in which 25 and less percent of the state share in their
authorized fund and unplaced assets to be sold during the 2003-2004 on exchange and over-thecounter markets.
It should be noted that this group combines enterprises the shares of which today are in demand
among investors on the stock market.
The second group includes enterprises, which until present time have been under state ownership. In
accordance with the Resolution it was decided to sell entirely these enterprises on the stock market,
first of all, entirely to the private ownership.
The third group includes enterprises, which have been under stable stagnation for the several years. On
these enterprises it is considered to take more strict measures on denationalization. Full their
privatization is planned to be carried out during the 2003. In this connection, the Special Commission
117
on issues of the improvement of privatized enterprises management, the State Property Committee,
together with the Complexes of the Cabinet of Ministers shall make careful inventory of privatization
results of these enterprises and objects for the 2003. On the basis of this it is required to identify those
enterprises, which were not interested by the investors and have no perspectives for further
development. Such enterprises to be liquidated with excluding from the state register. In addition, the
equipment and other assets of these enterprises shall be sold partially. At the same time, the occupied
land together with buildings of the separate having no perspectives liquidated enterprises and objects
are considered to be transferred on a competitive basis to other economic entities.
The fourth group includes large and strategic enterprises in the authorized fund of which it is
expedient to retain the state share. At the same time, the task set is to radically change the system of
management of these enterprises, considerably strengthen the role of shareholders-owners, strengthen
the authority of supervisory board, increase responsibility of executive directors for fulfillment of the
approved business plans, production growth, financial condition of the enterprises, profitability and
dividends payment to the shareholders.
Special attention in the Resolution is given to the privatization mechanism of economically insolvent
enterprises. Consequently, it is authorized to sell unplaced state assets of insolvent enterprises on a
competitive basis at a price below par value on the condition that the buyers undertake investment
obligations sufficient for technical re-equipment and expansion of the production capacity, and
covering payables of the enterprise.
As a result of adopted Program on denationalization and privatization of the enterprises for 2003-2004
there will be cardinal changes in the ownership structure, sharply decrease of the state share in the
authorized capitals of the enterprises, the role and significance of the private sector will increase in the
economy as a whole, and the favorable conditions for attraction of investors, including foreign
investors to the privatization process are being created.
4. Clearing and settlement system
The privatization of state enterprises gave an impulse to development of a securities market in
Uzbekistan. The majority of the state enterprises were reconstructed into joint-stock companies, which
issued first shares mainly in non-physical form. First shareholders have appeared. For custody and
accounting these shares, first depositories were founded.
By 1997 there were a lot of depositories. They didnt have enough links between each other. The
depository system was complicated.
The new law about depository activity issued in August 1997 has initiated reorganization of the
depository system into two-leveled system. This system started operating since October 1999 from the
moment of foundation of the State Central Securities Depository. Today, depository system consists
from CD at the first level and 29 depositories on the second level. They a bit like to custodians.
Second level depositories provide services for over 1.2 million private investors.
Main legislative documents regulating activity of CD
Activity of CD and depositories of the second level is regulated by the following laws and acts:
1) Law On Depository Activity on the Securities Market
2) Requirements on conducting depository activity
118
3) Standards of the depository accounting

4) Procedure of interaction of the Securities Commission for market with Central Depository
5) Procedure of interaction of the Central Depository with trading and clearing systems
6) Procedure of depository operations in cases of suspension and liquidation of a depository
Custody and accounting of securities issues
The main type of securities accounted in CD till May 2002 were shares. The special Decree issued on
March 2002 created good conditions for issuing of corporate bonds. Today number of companies
using the new mechanism of borrowing of money is increasing. On December 2002, the largest
mining company like POSKO issued bonds on the sum of 2 billion soum and became the largest
corporate bond issuing company in the country.
Trading and settlement system
There are two trading markets in Uzbekistan. One of them is Tashkent Stock Exchange and the second
is the special electronic trading system for small investors. We call it ELSIS-SAVDO.
Tashkent Stock Exchange (TSE) was founded in 1993. Brokers can make transactions from 12
branches of the Stock Exchange located in different regions of the country.
Participants of the TSE are 101 brokers. Trading and settlement system is illustrated in Annex.
The special electronic OTC trading system is a system for small investors.
In accordance with the rule of the stock exchange, participant must deposit 100% securities meant for
sell on his account in CD. CD blocks these securities and notifies of the Stock Exchange. The
participant cannot sell greater amounts of securities than it is blocked by CD.
After the trade SE sends information about all transaction to Clearing House, Clearing House sends the
information about transactions to CD for accounting selling securities. Clearing House settles positions
of the participants using trade by trade method. At the settlement day Clearing House sends the
instructions to the CD to delivery securities. CD transfer securities from seller account to buyer account.
CD has electronic links with SE, CH and OTC trading system.
Since August 2002, participants have electronic links with the CD. Nowadays participants send
electronic instructions for deposit in CD from through second leveled depositories.
5. Regulatory and supervisory structure
The Centre for Coordination and Control of the Securities Market under the State Property
Committee of the Republic of Uzbekistan
The Centre for Coordination and Control of Securities Market under the State Property Management
Committee of the Republic of Uzbekistan (further - the "Centre") was established in accordance with
the Decree of the President of the Republic of Uzbekistan dated 26th March 1996.
119
Within the framework of authorities stipulated by the Government of the Republic, the Centre
functions as the state authorised regulatory body of the securities market in Uzbekistan, and is
assigned to fulfil the same tasks and objectives as the ones inherent to Securities and Exchange
Commissions worldwide.
The structure of the Centre
The administrative structure of the Centre includes the position of the General Director, which also
encompasses the position of the Deputy Chairman of the State Property Management Committee, two
Deputy General Directors and 6 Departments. In the Centre there is also created and successfully
functioning the collegial body, namely the Board of Appeals, whose structure, alongside with the
representatives of Centre, also includes representatives of the Ministry of Finance, State Tax
Committee, Committee on Fair Trading as well as other organisations.
The total number of employees of the Centre is 153 persons. Out of these figure 29 people are
employed in the HQ of the Centre and remaining 124 people are employed in its territorial branches.
Having the status of the supervisory bodyt the Centre is staffed by qualified experts -economists,
financiers, lawyers and other professionals, who constantly improve and upgrade their professional
qualifications both in Uzbekistan and abroad.
Functions of the Centre
According to the tasks set up the Centre carries out its activity in the following major directions:
First, creation and improvement of legislative base of securities market, which includes the
development of legislative and other normative-legal acts (resolutions, regulations, instructions,
standards, normative provision and other documents). As a whole, under the direct participation of the
Centre, essential normative-legal base of securities market there was created in Uzbekistan, which
currently comprises 5 Laws, 11 Presidential Decrees, 31 Orders and Resolutions of the Cabinet of
Ministers of the Republic of Uzbekistan and more than 50 normative-legal acts.
These documents provide for the legal basis of formation and further development of securities market
and its infrastructure, carrying out of operations with securities, protection of rights and interests of
securities market participants as well as regulation of their activities and others.
Second, the state regulation of securities market participants activity; the state registration of
securities issues; licensing of securities market professional participants activity, and conducting
qualification examinations to gain the right to carry out operations with securities.
Alongside with the mentioned above, the Centre also conducts works on registration of corporate
securities issues. For this reason, there were developed a appropriate normative-legal base; there was
formed the Uniform state register of securities issues, which is regularly upgraded and published after
every new issuers securities issue. For instance, as of end of 2002 the Uniform register recorded data
of new 625 securities issues.
There are currently 4670 acting Joint stock companies in Uzbekistan, 304 so-called "investment
institutions or market participants gained their licenses from the Centre.
Third, development of the institutional infrastructure of securities market by both the creation of new
structures and further development of existing ones. Currently, under the direct participation of the
Centre there was formed an institutional basis of securities market - i.e. infrastructure capable of
120
rendering the necessary spectrum of services for circulation of different types of securities and
ensuring the integration of the domestic market in the international capital markets.
Ggradually since 1994 securities market key players were organised. Among them are "Toshkent"
Republican Stock Exchange, Central Securities Depository, "Elsys-Clearing" Clearing company,
"Elsys-Savdo" OTC electronic market. In 1999 there were established the National Association of
Investment Institutions in Uzbekistan (NAII), which is the association securities market professional
participants set up in a form of self-regulatory organisation.
Fourth, control and enforcement of adherence to acting legislation by all the securities market
participants, undertaking the appropriate measures in case of occurrence of any infringements, and
protection of rights and interests of securities market participants, both investors and professionals.
Fifth, coordination of securities market professional participants activity -conducting capacity
building work on interpretation and application of normative-legal acts, conducting discussion
seminars etc.
Within the framework of this direction, the Centre and its territorial branches carry out various
activities, in particular, - explanation of the methodology and applicability of normative-legal acts. In
2002 more than 400 explanations and consultations were provided to natural persons and legal entities
Much work has done to increase the number of market specialists - securities professionals. The
number of specialists who received qualification certificates for the right to carry out operations with
securities reached 769. Currently, there are 3 educational centres specifically set up to prepare
securities market specialists.
Sixth, wide mass media network of information provision on securities market baseline, investment
opportunities and other aspects to investors (including foreign ones) and to the general public.
Within this direction, alongside with publications in mass media, the Centre regularly conducts "round
tables" and presentations with participation of foreign business representatives as well as the general
public both in the Republic and abroad. During 2002 more than 20 presentations on current situation
of securities market in Uzbekistan were conducted with participation of Korean, US, Japan, German
and other business people and market specialists.
Seventh, development of the international cooperation of the Centre with similar regulatory bodies
abroad, implementation of international projects on placement of domestic issuers securities on
foreign capital markets, integration of securities market of Uzbekistan into the international capital
markets as well as a number of other functions.
121
Government
The system of the securities market of the Uzbekistan

The bodies of the government management by the capital market
The Center for coordination and control over functioning of the

securities market under the State Property Committee of the
Republic of Uzbekistan
The Central Bank of the

Republic of Uzbekistan
The Ministry of Finance of

the Republic of Uzbekistan
Administrative and territorial bodies

(Khokimiyats)
Annex 1
Commercia
l banks
Insurance
companie
s
Notarys
offices
Information agencies,
Publishing houses
Stock Market
The institutes of the well-organized

over thecounter market
Stock Market
Stock. Exch dept/ of the

Republican foreign exch.
market
Elsis-Savdo
Republican stock
exchange Toshkent
Investment
consultants
Investment
Funds
(IFfs, PIFs)
Trust
companies
Clearing
organizations
Investment
companies
Registrars
The institutes of the special infrastructure of the securities market
Depositaries
Nominal
holders of
the
securities
Companies and organizations
Population
Investment
intermediators
(stock brokers
and dealers)
Consumers of the capital (issuers)
Auditing
organizations
Law firms
Governmant
Companies and organizations
Capital suppliers (investors)
Institutes of the general infrastructure of the securities market
122
ANNEX 1-A
Securities classification in the Republic of Uzbekistan
1. Securities that can be issued in accordance with the Law of the Republic of Uzbekistan On Securities and Stock Exchanges, dated 2
September, 1993.
Shares
Bonds
Treasury Bonds
Deposit Certificates
Bank papers
Derivative Securities
2. Securities that, except above mentioned, can be issued in accordance with the Civil Code of the Republic of Uzbekistan (Part II, as of 27
August, 1996)
Cheques
Bills of Lading
Bearers Bankbooks
123
Annex 2
Corporate Securities Market Regulatory Bodies and Participanys in Uzbekistan

Supervision and surveillance bodies
The Centre for coordination and control
of securities market
National association of investment

institution
Government regulatory body
Self-regulatory organisation
Issuers
Investors
on-Exchange market
Joint-Stock Companies
(newly established
or privatized)
"Toshkent" Republican Stock Exchange

(12 branches in the regions)
Large investors
(legal enitities and physical persons,
including foreign investors)
off-Exchange market
(legal enitities and physical persons,
Small investors
Joint-Stock Banks
including foreign investors)

Organized off-exchange market
"Elsis-Savdo" Electronic OTS Trading System
currently operating
structures
Non-organized off-exchange market
projects
Organisation providing services on the market
"Elsis-Clearing"
Settlement-Clearing
Company
124
Central Depository
Investment intermediares
Brokers-Dealers
101
Investment Funds
Register companies
55
Commercial
Banks
7
15
Second tier
depositories
30
"Consauditinform"
Agency
"A&TM" Center for electronic

information analysis and
provision
Manadgment
Companies
31
Nomine holders
10
Privatization Investment
funds
23
Investment
Companies
Annex 3
Participants structure of Corporate Securities Markets in 2002

Investment
Intermediaries 6%
Banks 1%
Foreign Investors 28%
Supreme
organizations, JSC,
upstream and
downstream
companies 11%
Physical persons 5%
SME (Small and

Medium enterprises)
48%
Investment Funds 1%
Annex 4
Securities trading & settlement system
"Tashkent" Republican Stock
"Elsis-Savdo" off-exchange
Exchange
trades electronic system
"Elsis-Clearing" SettlementClearing House
Settlement Banks
State Central Securities

Depositari
Custodians
125
Chapter 12
UZBEKISTAN CORPORATE SECURITIES MARKETS INFRASTRUCTURE:
VIEW THROUGH THE PRISM OF THE NEW RECOMMENDATIONS
OF THE GROUP OF THIRTY
by
Timur Yadgarov
Recommendation 1. Eliminate paper and automate communication, data capture, and
enrichment.
Even though more then 236 million shares or about 16 percent of all corporate securities are issued in
a paper form (Figure 1), there are very good opportunities for dematerialization and provision full
electronic documents turnover among Uzbekistan securities markets participants.
Figure 1. Increasing volume of dematerialized corporate securities
204.9
1600
236.8
1400
117.8
1200
118.6
1000
800
66.9
600
51.9
400
200
0
52.9
1242.8
22.8
14.7
33.0 127.8 272.8 308.5 456.9 843.4 992.3 1209.0
1995 1996 1997 1998 1999 2000 2001 2002 2003
We have conventional understanding among professionals on the need to eliminate issuance, use,
transfer and retention of paper securities without delay. As a result, from the year of 1999 all
important institutions made efforts to implement electronic document turnover, and finally from the
August 2002 most of documents among stock exchange, clearing house, central depository and
custodians have been circulated in electronic form.
About one hundred brokers and thirty registrars should join this network to ensure full electronic
documents turnover among professional participants. This goal can be reached by introducing new
requirements on data exchange. Recently, new Law On electronic documentation turnover, was approved
by the Parliament of Uzbekistan that established legal fundament for electronic document turnover.

Senior Lecturer, Tashkent Institute of Finance, Uzbekistan
127
Recommendation 2. Harmonize messaging standards and communication protocols.

Development of software compatibility is one of the most topical issues of the securities market
institutions in Uzbekistan. We are at the early stages of implementing ISO standards. However,
perspective exploring of IPprotocols and extensible mark-up language are very possible, because the
main institutions already have web sites, and I believe, there are qualified personnel able to explore
such advanced technologies. Probably Uzbekistan securities market may need some technical
assistance to organize this process at appropriate level.
Recommendation 3. Develop and implement reference data standards.
The supply of transparent information and fair price, as a part of developing corporate governance, are
the current priorities of the economic reformation in Uzbekistan. Several resolutions have been issued
by the Government of Uzbekistan and by the President Islam Karimov towards strengthening private
sector positions in the national economy.
The first steps in the direction of improving the securities markets transparency have already been
made by securities markets authorities. To illustrate, new Internet site was launched in September
2003 - www.uzsecurities.com. This site contains actual information about current developments on
securities market and will be a part of mechanism that ensures informational rights of investors.
Figure 2. Dynamic of joint-stock companies number in 1995-2004
4000
4469
4186
4555
4654
4716
2003
4215
2002
4805
5000
2001
6000
4305
3356
3000
1985
2000
1000
2004
2000
1999
1998
1997
1996
1995
The law On protection of investors rights on securities market, governs information disclosure and
Government resolutions on the development of corporate governance contain the requirements to
issuers, professional participants and other related institutions to disclose:
x
information about essential events;
information about affiliated bodies;
quarterly reports of executives activity; and
quarterly and yearly financial reports.
128
In order to make our market a part of global network, we should implement international standardized
system with unified interface that is clear and efficient for investors from any part of the world.
At the start of 2004, there were 4,305 joint stock companies, as you can see in Figure 2. It seems that
foreign investors could be interested in some of them.
Recommendation 4. Synchronize timing between different clearing and settlement systems and
associated payment and foreign exchange systems.
In the fourth quarter of 2003, the main restrictions on national currency conversion were removed. It
was a result of combined work of the Government of Uzbekistan with international organizations.
However, there is still a lot of work to be done in the sphere of harmonization of our national financial
system with international financial market, as well as with national securities and bank system.
Briefly, we can underline several issues that have first priority:
x
developing the regulatory framework for conversion operations for foreign investors on
national securities market;
creating regulations for cross-border securities transfers;
establishing of cross-border linkages with foreign depositories; and
providing rights for Central depository and second level depositories to manage clients cash
accounts.
It seems that implementing the conception of Mega-regulator on Uzbekistan financial market, could
help to solve abovementioned and other problems in an appropriate way.
As you can see in Figure 3, the total volume of corporate securities has stable growth rate, and looks
healthy, even taking into consideration inflation ratio. The privatization process, with all its ambiguous
results however, goes further.
Figure 3. Volume of issued corporate securities on face-value in thousands of Uzbek Soum
2,500,000
1,993,600
1,943,780
1,902,188
2,000,000
1,754,444
1,931,150
1,634,271
1,717,401
1,561,206
1,500,000
1,617,060
1,228,509
1,000,000
815,309
804,800
844,038
609,639
590,773
500,000
131
878
211,400
168,600
52,702
217,600
1-1-2004
7-1-2003
4-1-2003
/01/2003
10-1-2002
7-1-2002
4-1-2002
1-1-2002
10-1-2001
7-1-2001
4-1-2001
1-1-2001
10-1-2000
7-1-2000
4-1-2000
1-1-2000
1-1-1999
1-1-1998
1-1-1997
1-1-1996
1-1-1995
129
As a result one of the major economies in Central Asia, mostly completed its corporatization process.
So, we hope that establishing cross-border relationship with other markets in a region will become
fruitful in the new future.
Recommendation 5. Automate and standardize institutional trade matching.
Recommendation 6. Expand the use of central counterparties.
Recommendation 7. Permit securities lending and borrowing to expedite settlement.
Recommendation 8. Automate and standardize asset servicing processes, including corporate
actions, tax relief arrangements, and restrictions on foreign ownership.
All these recommendations are focused on improving the efficiency of securities markets clearing and
settlement infrastructure activity. The need to cut off transactional costs and provide fast and reliable
operation is the crucial to further development of securities market in Uzbekistan.
Currently, four entities are involved in this process: the stock exchange, clearing house, central
depository and the settlement bank.
Implementation of Central Counterparty based on Central Depository and widening its functions by
law, can ensure further development in all spheres of infrastructure functioning.
Recommendation 9. Ensure the financial integrity of providers of clearing and settlement
services.
Evaluation of information disclosure and risk management in the State Central Securities Depository of
Uzbekistan
Evaluation criterion
Information disclosure (100%)
Publishing of quarterly reports
Publishing of yearly reports
Publications on current events
Corporate Internet-site
Risk monitoring and control (75%)
Legal counselors
External auditors
Independent internal audit and risk management department
Well developed regulations on risk management procedures
Requirements to participants (25%)
General requirements on participants own assets value
Audited financial reports
Participants financial integrity requirements
Participants financial liquidity requirements
Participants due diligence (25%)
Request for acknowledgements of participants state registration and professional qualification
Investigation of participants financial history
Request for references
Investigation of participants personnel professional history
Total result (56%)
130
Points
4 from 4
Yes
Yes
Yes
Yes
3 from 4
Yes
Yes
Yes
No
1 from 4
Yes
No
No
No
1 from 4
Yes
No
No
No
9 from 16
Recommendation 10. Reinforce the risk management practices of users of clearing and
settlement service providers.
Provisions of financial integrity, disclosure and risk management are always kept an eye by Uzbek
securities markets experts. We developed the evaluation table above to demonstrate you the current
situation in this field.
In general, the Central Depositorys activity is sufficiently transparent and its management pays
adequate attention to risk monitoring and control issues. However, there are several questions in
relationship with participants that should be taken into consideration.
Recommendation 11. Ensure final, simultaneous transfer and availability of assets.
Delivery versus payment as a basic principle of clearing procedures was accepted in our practice from
1998, when the Clearing House was established as an independent securities market institution.
During this period a significant improvement in infrastructure development has taken place.
Currently securities clearing and settlement procedure is as follows:
Prepayment of the contract is blocked on the buyers broker account in the Clearing House, at the
same time securities are frozen on sellers broker account in the Central Depository. Both institutions
provide information to Stock Exchange about available cash and securities. Twice a day Clearing
House launches process, when all paid deals go through the clearing. Central Depository transfers
securities to buyer; Settlement Bank transfers cash to seller. This mechanism is very stable there were
no serious occasions of un-delivered or un-paid securities. However, in our understanding it will not
be compatible with an active secondary market trading, on improving of which our Government
makes consecutive efforts. The period of settlement, on such scheme, is not matched with the
recommendations of Group of Thirty.
To simplify and speedup this process, we need to implement Central Counterparty on the basis of
Central depository.
Recommendation 12. Ensure effective business continuity and disaster recovery planning.
Recommendation 13. Address the possibility of failure of a systemically important institution.
Central Depository, as a systematically important organization is paying attention to providing stable
functioning and readiness to force-majeur events. The following table will provide you information
about current situation in this field.
131
Evaluation of readiness to force-major events in the State Central Securities Depository of Uzbekistan
Evaluation criterion
Software-hardware and documentation readiness 100%)
Duplicate server availability
Remote Disaster Recovery Center (RDRC) availability
Evacuation plan availability
RDRC launching plan availability
Infrastructure readiness 75%
Correspondence of main server environment conditions to manufacturer requirements
Availability of two independent communication lines on RDRC
RDRC remoteness from main server on at least 12 km
RDRC under supervision of two independent security services
Personnel readiness 50%
Preparing of personnel in theory
Training evacuation to RDRC
Does necessity of evacuation of personnels family members taken into consideration?
Training of personnel in emergency unhooking of computers
Third parts readiness 0%
Joint theoretical lessons
Joint evacuation
Training in RDRC 1 RDRC 2 cooperation
Is the list of authorities, which should be informed on RDRC location approved?
Total score 56%
Points
4 from 4
Yes
Yes
Yes
Yes
3 from 4
Yes
Yes
Yes
No
2 from 4
Yes
No
No
Yes
0 from 4
No
No
No
No
9 16
It mainly shows that Central Depository itself is ready for force-majeur events, but cooperation with
other systematically important organizations in this field is not up to a satisfactory level.
Recommendation 14. Strengthen assessment of the enforceability of contracts.
Although there is some evidence of work in providing reliable and effective functioning of clearing
and settlement institutions, problems of legal due diligence and risk management could be solved in
principal only by mutual efforts of all professional community. There are more then 5 thousand
professionals on Uzbekistan securities market, however, self-regulating organization is not well
developed yet and has not enough power to influence the decision-making. Consequently, state
regulatory body probably will make efforts in field of:
x
establishing guarantee fund;
developing risk management standards; and
creating due diligence procedures.
Recommendation 15. Advance legal certainty over rights to securities, cash, or collateral.
Civil Code, Law On depository activity on securities market and main regulations provide legal
certainty over the rights to securities. But collateral ownership is not sufficiently developed in
legislation.
132
Recommendation16. Recognise and support improved valuation and close out netting
arrangements.
Implementation of Central Counterparty conception in Uzbekistan practice is necessary to provide this
recommendation. There are no restrictions in the legislation, and master agreements should be redrafted to provide consistent closeout netting and valuations provisions.
Recommendation 17. Ensure appointment of appropriately experienced and senior board
members.
In the Uzbekistan securities market, chief executives and board members in all important institutions
have the appropriate professional experience and a deep understanding of the importance of
international expert recommendations.
Recommendation 18. Promote fair access to securities clearing and settlement networks.
As mentioned before, all important organizations have corporate Internet sites and publish their reports
on access rules and procedures. However, so far access to these institutions services is limited only for
professionals, who have local licenses and registration.
During the next stages of cooperation development, regulatory bodies under the IOSCO guidance
could create some kind of international (or regional) license that will give an opportunity to work on
related markets under several jurisdictions.
Recommendation 19. Ensure equitable and effective attention to stakeholder interests.
The Central Depository of Uzbekistan is a unitary state entity founded by the State Property
Management Committee that reports to the Ministry of Finance.
In accordance with this recommendation stakeholders can defend their interests by creating a
Professional Supervisory Board, elected by General Meeting of professional community that controls
systematically important institutions with power to approve important changes in their activity.
So far this self-regulating organization is under-developed stage that is another crucial field for
international organizations support.
Recommendation 20. Encourage consistent regulation and oversight of securities clearing and
settlement service providers.
State regulatory body in Uzbekistan securities market has outstanding authority not only because of
their powers, but also because of higher professionalism of its staff.
It seems that harmonization and unification of all two hundred legislation documents in force, will
make supervising and regulation more consistent and transparent.
The unification of all legislative documents into one Code on the securities market, could help
progress in this field.
The Center for Coordination and Control is a member of IOSCO and we hope that the
Recommendations of Group of Thirty as always will be taken into consideration and we will see in a
near future significant improvement in Uzbekistans securities market.
133
OECD PUBLICATIONS, 2, rue Andr-Pascal, 75775 PARIS CEDEX 16

PRINTED IN FRANCE
(21 2005 09 1 P) ISBN 92-64-01222-2 No. 54465 2005

Since the collapse of their Communist regimes, Central Asian countries have
been heading rapidly toward a market economy and have made considerable
efforts to establish a functioning market infrastructure. However, the regions
securities markets remain small-scale and underdeveloped. Building up well
Securities
Markets
in Eurasia
This publication contains an overview of securities markets in the region and

selected country reports prepared for the OECD Conference on Financial Sector
Development in the Central Asian countries, Azerbaijan and Mongolia held in
April 2004. It provides comprehensive data and analyses of securities markets in
the region, updated to April 2005, addressing specifically:
Effective measures to develop securities markets and infrastructure, especially
the role of institutional investors and clearing and settlement systems.
Building investor confidence.
Regulation and supervision of securities markets.
This volume is part of the OECDs ongoing co-operation with non-member
economies around the world.
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The full text of this book is available on line via this link:
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Securities Markets in Eurasia

This publication contains an overview of securities markets in the region and

Securities Markets in Eurasia

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

ORGANISATION FOR ECONOMIC CO-OPERATION

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

Part I Analytical Report

Summary of the OECD Conference on Financial Sector Development

Potential for Securities Markets in the Central Asian Countries,

Financial Markets and Institutional Investors in Central Asia

1. Capital markets in emerging economies ....................................................................................... 53

Securities Market in the Republic of Azerbaijan

Supervision of the Securities Market in the Republic of Kazakhstan

The Further Development and Reliable Operations of the Securities Market

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

The Development of Institutional Investors and Pension Funds in Kyrgyzstan

The Origin and Development of the Securities Market in Mongolia

Securities Market Development in Mongolia

Chapter 10 Securities Market in the Republic of Tajikistan

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

Harmonisation between messaging standards and communication protocols: Uzbekistan is in

Reference data standards: A new website (www.uzsecurities.com) regarding the securities

Automation and standardisation of institutional trade matching/asset servicing processes and

Assessment of enforceability of contracts: mutual efforts of all market professionals will be

Valuation and closeout netting arrangements: Implementation of the central counterparty

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

Improve the role of government as shareholders, refraining from excessive intervention in

Improve the function of boards of directors, promoting the director-accountability

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

Regulating markets in line with international standards facilitates the understanding of

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

Kazakhstan, Uzbekistan, Kyrgyz Republic, Tajikistan and Turkmenistan

GSCS Benchmarks is an institution measuring operational performance of the international securities

ANNA: Association of National Numbering Agencies

The duration of an inspection does not exceed 30 days.

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

Introductory Session: Opening Remarks

2 The Hungarian Financial Supervisory Authority is a single market regulator in Hungary.

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

Day 2: Friday 30th April,

The development of a well-functioning securities market cannot be achieved without an appropriate

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

enforceability of regulations. In particular, integrated regulators are becoming widespread in advanced

Concluding Session: Future Works

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

Administrator, Directorate for Financial and Enterprise Affairs, OECD

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

Figure 1: Real GDP Growth Rate

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

Kazakhs tan (KAS E )

(Source) OECD Market Survey 2004

SECURITIES MARKETS IN EURASIA ISBN-92-64-01222-2 OECD 2005

Table 1: Major Products

- Shares in stateowned and private

(Source) OECD Market Survey 2004