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«OECD Centre for Private Sector Development Sixth Conference on Financial Sector Development in the Central Asian Countries, Azerbaijan and Mongolia ...»

Session II (B)

Presentation by Mr. Timur Yadgarov

OECD Centre for Private Sector Development

Sixth Conference on Financial Sector Development in the Central Asian Countries,

Azerbaijan and Mongolia

29-30 April 2004, Istanbul

Timur Yadgarov

Senior Lecturer of

Tashkent Institute of Finance

Dear Chairman! Colleagues!

I would like to express my cordial thanks to OECD Directorate for Financial,

Fiscal and Enterprise Affairs and personally to Mr. Shinozaki, for inviting me and

supporting my participation in this significant event.

A few words about myself. My name is Timur Yadgarov. For last five years I have been working on securities market of Uzbekistan, in the capacity of the First deputy Chairman in Clearing House, Deputy Head of Financial Department in State Property Management Committee and the First Deputy General Director in Central Depository. To complete my dissertation in the field of securities market infrastructure I left Central Depository and started working as a Senior Lecturer in the biggest Uzbekistan university preparing specialists for securities market.

Today’s topic of my presentation is:

“Uzbekistan corporate securities market’s infrastructure.

View through the prism of the New Recommendations of Group of Thirty” Recommendation 1. Eliminate paper and automate communication, data capture, and enrichment.

There are very good opportunities for dematerialization and provision full electronic documents turnover among Uzbekistan securities market’s participants.

Currently, more then 220 million shares or about 15 percent of all corporate securities are issued in a paper form. These securities were issued by companies that have been privatized on early stages of reformation processes in our country.

Distribution of paper securities was accepted as an instrument of developing owner’s felling in wide circles of people, who had not much experience. However the volume of paper securities has been decreasing over the last four years.

We have conventional understanding among professionals on necessity of elimination of issuance, use, transfer and retention of paper securities without any delay. As a result, from the year of 1999 all systematically 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 introduction of the newrequirements on data exchange. New Law “On electronic documentary”, has already been drafted with participation of securities market’s specialists, and is now on the agenda of the Parliament of Uzbekistan for upcoming session.

Recommendation 2. Harmonize messaging standards and communication protocols.

Development of software compatibleness is one of most topical issues in Uzbekistan securities market institutions’ activity. We are on the early stages of implementing ISO standards. However, main institutions have their web sites (www.spc.gov.uz; www.deponet.uz; www.atm.uz), and I believe perspective exploring of IP–protocols and extensible mark-up language are very possible.

There are qualified personnel able to explore such advanced technologies.

Probably we may need some technical assistance to organize this process on appropriate level.

Recommendation 3. Develop and implement reference data standards.

Supply of information transparency and fair price, as a part of developing corporate governance, are the priorities of current stage of the economic reformation in Uzbekistan. Several Resolutions were issued by the Government of Uzbekistan and by the President Islam Karimov, with purpose of strengthening private sector positions in the national economy.

First steps in the direction of improving securities market’s transparency has already been done by securities market’s authorities. To illustrate, new site in Internet was launched in September this year 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. The Law “On protection of investors rights on securities market”, rules of information disclosure and Government resolutions about developing corporate governance consist of requirements to issuers, professional participants and other related

institutions to disclosure:

- information about essential events;

- information about affiliated bodies;

- quarterly reports of executives’ activity;

- quarterly and yearly financial reports.

Anyway, to make our market a part of interoperable global network, we should implement international standardized system with unified interface that is suitable and understandable for investors from any part of the world.

Recommendation 4. Synchronize timing between different clearing and settlement systems and associated payment and foreign exchange systems.

As you probably know, in September this year main restrictions on national currency conversion were canceled. It was a result of consecutive work of the Government of Uzbekistan. However, there are still a lot of work that should be done in sphere of harmonization of our national financial system with international financial market, so as among national securities and bank system. Briefly, we can

underline several issues, that have first priority:

√ developing the regulatory framework for conversion operations for foreign investors on national securities market;

√ creating regulations of cross-border securities transfers;

√ establishing of cross-border linkages with foreign depositories;

√ providing right for Central depository and second level depositories to manage client’s cash accounts.

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 market infrastructure’s activity. Necessity of cutting off transaction costs and providing fast and reliable functioning is the central question of further development of securities market in Uzbekistan.

Currently four entities are involved in this process: stock exchange, clearing house, central depository and settlement bank. Implementing of Central Counter Part based on Central Depository and widening its functions by Law, can lead to fast development in all spheres of infrastructure functioning.

Recommendation 9. Ensure the financial integrity of providers of clearing and settlement services.

Recommendation 10. Reinforce the risk management practices of users of clearing and settlement service providers.

Provision of financial integrity, disclosure and risk management is always in the field of vision of Uzbekistan securities market’s experts. We developed the following evaluation table to demonstrate you current situation in this field.

Evaluation of information disclosure and risk management in the State Central Securities Depository of Uzbekistan

–  –  –

As you can see, in general, Central Depository’s activity is sufficiently transparent and its management is giving 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 Clearing House was established as an independent securities market institution. During this period significant improvement in infrastructure development has taken place.

Currently securities clearing and settlement procedure is following.

Prepayment of the contract is blocked on buyer’s broker account in the Clearing House, at the same time securities are blocked on seller’s broker account in the Central Depository. Both institutions provide information to Stock Exchange about available cash and securities. All securities traded on Tashkent Stock Exchange are blocked in Central Depository. Twice a day Clearing House launches clearing process, when all paid deals go through clearing and settling.

Securities transfers by Central Depository to buyer, cash transfers by Settlement Bank to seller. This mechanism is very stable there was no any 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.

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.

Following table will provide you information about current situation in this field.

Evaluation of readiness to force-major events in the State Central Securities Depository of Uzbekistan

–  –  –

It shows that mainly, Central Depository itself is ready to force-majeur events, but cooperation with other systematically important organizations in this field is on unsatisfactory 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 5000 thousand professionals on Uzbekistan securities market, however, self-regulating organization is not well developed yet and has not enough power to influence decision-making.

Consequently state regulatory body probably will make efforts in field of:

- establishing guarantee fund;

- developing risk management standards;

- 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 rights to securities. But collateral ownership is not enough developed in legislation.

Recommendation 16. Recognize and support improved valuation and closeout netting arrangements.

Implementation of Central Counter Part technology in Uzbekistan practice is necessary to provide this recommendation. There are no restrictions in legislation and master agreements could be re drafted to provide consistent closeout netting and valuations provisions.

Recommendation 17. Ensure appointment of appropriately experienced and senior board members.

We could be proud that in Uzbekistan securities market, chief executives and board members in all systematically important institutions have reach appropriate professional experience and deep understanding of importance of the international experts recommendations.

Recommendation 18. Promote fair access to securities clearing and settlement networks.

As it was mentioned, all systematically important organizations have corporate sites in Internet and publish their reports on access rules and procedures. However, access to these institutions services is limited to professionals, who have local licenses and registration. Probably on next stages of cooperation, regulatory bodies under the IOSCO guidance should create some kind of international license.

Recommendation 19. Ensure equitable and effective attention to stakeholder interests.

Central Depository of Uzbekistan is a unitary state entity founded by the State Property Management Committee that reports to Ministry of Finance. In accordance with this recommendation stakeholders can defend their interests by creating Professional Supervisory Board, elected by General Meeting of professional community that controls systematically important institutions with power to approve important changes in their activity.

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. Center for Coordination and Control is a member of IOSCO and we hope that Recommendations of Group of Thirty as always will be taken into consideration.

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