Банкеръ Weekly

Briefs

FSC PREPARES CAPITAL MARKET REVOLUTION

A capital market revolution or application of the European directives - that's the question arising when one reads the amendments to the Law on Public Offering of Securities the Parliament is likely to adopt in September. The answer is - both of them. Parts of the amendments are quite revolutionary for Bulgaria not because they are something new but because the Bulgarian capital market is still in its early years of development.
The gravest amendments are in the part dedicated to the notion of securities and the places where trading in them can take place. According to Dimana Rankova, Deputy Chairwoman of the Financial Supervision Commission (FSC) in charge of the Investment Activities Supervision, the scope of the law is being changed significantly. Texts about expanding the investment and trading abilities of managing companies and investment intermediaries are included in it. Securities trading is subject to innovation, too - according to the new regulation, trading will also be possible outside the stock exchange, provided that the market distributes information about the deals and the participants have equal access to it.
Once the act is adopted, the group of financial instruments will include not only securities but also commodities and services futures and options as well as the shares of collective investment schemes. The term also includes all types of financial income, including that from real estates, which is an innovation for Bulgaria. Besides, the amendments stipulate that capital market participants be able to invest in contracts for difference (which arrange the right to receive and pay the difference between the market value of a financial instrument and a price earlier fixed by an agreement). According to Dimana Rankova, these amendments to the law will cover all types of financial instruments included in the European directives on the capital market arrangement.
According to the amendments, investment intermediaries will be able to trade in commodity derivatives: derivative contracts in which oil, wheat, gold and other commodities are the underlying assets. The currently operating act does not consider them financial instruments and intermediaries are not allowed to trade in them.
On May 3, the Financial Supervision Commission approved the Practice of trading in commodity derivatives by investment intermediaries. The document explains that the acting legislation does not allow that investment intermediaries make transactions with commodities and commodity derivatives on their own or someone else's account. Moreover, an investment intermediary cannot provide access to an electronic platform for trading in commodity derivatives placed by a third person. However, companies are allowed to assist the contact between their customers and intermediaries abroad who trade in derivatives, but the information flow only passes through them and they do not make deals on their own or someone else's account. This practice will probably be valid until the potential amendments to the Law on Public Offering of Securities are adopted (they provide this possibility in accordance with the European regulation).
The Financial Supervision Commission will be given broader rights in the regulation of acquisition (direct and indirect) of significant stakes in the capital of investment intermediaries. Until now, an approval by the commission was required in case of acquisition of 10 or more per cent directly or through related individuals. After the potential amendments are adopted, the new owners will have to provide information about the acquisition of such stakes, while the commission will have a right to put a ban on exercising the voting right at the intermediaries' general meetings of shareholders. The new regime is much stricter, Mrs. Rankova said, as the commission is allowed to ban the acquisition of significant stakes, too.
As the number of financial instruments operated by the investment intermediaries is growing, the capital adequacy regulation will have to be changed, Mrs. Rankova added. The amendments to the law will also result in amending other normative acts. But what these amendments will be is not known yet.
Investment companies and mutual funds, also known as collective investment schemes, will be allowed to invest in a broader range of financial instruments. So far, they were only able to invest in securities allowed for trading on a regulated market and included in indices. The new law will not require that they are included in indices. Due to the amendments, companies and funds can also put money in liquid financial instruments. These are all types allowed to regulated markets but not subject to trading. Collective investment schemes will be allowed to invest in real estates and movable property, but there will be a limit of the amount of collected funds that can be invested. As to opened-type companies, they are restricted to investing in property that is necessary for implementation of the activity.
There will be a serious change in the concept of the regulated market on which stocks can be traded. It already includes multilateral trading systems operating on a certain principle and distributing information. It is possible that transactions with securities accepted on a regulated market be signed outside this market as well, provided information about them is delivered. Trading in securities will also be possible on alternative markets, which means that trading in shares will be allowed almost everywhere, if the markets are regulated and accurate market information about the transactions signed on them is delivered on time.
Because of the European legislation the Financial Supervision Commission is also going to amend the part that refers to the prospects of public offering of securities. New facilities are provided for financing companies through the capital market. They will no longer be obliged to issue a prospect, if they are going to offer their securities to qualified investors. A new definition is created for them. In order for potential applicants to be facilitated, the Law on Public Offering of Securities will stipulate that companies which already have prospects can simply add updated information if, for example, they want to change the amount of their capital. This order is currently included in the regulations to the act. That will make it easier for joint-stock companies to attract capitals since their costs will be reduced, too. No prospects will be required if the securities are offered to fewer than 100 individual or legal entities.
No change is planned in the activities of the managing companies since it is synchronized with Directive 85/611 of the European Union. As to their payments to the Fund for Compensating Investors in Securities, the Deputy Chairwoman of the Financial Supervision Commission explained that discussions continued about whether they should owe money only when they occupy with trust asset management. However, she added that in this case the managing companies should keep customers' assets with them. The issue remains subject to debate since even if they keep assets with them, the assets will be of institutional investors for which no payment is made to the fund.
Branch organisations have not yet announced their opinion on the amendments to the law, but there must be a new law by year-end so that the commitments to the European Union can be fulfilled.

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