ICC Commission on Financial Services and Insurance: 4th Corporate Governance Roundtable
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ICC Commission on Financial Services and Insurance: 4th Corporate Governance Roundtable Prague, 18th April 2007 The Capital Market in the Czech Republic: Development, Regulation, Supervision, and Corporate Governance Miroslav Singer Vice-Governor, Czech National Bank Outline

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ICC Commission on Financial Services and Insurance: 4th Corporate Governance Roundtable

Prague, 18th April 2007

The Capital Market in the Czech Republic: Development, Regulation, Supervision, and Corporate Governance

Miroslav Singer

Vice-Governor, Czech National Bank


Outline l.jpg
Outline Corporate Governance Roundtable

  • Integration of financial market supervision

  • Capital market: History and current arrangement

  • Capital market: Some statistics

  • Capital market: Corporate governance


Financial market supervision l.jpg
Financial market supervision Corporate Governance Roundtable

  • No blueprint for supervision existed at beginning of 1990s  gradual and spontaneous development

  • Supervision developed in response to liberalisation, privatisation and other transformation steps

  • Four-tier sector-based supervision emerged over time:

    • CNB (since 1990): banks

    • Czech Securities Commission (since 1998): capital market

    • Ministry of Finance: insurance + pension funds

    • Office for Supervision of Credit Unions (since 1997): credit unions

  • April 1, 2006: one-step integration of all supervisory institutions into CNB

Supervision integration


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Possible advantages of integrated supervision Corporate Governance Roundtable

  • Better monitoring of overall financial sector from one place

  • More effective supervision of financial groups

  • Greater efficiency and synergies

  • Easier attainment of level playing field for all financial market participants (to curb regulatory arbitrage)

  • Higher flexibility and faster response to innovations and changes in financial market

  • Clearer responsibilities for supervision through replacement of overlaps and “grey” areas (no man’s land)

Integration of supervision is a reaction to increased interdependencies of individual sectors of the financial market; the above advantages are not “automatic”

Supervision integration


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Possible risks of integrated supervision Corporate Governance Roundtable

  • Prevalence of one sector of regulation (e.g. banks)

  • Growth of some administrative costs (bureaucracy of big institution)

  • Spread of moral hazard to whole financial sector

  • Loss of good employees during very process of integration  weaker efficiency of supervision

  • Synergies unattainable without changes to laws in individual sectors

The CNB was aware of the above risks and made an effort to mitigate them as much as possible

Supervision integration


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Priorities of Corporate Governance Roundtablethe integration

  • Detailed overview and unification of legislation and procedures

  • Identical approach to the same kinds of risks

  • Balancing of technical and sectoral differences in individual segments of regulation

  • Creation of common company culture of financial regulation

  • Better quality of regulation and supervision

Only institutional integration was implemented in April 2006; full-fledged integration will take several years

Supervision integration


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Recent legal developments Corporate Governance Roundtable

  • Most of the recent legislation consisted in transposition of EU directives into Czech laws

  • CNB is still accumulating experience in newly acquired fields of supervision

  • Preparation of laws regulating financial market rests entirely with Ministry of Finance (CNB actively participates)

  • Preparation of comprehensive law on financial market supervision is in its initial stages

  • Recent achievement of CNB: unification of reporting procedures applied to all financial institutions

Supervision integration


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Czech capital market: Modern history Corporate Governance Roundtable

  • 1989: political revolution

  • 1991-92: preparation of legal framework

  • 1992-94: two waves of coupon privatisation (more than 1,700 national enterprises were transformed into joint-stock companies whose shares were publicly traded)

  • 1993: Prague Stock Exchange re-opened and RM-Systém started

  • 1996: adoption of KOBOS (continual exchange trading system)

  • 1996: end of “learning period”

In the 1st half of the 1990s the capital market suffered from: 1) a lack of experience (both management and retail shareholders), 2) little public interest

Capital market: history


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Czech capital market: Modern history ( Corporate Governance Roundtablecont.)

  • 1997: exclusion of about 500 issues in March and about 400 issues by mid-year

  • 1992-98: supervision of capital market by Ministry of Finance

  • 1998: Czech Securities Commission established

  • 1998: trading in SPAD started (blue chips)

Starting from 1997, efforts were directed at achieving higher capital market transparency and introducing the principles applied on exchanges in developed countries

Capital market: history


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Number of issues Corporate Governance Roundtable on PSE

Source: PSE

The number of share issues dropped dramatically in 1997 as a consequence of massive exclusion

Capital market: history

M. Singer: Capital Market in the Czech Republic10


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Czech capital market: Modern history (cont.) Corporate Governance Roundtable

  • 2001: Prague Stock Exchange became member of FESE (Federation of European Securities Exchanges)

  • 2004 (May 1): entry to EU  adjustment of laws

    (Act on Business Activities on Capital Market, Act on Collective Investment, Act on Bonds, amendments of several other laws)

  • 2005 (May + September): adoption of squeeze-out principle

  • 2006 (April 1): establishment of single financial market supervisory body (capital market supervision: CSC  CNB)

The capital market has transformed from a spontaneous by-product of coupon privatisation initially to a more organised, more transparent and better regulated system today

Capital market: history


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Regulated capital markets: Structure Corporate Governance Roundtable

  • Prague Stock Exchange (most important market – used typically by big institutional investors)

    • started in 1993

    • SPAD (since 1998)

    • membership principle

    • licensed and supervised (partly) by CNB

    • partly self-regulating system

  • RM-Systém (an organisorof off-exchange trading)

    • started in 1993

    • used typically by small private individual investors

    • license from CNB

    • trading rules approved by CNB

Capital market: structure


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Trading volume Corporate Governance Roundtable(bn CZK)

Source:

PSE, RM-S

The Prague Stock Exchange has clearly dominated the Czech capital market in recent years

Capital market: structure


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Securities register and Corporate Governance Roundtablesettlement system

  • Prague Securities Centre (unified register of owners of dematerialised and immobilised securities)

    • started in 1993

    • state-owned company

  • UNIVYC (settlement system)

    • started in 1996 (since 1993 settlement was done through BRCP)

    • settlement of exchange trades and OTC transactions of stock exchange and UNIVYC participants

    • rules approved by CNB

  • Central Securities Depository will be created in future (to replace Prague Securities Centre)

Capital market: structure


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Capital market regulator: Corporate Governance RoundtableFour types of activities

  • Licensing and supervision of investment companies and collective investment funds, securities exchanges, investment firms (security brokers and dealers), off-exchange markets and settlement systems

  • Supervision of listed securities issuers with regard to their disclosure duty

  • Supervision of takeover bids, squeeze-outs and buy-outs

  • Fight against illegal practices (insider trading, market manipulation); monitoring of markets

Capital market: structure


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Trade volume of shares and units and bonds Corporate Governance Roundtable(in bn CZK)

Source: PSE

While the share trade volume has increased, the volume of bond trades has declined in recent years

Capital market: statistics


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Trade volume of shares and units and market capitalisation Corporate Governance Roundtable at PSE

Source: PSE

Both indicators are growing over the long run

Capital market: statistics


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Prague Stock Exchange Corporate Governance Roundtable(PX Index)

The capital market has been enjoying growth since 2004

Source: PSE

Capital market: statistics


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Share price indices Corporate Governance Roundtable2001 = 100

Source: Eurostat

The PSE growth in recent years is comparable with other stock exchanges in emerging economies

Capital market: statistics


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Market capitalisation in Dec. 2006 Corporate Governance Roundtable(as % of GDP)

Source: FESE, Eurostat, own computation

The market capitalisation of the PSE in terms of GDP is one of the lowest

Capital market: statistics


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Capital market regulation and corporate governance Corporate Governance Roundtable

  • No comprehensive discussion of corporate governance on Czech capital market occurred in past

  • Capital market still suffers from legacy of 1990s – two kinds of companies traded on PSE:

    • Most companies entered PSE without really wanting to be there

      • they stay there because it would be costly to leave

      • they fulfil only the minimum requirements

    • Blue chips traded on SPAD – most of them comply with all required transparency standards

    • This dichotomy has long persisted

Capital market: corporate governance


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Capital market regulation and corporate governance Corporate Governance Roundtable(cont.)

  • Two Codes of Corporate Governance (based on OECD Principles) were published: 2001 and 2004

  • Since 2002, former Czech Securities Commission (and since 2006 CNB) have recommended compliance with Code (through statement in companies’ annual reports)

  • However: compliance is voluntary and cannot be enforced (is in companies’ own interest)

  • So far only 13 companies have declared compliance with Code

  • PSE accepts securities for trading without insisting on compliance with Code

Unfortunately, the principle of “comply or explain” has its limits on the Czech capital market

Capital market: corporate governance


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Current challenges for capital market regulator Corporate Governance Roundtable

  • MiFID (into effect in November 2007)

  • Basel II (into effect in July 2007)

  • Takeover bids (delayed transposition of EU Directive)

  • Squeeze-outs (companies which issue non-listed shares)

  • Creation of Central Securities Depository

  • Future of pension funds (scope of their engagement in capital market)

Despite all the progress made, the PSE needs many years to become a source of capital for firms

Capital market: corporate governance


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Summary Corporate Governance Roundtable

  • The Czech capital market has been through a long, painful and costly process of learning by doing

  • A crucial segment of the capital market (SPAD – blue chips) complies with high standards of corporate governance

  • The segment of unlisted issues still stands as a legacy of coupon privatisation

  • A comprehensive legal framework consistent with integrated supervision of the financial sector has to be developed

Summary


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Thank you Corporate Governance Roundtable

Miroslav Singer

Česká národní banka

Na příkopě 28

115 03 Praha 1

[email protected]

Tel: 22441 2008


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