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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

  • Integration of financial market supervision
  • Capital market: History and current arrangement
  • Capital market: Some statistics
  • Capital market: Corporate governance
financial market supervision
Financial market supervision
  • 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

possible advantages of integrated supervision
Possible advantages of integrated supervision
  • 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

possible risks of integrated supervision
Possible risks of integrated supervision
  • 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

priorities of the integration
Priorities of the 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

recent legal developments
Recent legal developments
  • 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

czech capital market modern history
Czech capital market: Modern history
  • 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

czech capital market modern history cont
Czech capital market: Modern history (cont.)
  • 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

number of issues on pse
Number of issues 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

czech capital market modern history cont11
Czech capital market: Modern history (cont.)
  • 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

regulated capital markets structure
Regulated capital markets: Structure
  • 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

trading volume bn czk
Trading volume (bn CZK)



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

Capital market: structure

securities register and settlement system
Securities register and settlement 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

capital market regulator four types of activities
Capital market regulator: Four 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

trade volume of shares and units and bonds in bn czk
Trade volume of shares and units and bonds (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

trade volume of shares and units and market capitalisation at pse
Trade volume of shares and units and market capitalisation at PSE

Source: PSE

Both indicators are growing over the long run

Capital market: statistics

prague stock exchange px index
Prague Stock Exchange (PX Index)

The capital market has been enjoying growth since 2004

Source: PSE

Capital market: statistics

share price indices 2001 100
Share price indices2001 = 100

Source: Eurostat

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

Capital market: statistics

market capitalisation in dec 2006 as of gdp
Market capitalisation in Dec. 2006 (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

capital market regulation and corporate governance
Capital market regulation and corporate governance
  • 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

capital market regulation and corporate governance cont
Capital market regulation and corporate governance(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

current challenges for capital market regulator
Current challenges for capital market regulator
  • 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

  • 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


thank you
Thank you

Miroslav Singer

Česká národní banka

Na příkopě 28

115 03 Praha 1

Tel: 22441 2008