REGULATION OF THE SECURITIES MARKET IN UZBEKISTAN
Mannon Aliev, Ph.D. (Econ.), Vice-President of the CIS Association of Banking Institutions, Director of the Higher School of Business of the Academy of State and Social Construction under the President of Uzbekistan
After the Soviet Union collapsed and Uzbekistan gained its independence, the country’s government set its sights on building a democratic state with a market economy. Since it was perfectly well aware that integration into the international market would be impossible without a diversified economy and competition between enterprises with different forms of ownership, some of the first laws it adopted as early as 1991 were On Property and On Denationalization and Privatization.
Today it can be said with no qualms that privatization, which unlike the process in other CIS states is of a buying-out nature in Uzbekistan, has been successful. Thousands of state enterprises have been privatized. With a population of approximately 25 million people, more than 200,000 private and small businesses, approximately seven thousand corporations, and more than 14,000 companies with limited liability have been created in the republic.
Our republic occupies fifth place in the world in terms of gold reserves, seventh in terms of gold mining, and fourth in terms of cotton production, and it also possesses sufficiently large amounts of energy resources and rich deposits of rare and non-ferrous metals (especially copper). Uzbekistan, which for a long time took the back seat in the former Soviet Union, is now interested in attracting foreign investments and establishing mutually advantageous cooperation. Thus it stands to reason that the economy’s key industries have mainly been privatized through issuing their shares. In so doing, government decisions on privatization of the enterprises of the chemical and cotton-processing industries, the oil and gas complex, power engineering, and railroad transportation envisage selling the controlling set of shares to a foreign investor.
As the economy made its transition to market relations, a securities market also began to form, which operates according to universal rules and standards and is integrated into the world stock market. Its development is the natural outcome of the privatization processes going on in the country. The republic formed an institutionalized basis for the market in a relatively short time, that is, an infrastructure for trading in securities that can render the necessary range of services for circulating various types of financial instruments and ensuring integration of this sphere into the international capital market.
The market of corporate securities is divided into stock and over-the-counter markets, which are serviced by corresponding trading systems. For example, the stock market is represented by the Toshkent Republican Stock Exchange, which has 12 subdivisions in the country’s regions, and the over-the-counter market is serviced by the Elsis Savdo Electronic System of Over-the-Counter Securities Transactions, which has more than 35 offices for submitting orders. Operation of these two markets is facilitated by the following systems: a bilevel depositary system consisting of a Central Depositary and more than 30 second-level depositaries; the Elsis Clearing Chamber; more than 30 information analysis, consulting, rating, assessment and auditing organizations; more than 300 investment funds, assets management and investment companies, brokerages, registrars and similar organizations. What is more, Uzbekinvest, a joint Uzbek-British insurance company, has been founded to protect the interests of foreign investors.
The shares of more than 4,600 joint stock companies and commercial banks mainly circulate on the corporate securities market, the total volume of which currently amounts to more than 1,700 trillion sums (or about 1.7 billion USD). The most active foreign investors are the U.S., Great Britain, Turkey, Germany, and South Korea. But as the practice of forming stock markets in the CIS countries shows, successful regulation of the diverse and complex relations among the participants on this market cannot be effective without the timely formation of a flexible mechanism for monitoring and regulating the activity of these participants that encompasses all the levels and links of the stock market industry.
The government regulates the securities market by means of a special Center under the State Property Committee of the Republic of Uzbekistan. This Center was founded by a presidential decree and resolution of the Cabinet of Ministers “On Organizing the Activity of a Center for Coordinating and Controlling the Functioning of the Securities Market under the Republic of Uzbekistan State Property Committee” of 30 March, 1996 (No. 126), which is analogous to securities commissions abroad. The main tasks of this structure are to regulate professional activity, and protect the rights and interests of all the market participants. Both the securities market participants and the government are interested in the efficient regulation of this market. Market regulation is necessary for preventing and resolving conflicts between participants, improving liquidity and risk management, reducing fraud, stimulating capitalization, and introducing the best examples of business management practice and standards. The market participants and the government have the same goals in common.
But while realizing these goals and finding the optimal level and method of regulation, it must be kept in mind that this market is extremely sensitive to operational changes, and the time for responding to these changes is minimal. All kinds of negative phenomena, such as abrupt fluctuations in price, a drop in liquidity, or capitalization reduction, could occur within literally minutes of such market changes (the so-called “stock exchange wind”). These features make it impossible to regulate this market by means of traditional methods, like those used in the banking system for example. And the approaches to creating efficient regulatory tools must be diversified. One such approach is self-regulation, which is a special form of regulation whereby volunteer associations of securities market participants monitor the activity on the market. These professional participants form self-regulatory organizations (SROs), which draw up professional ethics codes and monitor their observance, protect the interests of shareholders and other participants in the stock market industry, set rules and standards for transactions with securities, and establish a balance of interests among all the participants on the stock market to maintain a stable level of trust and interest between investors and potential issuers.
Creating a system of SROs is particularly important in countries with a transitional economy, in most of which the question, “Is there a need for self-regulation on the securities market?” has long been replaced by the question, “What specifically should be done to develop a self-regulation system?” For objective reasons, self-regulation cannot arise “all by itself” on the market of CIS countries. It is not a spontaneous phenomenon and must be carefully fashioned. It requires an initiator who proposes very specific guidelines for forming these institutions and the procedures for staffing them with the relevant specialists.
If all the market participants understand that high-quality standards and operational rules must be established for the stock market industry, then corresponding self-regulatory institutions must be formed and tried out in practice. The approach in this instance is very market-oriented: if the plan is successful, and its manager sufficiently well qualified, this function can be self-financed. If, on the other hand, it is impossible to organize the self-financing of a particular component of self-regulation, either the plan itself, or its manager, must be changed.
On the basis of the above, the following main stages in establishing market self-regulation in countries with a transitional economy can be singled out: creating a conception and plan for the institutional organization of self-regulation, establishing the “game rules” for this process; recruiting the appropriate people to work in these institutions, who are authorized to regulate the securities market; and the actual functioning of self-regulatory institutions.
In 2000, the National Association of Investment Institutions was founded in Uzbekistan, which is a self-regulatory organization. Nevertheless, since self-regulatory organizations have not accumulated their own experience, they were unable to cooperate effectively with the government’s regulation structure for coordinating and controlling the securities market and fulfill their functions adequately. In so doing, we believe that the following principles for building a civilized, efficient, and institutionalized self-regulatory system can be adopted for the markets in developing countries: self-regulation should be initiated and prepared by the state, a stage-by-stage program should be developed for distributing powers and delegating them to the self-regulatory organizations; the time and procedures for delegating authority to an SRO should be specified; the absence of regulation should be prevented at all times, in other words, at every stage of development, regulation of the securities market should either be under government supervision or controlled by the SRO itself, whereby the SRO should take control over a specific type of activity only when it is ready to do so.
For example, the government’s regulation structure proposes and introduces its own regulations for licensing brokers in the country. After that, any self-regulatory organization of brokers may suggest its alternative for licensing its participants. This proposal will be assessed by a third independent party (for example, an Experts’ Council). In the event the self-regulatory organization’s proposal is considered superior, the original “government” licensing regulations will be replaced by the new “market” regulations proposed by the self-regulatory brokers, and from that moment the self-regulatory organization in question assumes entire broker control.
In some countries (for example, in Russia), one of the ad hoc projects for institutional self-regulation is already being implemented and the emphasis is placed on multi-functional self-regulatory organizations. But this project is in no way the best, since two different self-regulatory functions are combined in one organization, which could lead to a conflict in interests. For example, in developed countries these two functions are drawing up standards and regulations, exchanging experience, rating market participants, providing protection from foreign over-regulation, and so on (the trade association’s function), on the one hand, and enforcement, access to the market (the self-regulatory organization’s function), on the other. In developed countries these two functions are strictly delegated to different organizations (in the U.S., the first function has been delegated to the leading Securities Industry Association, and the second to the leading self-regulatory National Association of Securities Dealers).
What is more, when creating an SRO system it must be borne in mind that financing the drawing up of regulations and standards and financing their enforcement are two entirely different kettles of fish and should be organized differently.
Market participants are not ready to pay a common tax for drawing up standards and regulations, since no one knows in advance how many regulations and standards will be needed and what resources will be required to develop them. What is more, market participants are much more willing to pay only for the services they are interested in. This is why they would like to have greater control over how their membership fees are spent. In addition, it is preferable for the market participant to independently finance each development. Then automatically, based on free market principles, larger amounts of money will be spent on the more important developments, and these measures will be carried out faster and more efficaciously.
Taking into account the considerable size of this sector (even in developing countries, tens of thousands of citizens are employed in it), it is not only possible, but also necessary to apply the following organizational principles: regulation must be institutionalized (that is, functions should be separated from specific persons, and institutions should be established appropriately to match these functions); institutions should mutually complement each other, and their directors should be elected on democratic principles; the activity of SROs should be open and transparent not only for market participants, but also for society as a whole. What is more, taking into account the globalization processes in the world economy, SROs should incorporate international trends in securities market development into their activity.
Thus foreign and domestic consultants should be more broadly involved in establishing market-regulating institutions, as well as in rendering technical support to state regulators and self-regulatory structures.
So we would like to take this opportunity to invite any interested parties in the U.S.A. to cooperate with us.