By Elena Fehrbach
Jan. 20 – 2013 was a very busy year for the Mongolian Stock Exchange (MSE) and resulted in a legal and structural reform being introduced to the investment community on 1 January 2014. The new Securities Market Law came into force on that day, marking a beginning of the new securities investment era in Mongolia. The adoption of the new Securities Law came straight after adoption of the revised Investment Law on 1 November 2013 that has replaced the controversial Strategic Foreign Investment Law. New regulations are targeting the attraction of the foreign investment into Mongolia by providing internationally-accepted best practices and platforms for investments.
Securities Markets Law
As the newest regulation, Securities Markets Law (SML) immediately became the major point of discussion and attention since January 1 this year. It took about 5 months to draft the Law with all the relevant regulations. The final document is a sophisticated framework introducing financial instruments and concepts which have never been practiced in Mongolia before, such as custody, differentiation between nominee and beneficial ownership, options, futures, depository receipts and warrants. Twenty-two tailored regulations have been designed for each component of the Law, such as dual listing, clearing and other relevant components.
Dual listing should be given special attention, as the Mongolian companies now have opportunity to be listed on MSE and any other stock exchange globally that might provide better liquidity for the business. Foreign companies would also be able to make a secondary listing at MSE. Top managers of the MSE are obviously concerned about the level of liquidity dual listing will keep in Mongolia. Examples from Kazakhstan and Russia shows that companies understandably prefer to be listed in London or Toronto, because this is where investors are. MSE would try to keep a certain level of liquidity in-house by establishing a rule in the new Law that at least 25% of the company’s outstanding shares should be floated in Mongolia. This will help to increase turnover, liquidity and tradability of the market. In addition to above said, MSE will now require the filling of the listing documents in English and Mongolian to provide better confidence.
Introduction of a globally-accepted T+3 trading standard is another step forward for MSE. Such standard makes trading at MSE more open for sophisticated institutional investors to trade in Mongolia in compliance with the same standard as at their favorite trading platforms worldwide. Other trading innovations introduced by the MSE include a suite of capital markets products designed by Millennium IT company. Millenium IT is a Sri Lanka-based subsidiary of London Stock Exchange Group supplying software products to stock exchanges globally. London Metal Exchange, Boston Stock Exchange and American Stock Exchange are just a few clients to name. The key concept of Millennium IT is to provide an integrated internet-based trading and post-trading technologies. The majority of the brokerage houses based in Mongolia have already moved to trading on MSE remotely from their offices.
The CEO of the MSE and his team have conducted an extensive roadshow meeting institutional investors and banks in Hong Kong, London, New York and other places raising awareness in the new profile of the MSE as a stock exchange that welcomes investors and is ready to provide the highest business standards. Separately, Mongolian banks started discussions with international banks on cooperation in the custodial services. Some banks have signed Memorandums of Understanding, but the process will not be fast. MSE expects the custodial services environment in Mongolia to be more shaped and ready in terms of capacity by middle of 2014.