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By Mr. Bayarsaikhan. DChairman

Financial Regulatory Commission of Mongolia

Ulaanbaatar, Mongolia March 1-2, 2007

Capital Market Development in Mongolia

By Bayarsaikhan. DChairman

Financial Regulatory Commission of Mongolia

March 1-2, 2007

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Contents Contents

Background of Capital Market Background of Capital Market Regulation and Supervision of Capital Regulation and Supervision of Capital Market Market Strategy for Capital Market Development Strategy for Capital Market Development

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Mongolia Mongolia

Country dataCountry dataPopulation( in millions):Population( in millions): 2.62.6Area (Area (’’000 sq km):000 sq km): 1,567.01,567.0GDP ( in billion USD, 2005):GDP ( in billion USD, 2005): 1.91.9GDP per capita USD:GDP per capita USD: 1,1691,169National currency:National currency: TugrugTugrug

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19911991. MSE was established and . MSE was established and following that 29 broker dealers following that 29 broker dealers firms launched its business in firms launched its business in each of the 21 provinces and the each of the 21 provinces and the city districts.city districts.

19921992. In the privatization . In the privatization framework 475 state owned framework 475 state owned enterprises were reorganized into enterprises were reorganized into Joint Stock Companies (JSC) and Joint Stock Companies (JSC) and 1.3 million people became the 1.3 million people became the shareholders of these companies.shareholders of these companies.

19941994. Mongolian Securities . Mongolian Securities Exchange Commission was Exchange Commission was established.established.

Background of Background of Capital Market Capital Market

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(continued)(continued)

1995.1995. Securities law was passed Securities law was passed and started and started ““cashcash”” trading trading between the shareholders of between the shareholders of privatized JSC which is the privatized JSC which is the ““secondary marketsecondary market””..1996.1996. First government bond First government bond was traded through the MSE.was traded through the MSE.2001.2001. Started trading company Started trading company bonds.bonds.

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(continued)(continued)

2002.2002. Securities Market law was amended Securities Market law was amended by the Parliament of Mongolia.by the Parliament of Mongolia.2003.2003. Securities Clearing House and Securities Clearing House and Central Depository was organized and Central Depository was organized and MSE reassigned its savings and clearing MSE reassigned its savings and clearing and settlement activities over to the and settlement activities over to the SCHCD.SCHCD.2005.2005. New New JSCJSC’’ss were registered in FRC were registered in FRC and listed on MSE.and listed on MSE.

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(continued)(continued)

In Nov of In Nov of 2005,2005, the Parliament of the Parliament of Mongolia has passed the Law on Legal Mongolia has passed the Law on Legal Status the Financial Regulatory Status the Financial Regulatory Commission of MongoliaCommission of MongoliaIn Jan of In Jan of 20062006, FRC of Mongolia was , FRC of Mongolia was restructured with extended duties instead restructured with extended duties instead of SEC by the decision of the Parliament of SEC by the decision of the Parliament and on Jan 25, the Chairman, the and on Jan 25, the Chairman, the members, and the head of the members, and the head of the Supervisory Board for the FRC of Mongolia Supervisory Board for the FRC of Mongolia were appointed. were appointed.

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Regulation and Supervision of the Regulation and Supervision of the Capital Market in MongoliaCapital Market in Mongolia

FRC of Mongolia is responsible for the FRC of Mongolia is responsible for the regulation and supervision of the following regulation and supervision of the following sectors:sectors:

•• Capital marketsCapital markets•• Insurance companiesInsurance companies•• NonNon--bank financial activitiesbank financial activities•• Saving and Credit CooperativesSaving and Credit Cooperatives

The year of 2007 has been announced as The year of 2007 has been announced as a year of further development of the a year of further development of the capital market by FRC. capital market by FRC.

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The Structure of the Capital Market The Structure of the Capital Market in Mongoliain Mongolia

Financial Regulatory CommissionFinancial Regulatory Commission•• Operates under the supervision of the Parliament of MongoliaOperates under the supervision of the Parliament of Mongolia•• By law it is required to regulate and supervise all aspects of By law it is required to regulate and supervise all aspects of

Capital Markets except for the Banking SectorCapital Markets except for the Banking Sector•• Grants an approval to the capital market professionals and Grants an approval to the capital market professionals and

registration of the securities at IPOregistration of the securities at IPO

Mongolian Stock ExchangeMongolian Stock Exchange•• Currently the only place that organizes trading of the securitieCurrently the only place that organizes trading of the securitiess•• Trades Gov. Bonds, and Company bonds, and stocksTrades Gov. Bonds, and Company bonds, and stocks

Securities Clearing House and Central Securities Clearing House and Central DepositoryDepository

•• Executes the settlement and savings of the securitiesExecutes the settlement and savings of the securities•• Keeps a record of the dematerialized securities registration on Keeps a record of the dematerialized securities registration on

the basis of contracts made with the basis of contracts made with JSCJSC’’ss

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Regulation Concerning Operation Regulation Concerning Operation of the Capital Marketof the Capital Market

Civil CodeCivil CodeCompany LawCompany LawSecurities Market LawSecurities Market LawRegulations authorized by FRCRegulations authorized by FRCRegulations authorized by MSE and Regulations authorized by MSE and SCHCDSCHCD

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Current situation of Capital market Current situation of Capital market

4.1112,600,0002,700,0002006

2.2 45,600,000 2,145,800 2005

1.7 24,800,000 1,550,000 2004

3.6 42,400,000 1,174,5002003

2.9 31,900,000 1,240,800 2002

3.7 37,500,000 1,115,600 2001

4.0 36,900,000 1,018,900 2000

%%Market Market

CapitlisationCapitlisation//USDUSD//

GDPGDP//000000’’ USDUSD//

Date Date

•• (Market capitalization/GDP)(Market capitalization/GDP)

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Securities market Securities market

2005

Govern mentbond57%

Shares21%

C o rp orat ebo nd2 2 %

2006

Shares70%

Corporat e bond

5%

Govern ment Bonds

25%

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0

200

400

600

800

1000

1200

1400

1600

1800

2000

95 96 97 98 99 00 01 02 03 04 05 06

MSE TOP-20 INDEX from 1995 to 2006

MSE TOP-20 INDEX 1995-2006

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The Current Situation of the Capital Market The Current Situation of the Capital Market in Mongoliain Mongolia

475 449 435 430 418 410 400 403 402 395 392 387

0

100

200

300

400

500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

NUMBER O F CO MPANIES LISTED O N THE MSE

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The Current Situation of the Capital Market The Current Situation of the Capital Market in Mongoliain Mongolia

27.1 25.9

53.2

39.832.1

36.9 37.531.9

42.4

24.8

45.6

112.6

0

20

40

60

80

100

120

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

CAPITALIZATION OF THE MONGOLIAN STOCK EXCHANGE(mln USD)

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The Current Situation of the Capital Markets The Current Situation of the Capital Markets in Mongoliain Mongolia

0

50

100

150

200

250

300

350

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

NUMBER OF INVESTMENT ACCOUNTS(IN THOUSAND)

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Challenges Challenges

IT and Data Base Development IT and Data Base Development Legal Environment Legal Environment Capital Market Standards and Policy Capital Market Standards and Policy Training for Market ParticipantsTraining for Market ParticipantsCorporate Corporate governonacegovernonaceProtection of minority Protection of minority sharholderssharholdersEthical issuesEthical issues

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The Current Situation of the Capital Markets The Current Situation of the Capital Markets in Mongoliain Mongolia

28 29 29

41 41 42 42

34

25 25 24 24

05

1015202530354045

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

NUMBER OF BROKERAGE DEALER COMPANIES

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International Cooperation of International Cooperation of Mongolian FRC Mongolian FRC

IOSCO: Became a member of IOSCO in IOSCO: Became a member of IOSCO in 20022002

•• FRC is IOSCO ordinary member and has one voting rightFRC is IOSCO ordinary member and has one voting right•• FRC is Member of Asia Pacific Regional and Emerging FRC is Member of Asia Pacific Regional and Emerging

Markets CommitteeMarkets Committee

Memorandum of Understanding:Memorandum of Understanding:•• Has signed an agreement with such countries as Poland Has signed an agreement with such countries as Poland

and India.and India.•• Preparing to sign an agreement with China Securities Preparing to sign an agreement with China Securities

Regulatory Commission to cooperate in this matterRegulatory Commission to cooperate in this matter

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International Cooperation with International Cooperation with international and bilateral Organizations international and bilateral Organizations such as ADB, EBRD, WB, IMF,UNDPsuch as ADB, EBRD, WB, IMF,UNDPUSAID, GTZ, JAIKA,KOIKA...USAID, GTZ, JAIKA,KOIKA...

•• ADB TA3747ADB TA3747--Mon, Capacity building for Financial Mon, Capacity building for Financial Sector Reform Sector Reform

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What Should We Do to Improve What Should We Do to Improve the Capital Market?the Capital Market?

To enhance the legal environmentTo enhance the legal environmentTo encourage competition among the To encourage competition among the professional participants and increase professional participants and increase their staffs capacitytheir staffs capacity

•• Improve the management and conduct of Improve the management and conduct of those market participantsthose market participants

•• In order to support competition, we need to In order to support competition, we need to encourage professional participants that are encourage professional participants that are being newly foundedbeing newly founded

•• Enhance conduct of staff and their skillsEnhance conduct of staff and their skills

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Encourage the issuers of securities Encourage the issuers of securities

To support the issuersTo support the issuersTo provide an harmonization of the IPO standards in To provide an harmonization of the IPO standards in Mongolia with the internationally acceptable standards Mongolia with the internationally acceptable standards To promote Mortgage To promote Mortgage -- Backed Securities MarketBacked Securities MarketTo promote issuance of new type of security instruments To promote issuance of new type of security instruments

and to form a legal environment to do so.and to form a legal environment to do so.

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The Protection of Investors and Reduction of The Protection of Investors and Reduction of Market RiskMarket Risk

To develop an effective method which is intended to To develop an effective method which is intended to protect investorsprotect investorsTo ensure that investors are given fair access to To ensure that investors are given fair access to market facilities market facilities To ensure that securities markets are transparentTo ensure that securities markets are transparentTo facilitate an effective regulation to prevent the To facilitate an effective regulation to prevent the financial failure of market intermediariesfinancial failure of market intermediaries

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The Effective Enforcement of Securities The Effective Enforcement of Securities RegulationRegulation

Harmonization of the Mongolian Regulations with Harmonization of the Mongolian Regulations with the International Standards the International Standards To clearly define the responsibilities of the selfTo clearly define the responsibilities of the self--regulatory organizationsregulatory organizationsTo ensure better regulation and supervision of the To ensure better regulation and supervision of the

issuer activities and the professional intermediaries issuer activities and the professional intermediaries

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Thank you for your attention!Thank you for your attention!

www.frc.mnwww.frc.mnFax: + 976 11 329084Fax: + 976 11 329084

Tel: +976 11 328452Tel: +976 11 328452

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