About capital markets [EBRD - Sectors: Legal transition]

Over the last decade, most countries in the EBRD region have established their capital markets virtually from scratch. Countries pursued different approaches and took different policy considerations into account to design and implement economic reform programmes. In some countries e.g., the Czech Republic, capital markets were initially created as support institutions to implement massive voucher privatisation programmes. In such cases, capital markets were established even before sound regulatory frameworks and competent market regulators were in place. Other countries, e.g. Poland, followed a more traditional approach and legal institutions were created before trading practices were established. Some countries however still have under-developed capital markets due to unfavourable economic conditions.

The EBRD's legal reform work on capital markets and securities markets legislation

The major reform projects undertaken by the EBRD over the years in the areas of capital and securities markets legislation include:

Assisting the Albanian Financial Service Authority in drafting new legislation in order to provide corporations and municipalities with alternative means of raising debt capital and finance their development. A new law on corporate and municipal bonds is currently being developed on the basis of an Action Plan (0.5Mb) agreed with the Albanian authorities.
Assisting the Financial Market Supervision and Regulation Service of the Kyrgyz Republic in enhancing the quality of investors’ protection legislation in the country. A series of legislative amendments are currently being developed on the basis of an Action Plan (0.6Mb) agreed with the Kyrgyz authorities.
Assisting the Moldovan Ministry of Economy in drafting a modern and comprehensive law on leasing. The legislative proposal led to the enactment of a new law on leasing (0.1Mb) which was approved by the Parliament on April 28, 2005 and published in the Official Gazette on July 8, 2005. The new legislation extends the range of goods that could constitute the object of leasing, allows any individual or legal entity to participate as a lessee to a leasing transaction, grants a higher protection to the lessor in case of lessee’s breach of leasing obligation and harmonises the leasing regulatory framework with the tax and customs legislation.
Assisting the CIS Inter-Parliamentary Assembly in developing a CIS Model Securities Law (0.1Mb). The model law was approved by CIS Inter-Parliamentary Assembly in November 2001. The model law serves as a reference for CIS countries for harmonising and fine-tuning their legislation with the best international standards.
Assisting the Russian Federal Commission for the Securities Market (now Federal Financial Markets Service) in improving the Russian legal and regulatory framework governing the debt capital markets by bringing it into line with the sound practice of international bond markets. The project aimed to clarify the Russian regulatory regime so that foreign issuers with good credit ratings are able to raise capital in roubles by issuing rouble-denominated bonds and paying debt securities in a cost-efficient way. In May 2005, the EBRD launched the first rouble bond issue in Russia. Read the EBRD Press Release on the operation.
Helping the Hungarian Ministry of Finance to draft a new Securities and Investment Services Act to bring its main capital markets legislation into line with international standards and EU directives. The new law became effective in January 2002.
Assisting the Russian authorities to improve their capital market and corporate governance legislation. The Bank worked with Russia's Federal Commission for the Securities Market to refine Russia's company and securities market legislation, which took effect in early 2003.

In addition, the EBRD undertakes a securities markets sector assessment project to gauge the quality of securities markets related laws and regulations in transition countries. It uses a checklist based on the Objectives and Principles of Securities Regulations (0.4Mb) issued by the International Organization of Securities Commissions (IOSCO). To complement its assessment of securities market legislation, the EBRD launched the 2007 Legal Indicator Survey. The aim of the survey is to assess how the legislation, together with the local institutional framework, in each country, works to create a functional securities markets legal regime. The two initiatives assist the Bank to better understand legal developments in the region and serve as a reference for countries formulating reform. Similar sector assessments are undertaken with reference to corporate governance, insolvency, concessions and secured transactions.

Future challenges

After more than ten years of transition, the development of capital markets and the degree of sophistication of legal and regulatory frameworks varies from country to country. However, while countries endeavour to establish modern and efficient capital markets, world financial markets are not standing still and the global economic environment is rapidly changing. For example, capital markets in the European Union are evolving rapidly due to technological advancement and the Euro.

Strong globalisation and consolidation trends in world financial markets raise concerns about whether transition country capital markets will ever achieve the necessary economies of scale to compete internationally. These considerations have made some countries question whether it is worthwhile for them to invest time and resources to establish individual capital markets.

While the adoption of legal and regulatory frameworks similar to those in developed countries is not difficult, the key to developing and maintaining sound capital markets in the long term lies in strong supervision of market activities and rigorous legislation enforcement. Supervision and enforcement require qualified and sophisticated capital market professionals in the public sector, e.g. market regulators and judges. This is an area where international financial institutions and bilateral donors should play a role in providing financial and technical assistance.

about securities markets