National Securities Commission
Professional Participants and Nominal Holders
Repos and Reverses
Futures, Forwards, Options & Swaps
Kazakhstan has made numerous attempts to establish and develop securities markets. The first Law on Circulation of Securities and Stock Exchange was adopted on June 11 1991, before the demise of the Soviet Union. This law was followed by presidential edicts which were implemented by Law 1613 on Measures on Formation of the Securities Market, dated March 20 1995, and Law 2227 on Securities and Stock Exchange, dated April 21 1995. Most recently, the Law on the Registration of Securities Transactions (the Securities Transactions Law) and the Law on the Securities Market (the Law on Securities), both dated March 5 1997, were adopted.
National Securities Commission
The Law on Securities provides that relations in the securities markets must be regulated and controlled by a special state agency. This function is performed by the National Securities Commission (NSC), which was established in 1996. The NSC's principal objectives are to establish transparent and efficient securities markets, to ensure fair trade and competition, and to protect the interests of participants. Its functions include the following:
- registering the issuance of securities;
- providing national identification numbers for issued securities;
- maintaining a state register of all securities issued and in circulation in Kazakhstan;
- issuing licences for professional participants in Kazakh securities markets;
- approving the form of shares issued in material form; and
- ensuring compliance with Kazakh securities laws.
Under the Law on Securities, 'stock exchanges' are nonprofit organizations established by professional participants of the securities markets. A stock exchange may only trade in securities. It is prohibited from engaging in any other activities, including trading in commodities and performing the functions of other exchanges (an exception to this rule is the Kazakhstan Stock Exchange's separate subdivision trading currency).
The Kazakhstan Stock Exchange (KASE) is the country's only stock exchange. It is a nonprofit organization that is registered with the NSC. Previously, only treasury bills were traded on the KASE, but a number of companies recently listed their shares. These include Kazkommertsbank, the Ust-Kamenogorsk Titanium-Magnesium Plant, the Shymkent refinery and Kazakhtelekom. The Central Asian Stock Exchange, which lost its operating licence in April 1998 due to insufficient capital, was the country's first exchange. It was established in November 1994 and listed the stock of relatively small companies in terms of capitalization.
The KASE was selected in a government tender at the end of 1996 to conduct trading of shares in blue-chip state enterprises. However, the existing KASE was created when the previously operational Kazakhstan Stock Exchange and the International Stock Exchange merged to submit a joint bid in the tender.
The Law on Securities envisages that a quoting organization for over-the-counter trading in securities will be established. It must be established as a nonprofit organization. A buyer or seller will need to be a member of this quoting organization in order to utilize its services. Effecting transactions with securities listed on a stock exchange via a quoting organization is prohibited. The authors of the Law on Securities seem to intend that the quoting organization will be the Kazakh equivalent of NASDAQ (the National Association of Securities Dealers Automated Quotation system).
Professional Participants and Nominal Holders
Trading activities on the organized securities markets in Kazakhstan must be conducted through a professional participant that is licensed in Kazakhstan, such as custodians, brokers, dealers, registrars and depositaries. The Law on Securities and the Securities Transactions Law have no restrictions with respect to whether local or foreign entities may be licensed in Kazakhstan as professional participants of the securities markets. Since licensing procedures have not yet been provided in detail, it is unclear what kind of presence will be required for a foreign entity to engage itself as a professional participant of the securities markets in Kazakhstan Professional participants must comply with a minimum own capital requirement, which currently stands at about $145,000 for broker-dealers.
Under the Law on Securities a 'nominal holder' is defined as any professional participant in the securities market, with a licence to effect registration of securities transactions, that undertakes transactions on behalf and for the account of its clients. Broker-dealers, custodians and the central depositary may act as nominal holders. The Securities Transactions Law provides that the transfer of securities into the nominal holding of a custodian, dealer or broker does not entail the transfer of ownership of the securities to such holders. A nominal holder must keep its own securities separate from those of its clients. The Securities Transactions Law states that securities belonging to the clients of a nominal holder, or to the clients of such clients, are not subject to the claims of creditors against the nominal holder. Thus, the insolvency or bankruptcy of a local custodian, broker or dealer should not affect their clients' rights to their securities.
A nominal holder is not obliged to investigate how assets transferred to it were acquired. Article 8 (4) of the Civil Code of the Republic of Kazakhstan (General Part), dated December 27 1994, presumes that parties to civil transactions are acting with "good faith, reasonableness and justness of actions."
Under the Law on Securities a 'broker' is defined as an intermediary that undertakes securities transactions upon the order, on behalf and for the account of clients on the basis of a written agreement between them. A 'dealer' is defined as a professional participant of the securities markets that acts in its own name and for its own account as a regular business. Broker-dealers require a licence from the NSC to act in this capacity.
Under the Law on Securities a 'custodian' is defined as a professional participant of the securities markets that undertakes on the basis of a written agreement the safekeeping and maintenance of records of securities and monetary funds entrusted to it by clients. Only banks and non-banking financial institutions may act as custodians. Custodians always act as nominal holders. Custodians require licences from both the NSC and the National Bank in order to act in this capacity. Custodians are not permitted to have their affiliates as clients.
Under the Law on Securities a 'depositary' is defined as a special organization that maintains records of securities, certifies the rights of their holders and performs clearing and settlement activities. The Securities Transactions Law provides that there is only one depositary in Kazakhstan - the Central Depositary. The Central Depositary only provides its services to nominal holders. The Central Depositary must be a nonprofit organization and have licences from both the NSC and the National Bank in order to act in this capacity.
The Securities Transactions Law provides that all nominal holders may conduct registration of securities transactions. Securities transactions that involve securities between holders who are clients of the same broker-dealer or custodian shall not be registered with the central depositary or registrar, since these securities are registered in the name of nominal holders only.
Equity securities are usually issued in dematerialized or paperless form. Registrars that hold a license from the National Securities Commission maintain stock registers with respect to inscribed stocks. Only Kazakh legal entities may act as registrars. Nominal holders and registrars certify (by way of issuance of excerpts from the stock registers or stock certificates) the rights of the holders of securities. A nominal holder must provide a registrar with full information on such rights if the registrar requires this. The stock register is the key source for tracking title to shares (issued in dematerialized or paperless form). In the instances where an independent registrar keeps the stock register, such tracking should be reliable.
There is no restriction on shareholders' rights to make a public offering of their shares in Kazakhstan. Even a shareholder in a closed joint stock company may make a public announcement offering its shares, provided that applicable statutory transfer restrictions are observed. Accordingly, unofficial stock markets emerged immediately after the introduction of joint stock companies in Kazakhstan. The procedure for issuing shares for placement among specified persons is almost identical to that for distribution among an unlimited number of offerees.
The market for State Treasury Obligations of Kazakhstan (T-bills) and National Bank of Kazakhstan Notes is one of the most actively traded markets in Kazakhstan. T-bills are tenge-denominated (the national currency of Kazakhstan), registered securities in paperless form. T-bills may be bought and sold by any legal entity or individual, resident or nonresident of Kazakhstan No licences, approvals or authorizations are required to purchase T-bills.
In the primary market (ie, at National Bank of Kazakhstan (NBK) auctions) only licensed primary dealers may purchase T-bills. Primary dealers may do this on their own behalf and on the behalf of their customers. About 19 primary dealers hold licences that allow them to participate in primary auctions. All are Kazakh commercial banks, since the licence requirement can be met only by banks that hold a banking licence in Kazakhstan. ABN AMRO Bank Kazakhstan, Narodny Bank of Kazakhstan and Kazkommertsbank are usually thought of as the most reputable among these.
Primary dealers, brokers and others may participate on the secondary market. However, there is no requirement for any investor that deals in T-bills to use a local intermediary or broker. Since T-bills are maintained in the accounts of primary dealers, even transactions in the secondary market must eventually be conducted through primary dealers. In addition, primary dealers may undertake secondary market transactions from their own and their customers' accounts without needing to contact other primary dealers. On the other hand, a broker must undertake all its transactions through a primary dealer, which may or may not wish to fill the broker's order. Under the current scheme, brokers are not necessary for trading in T-bills. Use of a broker just adds an intermediary and is likely to increase the costs of conducting transactions.
Clearance and settlement
All clearance and settlement occurs at the NBK, which has established its own central depositary for all T-bills. It maintains accounts for each primary dealer, with sub-accounts for each investor that has a custodian ('depo') account with a primary dealer. The particular clients are not known to the NBK, as the sub-accounts do not include the name of the investor but rather a coded designation indicating only whether the investor is a resident or nonresident of Kazakhstan
The Securities Transactions Law states that securities transactions between securities holders who are clients of the same custodian are not registered with the central depositary. This may affect the NBK's maintenance of sub-accounts for the clients of primary dealers. On the other hand, a nominal holder must keep its own securities separate from those of its clients. It is therefore likely that the NBK would maintain at least one sub-account for each primary dealer, in order to separate the primary dealer's own securities and those of its clients. According to an informal source at the NBK, the NBK is not planning to change the way it maintains accounts and records of primary dealers and their clients.
When the T-bills mature the NBK makes payment to the primary dealer for the securities in its accounts and sub-accounts through the primary dealer's correspondent account at the NBK. The primary dealer should then place appropriate amounts in the bank accounts that its customers maintain for the purposes of undertaking transactions in T-bills.
In line with this scheme, an investor must maintain the following accounts:
- a hard currency account for transferring funds to the primary dealer;
- a tenge account (type I, meaning investment) for the purchase and sale of T-bills, which are denominated in tenge; and
- a depo account, which in fact is not really an account but rather a register of securities held for the investor.
Tenge and depo accounts should be maintained with the primary dealer through which an investor undertakes T-bill transactions. The primary dealer will convert currency through the foreign investor's accounts at market rates.
No specific approvals are required to open the accounts. Rather, it is necessary to enter into a contractual arrangement with one of the primary dealers. An investor may use as many primary dealers as it wishes. However, an investor may maintain only one type I account. This provision makes it impractical to operate through more than one primary dealer.
An investor may legally maintain a number of depo accounts in order to separate securities held for itself from those purchased for its customers. However, practically speaking, a primary dealer would prefer to maintain only one account for all of a particular customer's transactions. In that case, the investor would be responsible for keeping its own records to reflect the transactions that are for its own account and those that are for its clients' accounts.
The first equity offerings by Kazakh entities were made on international capital markets through the issuance of American/global depository receipts (ADRs/GDRs). In July 1997 Kazkommertsbank became the first Kazakh entity to issue ADRs/GDRs, raising more than $50 million. That was followed by a private placement of ADRs/GDRs by the Shymkent oil refinery. Shymkent shares are currently listed in category B of the KASE, and the company is also expected to undertake a public international offering of ADRs/GDRs and float additional shares on the KASE, possibly in category A.
Kazkommertsbank was the first company to meet KASE requirements for listing in its category A. These require submission of two years of audited financial statements that conform to the new Kazakh accounting standards (which are generally consistent with international accounting standards) and show no losses. Companies on the A list must be registered in Kazakhstan for at least three years. Most Kazakh companies cannot satisfy these requirements and are either listed in the less desirable category B (requiring one year of financial statements) or offered as 'additional listings', a preliminary step to official listing on the exchange. The statements for category A companies must be audited by a major international accounting firm, and the company must have at least $1 million in charter capital and 500 or more shareholders.
In many cases, companies that wish to join the A list simply do not have accurate data from previous years to submit to auditors. They must therefore operate for another year or two in order to accumulate the required financial records before applying for the A listing. In time, more companies will be able to list their shares in category A and can thus expect them to sell at higher prices than they would in a lower category. Companies listing category A stocks are by definition more financially stable and transparent than their lower grade counterparts, and some institutional buyers, such as pension funds, are restricted by law to purchasing stocks and bonds of companies listed in category A.
In December 1996 Kazakhstan issued its first 'Rule 144A/Reg S' Eurobonds to raise $200 million for the budget, followed by a second offering in October 1997 that raised $350 million. Although both were international offerings, they appear to have given some impetus to the development of Kazakhstan's domestic securities markets. They improved the country's image on international capital markets and increased awareness and interest among Kazakh nationals to raise funds for local enterprises through capital markets.
Several Kazakh entities are interested in issuing bonds on international capital markets to raise capital relatively cheaply and enhance their corporate profiles. Among these are Kazkommertsbank, Halyk Savings Bank, KEGOC (Kazakhstan Electricity Grid Operating Co), Kaztransoil and Kazakhtelekom. So far, only Kazkommertsbank ($100 million offering) has succeeded in completing a Eurobond offering.
The local corporate bond market has just started to take off. Only two Kazakh companies have completed their local bonds offerings on the domestic market. These are Kazakhoil, the national oil and gas company, and Kazakhstan Temyr Zholy, the national railroad transportation company.
On June 30 1997 the NBK introduced the new Regulation 246 on Rules for the Placement, Circulation and Redemption of Short-Term Notes of the National Bank of the Republic of Kazakhstan, which replaced the old Rules on the Procedure, Conditions of Issuance, Circulation and Redemption of Short-Term Notes of the National Bank of the Republic of Kazakhstan 47, dated 26 June 1995. The rules also allowed nonresidents to participate in trading NBK notes. The notes have the same legal regime as T-bills with the specifics as follows:
- the NBK issues the notes, while T-bills are issued by the Ministry of Finance. Accordingly, the NBK is liable for redemption of the notes, when they mature, from its own assets rather than from the state budget, as in the case of T-bills;
- the notes are denominated in Kt100 amounts, while T-bills are denominated in Kt1000 amounts; and
- the notes can be issued for any period of maturity up to 90 days, while T-bills have three, six, nine and 12-month (short term) and two and three-year (medium term) maturities.
The purpose of the notes is to serve as a tool of monetary policy by affecting the money supply.
Repos and Reverses
Repos and reverses involving T-bills are quite developed in Kazakhstan. According to informal sources at the NBK, some Kt300 to Kt400 million worth of T-bills (about $4 million to $4.5 million) are sold in repos and reverses daily in Kazakhstan.
Repos and reverses are governed by NBK Regulation 160 on Rules on Conducting Repo and Reverse Operations with State Securities of the Republic of Kazakhstan, dated July 3 1999. Pursuant to the regulation, repos and reverses may be conducted in both the primary and the secondary markets. In the primary market repos and reverses are conducted between the NBK and primary dealers (ie, those who are licensed to purchase T-bills at NBK auctions) acting for their own account only. In this market, the NBK can transact repos and reverses either by accepting bids or on a noncompetitive (ie, direct) basis with primary dealers. Practically, the NBK has ceased conducting repos and reverses, and almost all transactions now take place in the secondary market. In the secondary market, the transactions occur between one primary dealer and either another primary dealer or an investor.
In Kazakhstan the return on repos and reverses is incorporated into the transaction by setting the repurchase price above the purchase price. In addition, a margin is given to the implicit lender of money to encourage compliance with the repurchase obligation.
Restriction on reverses
Article 2 of the Edict of the President of the Republic of Kazakhstan implemented by Law 2444 on Banks and Banking Activity, dated August 31 1995 (the Banking Law) considers as a deposit "the sale of securities with the obligation of the subsequent repurchase thereof". According to Article 6 of the Banking Law, accepting deposits without a banking licence is prohibited.
While a repo or reverse transaction (ie, where the NBK or a primary dealer sells securities) can be deemed as an interest-bearing loan, it is arguable that it is, in fact, a purchase and sale of securities. Based on this argument an investor without a banking licence is permitted to engage in repos (being the purchaser, rather than the seller, of securities). However, such an investor would be prevented from engaging in reverse transactions, since this would involve undertaking 'the sale of securities with the obligation of the subsequent repurchase thereof', which in accordance with the Banking Law is not permitted without a banking licence.
It is uncertain whether this prohibition is applicable to a nonresident investor. According to an unofficial source at the NBK it is unlikely to apply to nonresident investors, since trading in T-bills does not create 'a permanent establishment' (ie, a legal presence) in Kazakhstan.
Security sale or loan?
Under the regulation, repos and reverses are treated as sales of securities. If at the closing of the repo or reverse a party defaults (ie, fails to repurchase or resell the underlying securities), the repo or reverse will be deemed as never taking place and the initial part of the transaction (ie, opening of the repo or reverse) will merely constitute a complete purchase-sale of securities. As such, there are no procedures to be followed in the event of 'default'. Restrictions imposed on the purchaser of the securities will terminate immediately upon such event of 'default'. The incentive for both the lender and borrower to complete the transactions should be the repo rate and the margin provided.
Futures, Forwards, Options & Swaps
There is no market for futures, forwards, options or swaps. There is some trading of currency forward contracts on the Kazakhstan Interbank Currency Exchange. However, the total outstanding value of such contracts is insignificant. The NBK is not involved in and has not issued regulations concerning any of these instruments.
No provision in Kazakh law prevents creating and trading in such instruments and their enforcement based on the general provisions of contract law. Moreover, Articles 1 and 4 of the Law on Securities specifically refer to derivatives.
Kazakhstan is in the midst of radically reforming pensions. These reforms are expected to promote the development of the local securities market as the pension funds and management companies become key market players. In June and August of 1997, Kazakhstan passed a package of pension reform laws aimed at shifting from a 'pay-as-you-go' system to a fully funded and privately run pension system. Under the previous pay-as-you-go system, which will continue to some degree in parallel with the new system, contributions funded current payments to pensioners and were not necessarily set aside for the individual on whose behalf the contribution was made.
But from January 1998, employers were required to contribute to individual pension accounts created for each of their employees. Each employee may select a private or state pension fund to maintain his or her account, and companies may establish private funds for their own employees or open funds. Operating through pension management companies, private funds may invest some assets in the stocks and bonds listed in category A of the KASE. However, all funds can invest in state securities, such as T-bills. Clearly, the development of private pension funds will increase demand for securities listed on the KASE.
However, the pension system in Kazakhstan is not yet developed enough to spark a rally on the KASE. The pension funds may not manage their assets themselves but must rely on asset managers licensed by the NSC. Although there are currently nine non-state pension funds, Kazakhstan has only two asset management companies. The Statute on Investment Activities of Companies Managing Pension Assets, confirmed by NSC Decree 133 (dated August 29 1997), defines the investment limits for the management companies.
In order to boost the new corporate securities market in Kazakhstan, the NSC and the government are selling portions of the state's interest in several Kazakh blue-chip companies. Majority stakes in the first thirteen enterprises, including companies involved in oil and gas, metals, telecommunications and banking, have already been offered in tenders to strategic investors. Next, minority stakes in these companies will be floated on the Kazakhstan Stock Exchange or sold on the international market. The minority stakes are expected to range from 4.5% to 20%, and will be offered to portfolio investors as part of the Blue-chip Programme.
Although the Blue-chip Programme was initially designed to raise funds on the KASE from both domestic and foreign buyers, it appears that most of those companies' funds will be raised through international ADRs and GDRs. The ADR/GDR offerings should spark interest in the KASE among international investors, since they may be converted into the underlying shares and vice versa. But it will take some time before the exchange sees high-volume trading.
Since the markets in Kazakhstan are not well developed, there are no standard form documents for the instruments mentioned above. One exception is for repos and reverses undertaken on the primary market, for which standard documents, provided as exhibits to Regulation 160, are used.
As a common practice in Kazakhstan, documents are negotiated with any party on a case-by-case basis. In many places the Securities Transactions Law gives discretion to custodians (see Article 14 (4)) and dealers and brokers (see Article 17 (1)) to determine the form and substance of their arrangements with clients. As such, an investor would be able to use standard documents (eg, International Swap Dealers Association, Public Securities Association /International Securities Market Association) provided that such documents comply with Kazakh legislation and are accepted by a relevant party.
The Law on Securities refers to standard types of orders for effecting transactions with securities, which indicates that as the security markets develop in Kazakhstan standard documents may be created and commonly used in the future.
For further information on this topic please contact Yuriy Maltsev at White & Case by telephone (+7 3272 50 74 91 ) or by fax (+7 3272 50 74 93) or by e-mail ([email protected]).
The materials contained on this web site are for general information purposes only and are subject to the disclaimer.