OBG talks to B. Bold, Chairman, Mongolia Stock Exchange (MSE)

Interview: B. Bold

How significant is the MSE’s joint venture with the London Stock Exchange Group (LSEG)?

BOLD: One needs to look at the events of 20 years ago, when the country transitioned from a planned economy to a process of rapid privatisation of all state-owned enterprises. This created over 340 listed companies, but most of these did not survive, as they were not competitive on the stock market and their significance disappeared over time.

The stock exchange was created in 1992 as a vehicle for privatisation, but has not had a single upgrade since then; the securities law has experienced some periodic changes, but no significant updates. The government, under the leadership of the prime minister, sought to create an exchange that competed effectively and efficiently with the banking sector and that could raise equity capital to help companies finance long-term investment projects. More critically, we must update our IT system, which today uses the same system that was running in 1993.

We needed a partner that could bring global standards, global expertise and, more importantly, a comprehensive and up-to-date IT solution. To be honest, I did not expect London to be so enthusiastic about this project. The key force behind this partnership is Xavier Rolet, the current CEO of LSEG, who travelled around Mongolia and realised its mining potential, saying it reminded him of Chile. This is what attracted London to the MSE, and what attracted us to London; London is the hub of the mining investor community, and in order to further develop, we need investors who understand mining risk.

What are the key components of the pending new securities law and what immediate effects will its passage have on the domestic market?

BOLD: The most crucial issue that we are addressing is governance. In terms of securities legislation, every publicly listed company will have a third independent board member who must follow very specific rules on conflicts of interest and related party transactions. This creates transparency on pricing so that minority shareholder rights are protected.

Another important change is the introduction of a post-trade settlement payment process, where we are moving to an internationally accepted T+3 settlement period. Previously, all trades in Mongolia were pre-fund trades, which scared away liquidity. In addition, the securities law reform will legalise the creation of closed joint-stock companies.

Other notable changes include the institution of regulations on insider trading and ethics. The securities legislation will be less rules-based and more principles-based. By this I mean that legislation cannot foresee all of the changes that are associated with a rapidly developing capital market, so the Financial Regulation Commission, which could be more in tune with the markets, will have more power and flexibility in imposing their own rules.

What legal changes are required by parliament for the MSE to continue with its reform measures?

BOLD: Key reforms, unfortunately, must take place in criminal law and provisions concerning embezzlement and insider trading. There must be consequences for abusing the markets; without severe punishments for illegal activity, markets will not work. One of the key challenges we must address is the judicial system. How can we define market abuse and its consequences, and how can we enforce the laws prohibiting such abuse? In this situation, if the punishment is very severe then people will abide by the law. Currently, we impose a $200 penalty for market abuse; this is not effective in stopping this behaviour.

On another note, a code of ethics for the securities market is being prepared, which involves a certification process to meet international standards. The programme is less focused on technical knowledge and works instead to curb abuse and cultivate a sense of responsibility by professionals for clients’ money.