EU Accession What next in Hungary?

Tamás Madlena KELER Director Marketing & Customer Relations 15 th September 2004 – 7 th Annual Clearing and Settlement Conference / pre-conference workshop

The Hungarian Landscape / Institutions

Budapest Stock Exchange (BSE) • Re-established in 1990 by 42 Hungarian banks and brokerage companies • De-mutualized and became a joint-stock company in 2002 • Turbulance in ownership • Acquisition by an Austrian group (see later) • Sections: equities, debt, derivatives

The Hungarian Landscape / Institutions

Budapest Commodity Exchange (BCE) • Leading commodity exchange in CEE • Established in 1989 • BSE-BCE merger under preparation • Sections: grain, financial, livestock

The Hungarian Landscape / Institutions

KELER (Central Clearing House and Depository) • Established in 1993 (50% Central Bank, 25% BSE, 25% BCE) • CSD functions • CCP clearing house for spot and derivatives • Other services (cross-border, share registry)

The Hungarian Landscape / Institutions

Interbank Market • State Debt Management Agency • Primary dealer system (10 banks, 1 broker) • OTC- dominated by government bonds • DVP settlement in KELER (usually T+2)

The Hungarian Landscape / Institutions

Hungarian Financial Supervisory Authority • Integration of different supervisors (banking, securities market, insurance, pension) in HFSA in 2000 • Indipendence, accountable to the Parliament and the government (Ministry of Finance) • Tasks include: entry control, risk assessment, compliance, transparent regulations, etc.

The Hungarian Landscape / Institutions

Trade Bodies • Allience of Investment Service Providers • Association of Fund Management Companies • Hungarian Banking Association

The Hungarian Landscape / Institutions

• The National Bank of Hungary • Ownersip in KELER • Oversight role

Securities Market Legislation

• Capital Market Act • Act on Venture Capital Funds • Act on Financial Services • Companies Act

EU Compliance 1

• Hungary was a regional pioneer • 1990, First Act on Securities and the Stock Exchange • 1996, Significant amendments to bring legislation closer to EU • Supervisory bodies merged • 2002 Act on Capital Markets, harmonized with EU

EU Compliance 2

• 2002-2003 other regulatory changes (e.g. Central Bank oversight over SSS) • Latest amendments to incorporate USITS II and III provisions • Little additional work remained • Updates on Capital Market Act are relatively fast and efficient – should be furher simplified in places • The Capital Market Arbitration Court – offering convenient solutions

Corporate Governance

• Budapest Stock Exchange coordination • Prepared for listed companies, adopted in February 2004 • Standards vary • Blue chip listed issuer largely converged

Gains with accession

• Reputaion • Additional foreign companies entering the market – promote competition and increase investment opportunities • EU structual fund investmeent project may encourage securities based finacing • Dual listings

Challenges 1

• Implications of joining the EU on the securities market are not clear • Small size of the Hungarian market • Cost of doing business (transaction + safekeeping) • Hungarian subsidiaries of foreign banks (OTC) • Emerging market funds exit

Challenges 2

• Domestic funds investing abroad • Limited supply of domestic securities • Small number of IPOs • Limited opportunities for further privatization • International ownership and consolidation may end up in takeover

KELER Profile

• Innovative institution committed to development, responsive to market participants • Full range of services, comparable and competitive with EU • Changes in ownership structure • Strategy

KELER – new clearing membership structure

 Remote membership on BSE  January 2005 – opportunity for traders to choose a clearing bank  Responsibilities of a general clearing member  Real time trade data from KELER / monitoring

KELER - Communication

• Subject to client needs (existing and potential) • Propriatory system • Standard SWIFT – Strategic decision to be made – Different stages

Budapest Stock Exchange - Profile

Takeover of a majority stake in BSE by a group of Austrian banks and securities market institutions in May • Restructuring – review by EU competition authorities • Main shareholders (June 2004): – HVB Hungary (25,2% ) – Wiener Börse AG (14%) – OeKB AG (11%) – The National Bank of Hungary (6,95%) – Raiffeisen Zentralbank AG (6,37%) – Erste Bank Vienna AG (6,37%) – Erste Securities Hungary (5,85%)

Budapest Stock Exchange - Strategy

To form strategic alliance of independent markets with  co-ordinated strategies  focus on new listings    increased liquidity easy access for investors transparency • Warsaw?

• Prague, Bratislava, Ljubljana?

• Domestic consolidation – BSE/BCE integration • KELER stake

Practical issues

• Setting up securities / bank accounts – no restrictions • KELER account – Netting + CCP, RTGS – Weakness in communication / reporting, language • Non-resident accounts – Strategy (CSDs, ICSDs) – Bilateral agreement – standard custodian service • Central Bank Money – Banks – Brokers (CSD money)

Summary

• Well-established infrastructure • Harmonized legislation and market practices • Further domestic consolidation for growing efficiency • Well performing market • Ownership issues

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www.keler.hu