1. 1 Is There A Room For Regulatory Improvement? Facts Need for Improvement? A Few Ideas Kristijan Polenak, member of MSE Board Partner, Polenak Law Firm www.polenak.com

2. 2 Facts:  corporate legislation and securities markets legislation in high compliance with the Principles of Corporate Governance issued by the Organisation for Economic Cooperation and Development (OECD) and the Objectives and Principles of Securities Regulation published by the International Organization of Securities Commissions (IOSCO)  Corporate governance extensiveness at the highest level compared to 27 countries of operation of EBRD Source: EBRD Is There A Room For Regulatory Improvement?

3. 3 Facts (cont.): The Securities law was adopted by the Parliament on October 27, 2005 making Macedonia fully compliant with IOSCO. (The International Organization of Securities Commissions (IOSCO) Principles are recognized today by the world financial community as international benchmarks for all markets) Laying the ground work for EU compliance. Is There A Room For Regulatory Improvement?

4. 4 FESE Action Plan for 2006-2007: Advocacy of high-quality regulation Promoting regulatory processes that make better regulation possible Enhancing competition in securities markets on a level playing field Improving the efficiency of clearing and settlement of securities in Europe Improving supervisory cooperation Enhancing exchanges’ ability to attract a broad range of issuers, including small and medium sized enterprises (SME’s) Participating in the Trans-Atlantic and global financial sector dialogue Is There A Room For Regulatory Improvement?

5. 5 What’s missing on the Macedonian market?  New Trading Material (corporate bonds, notes, security futures, debt instruments, stock options, other financial derivatives)  IPO’s  Municipal Bonds  Investment Funds  Investment Banking Activities Is There A Room For Regulatory Improvement?

6. 6 Some regulatory improvements to develop the market:  Dealing with regulatory overlaps  Liberalization of the foreign exchange regime  Liberalization of local self-governance financial regime  Development of Derivatives market regulation at the Stock Exchange  Double Taxation Treaties Is There A Room For Regulatory Improvement?

7. 7 Some regulatory improvements to develop the market (cont.): Dealing with regulatory overlaps  Coordination among authorities;  Frequent communication with the market participants;  Consultations with professionals (investment advisors, lawyers, accountants);  Implementation of international practice Macedonia’s Recent Specifics: Regulatory Guillotine Is There A Room For Regulatory Improvement?

8. 8 Liberalization of the foreign exchange regime (lifting of existing limitations) Closed access to international markets: Macedonian corporate entities are not allowed to purchase securities abroad and enter into foreign derivative transactions on their own. Only authorised banks (banks licensed by the National Bank of the Republic of Macedonia to perform operations with high authorization i.e. banks with nine million Euro paid up share capital) may purchase securities abroad for their own account and on their own behalf. This right refers to the securities issued or guaranteed by the Governments or central banks of the member-states of the OECD or by the international institutions. There are exeptions when a bank may purchase immaterialized securities authorized by a SEC or similar institution from a OECD member-state that has at least the credit rating Baa according to Moody’s or credit rating BBB according to Standard and Poors, and if the settlement of the security is realized according to the DVP principle through Euroclear or Cedel-Clearstream or through commercial banks with a credit rating A established by the rating agency Moody’s or credit rating A established by the rating agency Standard and Poors. Is There A Room For Regulatory Improvement?

9. 9 A Bank may purchase or sell foreign financial derivatives when the issuer of the security has at least a credit rating Baa according to Moody’s or credit rating BBB according to Standard and Poors, or the security may be settled through the clearing houses with head offices in the member-states of the OECD. As an exception, the Deposit Insurance Fund, the insurance companies, pension funds and investment funds may purchase securities abroad in accordance with the laws that govern their operations, without restricting the possibility of these entities to invest. Why is it important to liberalize the foreign exchange regime:- Visibility of the market - International presence Some regulatory improvements to develop the market (cont.): Is There A Room For Regulatory Improvement?

10. 10 Liberalization of local self-governance financial regime The Law on financing of the units of the local self-governance requires prior consent of the Government of the Republic for borrowing abroad, provided that positive opinion of the Ministry of Finance is obtained. Additional financial limitations, such as the prescribed total amount of short- term borrowing or the total amount of the annual repayment instalments of a long-term debt. All together disables market participation of municipal securities. Is there a room for regulatory improvement? Some regulatory improvements to develop the market (cont.):

11. 11 Development of Derivatives regulation The products recognized and defined by the Securities Law as: FUTURES (standardized contract for future sale of securities, foreign currencies, commodities, securities indices or interest rates pursuant to which one of the contracting parties is obliged to deliver the underlying asset and the other contracting party undertakes to pay the agreed-upon price on a previously agreed date) OPTIONS (standardized contract for the future purchase or sale of securities, foreign currency, commodity, securities indices or interest rates pursuant to which one of the contracting parties to the contract maintains the right, but not an obligation, to buy or sell the underlying asset at a previously agreed upon price on any business day up to and including the day on which the agreed period expires and for which the other party undertakes an obligation to unconditionally deliver or pay the agreed underlying security or other asset, upon the request of the option holder) and DERIVATIVE FINANCIAL INSTRUMENTS (defined as instruments the price of which directly or indirectly depends on the price of securities, commodities, foreign currencies, securities indices or interest rates, other than depository receipts) are still not available on the market. The manner and procedure of issuance, offer and sale on the primary market, trade transactions in these instruments in the secondary market and the clearance and settlement of trade transactions in these instruments should be prescribed by the SEC. Is there a room for regulatory improvement? Some regulatory improvements to develop the market (cont.):

12. 12 Conclusions:  Improvement of regulation and liberalization attracts investors and gives local issuers stronger impulse to offer financial products on the local stock exchange.  High level of compliance of the Macedonian securities regulation with international standards.  Well-regulated corporate governance and local securities market.  Lack of regulation on financial derivatives. Is there a room for regulatory improvement?