Impact on Capital Markets from EU Accession

© Catalyst Development Ltd 2002 AGENDA Introduction Current Status Expectations Special problem areas Cross-market linkage Next steps

© Catalyst Development Ltd 2002 Trading Technology Specialists in Exchange Technology Exchanges survey Consultancy, not development  People are the challenge, not the technology! Business analysis Program and Project Management IT Marketing and Research Cross-market linkage expertise Europe, Far East, US

© Catalyst Development Ltd 2002 EU Accession countries - status Emergence from predominantly communist economics Mass privatisation  Bulgaria  Czech Republic  Lithuania  Romania  Slovakia Initial Public Offerings  Estonia  Latvia  Hungary  Poland  Slovenia  Malta

© Catalyst Development Ltd 2002 EU Accession countries - status Differing economic and monetary policies Pension reform  Example Poland  Adoption of Chilean model Free market economies Banking vs public corporate funding

© Catalyst Development Ltd 2002 EU Accession countries - status Confidence in Capital Markets is LOW! Privatisations bungled – voucher system  Modelled on Russia/Czech Republic  Widely dispersed certificates  No established trading system!  Oligarchs purchased all certificates  Now control significant portions of former state-run industries Lack of stocks to invest in  Typical emerging market  Polarised to few stocks  Presents unacceptable risk

© Catalyst Development Ltd 2002 EU Accession countries - status Hyperinflation  Bad experiences with respect to investments  Investors lost savings  Forced investors towards property  Thankfully looking towards Euro = low inflation  Brings other problems.. Boom and bust bubbles

© Catalyst Development Ltd 2002 EU Accession countries - status Regulation  Generally weak  Undermines local confidence  Forces larger floatation to London, NASDAQ  Investment advice  Directors shareholdings and dealings  Corporate news disclosure Over-regulation  Malta – world standard  BUT – Caused problems  “Right-size” regulation

© Catalyst Development Ltd 2002 Expectation “The size of the financial sector might rise by as much as a factor of 15 in absolute terms during the catch-up process” - European Central Bank 2001

© Catalyst Development Ltd 2002 Expectation Pension/Health welfare reforms Increasingly aging population Require liquid capital markets for investment State funded at present Previously mentioned Chilean Model? Much of Western Europe has not decided on this yet!

© Catalyst Development Ltd 2002 Expectation – Foreign interest Investment will come from west Speculative interest Economic shift from Western Europe Manufacturing, petrochemicals, technology, property Educated population May force bubble… Net purchases of shares by non-Slovenian residents

© Catalyst Development Ltd 2002 Specific Issues / Problems Invasion of Western Europe: Broker level  Fears that local brokers will be forced out Listing  Estonia example  Acquisition and de-listing Exchanges merging/acquisition  Deutsche Borse Group  ATOS Euronext  Austrian Stock Exchange  Ireland?

© Catalyst Development Ltd 2002 Specific Issues / Problems Regulation tightening/harmonisation: Moving target!  ISD2  Basle 2  IOSCO No central School for learning! Danger of over-regulation Lack of expertise/practise in designated countries  Experiences of middle-east… World Bank, IADB, ADB are already funding projects  Caribbean, South America, India

© Catalyst Development Ltd 2002 Specific Issues / Problems Euro Conversion Specific Project All Stocks to be changed to different currency Big Bang approach Historical prices also need conversion Payment, deposition and registry information also Dividends, etc

© Catalyst Development Ltd 2002 Specific Issues / Problems Technical infrastructure Most systems are old or small No commonality Reliance on the RTS Future needs will be  Upgrading of depository  Exchange linkages  Market Surveillance  Internet-facing activities  Business continuity plans

© Catalyst Development Ltd 2002 Cross-border trading Cross border trading  Needed to improve liquidity  Access to other EU markets  Re-orientation of funds  Reduce market polarisation  Temptation to merge…

© Catalyst Development Ltd 2002 Cross border trading Local Alliances Slovenia leading alliance with:Bosnia Herzegovina, Montenegro, Macedonia and Srpksa stock exchanges Other international interest  Athens, Italy  Deutsche Borse Group  Austria, Hungary Likely targets for mergers/takeover  Euronext

© Catalyst Development Ltd 2002 Summary Confidence in Capital Markets Low Requirement for development from:  Accession criteria  Pension reform  Local economy  Cope with demand  Low inflation Specific issues in  Regulation  Technology  Cross-border trading  Euro conversion

Impact on Capital Markets from EU Accession