The Prague Stock Exchange is striving for market standardisation

Although established in 1870s, the Prague Stock Exchange's modern history has been exceedingly brief. The first modern-day trading commenced on 6 April 1993 after a 55-year hiatus (the last session in 1938). But every cloud has a silver lining: the Prague Stock Exchange now joins the fully electronic stock exchanges and works with securities in a dematerialised form. It has a membership in excess of one hundred among whom there are many subsidiaries of large international companies; it has established a reliable clearing house with a wide range of well-functioning services. Intensive efforts have been spent on the development and strengthening of information flows regarding the listed-security issuers.

The stock exchange's renewal is related to the voucher privatisation which denationalised extensive assets. The two-stage voucher privatisation took place in the period 1992-1995. In the wake of each stage, a numerically very strong set of issues reached the stock exchange. First, almost in 1993 1,000 issues, and subsequently, in 1995, more than 700 were registered at the stock exchange. Marker capitalisation amounted to CZK500 billion in 1996. Trading with all issues began in earnest. Starting with the first session, the trade value continued to increase rapidly. While the trade value amounted to a mere CZK9 billion in 1993, it rose to almost CZK400 billion in 1996. The stock exchange's burgeoning transactions have demonstrated the rapid development of the Czech capital market while still searching for its optimal form to meet the expectations of developed markets. These, in turn, would force improvements in the quality of parameters of the Czech capital market.

It soon became apparent after registration the voucher privatisation's new titles that not all issues were sufficiently attractive. Gradually, the stock exchange split them into three markets, depending on the degree of their liquidity and the companies' market capitalisation. Nowadays, 120 issues are listed on the main and secondary markets. All other issues (1,500) are traded on the free market. The two prestigious markets subject the issuers to strict disclosure rules in the form of internationally accepted quarterly financial statements. This information is then promptly disseminated by EKIA, a subsidiary of the stock exchange. In addition, all transactions falling under the Price Sensitive Information category have to be reported. The free market issuers' reporting duties are less stringent.

Besides shares and units, bonds are also traded on the stock exchange. The structure and number of issues traded on the Prague Stock Exchange is currently undergoing substantial changes: gradually, a number of these cease to be publicly marketable or their liquidity level is quite low. This year is likely to witness a sizeable reduction in the stock exchange market, which will in turn render it more transparent.

In March 1996, the stock exchange made a step in the right direction by having implemented continual trading in the most liquid issues. Derivatives will commence to be traded in the second half of 1997. The gradually implemented modernisation of the trading system - to be upgraded this year - is proceeding apace in order to acquire the essential requisites so that the services to investors would gradually meet the European standards. These have been essentially achieved as regards the mechanism of the finalisation of the stock exchange transactions. The stock exchange settles the trades via its subsidiary UNIVYC ('Universal Settlement Center'). It allows for a wide range of capital market transactions to be performed by the traders within the scope or rules delineated by the Czech legal environment.

The stock exchange, and the Czech capital market as a whole, are still significantly marked by the non-standard manner of its origin and by the effects of the institutional and legislative framework that had been created to meet the demands of a successful course and completion of the voucher privatisation. The dominant influence that dictates the current shape of the Czech capital market is a wrong philosophy of its development in the post-privatisation period. This wrong philosophy espoused by certain powerful interest groups centred around the investment of privatisation funds. Their influence reaches up to the leading official at the Finance Ministry who is in charge of surveillance over the capital market. At the very heart of this philosophy is the notion that it is the mission of the post-privatisation capital market to bring about a concentration of asset holding. The expression of 'the privatisation's third stage' has been coined to describe this developmental phase of the Czech capital market. For the privatisation's third stage to take place, it is necessary - in the view of the subscribers to this philosophy - to hold off on the implementation of European legislative standards, in particular where the standard regulation of the capital market is concerned - until the concentration has been completed. The most serious consequence of this philosophy is likely to be the loss of investor confidence since the concentration of assets is occurring to the detriment of minority shareholders. Wary of hostile takeovers, the issuers, too, no longer have confidence in such a capital market.

The Prague Stock Exchange is a fierce opponent of this philosophy. It is of the opinion that standardisation of the legislature governing the capital market and, first and foremost, its regulation, should have taken place immediately upon the voucher privatisation's completion. At most, the concentration of asset holdings could be a by-product of the regular processes that are supposed to be at play on the capital market: the transformation of savings into capital and the generating of reliable valuation of capital. The Prague Stock Exchange favours the timely creation of standard conditions and regulatory devices proven as useful in the stable market economies but also in the countries that are, like the Czech Republic, going through a similar transformation. Clearly, neighbouring Poland's experience shows the benefits of the setting and enforcement of explicit rules of the capital market game.

It is obvious to the Prague Stock Exchange that its future development is crucially dependent on how soon this false philosophy is going to be defeated. And on how soon the standard conditions reflecting the European Union's Investment Service Directive as well as the accumulation of collective experience embodied by the European Stock Exchange Federation, International Organisation of Securities Commissions (IOSCO) and others are restored to the Czech capital market.

The Prague Stock Exchange took the initiative and has been preparing, since mid-1996, a draft legislation which will establish an independent Securities Commission. The Administration gave the establishment of the Commission its thumbs-up in the end of 1996. This draft legislation is currently at a very advanced stage and it is hoped the Commission will be working in the second half of 1997. Based on the American Security and Exchange Commission (SEC), the Commission has also been inspired by the COB of France or the Securities Commission of Poland. The Commission should significantly improve the level of enforcement of laws and other regulations and of protection of the investors.

Mandatory reporting of all real-time capital market trading, effective 1 February 1997, is seen as yet another successful initiative by the Prague Stock Exchange. This measure should enable the stock exchange to attain the level of transparency in trading as is customary in the countries with developed capital markets. Another positive consequence of this mandatory real-time trade reporting should be a considerable reduction in off-stock exchange trading. This should increase the volume of rate-setting trades, thus increasing the reliability of the rates quoted by the Prague Stock Exchange. The efforts spent on speeding up the market's development and on improving its elementary conditions are gradually reaping results.

The Prague Stock Exchange made it clear that with the passing of 1996 the period of apprenticeship was over, and so was the tolerance of imperfections in the issuers' disclosure duties and in the members' fulfilment of their duties. We expect that the year of 1997 will bring about a decisive movement of the Czech capital markets towards European standards. The Prague Stock Exchange intends to be firmly in the driver's seat of this desirable move.

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