Making Mongolia Frontier again:

Financial market developmentsNarantuya Z. Chair, Financial Regulatory Commission

Invest Summit Mongolia 2015Hong Kong

Contents

Policy & Regulatory reforms • Challenges • Policy & regulatory reform • Legal framework • Decreasing constraints• Investment fund & custodian

regulatory framework• Investor & client protection• Risk based supervisory approach

New products & services• Privatization of state owned companies• Increasing bond market /government &

corporate/• Strategic mining deposits • Quality of listed companies & top

private companies IPO• Forex futures trading • Commodity based derivatives • Insurance companies & NFFIs as

investor• Social welfare - Insurance – Capital

market

Strategy & Future plans • Sustainable national

strategy until 2025 • UB international financial

zone initiative

Policy and Regulatory reform actions

Challenges of market development

Macro instability /inflation, exchange rate/

High deposit rate /caused by instability/

Weak investor protection

Inefficient infrastructure

Regulatory capacity

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

0

5

10

15

20

25

11.012.5

14.0

8.9

13.0

4.2

22.1

17.8

6.29.5

11.0

4.71.6

8.0 8.1

Annual inflation rate /2014-2000/

2015. 10

2015. 06

2015. 02

2014. 10

2014. 06

2014. 02

2013. 10

2013. 06

2013. 02

2012. 10

2012. 06

2012. 02

2011. 10

2011. 06

2011. 02

2010. 10

1,000.001,200.001,400.001,600.001,800.002,000.002,200.002,400.002,600.00

Monthly exchange rate /2015.10-2010.10/

USD/MNT

EUR/MNT

2007 2008 2009 2010 2011 2012 2013 2014 2015Q30.0

13.6 12.9 10.7 10.5 11.7 12.1 12.5 13.18.4

9.8 10.0 11.0 12.3 13.310.5 12.0 13.0

9.9

14.810.8 11.0

14.315.5

10.512.1

13.0

Interest rates /2007-2015Q3/Bank MNT deposit, weighted average Policy rate Central bank note

Legal frameworkRecent legislations

2010. Law on asset backed

securities

2011. Corporate

law renewed

2011. SCU law renewed

2012. Loan guarantee fund law

2013. Law on securities

2013. Investment fund law

2014. Law on index

based insurance of

livestock

Following recent changes and reforms in legal framework; • 40+ regulations in securities market • ~20 regulations in insurance market • 10+ regulations in micro finance industry

Were newly introduced or renewed. All intended to adapt international standards by IOSCO, Basel and IAIS.

Decreasing constraints in 2015

Regulatory

Administrative

Financial

Infrastructure

• New licensing regulations• Accounting rules compliant to int’l

standard

• Registration & Licensing separated from supervision

• Licensing & registration software• Electronic reporting

• Reduced regulatory fee • Reduced transaction cost

• Custodians in operation • Investments managers licensed • Clearing & settlement

Investment fund & Custodian regulation

• Comprehensive regulatory framework consistent to the international standard is ready

• Mutual funds are adequately regulated • Private funds can be more flexible

• 10+ funds are registered abroad and invest in Mongolia

• Approx. 180 foreign companies and 1800 foreign citizens own investment account at CSD.

• • JPM & Development Bank of Mongolia setting an investment fund

• 3 major banks are operating custodian banking

Investor protection

Strong regulation & advocacy

Investor protection fund

Ombudsmen mechanism

Division for Investors and clients rights

Risk based supervision

Regulation System

Efficient regulation

Improved efficiency

Less administrative

burdens

Systemic risk management

Participants

Listed companies 302 Insurance company 16Broker, dealer 61 Insurance broker 33Underwriter 25 NBFI 423Investment advisor 16 S&C Union 242Investment manager 3 Mortgage backed sec issuer 6Custodian 3 Loan guarantee fund 1

Totally 1000+ regulated entities by 2015 Q2

New investment products& services

Privatization of SOCs

In 2015 – 2016, 8 companies to be privatized through stock exchange;

- 5 biggest power plants in UB, Darkhan and Erdenet /major cities/

- Mongol Post, Nationwide post service

- Shivee Ovoo, supplies 30% of total domestic coal

- Baganuur, supplier of 70% of Mongolia’s energy coal consumption

- MSE privatization is offered in 2016 budget draft +more 51 SCOs

SPO, Dual listing

Strategic partnership with MSE

Daiwa implements project under JICA

Domestic bond market

• Government bond trading at stock exchange rapidly increases since 2014

• Secondary trading already activated

• Setting benchmark yield curve

• More supply of government bond with longer term is expected to be traded at MSE

• Needs of domestic corporate bond market is very high at relatively high coupon rate because of higher interest rate, short maturity & collateral requirement of bank loans

• Varieties of bond such as insured & covered bonds are regulated

Strategic mining deposits • License holders of strategic mining deposits must offer at least 10% of its equities to

the public through domestic stock exchange according to law.

• FRC is facilitating regulatory framework of this financial activity and also preparing regulations for dual and cross listing with other international exchanges.

• FRC will also introduce financial valuation standard and guideline of mineral deposits soon with cooperation of Ministry of Mining, National Mining Association and other stakeholders.

• There are 23 companies that hold exploration or mining licenses of 15 groups of strategic deposits. 14 of them started mining operations.

Internationally listed

Can be dual or cross-listed at MSE

Need to be complaint with ASX, TSX, HSK…

State owned companies

Some registered at MSE& to be privatized

Private companies

Policies to encourage them to be listed at

domestic market shall be implemented

Quality of listed companies & National TOP companies’ IPO

• Corporate governance of listed companies is in focus

• In terms of numbers of shares, 51% ownership of MSE listed companies are centralized in government’s hands. That constraints the efficiency and liquidity of market significantly.

• Policy direction; De-listing over centralized companies, privatization of state owned listed companies & incentives to offer additional stocks or secondary public offering

• Tax incentives to go public to be legalized

• Promoting advantages of listed companies.

• With JICA project 2-3 of TOP private companies will do IPO within 2016-2017

• New registration rule of securities & MSE listing rule

FOREX & Commodity derivatives

• Plan to establish open Forex exchange is submitted

• Before that some hedging instruments will be traded in 2016

• Listed currency futures and interest rate futures at MSE

• Cashmere futures /Mongolia supplies 30% of world cashmere/

• OTC market regulation is prepared

• Splitting state owned Central Securities Depository and Settlements Company into CCP and CSD

Insurance companies and NBFIs as institutional investor • Pension fund reform and creation of

sovereign wealth fund are expected in near future

• Insurance companies and non-bank financial companies can now be a capital market player under new regulation

• Insurance companies can allocate portion of its reserve funds in capital market; government bonds, central bank note, investment fund share, investment grade equities, shares of financial companies.

• NBFIs are no longer just a credit company but can be an investment manager and institutional investor.

• Policy is planned to transfer social welfare expenses of state budget & social insurance fund into life insurance scheme.

2007 2008 2009 2010 2011 2012 2013 2014 2015Q30

100

200

300

400

500

600

66.4 78.5 96.5 128.6205.4 252.1

381.1

508.0581.9

Growth of NBFIs /assets in billion MNT/

2010 2011 2012 2013 2014 2015.Q3

56.8

81.2

107.6126.4

152.5169.6

23.8

48.9

79.093.9

108.789.1

Growth of insurance industry

Total asset /billion MNT/ Total premium / billion MNT/

Strategy & Future plans

Strategy & future planComprehensive national strategy

Derivati-ves, ABSs

Securities market

Gov’t bond

market

Money & Forex

market

Micro finance industry

Insurance industry

Banking industry

Financial Regulatory

CommissionFinancial market

regulation

Central BankMonetary policy Banking regulation

Ministry of Finance Fiscal policy

Policy & Regulatory reform Development phases

Pre conditions for development; macro stability, regulatory framework,capacity of market intermediariesinfrastructure

Development phase; Depth Access Efficiency

Matured market; CompetitivenessIntegrated Stability

2016-2017

2018-2020

2020-2025

UB International Financial Zone initiative

• Special law is drafted • Expected features;

• Unique legal environment• Modern regulatory framework• Tax incentive • Stability guarantee

• Beneficial to;• Adopt international standards • World class knowledge & skills• Capital market integration

• Advantages over region;• Strategic location • Democracy • Market economy • Open financial system

THANK YOU www.frc.mn