New Rules of Game on Georgian Monetary Fund

Maka Ghaniashvili

The new Bill on Global Competitive Ability of Financial Sector introduced to the Legislative Organ by the Government of Georgia was received with the first hearing in February.

Alternation was introduced to 26 laws in force, even to the law about “market of the bonds”. What main changes are in it and what kind of influence it will have on the trade rules of Monetary Fund? What kind of outcome these changes will bring? On this issue we talked to the general manager of Georgian Monetary Fund Vakhtang Svanadze:
“Many alternations were introduced in the law; among them are changes that refer to the general regulation of bonds market, naming of which may take us too far. As for, specifically Georgian Monetary Fund, the most important alternation is that if before legislation used to foresee that only licensed companies had possibility to be the owner of Georgian Monetary Fund, now this chance is given to every licensed financial institute. Also it has no significance if the license is distributed in Georgia or out of Georgian territory, by the country that is considered in the list of countries developed by the Georgian government. If it has written in the license that it has right to trade with bonds, than it can be received as the member in Monetary Fund.
The second important news is as follows: the law did not use to separate Fund Ownership and Fund Membership before, so the corresponding term was used – owner-member, member can only be the subject which at the same time was an owner and ownership could not be reached without membership. Now the member and owner are the separated senses.
_ Is it possible that the member subject of the Monetary Fund at the same time be an owner?
_ Yes it is, simply it was obligatory before, when law said, that it is not possible to be a member and simultaneously not be an owner or vice versa. Now according to law, if you want to be a member and owner at the same time it is possible, but it is not obligatory. You may choose either ownership or membership.
_ What kind of influence these changes may have on the development of Georgian Monetary Fund?
_ Such kind of changes, that widens the circle of market members, simplifies the possibilities of appearing on Monetary Fund and favoures the broad and democratic participation of investors on trade process. It will accomplice the development of Monetray Fund and I am sure that this soon be visible for everyone. But as we know no ideal legislation exists and in spite of the fact, that alternations were introduced into the law, it is completely possible that soon we see that still lots of things are to be changed and added. To my mind there are moments in the new law that consist a kind of threats. For example, the possibility of complete entrustment to foreign licence. Before, every financial institute- foreign or native, operating in Georgia should have had the licence distributed by Georgian government. With this license state gave society a special guarantees that this is not a criminal group, happens the examination and monitoring of their business and documents. Today this does not exist, and of course it implies a kind of risk. For the second side, factually there exists no system of selfregulation, that earlier was a characteristic feature of Monetary Fund and Bond’s Central Depositor. It was a unique system, when state handed the part of regulation functions on Monetary Market to the selfregulating organization. Due to this action happened the maximal insertion of market members on governing process, though the decision of selfregulating organization became legal only after the state recognition.
_ So, was it a mixtured regulation, partly by the state and partly by the selfregulating organization?
_ Yes, the state had its part of regulation, but what referred to rules, procedures and operation strategies for such kind of unique organizations as Monetary Fund and Central Depositor, decision of them state left to the Central Depositor and Monetary Fund Members. They made the corresponding decisions, but the state had the right of confirming them. If it was not confirmed by the state it lacked the validity. For one side, this gave the possibility of operation according to the rules worked out by the Monetary Fund and the Member of Central Depositor Market participants. For the second side gave guarantees that rules were carefully checked and confirmed by the state.
_ Are the bonds interesting in Georgia?
_ This is the main problem that characterizes the Georgian stock exchange market. It is worth mentioning that the development of Georgian stock exchange market happened very unnaturally- in 1999 the experts of the USA, who were helping Georgia in the reform of the above mentioned sphere, wrongly considered that the process of privatization was finished in Georgia, which in reality was not held normally and that there are preconditions to create a market of stock exchange. The plan of development had been worked out, the great defect of which was the existence of a sufficiently formal approach, instead of making the prime accent on the formation of market, on the existence of bonds on the market, the trade by which would be interesting. The experts of the USAID followed to another way- drew out normal legislation, backed the formation of Monetary Fund as an Institution, factually due to their force was created the first licensed Broker Companies and the Central Depositor of Bonds. In reality they created a well developed stock exchange market infrastructure and institutes there, where no bonds existed itself. Georgia received the stock exchange market institutes which were compliance to the world technologies and experience, but there exists no product these institutes are to trade with- interesting and liquid bonds. Due to the privatization we received more than 90% of still-born enterprises. It is fact that they are wrongly called as joint-stock companies. They have no connection with the stockholder corporations. How can an enterprise that belonged to the state, now the 75% of its part belongs to the director, are considered as privatized? It is true that nearly it is privatized, but it dead as a joint stock company, at any rate for the Monetary Fund. In recent time the se4veral precedents of shares creation happened, that were produced by the successful enterprises, but it is so few that any kind of awaken of Monetary Fund would not follow.
And one more, this is the bases of the basement- if there is no instrument in the state, by which the National Bank regulates the money flow and interest rate on market, I mean State Bonds, than it is impossible to talk about the development of Corporate Bond Market. In every normal state the reference point are the State Bonds, according to which investors and eminent can think of bond emission and flow. Furthermore, the Municipal Bonds are also very important. These are the world’s most interesting bonds. Every country has the Municipal Bonds, even the less developed countries. Experts coming to Georgia are surprised with it. They are experts who successfully developed this reform not only in Europe, but also in Asia and in former Soviet Union Republics. Even in Lukashenko’s Minsk are issued Municipal Bonds and what is wrong with Tbilisi?! Everything these presents that we can not call Georgian Monetary Fund successful.
_ What kind of influence may have Free Industrial Zone of Poti on Georgian Monetary Fund?
_ Generally the Free Industrial Zone is very good, but behind this title with the world experience hides as successful as failed examples. Let’s say in this way, when this free Industrial Zone is transformed from ideal level to specific project level, after that discuss its benefits, because only with the keen observation of every aspect is possible to talk about pluses and minuses.

As for the Monetary Fund and wholy about financial activities new surveillance system in Georgia.
Financial Surveillance Agency begins its activity completely independent from the National Bank. Along with the National Bank new structure Financial Regulator is created. Surveillance on the price stimulation becomes a top priority for the National Bank, but it will not make a Financial Surveillance any more. Along with the National Bank an United Surveillance Agency was cretaed, which is to have a separate Commission that will realize simultaneously the surveillance of banking, insurance and financial papers. The Surveillance of Financial Activity and Adequate Regulation format searching took an intensive disposition. Traditionally the Surveillance of Financial Activity covers such spheres as: banks, insurance companies and trade with bonds. Conditionally we can point out 3 main types of Surveillance: Institutional, Functional and Integrated. Though we can find mixed type Surveillance Agencies in some countries ( Holland, Luxemburg). Institutional approach implies the existence of 3 different Surveillance Agencies, from which each is responsible for controlling on of the sector ( Bank Sector, Insurance Companies, Bonds Market) from 3 business directions. They do not interfere in each others competences. The mark off Surveillance Organizations are regulated by legislation. Such system of Surveillance Organization operates in those countries of European Union where Bank Sector, Insurance and Bonds Surveillance were formed as separate fields, because the formation of thses fields took place in historically different periods of time.
While Functional Approach, surveillance is done according to the profile of the activity. Overseer controls every organization that operates in one particular sphere, despite of its legal or institutional status. In the time of Functional Surveillance very frequent are cases, when the observation of one company is conducted by many Surveillance Organizations ( if the Organization is multyfunctional). The implementation of Integrated system of Surveillance is closely connected to the rapid growth and integration of financial market in recent period. From 1990s began the creation of those conglomerates in which the institutions having different functions were united. Using Institutional Surveillance on them the interference in each others competences were frequent.Such kind of Surveillance Organizations function’s overflow caused financial crises in some countries ( Great Britain in 1995, Scandinavian Countries). In order to avoid this, creation of new integrated approach in Financial Regulation and Surveillance Sphere became essential. Creation of Multifunctional Surveillance Organization was decided, which should have to unite Surveillance Organizations being in Institutional model. This process was hastened with the adoption of EURO.
Lets discuss models that are based on different schemes of Functional Surveillance, on the examples of several countries:Working with the Institutional Model France is worth metioning, where surveillance structure is based on the Institutional Model. One controlls the Bank, the second-Insurance sphere, the third- Bonds Market. The Bank Committee existing in France’s Central Bank strictly monitors the process of Licensing of Banks and makes a decision about unification of banks. In Insurance Sector Surveillance is headed by “ Insurance, Cooperative Insurance and Mutual Aid Surveillance Commission”. This commission also has a close connection with the Bank of France- Bank’s Manager is a member of Surveillance Organization’s Committee. The Surveillance of Insurance Sphere is implemented with the accordance of Bank Commission in Financial Sector Consultation Committee, but coordination of Regulator Activity is done by Financial and Legislative Regulation Consultation Organization. Due to the law adopted in 2003 the unification of Insurance Surveillance Commission, Cooperative Insurance and Mutual Aid Surveillance Commission took place. According to the Code on Insurance, carried out in August 1st, 2003, two controlling organizations of bonds (State and Professional) were unified and were called the Bonds Market State Organization. Its main functions are: to publish financial information about the members of Bonds Market, to establish the norms of behavior for them and control thier fulfilment, full monitoring of Bonds Market.
In Spain the surveillance of financial activity is done by traditional Institutional Model. The Central Bank is responsible for the control of Bank System Activity. The Surveillance of Insurance Sector is done by the Central Directorate of Insurance, as for Bonds Market, its surveillance is headed by Specialized Commission. Besides specific functions determed by the membership of European Central Bank System, Spanish Bank is obliged to committ the surveillance of private, saving and cooperational banks and other credit Institutions. It controls Credit Institutions,. Financial Markets and other units of Financial Stability and also observes how they defend the specific norms of activity. In 1988 the National Commission of Bonds Market was created. It is an independent agency responsible for the defense of investors. Its main aim is to gurantee the transparency on market, also fairness of price formation process. With the presentation of Insurance General Directorate, Spanish Ministry of Economics gives permission to the financial organizations, it also establishes the standards of accounting and carries out sanctions for norm infringers. The surveillance of Insurance Companies is realized by the General Directorate of Insurance, which is a structural unit of Ministry of Economics. Its functions are: surveillance of Insurance Companies, Pension Plans, Pension Funds and realization of the role of Insurance Mediation. The Institutional Model of Financial Surveillance operates in Italy, Portugal, Greece, Slovenia and other countries.
Functional and mixed model operates in Bulgaria, where surveillance of Bank Institutions is carried out by the Bulgarian Central Bank. It committs the licensing of them too. All other forms of financial surveillance, including non-bank Institutions unites the Commission of Financial Surveillance. Financial Surveillance Commission was established in 2003 and is an independent organ that realizes the surveillance of Bonds and its infrastructure, including brokers and transaction of bonds, also it surveilles Insurance and Mediation Companies. In Canada the Surveillance of the Bank Sector, Insurance and Pension Funds is done on the federal level, but the surveillance of bonds- on the province level. Financial Institutions Surveillance Agency is the chief Regulator Organ of Federal Financial Institutions and Pension Funds. The responsibility of this agency is to defend the owners of Insurance Policy, Depozitors and Pension Fund members from improvident lossess. OSFI surveills every bank of the country, every Federal Credit and Trusteeship Companies, Insurance Campanies, Coinsurance and Cooperative Credit Associations and Pension Funds. The surveillance of bonds is realized on the province level. In Canada 13 local Surveillance Organizations exist. Though the growing integration of Canada’s Financial Market of recent years raised the issue of Unification of Financial Surveillance Institutions.
Completely different Surveillance scheme operates in the USA. Here in one and the same sphere different agencies do the surveillance. Federal Reserve System, Monetary Surveillance Agency, Federal Depozitor Insurance Corporation and State Regulator Organizations realize the surveillance of the Bank System, creating a kind of competitive environment in regulation and surveillance sphere. As for Bonds Market, the surveillance of it is done by the Bonds and Monetary Funds Commission, presenting the only organ that operates on the Federal Level. In separate States this function is implemented by the Local Agency. The surveillance of Insurance is under the State’s competence. Functional and mixed model operates also in Holland, Luxemburg, Australia and in other countries.
Integrated Surveillance Model operates in Great Britain. The Bank of England is responsible is responsible for the implementation of country’s Monetary Policy and for the surveillance of systematic risks. In 1997 an Independent Financial Service Agency was created in Great Britain, that realizes the surveillance activity of Financial Sector. The creation of this agency was determined due to the law on Financial Service and Market adopted in 2000, that entered into force in December of 2001. In the Function of Financial Service Agency enters the Surveillance of nearly every sphere of financial sector (Non-Bank Depozitor Institutions, Insurance and Investment Business, Mortgage Crediting, Advisor and Insurance Mediator Services). In Europe this Agency is considered to be one of the most reliable departments in standards and regulation sphere. Hence from market demands, the surveillance spheres in the agency are almost integrated. The surveillance of Pension Funds in Great Britain realizes Professional Pension Funds Regulating Organization. Though Great Britain was not the first country adopting the United Regulator Institute. Earlier this system had been strengthened in Scandinavian countries. In Norway, Denmark, Iceland and Finnland the surveillance functions are accumulated in the hands of one agency. Differently from the Great Britain, in these countries the surveillance organs are in close connections with the State Structures. Norwegian redittilsynet is one of the oldest Integrated Surveillance Organ. It has many functions. Besides surveillance of business’ 3 main spheres it also realizes the surveillance of Professional Pension Funds, Financial Companies, Immovable Property Agencies and their lawyers, Debt Collector Agencies, Auditors and Accounting Agencies activities. In Sweden the surveillance of Bank System was always done by the Organ independent from the Central Bank. Finansinspektionen represents a State subordinate organ that is responsible for the Banking, Insurance and Bonds Market Surveillance. Its functions are the surveillance of Financial Funds, Insurance Institutes, Brokers, Monetary and Pension Funds. Just now the heated debate goes to add a competence of Customers Interest Protection Issues to this organ. Finnland’s Financial Surveillance Agency was created in 1993, as an independent organ. It closely collaborates with the Bank of Finnland and surveills the great part of Finnland’s Financial Sector and Bonds Market. Insurance activity isn’t included in its competences. Insurance sphere is controlled by the Surveillance Organ of Finnland, which is under the subordination of the Ministry of Health and Social Affairs. Before 2002, in Germany the Surveillance Structure was distinguished by the signs typical to Institutional model. Surveillance was done by the Financial Operations Federal Surveillance Agency, that operated in accordance with the Federal Bank. Insurance Federal Surveillance Agency was charged with the Insurance Surveillance, as for the Bonds Surveillance (it has been done since 1994) it was to implement the Federal Surveillance Agency of Bonds. In 2001, the reform of Surveillance Agencies was carried out in Germany. It was connected with the reform of the Federal Bank. Due to reform, three existing surveillance organs were united in the Federal Surveillance Agency of Financial Market. Nowadays in the competence of this agency enters the surveillance of Banks, Insurance Companies and Pension Funds, also the agency is to control the operations of money-laundering. Distinct power in Surveillance Sphere still is in the hands of the State Administration. It mainly touches the surveillance of Monetary Funds ( which are public organizations). From 2002 in Austria Surveillance Functions were given to the Surveillance Organization of Financial Market. It represents an independent Organ and completely covers those functions that before were distributed between the departments of the Ministry of Finance and Bonds Surveillance Organ. From 2002 in the functions of Surveillance Agency entered the Bank System, Insurance, Pension Funds and Bonds Market Surveillance. After this reorganization the Central Bank was awarded a special status: it can conduct the investigation that is connected to the Market and Credit Risks. In Denmark surveillance organ is presented with the Financial Surveillance Agency. The Agency with the existing form was created in 1988, and is an Integrated Model of Surveillance. It controls the Financial Sector including Banks, Mortgage-Credit Institutions, Insurance and Pension Companies, Investment Companies, Investment Associations, Insurance Brokers, Financial Holding Companies and Bonds sphere. In August 2, 2002 Belgian Parliament asserted a law on “Surveillance System”, although the surveillance institutions have existed here since 1935. If before the surveillance of Bonds Market and Bank Sector was done by one, and surveillance of insurance by another company, due to the above mentioned law, state managed to unite Surveillance Functions of Bank Sector in the hands of Financial and Insurance Commission. Reform entered into force on January 1, 2004.
On July 12, 2006 in Poland the law on the Surveillance of Financial Market was adopted. On this bases Insurance and Pension Funds Surveillance Commission, Financial Papers and Monetary Funds Commission had been abolished, their functions were imposed on Poland’s Financial Surveillance Organization. The aim of this organization’s creation is to ensure the market’s effectiveness, stability and transparency, and to defend its participants interests.
In February of 2006 Czech Parliament adopted the law on the “Integration of Financial Market’s Surveillance”. The aim of the adoption of this law was to improve the quality of Surveillance in separate segments of Financial Market and to harmonize Surveillance procedures. Accoording to this law, from the 1st of April Czech National Bank was made to realize all functions that before were done by the Commission of Financial Papers, Ministry of Finance, National Bank of Czech Republic and the department of Credit Union’s Control. This functions are the surveillance of the Bank Sector, Monetary Funds, Pension and Insurance Sectors and Credit Unions. It also has to make a control on foreign currency and on the institutions on electronic money. According to the law the Commission of Financial Market was created with the Bank Administration, as a consulting organ in the sphere of Financial Market Surveillance.
In Estonia the law on the Financial Surveillance Organ was adopted in 2001. Financial Surveillance Organ is an Agency having Autonomous competences, existing along with the Bank of Estonia. It has an independent budget and separate governing system. In its functions enter: Banks, Investment Firms, Bonds Market, Insurance Sphere and Investment Fund Surveillance. It is worth to mention that an Integrated Surveillance System exists in Japan, in Taiwan and in Korea. The same system operates in Thailand, China, Turkey and Singapore.
In that way, Surveillance Organs despite distinct differences among them, mainly are an independent, specialized structures. The guarantee of surveillance organs successful operation is the independence of its implementing Institutions. They are free from influence coming directly from market members, and also they are free from political interference. In the majority of countries the Integrated Model Operates. One of the priorities of Integrated approach is the high degree of independence of Surveillance Agency. In most countries ( e.g. in Czech Republic, Bulgaria and others) Financial Surveillance Organs are accountable in front of the Parliament ( Assembly). In some countries ( e.g. Belgium, Finnland) in the process of choosing surveillance organ’s leadership, with the right of parity takes part the State’s government and the Central Bank. In other countries (e.g. Dennmark) in the leadership of Surveillance Organ enter the representatives of Financial Sector and independent members. Here and there the staffing of the Surveillance Organ’s Administration is the Central Bank’s prerogative (e.g. France).