ADOPTION OF REGULATION ON OPERATION OF THE OVER- THE- COUNTER MARKET IS AN IMPORTANT STEP IN CAPITAL MARKET DEVELOPMENT
25th January 2021, Ulaanbaatar city.
The securities market is classified into regulated market or stock exchange market and unregulated market or over-the-counter market (“OTC market”) depending on its characteristics such as trade and regulatory framework, requirements and participants. The Mongolian Law on the Securities Market, adopted on 2013, laid down the legal basis of the OTC market by stipulating in the Article 4.1.3 that “Over-the-counter market” shall mean selling and buying of financial instruments, which are not prohibited by law, in the market by and between legal persons who hold special permits to engage in activities set out in Sections 24.1.1, 24.1.2, 24.1.4, 24.1.5, 24.1.10 and 24.1.12 of such law through direct agreements, owned by them or authorized by the owner. However, a long time has passed without the regulation of OTC market relations e.g. implementation of OTC market’s activities in practice, market participants, their requirements, trading procedures, and supervising.
Pursuant to Article 63.1.14 of the Mongolian Law on the Securities Market, the Financial Regulatory Commission has the authority to “set regulation on over-the-counter market operation and monitor its implementation” and within the scope of this authorization, the Financial Regulatory Commission adopted the “Regulation on Operation of the OTC Market” (“OTC regulation”) as an annex of the Resolution No. 995 of December 9, 2020. The adoption of this regulation specifies the detailed legal regulation of the OTC market for professional investors and is an important step in the development of the securities market. The Financial Regulatory Commission emphasized that an opening of the OTC market will allow joint stock and limited liability companies, NBFIs, small and medium enterprises to issue closed debt instruments, trade with professional investors, improve transparency, corporate governance, reduce the time and cost of issuing securities. As well as, it is of great importance to investors for having a secondary market for closed debt instrument, improved liquidity of security and transparency .
The OTC regulation regulates relations related to the OTC market scope, management, supervision, market participants, software for operating security trade, its requirements, fee of security trade, registration of security ownership right, centralized depository of the securities, and information transparency. However, this regulation does not regulate the registration and trading of the company’s securities to be offered to the public.
On the OTC market, securities can be traded in a limited subject or between professional investors without getting offered to the public.
The Mongolian Association of Securities Dealers (“MASD”) has become the entity responsible for organizing the OTC market. The MASD is now responsible for organizing securities trading on the OTC market through electronic software, monitoring the proper conduct of securities trading, and delivering information related to the OTC market to the public.
As of the date of this news, the MASD is drafting the relevant regulations to be adopted and enforced, and the MDS&KhanLex LLP’s lawyers are working on a draft of such regulations.
Entities licensed as securities broker, dealers, underwriters, custodians, securities trustees and investment funds can carry out activities on concluding direct sale and purchase agreement on financial instruments of own on the OTC market and of others in case of authorized by them. In addition, entities other than those engaged in professional investment activities may participate in the OTC market trading through a subject licensed to conduct securities brokerage activities.
Mongolian citizens and legal entities registered in Mongolia who wish to participate in the OTC trading are required to meet certain criteria. For example, a Mongolian citizen should have an average monthly income of MNT 10 million or more for the last year, or a net asset of MNT 500 million (liabilities deducted from the total amount of current and savings accounts and securities); and should have experience in securities trading in the domestic and foreign markets for the last 1 year. As for a legal entity registered in Mongolia, the amount of sales income for any of the last 3 years shall not be less than 2.5 billion MNT; and an equity requirement of at least MNT 1 billion.
In accordance with Article 5.2 of the OTC regulation adopted by Financial Regulatory Commission, certain technological requirements have been set for electronic software.
Professionals believe that developing its software and adopting relevant regulations set forth in the OTC regulation by the the MASD will create favorable conditions to raise funds for businesses that are unable to issue securities through the public offering, as well as, expand the understanding of the securities market and benefit from it in more broad scope, and simplifying the costly and complex process of raising funds which leads to new progress in the development of our securities market.
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