Document of The World Bank Report No. T-6916-RU TECHNICAL ANNEX THE RUSSIAN FEDERATION CAPITAL MARKET DEVELOPMENT PROJECT NAY 6, 1996 Agriculture, Industry and Finance Division Country Department III Europe and Central Asia Region CURRENCY EOUIVALENT Unit of currency: Ruble AVERAGE EXCHANGE RATES per US$1 Year Period Average End of Period 1993 1,018.00 1,247.00 1994 2,212.00 3,550.00 1995 4,566.00 4,901.00 1996"' 4,764.00 4,856.00 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS CSO Clearance and Settlement Organization DCC Depository Clearance Company EBRD European Bank for Reconstruction and Development GKI State Committee for the Management of State Property IMF International Monetary Fund MICEX Moscow Interbank Currency Exchange MOF Ministry of Finance NASDAQ National Association of Securities Dealers Automated Quotation NRC National Registry Company OTC Over the Counter PCD Primorski Central Depository PAU Project Administration Unit RFCSCM Russian Federal Commission on Securities and the Capital Market RS Resource Secretariat RTS Russian Trading System SRO Self Regulatory Organization UIF Unit Investment Fund VISE Vladivostok International Stock Exchange RUSSIA - FISCAL YEAR January I - December 31 I/ As of March 31, 1996. TABLE OF CONTENTS Page I. INTRODUCTION .................... 1 II. SECTORAL CONTEXT .................... 2 A. Regulatory Infrastructure .................... .2 B. Market Instruments .................... 3 C. Investors .................... 4 D. Trading .................... 5 E. Securities Transfer .................... 7 III. LESSONS OF EXPERIENCE. .................... 8 IV. THE PROJECT .................... 9 A. Project Rationale and Objectives. .................... 9 B. Project Description .................... 11 C. Project Cost and Financing. .................... 16 V. PROJECT IMPLEMENTATION ARRANGEMENTS . .18 A. Project Management .................... 18 B. Implementation Schedule ........I ............ 19 C. Procurement and Disbursement. .................... 20 D. Accounts and Audits .................... 26 E. Supervision .................... 26 F. Monitoring .................... 26 G. Status of Project Preparation .I .................. 28 VI. BENEFITS AND RISKS .................... 28 A. Benefits .................... 28 B. Risks .................... 29 VII. AGREEMENTS REACHED .................... .29 ATTACHMENTS 1. RFCSCM Organization, Statutes and Policy Statement .30 2. Detailed Projec. Cost .................. 43 3. Implemenitation Plan .................. 46 4. Summary of Major Procurement Activities ...... I 47 5. Supervision Plan .................. 49 6. Output Indicatois .................. 52 MAP IBRD 27653 This Report is based on the findings of an Appraisal Mission which visited Russia in October 1994, comprising Juergen Frdnz (Task Manager), Robert Pardy, Yvonne Jones, and Elena Shtykanova. Denise Vergot and Noritaka Akamatsu made contributions to this report and Shirley Dy processed it. Claudia Morgenstern and David Ferreira were the peer reviewers. Michael Gould and Yukon Huang are the managing Division Chief and Department director, respectively, for the operation. I. INTRODUCTION 1.1 Russian securities markets began operations in 1992 with the launching of the mass privatization program and the distribution of a tradeable privatization voucher to every Russian citizen. Vouchers were traded mostly through securities exchanges whereas the shares in newly privatized companies were traded through an over-the-counter (OTC) market. With mass privatization completed (in mid-1994) there are now some 15,000 joint-stock companies with an estimated 40 million shareholders, the world's largest capital market on both counts. There are also more than 60 licensed exchanges, 600 licensed investment funds, 1000 registered broker/dealers and a developing over-the telephone and curb-side secondary share market. 1.2 Until late 1994, markets have had to function amidst a proliferation of sometimes contradictory regulations emanating from and often haphazardly enforced by more than five separate government agencies. Since then, several steps have been taken: (i) the establishment in November 1994 of the Russian Federal Commission on Securities and the Capital Market (RFCSCM) which has broad jurisdiction for capital market regulation and development; (ii) the emergence of broker/dealer associations operating on an over-the-counter automated quotation trading system in four cities (Moscow, St. Petersburg, Ekaterinburg, and Novosibirsk); (iii) in September 1995, the establishment of the National Registry Company (NRC), a large-issue shareholders' registry; (iv) the launching in September 1995 by RFCSCM of a program for development of unit investment funds intended to attract a significant share of domestic savings, including retail investors, into the Russian capital market; and (v) the issuance by RFCSCM of regulations designed to protect the rights of shareholders in cases of increase of charter capital, which responds to a number of widely reported rights' violations during 1994 and 1995. A Law on Securities was passed by the Duma, the Russian Parliament, on March 20, 1996. The most important aspect of this law is that it gives legislative status to many rules and procedures that previously existed only in the form of Presidential Decrees. It also reaffirms the broad jurisdictional mandate of RFCSCM. 1.3 While the first phase of promoting capital market development focused on facilitating voucher-based privatization, the second phase must now focus on building a capital market which is sustainable and integrated with the wider financial system and which is able to fulfill its key support functions for a private sector economy: the efficient accumulation and allocation of investment capital, especially for restructuring and recapitalization of enterprises; the imposition of external discipline on corporate governance structures; and the management and sharing of risk among market participants with varied risk aversion profiles. Priority development needs include the adoption of basic securities policies and regulations within an appropriate legal framework, the building of associated institutional capacities, and the establishment of transparent and efficient trading and clearance and settlement systems. These tasks will need to be undertaken iteratively and with a high degree of flexibility and creativity, because institutions, relationships and transactions are new and rapidly evolving, and the shape and direction of market development will not always be clear in advance. The regulatory agencies will need to work through myriad policy decisions in an area new to Russia, and to support the market as it evolves rather than to impose structures on it. Private market participants will need to find a sense of shared purpose which allows them to associate effectively with each other, and to develop shared infrastructure and standardized practices. The proposed project would help meet key sectoral needs and its design allows for flexibility to respond to market evolution. - 2 - I. SECTORAL CONTEXT A. Regulatory Infrastructure 2.1 In 1990 and 1991, two basic regulations on the organization and governance of private companies and the circulation of securities were issued by Government. Subsequently, various Government agencies adopted rudinentary regulations on broker/dealers, investment funds and companies, and registrar/transfer agents. These regulations were in most cases a reaction to the market rather than an attempt to give the market a legal and regulatory framework. The new securities industry became the subject of jurisdictional struggles between the State Commnittee for Property Management (GKI), the Ministry of Finance, the Central Bank, and a Presidential Commission on Securities which led to duplicating and conflicting regulation. Following several investment "pyramid scheme" scandals in mid-1994, the President, in November 1994, established a single federal agency for the regulation and oversight of the securities industry, the Russian Federal Commission on Securities and the Capital Market (RFCSCM). 2.2 The RFCSCM has full regulatory and enforcement powers for the securities industry and federal ministry status within the executive branch hierarchy. The RFCSCM is formed by representatives from eleven government agencies, the Federal Duma and the Federation Council. Its executive structure consists of a Chairman, an Executive Director, and a Secretary of the Commission. Attachment 1, provides the statutes of RFCSCM and an organizational chart. The RFCSCM intends to build up its staff from the present level of 115 to 185 by the end of 1996. Most of the staff recruitment will take place through block transfers from other agencies, in particular GKI, the privatization ministry. RFCSCM's 1996 budget includes the necessary funding to permit the staff size to rise to 185 (the RFCSCM is one of five economic agencies with a priority budgetary status as per Government Regulation 1774 of December 1994, and Presidential Decree 202 of February 27, 1995). RFCSCM's initial institutional objectives aim at setting up efficient administrative systems, the training of regulators, the provision of public information, and the development of capabilities in the areas of enforcement, licensing standards, and prospectus review. In this, the RFCSCM is assisted by the Resource Secretariat (RS) which was created in January 1995, to provide policy advice in the areas of market regulations, finance, collective investments, and enforcement. The RS is currently funded by bilateral donors but in the medium term may become a financially independent "think tank" or public policy institute. 2.3 The regulations establishing the RFCSCM also establish a consultative body, called the Council of Experts (COE), which includes representatives of professional market participants and their associations, other public associations, stock exchanges, and independent experts. Currently the COE consists of 26 members. The RFCSCM will further be assisted in its nationwide regulatory effort by regional branches in republics and regions of the Russian Federation. The regional commissions have three primary responsibilities: (i) to monitor compliance with regulations issued by the RFCSCM; (ii) to provide information and services to market participants; and (iii) to monitor regional market activities. In May 1995, 19 chairmen of regional commissions were appointed by the chairman of RFCSCM. The regional network is expected to become operational during 1996 and 1997, starting in areas where significant capital market activity exists. 2.4 RFCSCM's strategic policy objectives for capital market development in Russia are summarized in Attachment 1 and include: (i) the development of market mechanisms in order to facilitate the accumulation of capital by privatized and newly created enterprises for the purposes of their reorganization and development; (ii) the creation of a unified capital market in the Russian Federation; and (iii) the creation of conditions for a market-driven development of Russia's securities market. In its approach to market regulation, RFCSCM envisages a combined role for itself and self- regulatory organizations (SROs) of market professionals. It will set specific guidelines, standards and criteria, and license SROs which adopt membership standards consistent with these. RFCSCM will continue to exercise regulatory control over licensed SROs. B. Market Instruments 2.5 Corporate Equity and Debt. To date, primary share issuance in Russia has been limited. During 1994, most new securities consisted of shares issued by commnercial banks and bearer shares or derivatives stripped of voting rights which were issued and sold by unlicensed investment companies of uncertain quality. During 1995, most of the issuances of stock by Russian companies have been sales of treasury shares or the issuance of shares in response to a re-evaluation of the companies assets as required by law. Since the cessation of soft government credits at the beginning of 1995, there has been noticeable interest by Russian companies in raising capital through the issuance of securities. Examples of completed offerings include the sale of $13 million in newly issued stock by the Moscow-based Red October candy factory in order to add new lines of production, and the sale of $3.5 million in newly issued stock by the St. Petersburg Khlebny Dom bread factory in order to replace outdated ovens. Both these issuances were sold through public distributions in which a Russian lead broker and several Russian selling agents used international- standard disclosure documents and responsible advertising to market the shares. In an effort to increase liquidity of their shares on the secondary market and create a market for primary distributions, at least 20 major Russian companies are in the process of issuing Level-1 American Depository Receipts (ADRs) in the United States and/or Eurobonds in the European market. Recently, LUKOil placed $365 million in bonds on the international market which are convertible into common stock now held by the Government. However, further advances in capital market regulation and institutions, not to mention public and international confidence, are needed before Russian enterprises will be able to obtain significant financial resources from securities sales. To facilitate an increase in the demand and supply of private sector securities, RFCSCM is training company directors in 16 cities in how to issue corporate securities. It also intends to help strengthen: (i) the corporate finance capabilities of brokers; and (ii) shareholder rights protection. 2.6 Municipal Bonds. These emerged as a fast-growing segment of the securities market in 1994, when the Ministry of Finance registered 28 new municipal issues, versus 14 in 1993 and five in 1992. Contrary to the equity market, the market for municipals has remained firm in 1995. Domestic demand for municipal issues is high, particularly among retail investors. Comparatively low interest rates are compensated for by perceived high reliability and tax privileges and, sometimes, by accompanying enhancements such as an apartment, lottery coupons or installation of a telephone. Although no municipal issuer has yet defaulted on its obligations, the weak budget management and revenue-raising skills of municipal officials give cause for concern. These concerns are reinforced by the general obligation form of most municipal issues. A municipal default would be a serious event because of its potential to destroy the confidence of retail investors in what has so far been a less distrusted segment of the securities market. RFCSCM will help establish a legal framework for municipal securities combined with training for local officials and the investing public. -4 - 2.7 Federal Government Obligations. Short-term Government Bonds (GKO), Federal Bonds (OFZ) and Treasury Bills (KO) are the most attractive sector of Russia's fixed income market. Trading volumes are significantly higher than those in the currency and interbank credit markets, reaching about 283 trillion rubles in 1995. As of March 1996, the total volume of GKOs, OFZs and KOs outstanding was about 99 trillion rubles, of which about 91 trillion for GKOs and OFZs. Several new debt instruments are under preparation, including Government Gold Bonds and Government Tax Bonds. Some fifty-six primary dealers are licensed, most of them commercial banks, and one exchange, the Moscow Interbank Currency Exchange (MICEX), for secondary trading The Government intends to gradually open the market for Government securities to foreign investors and is considering to allow terminals to be installed in a number of European financial centers to trade GKOs, KOs, and OFzs on the MICEX. Given the volume and diversity of Government debt securities, the Ministry of Finance intends to restructure its Department for Securities and the Financial Market and to establish a system to track, value and account for the Russian Federation's domestic debt. C. Investors 2.8 Collective Investment Vehicles. These include voucher and cash investment funds, pension funds and insurance companies. In any emerging market such institutions have the potential to play a major and a beneficial role in capital market development by providing better returns and risk management to individual investors, by adding liquidity to the secondary market, and by enhancing corporate governance with more professional investment decision-making. In Russia, investment and pension funds are especially well-positioned to play such a role for two reasons. First, a large number of investment funds already exists. Second, the simultaneous decline of the government pension scheme and liberalization of the private pension and insurance industry create conditions conducive to the growth of both types of vehicles. (a) Investment Funds. Although investment funds have been operating for more than three years (since the beginning of mass privatization), shortcomings in the structure of these funds have up to now discouraged broad public participation. Currently two types of investment funds exist. Several hundred Special Privatization Funds, commonly called voucher funds, were created during mass privatization. Vouchers collected by these funds were invested in shares of privatized companies. About 32% of all privatization vouchers turned in by the public were invested in these funds, a figure which indicates the potential attractiveness of funds as an investment option for the Russian public. However, these funds are closed, i.e. investors cannot redeem their shares upon request. The second type of investment fund operating in the Russian market is a group of several hundred unlicensed equity funds, known as investment companies. Although some of these funds are legitimate, many of them are pyramid schemes- with tne MMM Fund the most notorious example. In July 1995, a new collective investment vehicle, the Unit Investment Funds (UIF) was established by Presidential Decree No. 765. Similar to a mutual fund, the UIF will allow investors to buy a registered security which represents a share in the pool of assets held by the UIF. The UIFs will not pay dividends, but instead, will generate capital gains for investors through redemption of units. Each UIF will be administered by a fund management company and will be affiliated with a depository, which will be responsible for custody of assets and for overseeing the placement and redemption of units. UIFs will be permitted wide discretion in their investment strategies and they will be open-ended, either as "interval" funds, carrying out redemptions at least once per year, or as "open" funds, with share redemption within fifteen days of an investor request. UIFs, because they are pools of assets and do not have the status of a legal entity, will not be required to pay profit taxes; instead, only investors will be taxed on capital gains realized when they redeem their units. Voucher investment funds will have the option of either retaining their current form or undergoing restructuring into UlFs. Unlicensed funds will be required to undergo restructuring into UIFs or face liquidation. RFCSCM has begun a program for development of UIFs, including the restructuring of existing funds, pilot UIFs, and training of professional specialists. The program also aims at strengthening the regulatory protection for investors and at improving the enforcement of existing regulations. The program is being funded in part by the Bank's Privatization Implementation Assistance Project (Ln 3543-RU). Meanwhile, some of the larger and more professionally-managed funds are cooperating in drawing up formal professional standards jointly with one or both of the two existing industry associations. RFCSCM is working with both towards establishing an investment fund SRO that is capable of assuming substantial regulatory responsibility within the industry. (b) Private Pension Funds (PPFs). As of 1995, close to one thousand PPFs were reported to be operating in Russia. However, many of these institutions are quite small and of dubious character since regulation of PPFs remains weak. The PPF Inspectorate was created in mid- 1994, but by end 1995 few PPFs had officially registered with the Inspectorate. A draft Law on Private Pension Funds which principally serves to define the activities of PPFs is under consideration by the Duma. This law would strengthen the position of the PPF Inspectorate and provide a more favorable environment for development of an industry SRO. Despite these expected regulatory improvements, legitimate PPFs are unlikely to develop in any substantial way until the tax regime is modified: Presently, employer contributions to pension funds and benefits paid by PPFs are subject to general taxation. 2.9 Commercial Banks. Banks are active in the Russian securities market as both principal investors and as underwriters/brokers. Central Bank regulations presently allow banks to invest up to 25% of their own capital in enterprises. A systematic assessment of the actual value and extent of commercial banks' enterprise holdings is not possible because of the weak disclosure requirements and the practice of accounting for investments at cost. Still, reports published by banks themselves and in the business press indicate that a number of major commercial banks possess significant investment portfolios and are likely to play a substantial role as investors in the future. Discussions with various securities market participants, including banks, confirm that a number of major banks have an explicit strategic goal of developing their investment portfolio and that several may already have made substantial progress in realizing this goal. Universal banking was confirmed by the recently enacted Banking Law. Finally, a consortium of leading Russian banks has entered into an agreement with Government whereby the participating banks have tendered for state-owned enterprise shares as collateral for extending loans to the Government. However, the "shares for loans" program has been widely criticized for a lack of transparency. D. Trading 2.10 Primary share issuance and hence primary trading have been limited to date as mentioned earlier. The bulk of share trading takes place in the secondary market with an estimated trading volume in 1995 of $5 billion, and some 50 companies regularly traded/quoted as mentioned earlier. Based on a current market capitalization estimate of $20 billion, only 25% of the shares of actively traded companies are available for trading. The balance is locked up in the hands of the - 6 - Government, enterprise managers and employees, other small investors, institutional (portfolio) investors, and strategic investors. At present, 67 % to 75 % of secondary trading takes places off- shore, in order to avoid taxes and because of the custody and settlement risk. Stock prices as reported by the three most followed Russian stock indices, such as: the Moscow Times Index, the Interfax indices, and the AK&M Index which were established in September 1994, stood at 100 on September 1, 1994, rose to 120 by the end of September, fell steadily to 60 by February 1995, and increased to 90 in June 1995. As of April 19, 1996, the dollar-adjusted Moscow Times Index stood at 66.39. Over 60 exchanges are licensed for trading of stocks in Russia, but the largest volume by far is transacted through the informal OTC market among major Moscow brokers. It is estimated that 80% of trading volume is executed in Moscow and that 90% of all volume nationwide is non- exchange trading. A notable exception is the Vladivostok International Stock Exchange (VISE), which has about 350 listed companies and which due to an eight hour time difference, is able to offer off-hours liquidity. 2.11 One of the emerging trading platforms, the Russian Trading System (RTS), an electronic system based on the NASDAQ model, links four major trading centers: Moscow, St. Petersburg, Ekaterinburg and Novosibirsk. More than 100 brokerages in these four cities are using the system. It is estimated that currently about 40% of all Moscow over-the-counter trading, or about 15% of all trading nationwide, is carried out over the RTS. Furthermore, quotes on RTS are being used as the primary pricing mechanism for about 80% of all OTC trades. Access to the RTS is provided only to members of SROs of market participants, currently four - one in each of the participating cities. These SROs play an active role in developing and enforcing rules and thereby the integrity of the RTS marketplace. There have already been some cases of SROs taking disciplinary actions against members who violated the trading rules. Since start-up in October 1994 in Moscow, the usage of the system has evolved from a rarely used information system for the display of indicative quotes to a market making system exclusively for firm quotes. RFCSCM has supported, with bilateral funding, the creation of the RTS and intends to continue to provide support during the start-up phase and for expansion of the system to other cities. 2.12 The RFCSCM, with bilateral financing, also supports The Vladivostok International Stock Exchange (VISE), which serves as a trading platform for the Far East and is the only active auction exchange in the Russian Federation. It processes trades electronically from remote locations and has the potential to be a competing national trading system. Presently, 87 intermediaries are accredited to transact on the VISE, including members from firms in nine major Far Eastern and Siberian cities. Its trading mechanism is a continuous auction order-driven system. Trading sessions take place three days each week and the exchange publishes price quotes and last sale information the day after each sale. VISE is the only Russian exchange which has organized itself as a SRO in which members must sign agreements that specify the rules, privileges and obligations for membership. As such, it is an important model for other regional exchanges. 2.13 Outlook. Estimates of the proportion of shares of stock companies actually available in the public float for secondary trading range from 30% to as low as 15%. The remainder is locked up in the hands of managers, employees, the Government and passive institutional investors. Over the next five years, the float could increase to between 30-40% if the current intense focus on building and holding controlling stakes diminishes. By the turn of the century, market capitalization could be in the order of $100-120 billion and annual turnover could reach $50-70 billion. -7 - E. Securities Transfer 2.14 Depository. Clearance and Settlement Functions. The absence of an efficient on-shore mechanism for realizing the cash settlement of securities trades in Russia is one of the greatest challenges to development of a nationwide securities market. Today, the only nationwide payments system in Russia is managed by the Central Bank and requires from two to thirty days for settlement of interregional payments. It is uncertain when major improvements in that system will be made. Therefore the RFCSCM and its predecessor organization have played an active role in supporting regional depository and settlement organizations which market participants have established themselves and which have the potential to develop into a world-class clearance and settlement network. Their efforts, assisted by donors, have focused on the development of depository and settlement organizations in Moscow, St. Petersburg, Ekaterinburg, Novosibirsk, and Vladivostok. 2.15 To date, the most significant progress has been made in Moscow and Vladivostok. In Moscow, the Depository Clearing Company (DCC) was established in 1992 as a closed joint stock company. It is structured as a members' cooperative in the sense that the financial institutions which use DCC s services are also its shareholders. DCC currently has 20 member/shareholders, including Russian brokers, Russian banks, and Russian subsidiaries of Western banks. Membership is expected to expand particularly among Russian banks. DCC, in June 1995, settled its first book-entry share transfer in Rostelekom stock and introduced full-scale clearing and settlement services in the fall of 1995. A strategic plan is being implemented with bilateral financing to make it an international standard depository and clearance and settlement organization which will process the ownership and payments sides of securities trades for its members. In Vladivostok, the Prirnorsky Central Depository (PCD), with bilateral financing, is also making rapid progress. It is closely affiliated with the VISE and is developing slightly differently from the Moscow model, because equities trading in Vladivostok is exchange-based as mentioned earlier. The PCD is perhaps the most advanced in terms of book-entry transfer and payment settlement. Similar to the DCC, it continues to need start-up assistance while developing as a member-driven organization and moving toward financial viability. 2.16 In addition to the DCC and PCD, there are several other clearance and settlement organizations (CSOs) of a regional nature located in St. Petersburg, Novosibirsk and Ekaterinburg. They provide services to local brokerages and will be linked electronically to the DCC, to facilitate clearing and settlement among different regions of Russia and establish a nationwide network. The RFCSCM intends to support these CSOs on a timeframe consistent with support for the DCC. 2.17 Share Registrars. Although Russian companies may issue shares in book-entry or bearer certificate form, share ownership is not legally recognized until the investor's name is recorded in the issuing company's share register. Investors are then issued a document known as an extract, which provides written confirmation of their ownership interest. An unfortunate consequence of this system is that management at some privatized companies manipulate their companies' share register in order to block transfers of ownership. These conditions clearly impact negatively on market liquidity and enterprise corporate governance, although arbitration courts throughout Russia have ruled in favor of shareholders when formal complaints were made. 2.18 Registry services are provided by as many as 800 entities of various legal status - specialized registrars and depositaries, commercial banks, investment companies, investment funds, brokerage companies and, as mentioned above, special departments located within the share-issuing enterprises themselves. About five to ten of these registrars are large with respect to either the -8 - number of companies whose registers they hold (the largest client base is 60 companies) or the number of shareholders (Gaszprom's registry held by Gazprombank holds over one million names). In April 1995, the National Registry Company, a large-issue registrar was established by the Bank of New York, IFC, EBRD, and several Russian banks which should stimulate improvements in registry services by providing a best practices model and a new standard of performance. 2.19 The RFCSCM plans to address the systemic registrar problem by fostering the development of a nominee-based system used in many other equity markets. Under such a system, a transfer of share ownership would not typically take place at the level of the registrar. Rather, it would occur at the level of a depository or other market intermediary. At the same time, RFCSCM and DCC are also assessing the potential effectiveness of a transfer agent-depository (TAD) model as an alternative to the nominee-based system. Under the TAD model, registrars would continue to be the final focus of ownership transfer, but would have a direct electronic link with DCC, obviating the need for in-person visits to distant registrars. Although the introduction of a nominee-based system and/or the TAD model would reduce the significance of registrars in Russia, it would be some time before it is fully implemented and registrars would still have a role. Therefore the RFCSCM intends to provide broad based registrar support during the next several ycals for training, standards development, and the flow of information among registrars. RFCSCM also expects to license a SRO during 1996, which could provide a firmer regulatory structure for thze registrar industry. The Professional Association of Registrars, Transfer-Agents and Depositories, created in 1994, is the leading candidate. III. LESSONS OF EXPERIENCE 3.1 While the Russian capital market presents unique challenges in termns of scale and complexity, it shares with many early-stage transition economies a set of characteristics which greatly influence capital market development planning. Recent Bank experience and that of bilaterally funded projects in Eastern Europe indicate several lessons for project design which are described below. 3.2 In transitional economies in which the financial sector is at a relatively early stage of reformation, experience suggests that a two-pronged approach to capital market development is most likely to bring the desired results. First, attention must be paid to building the comprehensive policy, regulatory, legal, and institutional underpinnings of the financial market. Second, private sector cooperation must be fostered in the development of capital market industry standards and shared facilities. There is not a strict time sequence for these activities - they can successfully be addressed concurrently - but the degree of success in the second, is dependent upon progress in the first. 3.3 In many transitional economies, privatization programs have greatly affected the course of capital market development. Where privatization has been mass-oriented and rapid, the effect has been great and has commonly led to the creation of a capital market framework and institutions designed to serve short-term privatization goals rather than long-term financial market goals. As the privatization programs have progressed, heightened expectations of the capital market's potential contribution to capital raising and to improvements in corporation governance have often not been met. It has become apparent in these circumstances that a viable, fully functional capital market can best be created in the context of a broadly viable financial system and that planning for capital market development should be conducted in a financial sector context. 3.4 Because transitional economies typically have a large set of existing institutions in both the government and private sectors which are partially performing the functions of a modem financial market and are actively pursuing opportunities created by the transition, they present an unusually complex and fluid environment in which to plan capital market development. Successful programs depend upon establishing early clarity and agreement as to fundamentals and allowing for flexibility in implementation to take account of the changing circumstances that inevitably arise. 3.5 These lessons suggest the following goals and methods for capital market development programs in transitional economies: a) Goals appropriate for work in the capital market at an early transitional stage are ones which: (i) establish the basic legal and regulatory framework for transactions and improve certainty, transparency and uniformity in the application of laws and regulations; (ii) protect against systemic disruption or distress and discouraging fraud or mismanagement of investors' funds; (iii) encourage development of professional standards and ethics in the private sector and efficiency in the provision of services. b) Methods likely to be effective are ones which: (i) emphasize institution building in the private sector and government; and (ii) allow a flexible response to changing circumstances. 3.6 The proposed project, with its focus on developing the regulatory infrastructure, supporting self-regulation of the securities industry through SROs and providing assistance for the start-up of market architecture owned and shared by private participants is fully consistent with these lessons. IV. THE PROJECT A. Rationale and Objectives 4.1 Objectives. The project supports the second phase of capital market development. The first phase focused on facilitating voucher-based mass privatization which ended in mid-1994. The second phase focuses on building a capital market which is sustainable and integrated with the wider financial system. In line with this focus, the project has four specific objectives: (i) build a comprehensive policy and legal framework; (ii) build core institutional capacity in regulation and self regulation; (iii) improve the efficiency, transparency and systemic stability of market architecture; and (iv) ensure the efficient issuance, service, and registration of Russian Federation debt securities, the largest segment of Russia's Capital Market. Derived from these objectives, the project has three components: the regulatory inrfrastructure component which will establish the policy framework, laws, and regulations and the institutional capacity in regulation and self regulation which constitute an essential underpinning of modern capital markets; the market architecture component which will support private sector organizations in building efficient, fair and secure trading, clearance, settlement - 10- and registration systems; and the Government Securities Tracking System which will enhance the capability of the Ministry of Finance to manage its treasuries program. 4.2 Rationale. The rationale for choosing these objectives and project components is as follows. The regulatory infrastructure for capital markets in Russia is at present rudimentary and is widely acknowledged to be an impediment to capital market development because informational and contractual uncertainties make transaction costs high and provide strong disincentives to investment. Without introduction of a comprehensive legal and regulatory framework, the course of market development is likely to follow the pattern of the last two years which have been characterized by extreme uncertainty as to contractual rights and a marked lack of reliable information on public companies, and by the related phenomenon of large-scale, successful defrauding of investors. With a comprehensive regulatory infrastructure: (i) the contractual rights and obligations of parties buying and selling securities or owning and managing companies will be clearer in the first instance and, where civil disputes do arise, avenues of judicial and extra-judicial resolution will be available and, in the criminal area, offenses will be clearly defined and effective investigation and prosecution mechanisms will be available; and (ii) the information made available on public companies, major shareholdings iin public companies and secondary market trading in securities will be more complete and reliable. The project assumes that these are economically beneficial outcomes and are a necessary although not sifficient conditions for development of a modern capital market in Russia. The project is conceived nf as a focussed technical assistance project to create this part of the necessary conditions leaving to follow-on projects other pieces of sectoral development. It does so because establishing the required regulatory infrastructure is necessary in its own right, not dependent on other actions and projects and is now )irgent and important in support of the Government's second-phase economic reform plans. Witw-ut the project's regulatory infrastructure component, the Government would have limited capacity to est?b!is' the necessary infrastructure as the need is urgent and large in scale and no source o- finance other than the Bank loan is likely to be available to undertake the task. Thus, the component addresses a 1priority, un-met developmental need. 4.3 The market architecture in the secondary market for corporate securities in Russia is at present inchoate and in each main functional area (trading, clearance, settlement and registration) has been an acknowledgcd impediment to market deveiopment because systemic inefficiencies have raised transaction costs and led to default and fraud on a notable scale. Without improvements to the fairness, efficiency, and security of the secondary market architecture, it is expected that the price discovery mechanism of the market will remain unreliable and that high transaction costs will keep volume low. This would diminish the capacity of the secondary market to support efficient risk management by portfolio investors such as pension funds, insurance companies, and other collective investment vehicles. With improvements to architecture, the expected growth in interest in liquid secondary markets could be functionally supported without encountering technical bottlenecks. Developing the architecture will not itself lead to greater liquidity but it will facilitate the emergence of liquid secondary markets fueled by the growth in institutional investment and portfolio management that is expected in the next two to five years. The market architecture component of the project is intended as a limited, initial catalyst for development of the necessary private sector institutions and for creation of pilot operational systems to establish the basis for the large scale architecture which is expected to be ultimately necessary. Under this component advice and equipment to private commercial organizations will be provided on a cost recovery basis, and to private non-profit industry associations (self-regulatory organizations) on a grant basis. Because of the public benefits generated by the early operationalization of such systems, public financial support for them in the nascent stage of capital markets has been common since the 1950s in many countries, including Japan, Korea, - 11 - Mexico, and Singapore. The Government securities tracking component ensures that a reliable operating system with adequate capacity underpins the issuance, trading, servicing, and redemption of treasury instruments. B. Project Description 4.4 The project will develop regulatory infrastructure (75% of project cost), market architecture (18% of cost), a debt tracking system for Government securities (3%), and supporting project management (4% of cost). Each of these is described below. 4.5 Regulatory Infrastructure ($99.3 million). This component is focused on the RFCSCM and will assist it to: (i) build its institutional capacity through management and staff development; (ii) establish information systems; and (iii) conduct major program activities in the first three years of its operation. Each of these is described below. 4.6 Institutional Capacity ($39.9 million). This sub-component, based on an institutional development plan agreed during negotiations, will (i) assist the RFCSCM in building the institutional capacity of its Moscow-based head office and its network of ten regional offices to effectively and efficiently carry out all their functions under law; (ii) provide management support (strategic planning and policy and program management advice, organizational and MIS design); and (iii) provide human resource development (recruitment, induction and training): (a) Head Office and Regional Offices ($9.2 million). This includes the build-up of staff and facilities at the RFCSCM head office and the regional offices, funded from federal budget resources. (b) Activities in the management support area ($19.6 million) are directed to the RFCSCM and its senior management to assist the RFCSCM in an orderly and efficient transition to full operational capacity. The core activities are to: (i) provide a five-member Policy Advisory Group whose main responsibilities are to provide strategic and high-level policy advice to the RFCSCM and oversight of project management; (ii) provide a technical support group of eight specialists whose main responsibilities are line management of project activities; technical advice to the RFCSCM and ensuring the effectiveness of the on-the-job skill transfer to RFCSCM staff; and (iii) advisory services for organizational planning and management system. The policy advisors will have the following responsibilities: RFCSCM Institutionalization; Market Regulation; Communications; Training; and Information Technology. The technical advisors will have the following specializations: Trading systems, municipal finance, registrars, unit investment funds, depository and custodian organizations, pension funds, insurance funds, and enforcement. (c) Activities in the human resource development area ($11.1 million) are directed to building the necessary knowledge, skills and experience of the professional staff of the RFCSCM to enable them effectively carry out their work. The core activities are: (i) deliver 4,500 weeks of local coursework and 600 weeks of foreign coursework; (ii) provide 90 foreign and 150 local internships and site visits; and (iii) provide structured on-the-job training and skills transfer. - 12 - (i) The local and foreign coursework will provide 360 RFCSCM staff (185 headquarters and 175 regional office staff) with induction and introductory training and, following acquisition of pre-requisite skills, more detailed and technically advanced training in the regulation of securities market institutions, instruments and intermediaries and in accounting and legal principles. The coursework will be provided by existing financial sector training institutes including universities and OECD member-country securities commissions and securities industry training institutes but will be structured to meet the RFCSCM's specific needs and will not include completion of undergraduate or postgraduate degree courses. (ii) The foreign internships and local site visits will complement the coursework by providing exposure to the operational reality of securities market regulation and the conduct of securities business. The foreign internships will place 90 RFCSCM staff (30 from head office and 60 from regional offices) with operational departments of OECD member-country securities regulators for periods of up to three months of structured training and exposure to operational policies and methodologies. The local site visits will take 150 RFCSCM staff to private sector securities market organizations operating in the areas for which the staff are responsible for short visits to expose them to the operational reality of market practice. (iii) These time-bound coursework and internship activities will be complemented by continuous on-the-job training of RFCSCM staff in the execution of their duties. This will be conducted mainly through skills transfer from advisors contracted under the Information Systems and Regulatory Program areas described below. The Terms of Reference for each advisory contract will make skills transfer and on-the-job training a key deliverable. 4.7 RFCSCM Information Systems ($14.5 million). This sub-component will provide computer hardware, software and telecommunications and office equipment to support the RFCSCM in the exercise of its powers and performance of its functions. Activities include functional and technical specification, procurement and commissioning of equipment and training of RFCSCM staff in its use and maintenance. The sub-component has the following main activities: (a) RFCSCM Administration System and Office Equipment ($5.2 million). For the administration system, the project will provide micro computers, local area networks, and application software. The latter will be purchased and customized for RFCSCM, with software packages supporting both Russian and international accounting functionalities. Office equipment will include micro computers, copiers, and fax machines for RFCSCM headquarters and regional staff, with estimates based on past expenditures for current staff and extrapolated for 185 headquarters staff and 10 regional offices. (b) RFCSCM Operational System and Market Information Database ($9.2 million). The data base will underpin RFCSCM's enforcement, licensing and prospectus operations. - 13 - A sub-set, containing non-confidential data will provide public access to corporate information. The operational system will be custom designed and developed, based on collection of data from various sources and in electronic form where possible. It will have five sub-systems, such as: registration, monitoring, enforcement, data input and output modules, and data base administration. The public access data base will periodically down-load non-confidential data from the parent (operational) system on a smaller minicomputer using common hardware and software environment and tools. This concept will ensure security and data integrity as well as provide a back-up capability to the operational system. Both systems will utilize the common telecommunications infrastructure. In addition to hardware and software, consulting services will be provided for the design of the systems and telecommunications infrastructure, management of software development, implementation assistance and training, and some procurement assistance (formulation of tender documents and evaluation of responsive proposals). 4.8 RFCSCM Regulatorv Programs ($45 million). This sub-component supports the three major program areas of the RFCSCM, providing advisory services, public education materials, and regulatory handbooks: (a) Legal Reform ($11.8 million). Policies covering all areas of capital market activity will be developed and laws and regulations drafted to put the policies into effect. Formal and informal consultations with the private sector will test the effectiveness of draft policies and laws in light of evolving market practice. (b) Enforcement. Licensing, and Prospectus Review ($10.9 million). This focuses on the development of specific guidelines, interpretations and procedures for conducting the principal regulatory operations of the RFCSCM. It also includes on-the-job training of RFCSCM staff in the detailed execution of these functions and the production of regulatory handbooks. Provision is also made for retaining legal counsel for assistance with preparing prosecution briefs. (c) Comin'nications and Public Education ($22.3 million). This component supports a broad range of activities. First, it includes conferences, workshops, news services and publications for market professionals. Second, it provides for publications, lectures, and public advertisements to increase public awareness of the opportunities and pitfalls of securities investment. Third, it provides advice, publications and logistic support for shareholder groups to understand their rights and the avenues available to them to seek civil redress for losses suffered as a result of unlawful actions by company managers or securities market intermediaries. Last, it includes the creation and operation of a library and public reading room on securities markets matters in general and on the Russian securities market in particular. 4.9 Market Architecture ($24.8 million). This component provides institution building advice and technology development during the start-up phase of private sector organizations providing secondary market trading services, and clearance and settlement services. These organizations are in the process of developing key elements of the securities market and supporting them generates public benefits by contributing to the creation of fair and efficient market mechanisms. During negotiations it was agreed that RFCSCM will select organizations for participation under the market architecture - 14 - component in consultation with the Bank. Goods and services will be provided in kind, with design, packaging, and procurement carried out by RFCSCM in consultation with the selected organization. Insofar as non-commercial organizations are selected, i.e. non-profit industry associations with broad membership, there will be no cost recovery. If organizations are selected which operate on a commercial basis, Ministry of Finance and RFCSCM will enter with each organization into a supply and credit agreement under terms and conditions approved by the Bank. These conditions will include (i) a cost recovery of not less than 51 % of the goods and services provided; (ii) a maturity of up to 12 years including a grace period of 3 to 5 years; and (iii) an interest rate of up to 2% above the Bank's standard variable rate for currency pool loans. It is estimated that up to $9 million will be provided to commercial organizations. (a) Secondarv Market Trading ($14.1 million). This sub-component will support the development of organizations, agreements, procedures and protocols and the procurement of equipment related to building a stable and transparent national secondary market in private sector securities. (i) Over-The-Counter Market ($9.6 million). This will expand and up-grade the over-the-counter (OTC) market established as a pilot with funding from bilateral sources. It will provide consultant services for advice, training and the production of model agreements, procedures and protocols, and procurement of computer hardware and software and telecommunications. The OTC market is based en a participant-owned company, the Technical Corporation, which operates the Russian Trading System (RTS), based in Moscow using technology licensed by the (US) National Association of Securities Dealers. The RTS has well-conceived plans for expansion of its operation, both within Moscow and via regional linkages. The project will support upgrading the base system and expanding its regional reach by adding three more operational hubs to the existing four. It will also work with the regional securities dealers associations forming the hubs of the networked system. (ii) Stock Exchanges ($4.5 million). This will provide consultant services for advice, training and the production of model agreements, procedures and protocols, and computer hardware and software to assist stock exchanges to upgrade their operations to meet international standards of efficiency, transparency and fairness. From a policy perspective, at least three strong regional stock exchanges (the far east, Moscow region and one other) would add significantly to expanding retail investment services and improving the pricing mechanism of the market. To address this objective in the context of evolving market structures the project will support the Vladivostok International Stock Exchange, providing assistance with organizational planning and the drafting and adoption of trading and listing rules. It will also assist with establishing remote access gateways in the far east region. The Vladivostok Exchange is technologically linked with the Primorsky Central Depository through common hardware and software platforms. The project would finance several key improvements in both systems, including upgrading and enhancing the operational software so that direct trade input from over-the-counter operations can be received, additional hardware and software development tools, and the creation of a telecommunication hub for the far eastern areas with a high speed - 15 - direct linkage with Moscow which currently is the sole message switching center. Similar assistance will be provided to other exchange-based trading platforms, which will be chosen in the light of market developments. (b) Securities Transfer ($10.7 million). This will support the development of organizations, agreements, procedures and protocols and the procurement of equipment related to building a stable and transparent national clearance, settlement and registration system for private sector securities. (i) Clearance And Settlement ($5.0 million). This will expand and up-grade the depository, clearance and settlement system established as a pilot with funding from bilateral sources. It will provide advice, training and the production of model agreements, procedures and protocols. It is expected that the hub of the system, the Moscow-based Depository Clearing Company (DCC), will receive, in 1997, a major capital injection from new foreign sources including the IFC and EBRD. The project, with bilateral financing, will support DCC in its continued operation in the period prior to this investment and will, with Bank financing, support clearance and settlement organizations outside Moscow until market conditions make it financially viable to link them with DCC in a national system. Loan proceeds would provide institutional support to the Primorsky Central Depository which is closely linked to the Vladivostok Stock Exchange as mentioned above, and for the establishment of an additional three clearance and settlement organizations. Loan proceeds would further be used to define transaction structures/codes, identification schematics, telecommunication norms and other standards. They would also finance the custom design, development and implementation of application software to manage the registration and transfer of ownership functions, to develop links with other commercial bank/central bank clearing centers for confirmation of transfer of funds, to perform trade settlements and confirmation functions, and to establish electronic connections with the stock exchanges. IFC is being consulted on this part of the loan. (ii) Registration ($5.7 million). This will deliver programs in the already established registrar support center designed to improve the transparency, efficiency and fairness of the registration process. It will provide advice, training and the production of model agreements, procedures and protocols. This complements the investment by the IFC and EBRD in the large-issuer registrar based in Moscow,. in that it serves a large number of smaller registrars and disseminates the best practice standards used at the large-issuer registrar. 4.10 Government Securities Tracking System ($4 million). This component will provide to the Department for Securities and Financial Markets in the Ministry of Finance a comprehensive computer-based system for domestic debt securities management. It will include (i) system design, (ii) advisory support for the installation and implementation of the tracking system, (iii) computer hardware, telecommnunications, networking, and related software supporting the tracking system; and (iv) training of departmental personnel on the tracking system. The International Monetary Fund will be consulted on this part of the loan. - 16 - 4.11 Project Administration ($4.2 million). The project provides support to the RFCSCM and Ministry of Finance for project management and administration, including procurement, disbursement, accounting, and monitoring and reporting. Project administration will be handled by a team of six. C. Project Cost And Financing 4.12 Project Cost. The total project cost is estimated to be US$132 million equivalent (640 billion Rubles) net of taxes and duties. The estimated costs are summarized in Table 4.1 by component and in more detail in Attachment 2. Table 4.2 summarizes project cost by type of support. Project costs are based on end-1995 prices and conversions from the local currency at the market rate of 4445 Rubles per US dollar prevailing at end 1995. Consultant services costs are derived from recent fees quoted for similar specialized services in Bank-financed projects in Russia and are estimated per person-month at $5,000 for local and $25,000 for foreign consultants. Equipment costs have been derived by Bank staff in consultation with the RFCSCM by extrapolation from existing pilot projects in Russia and similar projects in other countries and from projections of market growth based on surveys and analysis provided by the RFCSCM. Physical contingencies have been estimated at 5% for training, and 10% for equipment and goods. Price contingencies are derived from projected MUV inflation of 3.3%, 2.3%, 2.5%, 2.5%, and 2.5% for 1996 to 2000 respectively. Table 4.1 Project Costs By Project Component (US$ million) Foreign Component in % of as % of Project Component Foreig Local Total Total Base Cost Regulatory Infrastructure RFCSCM Institutional Capacity 10.7 27.9 38.6 27.7 30.5 RFCSCM Information Systems 9.8 3.3 13.1 74.8 10.4 RFCSCM Regulatory Programs 20.3 23.0 43.3 46.9 34.2 Market Architecture Secondary Market Trading 8.8 4.6 13.4 65.6 10.6 Securities Transfer 7.0 3.3 10.3 68.0 8.1 Gov't Securities Tracking System 3.0 0.7 3.7 81.1 2.9 Project Administration 2.3 1.8 4.1 56.1 3.3 Total Baseline Costs 61.9 64.6 126.5 48.9 100.0 Physical Contingencies 1.4 0.7 2.1 66.7 1.7 Price Contingencies 1.8 1.8 3.6 50.0 2.8 Total Project Cost 65.1 67.1 132.2 49.2 104.5 - 17 - Table 4.2 Project Costs By Type of Support (US$ million) Project Component Foreign Local Total % of Total Policy Support 20.3 23.0 43.3 34.2 Institutional Support 39.3 39.8 79.1 62.5 Implementation Support 2.3 1.8 4.1 3.3 Total Baseline Costs 61.9 64.6 126.5 100.0 Physical Contingencies 1.4 0.7 2.1 1.7 Price Contingencies 1.8 1.8 3.6 2.8 Total Project Cost 65.1 67.1 132.2 104.5 It is expected that import duties, value added tax and special tax will be payable on project goods and services. The total estimated taxation liability is $29.8 million made up of $9.4 million import duty, VAT and special tax on $15 million of imported goods; $1.7 million VAT and special tax on $9 million of local goods; and $18.7 million VAT and special tax on $89 million of services. 4.13 Financin,e. The proposed Bank loan of $89 million would be made as a currency pool loan at the Bank's standard variable rate and would finance 67% of the project excluding taxes. $25 million (19%) would be financed by bilateral sources, and the balance of $19 million (14%) by the Government. The project financing plan is shown in Table 4.3 below. 4.14 The Bank loan would finance consulting services and training. It would also finance computer hardware, software, communications and networking equipment, office equipment, and technical services (printing, media space and time). The bilateral financing will be provided during 1996 and 1997, continuing institution-building, public information, market architecture, and project management programs begun in 1995. Government's contribution includes incremental operating costs for the RFCSCM (headquarters and ten regional offices - $13.2 million) and the cost of regulatory publications ($5.4 million). It was agreed during negotiations, that Government will fund the project's tax liabilities. The Ministry of Finance is designing a mechanism for financing project taxes under IBRD loans with federal budget funds, based on annual loan drawdowns and associated tax expenditure forecasts from the implementing agencies. This will begin in 1997. RFCSCM will pay project taxes incurred in 1996, if any, out of its existing budget. - 18 - Table 4.3 Financing Plan (US$ niillion) Bilateral IBRD Sources Government Total Regulatory Infrastructure RFCSCM Institutional Capacity 21.2 5.2 13.2 39.6 RFCSCM Information Systems 14.2 0.3 14.5 RFCSCM Regulatory Programs 29.9 9.5 5.4 44.9 Market Architecture Secondary Market Trading 10.9 3.5 14.3 Securities Transfer 5.9 4.8 10.7 Gov't Securities Tracking System 4.0 4.0 Project Administration 2.8 1.4 4.2 Total Financing 89.0 24.7 18.6 132.2 % financed 67.3 18.6 14.1 100.0 V. PROJECT IMPLEMENTATION ARRANGEMENTS A. Project Management 5.1 RFCSCM will draw on an existing core group of experienced project managers, which, since September 1994, has successfully managed eighteen TA contracts under bilateral financing, representing thirty-five separate activities at a total amount of about US$71 million. Under the overall responsibility of the deputy director for institutionalization and finance, RFCSCM will supervise and administer the project using a three tier arrangement and staff with qualifications and terms of reference acceptable to the Bank: (a) Proiect Administration Unit (PAU). Six specialist staff will handle the procurement, disbursement, accounting and reporting functions of the project including for the debt tracking component in the Ministry of Finance. All staff are in place. It was agreed during negotiations that RFCSCM will provide the necessary resources required for the administration of the project. (b) Policy Advisory Group. Five high-level international expert advisors to the RFCSCM on strategic and policy questions in the areas of market regulation, institutionalization and finance, communications, training and technology will have as part of their responsibilities oversight of the overall direction and quality of the project. The advisor on institutionalization and finance, who is a deputy director, will have overall project management responsibility as mentioned above. All advisors are in place. (c) Technical Support Group. Eight Russian technical specialists, acting in an advisory capacity to the RFCSCM, will have as a major part of their responsibilities line - 19 - management of project components and supervision of the work of consultant contractors. They will be expert in the following areas: trading system, registrars, enforcement, municipal finance, depository and custody organizations, investment funds, pension funds, and insurance. All specialists are in place. B. Implementation Schedule 5.2 Implementation has been planned with two objectives in mind: early start-up of core components; and smooth transition from existing programs. A detailed implementation plan is provided in Attachment 3. 5.3 There are three main phases in implementation. The first phase is September 1996 to September 1997. In this period: (a) project management capability is expanded and World Bank procurement and disbursement procedures are instituted (b) RFCSCM organizational planning and management systems, and core program activities are commenced including specification and initial procurement of equipment (c) legal policy advice and drafting is commenced (d) the RFCSCM public education program is commenced (e) support of the Russian Trading System, Depository Clearing Company and Registrar Support Center is commenced (f) design and procurement of the Government Securities Tracking System is commenced. 5.4 The second phase is October 1997 to December 1998. In this period: (a) the RFCSCM becomes fully operational and the core program areas reach peak activity (b) the main RFCSCM staff training activities commence and major equipment procurement for operations support components commences (c) the RFCSCM public education program reaches peak activity level including pilot activities under the shareholder rights program and establishment of the public access corporate data base (d) installation and start-up of the Government Securities Tracking System takes place 5.5 The third phase runs from January 1999 and involves the roll-out of activities commenced in the second phase and the continuation of RFCSCM operational and training programs. - 20 - C. Procurement and Disburement 5.6 Procurement. All Bank-financed goods and consulting services required for the Project will be procured, respectively, in accordance with the Bank's 'Guidelines for Procurement under IBRD Loans and IDA Credits (January 1995)' and "Use of Consultants by World Bank Borrowers and the World Bank as Executing Agency (August 1981) . The Bank's standard bidding and contracting documents, as appropriate, will be used for International Competitive Bidding (ICB) and for engaging consultants. Standard documentation will also be used for International Shopping (IS) and National Shopping (NS). Prior Bank reviews of procurement actions will be undertaken where indicated by the Guidelines and the procurement thresholds discussed below. A Country Procurement Assessment Report for Russia is under preparation and will be completed by the end of the fiscal year. The General Procurement Notice has been published on January 31, 1996. The project launch mission, planned for June 1996, will include procurement aspects. A summary of the proposed procurement arrangements is shown in Table 5.1 and the major procurement activities under the project are listed in Attachment 4. - 21 - Table 5.1: Summary of Proposed Procurement Arrangements (US$ million) ITEM Procurement Method TOTAL ICB Other a/ N.B.F.b/ Goods Office Equipment 3.5 1.4 4.9 (3.5) (1.4) (4.9) Information Systems 9.4 4.1 0.8 14:3 (9.4) (4.1) (13.5) Technical Services Printing 3.5 5.4 8.9 (3.5) (3.5) Media 1.2 2.0 3.2 (1.2) (1.2) Consulting Services Project Administration 2.8 1.4 4.2 (2.8) (2.8) Policy Advisory Group 8.6 1.8 10.4 (8.6) (8.6) RFCSCM System Support 6.5 0.6 7.1 (6.5) (6.5) RFCSCM Regulatory Program 23.2 4.7 27.9 (23.2) (23.2) Market Architecture Development 11.8 8.3 20.1 (11.8) (11.8) Gov't Securities Tracking System 1.4 1.4 Training Design, Courses, Internships 11.6 2.7 14.3 Conferences, Workshops (11.6) (11.6) Operating Cost RFCSCM Incremental Operating Costs 15.6 15.6 Total 18.6 71.4 43.3 132.3 (World Bank) (18.6) (71.4) (89.0) a/ Includes shopping (US$4.6 million) and direct contracting (US$0.9 million) in accordance with the Guidelines, Procurement under IBRD loans and IDA Credits. Also included are consulting and training services (US$65.9 million) which shall be procured in accordance with Bank Guidelines: Use of Consultants, 1981. b/ Non-Bank-Financing from bilateral sources ($24.7 million) and Government ($18.6 million) NOTE: Figures in parentheses are respective amounts financed by the Bank loan. Figures may not total due to rounding. - 22 - 5.7 Goods (12.9 million). Procurement of goods will primarily involve computer hardware and software, telecommunications and networking gear, reproduction and office equipment. ICB will be used for all goods in packages at an estimated cost of $300,000 or more per contract, i.e. about five packages with a total value of about $12.9 million. In the comparison of bids for equipment purchased under ICB, Russian manufacturers would be allowed a preferential margin over the competing price of imports, as per Bank Guidelines. Readily available off the shelf office equipment, including telephone exchanges, copiers, fax machines and micro computers, and grouped in packages under $300,000 per contract up to an aggregate amount of $3.8 million, would be procured through International Shopping. Smaller and sundry items, including telephones, local area networks (LAN) wiring, library supplies, and office supplies, in packages at an estimated value of $50,000 or less and up to an aggregate amount of $750,000 would be procured through National Shopping. Four contracts, including customized general ledger, payroll and personnel, NASDAQ/Portal, and Stratus applications for RFCSCM, and enhancement of existing technical platforms for the Russian Trading System and the Vladivostok Stock Exchange and Primorsky Central Depository, which are trading and database systems of proprietary nature, at an estimated aggregate amount of up to $900,000, would be procured through direct contracting from the original source. Other goods, consisting of textbooks and totalling $0.8 million will be financed by bilateral sources. 5.8 Technical Services ($13.1 million). Procurement of technical services, including printing of handbooks and other materials totalling ($3.5 million in about five packages) and media space and time ($1.2 million) will be carried out through ICB procedures using the Bank's SBDs for Textbooks or suitable bidding documents acceptable to the Bank. Other technical services, consisting of media space and time in 1996 and totalling $2.0 million, will be financed by bilateral sources. Official publications totalling $5.4 million, will be financed by Government. 5.9 Training ($14.3 million). Training services, including foreign and local training courses, internships, conferences and workshops, will be hired by RFCSCM on the basis of the relevance and quality of programs offered by government or private institutions, and to the extent possible, through competition, following the design and recommendations of an expert firm on training (that would also administer the component) to be hired through short-listing ($0.5 mnillion). The Bank will finance about $11.6 million and will disburse on the basis of an annual program approved by the Bank. Other training components, consisting of foreign courses, conferences and workshops during 1996 and totalling $2.7 million will be financed by bilateral sources. 5.10 Consulting services ($65.9 million). This will primarily involve institutional and operationa! advice, technical systems support, policy development and legal drafting. Twenty eight contracts totalling about US$50 million will be financed by the Bank as shown in Attachment 4. Consulting services will be procured through short-listing of consultant firms and hiring of individuals in accordance with the Bank's Guidelines: Use of Consultants by World Bank Borrowers and the World Bank as Executive Agency (August 1981). Bilateral sources will also finance consulting services in the areas listed above, totalling $15.0. 5.11 Incremental Operating Costs ($15.6 million). Incremental operating costs will be financed by Government ($13.2 million) and bilateral sources ($2.4 million). 5.12 Bank Review. Prior Bank review of procurement documentation and approval of contract award will take place for all ICB procurement, including media procurement, all direct contracting, and the first packages under International Shopping and Local Shopping procedures. All other goods - 23 - procurement will be subject to post-review. Shortlists and terms of reference, and all procurement documentation and contracts with consulting firms for packages exceeding $100,000 will be subject to prior Bank review and approval as will be short lists and contracts with individuals exceeding $50,000 each. Other consulting contracts will be subject to post-review. In addition, Bank staff will monitor procurement activities, contract administration and project record keeping during supervision missions. 5.13 Procurement Information. This will be provided through quarterly reports to the Bank, indicating: (i) changes in cost estimates for individual contracts and the total project; (ii) schedule changes in procurement actions; and (iii) compliance with aggregate limits on specified methods of procurement. 5.14 Supervision by the PAU. Procurement will be the responsibility of the PAU which will be staffed with an experienced procurement director, and a procurement assistant, both of whom are in place. The procurement director is familiar with Bank procurement procedures, both for goods and services, and has worked in Russia during the past two years. As mentioned earlier, RFCSCM has developed considerable project management and administration capabilities during the last eighteen months, including the capacity to procure and manage multiple contracts and consulting assignments. In addition, the consulting contracts under the market architecture component include the provision of assistance to RFCSCM with respect to the procurement of associated goods (hardware, software, telecommunications equipment). 5.15 Disbursement. Estimated loan disbursements by category of expenditure and the estimated disbursement schedule, based on the ECA profile for finance operations, are shown in Tables 5.2 and 5.3 respectively: - 24 - Table 5.2: Disbursements by Category of Expenditure Percentage of Category Amount Expenditures to be Financed (US$ million) Computer hardware, networks, 15.0 100% of foreign expenditures software, data bases, communications 100% of local expenditures gear, office and library equipment (ex-factory) and 80% of local and materials expenditures for other items procured locally Technical Services (Printing, 4.0 100% of expenditures Media Space and Time) Consultants 52.0 100% of expenditures Training 11.0 100% of expenditures Unallocated 7.0 Total 89.0 Table 5.3: Estimated Loan Disbursement Schedule Bank Fiscal Year 1997 1998 1999 2000 2001 Semester 1 2 1 2 1 2 1 2 1 2 Per Semester (US$million) 0 3 8 11 13 14 14 13 8 5 Per Semester (%) 0 3 9 12 14 16 16 15 9 6 Cumulative (US$million) 0 3 11 22 35 49 63 76 84 89 Cumulative (%) 0 3 12 24 38 54 70 85 94 100 - 25 - 5.16 Disbursements will be fully documented except that Statements of Expenditure (SOE) will be used for expenditures under: (i) contracts of goods valued at less than $300,000; (ii) contracts of consultants' firms valued at less than $100,000; and (iii) contracts of individual consultants valued at less than $50,000. The required supporting documentation will be retained by RFCSCM until at least one year after receipt by the Bank of the audit report for the year in which the last loan disbursement was made. This documentation will be made available for review by the auditors and by Bank staff on request. Disbursements for the incremental operating costs of the technical support group (which includes staffing costs, rents, communications, utilities, office equipment and supplies) will be made against SOEs based on actual expenditures against the Bank approved budget of the technical support group. The closing date of the loan would be June 30. 2001. 5.17 Special Account. To facilitate payments of small amounts and payment in local currency, the Government will initially establish one Special Account denominated in US dollars in a commercial Bank acceptable to the Bank. The selection process and qualifications of this bank are described in the next paragraph. The authorized allocation will be $3 million. An initial amount of $0.5 million will be deposited once the loan becomes effective. This arnount will be increased to the limit of the authorized allocation once disbursements have reached $5 million. The RFCSCM, as implementing agency, will be responsible for reconciliation of project accounts with disbursements and replenishment requests and will forward these as supporting documents with each application for replenishment. 5.18 The commercial bank holding the Special Account would be chosen on the basis of open competitive bidding, and would, as a pre condition, be required to meet the following eligibility criteria: (i) it should be financially sound as demonstrated by their latest accounts which would be audited by an internationally recognized audit firm; (ii) have significant foreign correspondence banking in all major currencies; (iii) have some experience, or at least the capacity to acquire experience, in issuing letters of credit, transacting direct foreign payments; (iv) provide a wide range of local banking services, including cash payments, domestic transfers, issuance of debit notes, and capacity to maintain several accounts for the Special Account; (v) be a member of SWIFT, or plan to use the facility to expedite payments; (vi) be willing and able to issue a Comfort Letter to assure that amounts deposited in the Special Account would not be set off, seized or otherwise attached to satisfy amounts due to the commercial bank by the Borrower; (vii) be willing and able to adequately maintain accounts as required by IBRD, including regular statements, and any other information that may be considered necessary; (viii) charge competitive rates for services and other transactions fees. - 26 - D. Accounts and Audits 5.19 The RFCSCM will maintain a single set of project accounts, including the Special Account. Project accounts are currently being set up and will be in place in June 1996, well before planned loan effectiveness. The project records will be audited in accordance with the "Guidelinesfor Financial Reporting and Auditing of Projects Finance by the World Bank' (March 1982). It was agreed during negotiations that the Borrower will provide, within six months of the end of each fiscal year, an audit report, including a separate opinion by an independent auditor acceptable to the Bank, on disbursements against SOEs. The separate opinion will mention whether SOEs submitted during the fiscal year, together with the procedures and controls involved in their preparation, can be relied upon to support the related withdrawal applications. E. Supervision 5.20 The Project supervision plan is shown in Attachment 5. The plan includes the schedule for Bank supervision missions, the skill mix required, the staff weeks input, and cost. An average of three supervision missions per year are planned. Staff inputs will total 6 staff weeks for the remainder of FY96, and 30 staffweeks in FY97. A start-up mission with a launch workshop is planned for June 1996, and agreement was reached at negotiations that a mid-term review will be carried out in June 1998. A project completion report will be prepared by RFCSCM. F. Monituring 5.21 Project performance will be monitored using: (i) outcome indicators for each of the project's three objectives; and (ii) output indicators for each project activity. These are described below. 5.22 Outcome Indicators. Project outcomes will be monitored using both qualitative and quantitative measures of the achievement of the project's objectives. The four objectives are: (i) reduce transaciion costs by reducing contract enforcement and information costs; (ii) reduce externalities by limiting the incidence of fraud, misinformation and manipulation in the securities market; (iii) improve the securities market's price discovery mechanism and strengthen the incentives for improved corporate governance by improving the efficiency, transparency and security of the secondary market for corporate securities; and (iv) establish a Government Securities Tracking System. Each of these is discussed in turn below. 5.23 Contract enforcement and information costs. At present, there are very few rules and standards for securities market transactions and this has led to high costs in gathering information on companies and investments and in structuring and enforcing contracts. The project addresses this by assisting with the development of a comprehensive policy and legal framework which will provide: (i) a baseline of standards and practices; and (ii) improved mechanisms for the enforcement of contractual rights. Outcome measures of the impact of these project activities on transaction costs will be indirect because the causal link is circuitous and other factors also impact on transaction costs. A mixture of quantitative and qualitative measures will be used, including an assessment by private sector market participants of the effectiveness of the policy and legal reforms: (a) the trend in the number of public offers of securities providing complete and timely information; - 27 - (b) the trend in the number of public companies publishing complete and timely financial reports; (c) the trend in the number of civil claims for damages arising from breach of contract related to securities transactions; (d) the efficiency and effectiveness of the resolution of civil claims; and (e) a qualitative assessment of the impact of improvements in the policy and legal framework on transaction costs as expressed by knowledgeable market participants in an organized survey. 5.24 Fraud, misinformation and manipuulton externalities. At present there is a high incidence of economic externalities arising from fraud, misinformation and manipulation in the securities market. This has led to less than optimal economic outcomes when the capital accumulation and allocation process has been distorted through mis-allocation of investment to non-productive or poor performing purposes or the withholding of investment because of lack of confidence in the integrity of the market. The project addresses this by assisting with the development of regulatory and self regulatory capacity to: (i) encourage the development of high standards of professional practice among private sector market participants; (ii) enforce compliance with the law; and (iii) educate and assist public company owners, managers and investors to understand their rights, responsibilities and avenues of recourse. Indicators of the success of project outcomes from these activities will be: (a) the trend in the number of significant incidents of fraud, misinformation and market manipulation; (b) the trend in the effectiveness of the government response to such incidents (cease orders, license suspension and revocation, criminal prosecution); (c) the trend in the number and effectiveness of self regulatory organizations (sub-sectoral coverage, adequacy of rules and enforcement capacity); and (d) a qualitative assessment of the impact of improvements in regulatory and self regulatory capacity on the mis-allocation and withholding of investment as expressed by knowledgeable market participants in an organized survey. 5.25 Price discovery mechanism and corporate governance incenaves. At present, the secondary market in corporate securities is opaque and iliquid which has led to inefficient price discovery and very limited price signaling as an input to capital allocation decisions and incentives for improved corporate governance. The project addresses this by assisting with development of private sector institutions and the procurement of equipment for the operation of securities trading, clearance, settlement and registration systems which wiUl: (i) be more efficient, fair and secure; (ii) more effectively serve the needs of domestic investors outside Moscow and foreign portfolio investors. Outcome measures will be: (a) the trend in secondary market liquidity; (b) the trend in the proportion of total secondary market trading occurring on authorized over the counter markets or stock exchanges compared to off-market trading; - 28 - (c) the trend in the number of civil claims for damages arising from breach of contract related to securities trarisactions; (d) tne efficiency and effectiveness of the resolution of civil claims; and (e) a qualitative assessment of the irmpact of improveiments in the policy and legal framework on transaction costs as expressed by knowledgeable market participants in an organized survey. 5.26 Government Securities Tracking Systemi. The outcome ineasure will be an enhanced capability of the Ministry of Finance to float domestic securities offerings, account for receipts, project deb: service reqiuirer-meints, and monitor the domestic Go-verrnrnent securities market. 5.27 Output Indicators. As measures of progress towards the planned outcomes, output indiicators will be monitored. These are predominantly quantitative measures of progress in .mplementation of the project at the mid-terrn and completion of the project. They are summarized in Attachment 6. G. Stattus of Project Preparation 5.28 The RFCSCM has worked closely with the Bank in the preparation of the project. Detailed draft terms of refetence haxe a.ready been prepared, and shortlists and letters of invitation are unnder preparation foi all project components sch.eduled ,o begin immnediately after loan effectiveness, i.e. eight packages totalling about $25 million ot 28% of the Bank loan: (i) training design and administration; (ii) RFCSCM management system, (iii) RFCSCM .Administrative system, (iv) legal policy and drafting, (v) entQorcemnenl, (vi) licerLsing of nmaiket participants, (vii) Vladivostok International Stock Exchange and Primorskv Central Depository; and (viii) Russian Trading System. All project adminstrative and advisory pcrsoiuiel is in place. VI. BENEFITS AND RISKS A. Benefits 6. Regulatory infrastructure for capital markets in Russia is at present rudimentary and is widely acknowledged to be an impediment to capital market development because informational and contractual unCertainties make transaction costs high and provide strong disincentives to investment. With its regulatory infrastructure component, the project supports the Government's efforts to inrstitutionalize the rule of law in capital market activities, providing a crucial underpinning of market development. Specifically, it will help put in place a first generation of rules and standards in all areas in which the RFCSCM has major jurisdictional responsibilities. It will also build, within RFCSCM. core institutional capacity and competency in an area of financial policy hitherto unknowri in Russia. With a comprehensive regulatory infrastructure: (i) the contractuai rights and obligations of parties buying and selling securities or ov.ruing and managing companies will be clearly defincra; whiere cisil disputes arise, avenues of judicial a-nd extra-iudicial resolution will be available and, in the criminal area, offenses will be clearly defined and effective investigation and prosecution mechanisms will he available; and (ii) the information made available on stock companies, major shareholdings in s(,ck companies and secondary market trading in securities will be more complete and reliable. T'he imr,rovemerits in market architecture, which the project 2 9 - supports, will catalyze the creation of pilot operational systems, owned and operated by private sector institutions, so that the expected growth in liquid secondary markets can take place without encountering technical bottlenecks. Developing the architecture will not itself lead to greater liquidity, but it will facilitate the emergence of iiquid secondary markets fueled by the growth in institutional investment and portfolio management, that is expected in the next two to five years. A system to track the Russian Federation's internal debt will enhance the Ministry of Finance's capabilities for managing its domestic securities operations and for maintaining efficient and reliable market operations in time largest segment of Russia's capital market. B. Risks 6.2 One set of risks associated with a project of this nature relates to the difficulties of implementation in a time of rapid transition. The project mitigates these risks in two ways: First, all three project components will remain important areas tcr developmental activity so long as the market- oriented transition is imot completely reversed. Thus, whatever the exact direction or pace of change in the capital market, all componernts will need to be pursued by the Government. Furthermore, within each component envelope there is scope for reallocation and refinement in light of developments during the term of the project. Second, the timing of the project allows the lessons of experience from the last two years of capital market development in Russia to be taken into account and thus, in important areas, tne proict builds upon existing, although nascent, government and private sector institutions. A second set of risks, affecting mainly the market architecture component, relates to acknowledged uncertainties of capital market growth. If the pace of market development slows significantly, the public benefits derived frorn building trading systems, and clearance and settlement systems, will be reduced, or at least, postponed. Low trading volumes will also make it more difficult for these systems to become financially self-sustaining. The project would deal with these risks '.y slowing down irmplementation or scaling down the hardware components of market architecture, whiie continuing with in:;titutional advice and training. VII. AGREEMENTS REACHED 7.1 It was agreed during negotiations that: (ij the Borrower will provide funds for the purpose of financing the tax liabilities under the project (para 4.14); (ii) RFCSCM will build its institutional capacity under the project in accordance with an Institutional Development Plan agreed to by the Bank (para 4.6); (iii) RFCSCM will provide the necessary resources required for the administration of the project, satisfactory to the Bank (para 5. 1(a)); (iv) RFCSCM will select organizations for participation under the market architecture component in consultation with the Bank (para 4.9); (v) insofar as selected organizations operate on a commercial basis, MOF and RFCSCM will enter with each such organization into a supply and credit agreement under terms and conditions approved by the Bank, including a maturity of up to 12 years with 3 to 5 years of grace and an interest rate of up to 2% above the Bank's standard variable rate for currency pool loans ( para 4.9); (vi) an audit report on the project accounts will be provided not later than six months after the end of each fiscal yea: (para 5.19); and (vii)i a mid-term review will be carried out in June 1998 (para 5.20). - 30 - Attachment 1 Page 1 of 3 RUSSIA CAPITAL MARKET DEVELOPMENT PROJECT ORGANIZATION, STAFFING AND PROCEDURES OF THE RF COMMISSION ON SECURITIES AND THE CAPITAL MARKET Status and Structure 1. The Russian Federation Commission on Securities and the Capital Market (RFCSCM) was created by Presidential Decree No. 2063 on November 4, 1994 with statutes shown in Appendix 1. 2. The RFCSCM is formed by representatives from each of the following government agencies: Administration of the President, Ministry of Finance, State Committee for Property Management, Federal Property Fund, Committee for Antimonopoly Policy and Support for New Economic Structures, Ministry of Justice, State Tax Service, Ministry of the Economy, State Inspectorate for Non-government Pension Funds, Insurance Supervision Service, and Central Bank. The Federal Duma and Federation Council are also represented. 3. The regulations governing the RFCSCM establish a consultative body, called the Council of Experts. Currently, the Expert Council consists of 26 members, who are representatives of investment funds, brokerage companies, banks, stock exchanges, clearing and depository companies, the Ministries of Finance and Economy, the Central Bank, the Federal Property Fund, the State Committee for Property Management, the law faculty of Moscow State University, and independent experts. 4. The RFCSCM is assisted in its nationwide regulatoiy effort by Regional Commissions (RC). The legal basis and authority of the RCs are established in a Presidential Decree of February 28, 1995. The Decree requires the RCs to issue warnings to market participants who violate the RFCSCM's regulations. If the violations are not corrected within 15 days, the RC must inform the appropriate law enforcement authorities and the RFCSCM, which has the authority to suspend licenses of market participants. The RCs are chaired by appointees of the Chairman of the RFCSCM. The initial 19 chairman were appointed in May 1995. The other members of the RCs are appointed by local governments, and at least half of the membership of each RC must be composed of market participants. 5. A current organization chart for the RFCSCM is shown on page 3 of this attachment. 6. RFCSCM's policy on strategic areas of Russian capital market development is summarized in Appendix 2. - 31 - Attachment 1 Page 2 of 3 Projected Status and Structure through 1998 7. The staff of the RFCSCM will continue to evolve and increase in numbers during the period of 1996-1998. The total staff is expected to stabilize at approximately 185 at headquarters and another 175 in the regional offices. The divisions and departments of the RFCSCM will be refined and defined during 1996 and 1997. The RFCSCM intends to be a lean and efficient bureaucracy by relying on its RCs and on industry self-regulatory organizations to monitor the market and provide the first level of supervision and regulation. Half-yearly projections for staff of the RFCSCM and RCs are as follows: Half-Yearly Projections July Jan July Jan July Jan July 1995 1996 1996 1997 1997 1998 1998 (Actual) (Actual) l Federal Comnission 4 115 150 185 185 185 185 Regional Commnissions 19 50 75 100 125 150 175 kUSSIAN FEDERAL COMMISSION ON SECURITIES AND THE CAPITAL MARKET FEDERAL COMMISSION | CHAIRMAN l Representatives 01 _________ I _________ L DEPUTY CHAIRMAN/FXECUITVE DIRECTOR Administration of the PresidLnt Expert Council FIRST DEPUTY Department for Regulation of the Market l _ _ _ _ _ _ _ Adiitrto f h rsiet§(Consultative) CHAIRMAN I l Department of State, Municipal and Corporate Securities Ministry of Financel SECRETARY Division of Licensing A~~~~~~ SECRETARY Regional Branch State Committee for Property Commissions Division of Methodological Study Management CoIunittee f Department of Statistical and Financial Information and Reports Committee for Antimonopoly Policy | Department of Monitoring the Development ofthe Securities Market Market Ministry ofJustice Self-Regulatory Division ofManagement of current Activities Organizations State Tax Service Department for Affairs of Foreign Investors Division for Analysis ofNonnative Acts of Ministries and Regions Ministry of Economy Legal Department State Inspectorrate for Pension funds I Division on Work with the Courts and Legal Defense Bodies Ins|rance Supervision Service Department for Communications with Regions & Affairs of Regional Commissions DepartmentofSupervision and Control l | Central Bankl Department of Investiagtion and Control Federal Division l L I I ~~~~~~~~~~~~~~~~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~Division of Affairsl Federation Council Division of Accounting Division of Administration Division of Extemal Affairs Division forCommunications with the Press II - 33 Attachment 1 Appendix 1 Page 1 of 6 RUSSIA CAPITAL MARKET DEVELOPMENT PROJECT STATUTE ON THE RF GOVERNMENT FEDERAL COMMISSION ON SECURITIES AND THE CAPITAL MARKET (Rossiiskaya Gazeta, November 10, 1994, p.4) 1. The RF Government Federal Comnrnission for Securities and the Stock Market (hereinafter "the Federal Commission"), shall be a federal executive power body and shall supervise and regulate the market in securities and the activities of professional participants in the stock market. 2. The Federal Commission shall pursue its activities on a collegiate basis. The Federal Cormnission shall comprise representatives of the Administration of the President ot the Russian Federation and the heads (deputy heads) of the Ministry of Finance of the Russian Federation, the Ministry of the Economy of the Russian Federation, the State Conmmittee of the russian Federation for the Management of State Property, the Russian Federal Property Fund, the Ministry of Justice of the Russian Federation, the State Cormmittee of the Russian Federation for Anti-Monopoly Policy and Support of new Economic Structures, the State Tax Service of the Russian Federation, the State Inspectorate of the Russian Federation for Non-Government Pension Funds, the Federal Insurance Supervision Service of Russia, the Central Bank of the Russian Federation, as well as, by agreement, one representative from each of the chambers of the Federal Assembly. 3. The personal appointments to the Federal Conmnission shall be subject to approval by the government of the Russian Federation. The representatives of the administration of the President of the Russian Federation, the representatives of federal ministries, government bodies and other orgarnizations indicated in sections 2 and 3 hereof shall work in the Federal Commission without remuneration. The offices of deputy chairman and secretary of the Federal Commission shall be state offices and shall be filled under established procedure. The secretary of the Federal Cormmission shall be, ex officio, a member of the Federal Commission. The Federal Conimission shall independently approve the regulations on its work and the activities of the expert council. 4. A consultative and advisory body--the Expert Council of the Federal Commission--shall be established consisting of representatives of state bodies and organizations whose activities are linked with the regulation of the financial market and the stock market, representatives of the professional participants in the stock market, alliances, associations and other groups thereof. stock exchanges and independent experts. - 34 - Attachment 1 Appendix 1 Page 2 of 6 5. The Federal Commission shall: a) provide guidelines for the development of the securities stock market and coordinate the activities of state bodies on matters of stock market regulation; b) approve standards for the issue of securities, prospectuses for the emission of issuers' stock, including foreign issuers which issue securities on the territory of the Russian Federation, and the procedure for the registration of issues and prospectuses of the issue of securities, as well as register securities of non-residents and foreign states and establish requirements for allowing such securities to circulate in the stock market; c) develop and approve uniform standards and rules of professional activities involving securities, trade and other operations involving securities, as well as security options and warrants, maintenance of records and compilation of reports, keeping of a register of shareholders of a joint stock company, payment and depository activities with respect to securities (both for residents and non-residents); d) establish mandatory requirements and other conditions for allowing public distribution and circulation, quoting and listing of securities; e) establish the procedures and license various types of professional activities in the stock market, issue general licenses for licensing the activities and specialized depositories and professional activities in the stock market as well as withdraw such licenses in the event of violation of the laws of the Russian Federation on securities; f) establish, with the concurrence of the Central Bank of the Russian Federation, the procedures and license payment and depository organizations created by participants in the stock market and withdraw such licenses in the event of violation of requirements of the laws of the Russian Federation on securities; g) establish the procedure and engage in licensing and keeping a register of self-regulating organizations created by professional participants in the stock market (alliances, associations and groups), and withdraw such licenses in the event of violation of the requirements of the laws of the Russian Federation; h) provide state registration of stock exchanges (stock exchange departments of commodity exchanges), alliances, associations and groups thereof, license their activities and withdraw such licenses in the event of violations of the requirements of the laws of the Russian Federation; i) determine standards of the activities of investment funds and non-government pension funds in the stock market; j) develop recommendations concerning regulations for the activities and functioning of stock exchanges; - 35 - Attachment 1 Appendix 1 Page 3 of 6 k) appoint and recall inspectors to supervise the activities of stock exchanges and check the activities of investment institutions; 1) supervise the creation of common information space in the stock and financial market of the Russian Federation, a public information data base on issuers, professional participants in the stock market and the functioning of the securities market as well as set requirements and standards for the disclosure of information by issuers and professional participants in the securities market; m) contribute to the upgrading of the professional skills of the participants in securities transactions, organize research into the development of the securities market, approve the content of curricula and texts to determine the qualifications of individuals and staff of organizations engaged in professional activities involving securities; n) develop and conduct expert examination of draft legislation and regulations on matters of regulation of the securities market, licensing of the activities of professional participants therein and supervising compliance with the laws and regulations; o) provide clarifications on the application of the legislation of the Russian Federation on securities, professional activities in the securities market, organization and activities of stock exchanges, as well as develop appropriate methodological recommendations; and p) provide, under established procedure, leadership of regional commissions for securities and the stock market. 6. The Federal Commission's decisions shall take the form of decrees and executive orders. The decision of the Federal Commission shall be passed by two-thirds of the votes and shall be considered valid only if more than half of members of the Federal Commission are in attendance. The executive orders and decrees adopted under established procedure by the Federal Commission shall be signed by the chairman of the Federal Commission. The members of the Federal Commission shall be entitled to having their dissenting opinions on individual issues introduced in the minutes or having a written statement of their opinion and individual materials attached to the minutes. The decrees and executive orders of the Federal Commission shall come into force within five days of the publication thereof, unless a different procedure shall be determined at the time of their adoption. The preparation and adoption of documents of the Federal Commission regulating the activities of banks and lending institutions in the stock market and any types of operations involving currency values shall take into account the opinion of the Central Bank of the Russian Federation. 7. The Federal Commission shall have the right to: a) issue within the commission's scope of authority general licenses to state bodies of the - 36 - Attachment 1 Appendix 1 Page 4 of 6 Russian Federation and self-regulating organizations to license the participants in the securities market and to supervise the stock market and discharge other federal functions; b) qualify securities and determine types thereof in accordance with the legislation of the Russian Federation; c) establish mandatory standards of non-borrowed reserves and other indicators which diminish the risks of securities transactions for professional participants in the stock market (with the exception of banks); d) in the event of repeated or gross violations of the Russian Federation laws on securities by professional participants in the stock market, to suspend a license for professional activities involving securities. Promptly upon the coming into force of an executive order of the Federal Commission to suspend a license, the state bodies or regulating organizations which have issued such licenses shall take measures to cure the defaults or to annul the license; e) on grounds envisaged by the legislation of the Russian Federation, refuse to issue licenses to a self-regulating organization or stock exchange (stock department of a commodity exchange), and to withdraw a license with subsequent filing of a law suit to invalidate the founding documents and withdraw their state registration; t) organize or conduct, jointly with appropriate bodies, audits and review of financial and business activities of issuers, professional participants in the stock market, self-regulating organizations created by professional participants in the stock market as well as stock exchanges (stock departments of commodity exchanges); g) to issue mandatory prescriptions to issuers and professional participants in the securities market as well as self-regulating organizations thereof and to require the same to submit the necessary documents. h) to send materials to law-enforcement bodies and to file suits with law courts (courts of arbitration) seeking invalidation of securities deals performed in violation of the laws of the Russian Federation as well as the decisions of the Federation Commission made within its scope of authority and envisaged in this Statute; i) make selective checks on the authenticity of the information provided by issuers and professional participants in the stock market and compliance with standards; j) establish the procedure for supervision by regional commissions for securities and the stock market of the authenticity of information provided by issuers and professional participants in the stock market. 8. Natural persons and legal entities may appeal against the decisions of the Federal Commission to the President of the Russian Federation as well as in a court of law or a court of arbitration. - 37 - Aftachment 1 Appendix 1 Page 5 of 6 9. The chairman of the Federal Commission shall: - supervise the activities of the commission; - sign the documents adopted by the Commission; - send prescriptions to the Commission; - distribute duties between the deputy chairmen of the Federation Commission and the secretary of the Commission; - determine and approve guidelines of the work of the Commission's expert council; - organize the preparation of materials for decision-making. 10. The composition of the Federal Commission Expert Council shall be approved by the chairman of the Federal Commission. The head of the expert council shall be appointed by the chairman of the Federal Commission and shall be, ex officio, a member of the Federal Commission. The Expert Council of the Federal Commission shall: prepare and conduct preliminary studies of issues connected with the discharge of the functions of the Federal Commission; - propose guidelines for stock market regulation. 11. The activities of the Federal Commission shall be supported by a working apparatus--the Executive Directorate of the Federal Commission. 12. The activities of the Federal Commission shall be financed out of the federal budget resources allocated for the maintenance of federal bodies of executive power. 13. The Federal Commission shall be a legal entity under the laws of the Russian Federation. 14. The Federal Commission shall have its seal with the state emblem of the Russian Federation and with its own name. The Federal Commission shall maintain settlement and other accounts, including a currency account, with bank institutions. The location of the Federal Commission shall be in the city of Moscow. - 38 - Attachment 1 Appendix 2 Page 1 of 5 RUSSIA CAPITAL MARKET DEVELOPMENT PROJECT The Policy of the Federal Conmmission on Securities and the Capital Market: Strategic Areas of Russian Capital Market Development The Federal Commission on Securities and the Capital Market under the Russian Federation Government (hereinafter referred to as the Commission) faces the following important tasks: regulation of the emerging Russian stock market and its accelerated development. The tasks imposed on the Commission are extensive. They include work with brokers, dealers, custodians and other intermediaries; securities placement issues; exchange and trading systems operations; custody, clearing and settlements; and market activities of investment funds, as well as pension funds and insurance companies. In addition, the Commission regulates issues of all types of securities, including corporate stocks and bonds, stocks of investment funds, Russian government securities, municipal securities and derivatives, as well as their trading. The objective of the Commission is to create a structure carrying out legal regulation of investors' activities, including their protection, and allowing issuers and market participants to operate in capital markets without state interference. The Commission also seeks to create a statutory federal level structure which would insure that securities market activities guarantee fair trading and efficient stock market operations and also provide maximum motivation for participation in its activities by the entire population in all Russian Federation regions. Finally, it seeks to accelerate the creation of a market infrastructure whose owners and managers would be its participants, and who can attract domestic and foreign investment for the development of Russian companies, and encourage higher standards of fair activities and professionalism of all issuers and other market entities. For the implementation of these tasks the Commission enacts its policy in three key areas: 1. The Commission seeks to develop market mechanisms in order to facilitate accumulation of capital by privatized and newly created enterprises for the purposes of their reorganization and development. This means that: a) neither the Commission nor the Russian Government as a rule will limit Russian issuers' access to the domestic stock market. They will require disclosure within necessary limits and will strive for the observation of stockholder rights; - 39 - Attachment 1 Appendix 2 Page 2 of 5 b) the Coimimission will seek to develop market mechanisms to make it possible to attract savings from the entire population and foreign Investors; to insure dynamic secondary market development; to accelerate stock market development foreseeing and satisfying its needs at each development stage in order to prevent emergence of monopolistic structures as a means of satisfying Russian companies' capital needs. For the purposes of the goals in question the Commission shall use World Bank loan proceeds as well as other resources in order to: Encourage both emergence and establishment (maturation) market participants and market infrastructure and their efficient self-regulation; Provide training for companies' managers, municipal agencies' administrative staff, brokers and dealers; develop and facilitate introduction of a Corporate Code for the medium-sized companies; finance model projects on placement of new corporate and municipal securities issues and creation of collective investment vehicles, /1.sist in development of a data base on issuers as well as methodology for training investors in stoc'kholders' rights and their enforcement. In Russia, like in other post-communist countries, large multi-purpose enterprises which desperately neee capital co-exist with the newly-born capital market incapable of meeting these needs. Russia needs, as soon as possible, to get rid of the governing role of the state in satisfying capital needs of these enterprises and to prevent the appearance of holding companies as a substitute mechanism for attracting capital. These imperatives make the search for capital formation in Russia the top priority t. ;k. The Government of the Russian Federation, acknowledging the fact that liquidity in the secondary market would encourage investors to invest surplus capital into Russian enterprises, initially tried to stimulate the secondary market development projects related to the creation of its infrastructure (registrars, exchanges and trading systems, clearing and settlement organizations). The on-going work on secondary market infrastructure creation, as well as development of regulatory documents on financial liabilities and other regulatory documents, are fully aimed at an increase in trading volumes and legal reliability of the secondary market, as well cost reduction in the selling and buying of securities. This work, and application of the same vehicles to development of the primary market now in process, is geared at acceleration of Russia's own capital formation and an inflow of funds from abroad with their subsequent re-channeling in reconstruction and development of the Russian economy. Encouraging the process of disclosure on issuers and upholding stockholders' rights, the Commission will help direct the capital to the most efficient companies in Russia. 2. The Commission strives to create a unified capital market in the Russian Federation. This means that the Commission will: put into operation uaified country standards, develop and enforce them, and assist in developing all- Russian market infrastructure; - 40 - Attachment 1 Appendix 2 Page 3 of 5 strive to replace, where possible, the direct state regulation for self-regulation, as well as develop and support the *ctivities of regional commissions in the sphere of the Russian capital market monitoring, and spread information to create a flexible regulation system responding to the market requirements with ready access throughout the Russian Federation. For the implementation of the defined targets the Commission shall: a) use the World Bank loan funds as well as other resources for: creating organizational structures of the Commission and the Resource Secretariat; develop a project management system and expenditures control system; provide information to managers, establish document control and accessibility, dissemination of information, staff hiring and training, office equipment and remuneration; provide office space and enlist experts' services; assistance in preparing and substantiating amendments to laws and the process of changing the policy of the Government of the Russian Federation in securities and related spheres; development of standards for securities market regulation in registration of issues, licensing, issuing qualification certificates; supervision of market participants and self-regulatory organizations; enforcement of legislative and other regulatory acts on securities; assistance in developing market participants and market infrastructure; b) help accelerate the creation of self-regulatory organizations and regional Commissions and give them comprehensive assistance at the initial stage of their development. Creating the above-mentioned institutions and assistance to them will guarantee that implementation of the projects financed with the World Bank's loan will become an integral part of the work of the Commission and the Resource Secretariat. The development of the these systems, support of employees' work and consultants' authority specified in these projects will give to the Commission's staff and the Russian experts in the Resource Secretariat all the necessary resources to build their organizations, to issue regulations and carry out enforcement, and to administer the infrastructure projects of the Commission. As a form of assistance to the Commission's activities, foreign experts will work jointly with the Commission staff and the Russian experts and under their guidance at the Resource Secretariat. Should any problems arise in the work of the Commission, foreign experts will write memos, hold briefings, develop, assess and discuss solutions for the Commission's policy problems and their settlement. They will work in close cooperation with the Russian managers and experts on formation of organizational structures, discuss staff selection and training jointly. Executive managers of the consulting firms controlling the training projects and infrastructure projects will discuss current issues with experts of interested Russian organizations and report directly to the Commission senior officials. 3. The Commission strives to create conditions for independent development of the Russian capital markets on the basis of its own potential. This means that the Commission shall: strive to strengthen the positions of existing market participants and contribute to the appearance of new market participants; - 41 - Attachment 1 Appendix 2 Page 4 of 5 encourage the development of strong self-financing, self-regulatory organizations and assist in unification of capital markets participants in their efforts to build a market infrastructure; give an impetus to the development of the key elements of the market infrastructure at the initial stages of its development. The subsequent role of the Commission shall be limited to simple regulation, namely: offering help to the capital markets participants in developing the mechanisms of independent development and financing the elements of infrastructure and their management; with the help of regulatory and self-regulatory measures and within the framework of legal reform, contribute to the establishment of market transparency and creation of flexible dispute settlement mechanisms, thus giving a chance to the victims of the market to make use of the legal, court and other forms of civil code applications to cover the inflicted damages; not interfere in the development and activities of the Russian capital markets; if it deems necessary to protect investors, assist in establishing honest and well-directed markets, and encourage competition; strive to use market mechanisms or other forms of soft interference, should such interference be deemed necessary. For the implementation of these tasks the Commission shall: use the funds of the World Bank's loan as well as other resources for the purposes of providing adequate training to its specialists and the Resource Secretariat personnel on the best methods of market regulation; train personnel engaged in this area and, if necessary, develop exemplary business management approaches and procedures; offer help in designing equipment and computer systems, developing management techniques and self- regulatory functions of the Russian Trading System, the Depository Clearing Company, Vladivostock International Stock Exchange and in implementing other projects on creating the market infrastructure as it exists at present as well as with prospects for the future and help the capital markets participants in their business management efforts. The Commission will help them to develop and accomplish strategic plans to receive on-going technical assistance from private capital financing sources and their transfer to private financing; help to speed up the process of legal reform in Russia, training judges, lawyers and law students, and adoption of a capital markets regulatory base and its implementation. The Commission shall act as a catalyst of the development of the market infrastructure for the purposes of introducing market regulation; the Commission's initiatives will enable the professional capital markets participants to observe the regulatory norms and stimulate their activity in this area. Once the possibilities and motivation appears, the Commission will have a chance to adopt regulatory - 42 - Attachment 1 Appendix 2 Page 5 of 5 norms and ensure their implementation by way of audit, training and legal application. The world standard registrar project put forward by the Commission serves as a good example and shows one of the methods by which the Commission pursues its policy of capital markets development and achieves results. The consultants working under the Commission conducted a marlret analysis and developed a model registrar and then organized a tender in search of a technical partner. After that the project was released for private management and financing. This project proved that a world class registrar ca21 be created in Russia. This registrar model gives us an opportunity to select high operations standards, which can be later applied to the overall Russian registrar activitv. This contributes to creating a self-regulatory organization for the registrars, which make their standards public and ensure their implementation with the help of on- going audit, training and assistance. A result of the joint effort of self-regulatory organizations and the Commission in this program will preclude the access to the market of non-competent organizations which violate legislation. - 43 - RUSSIA Attachment 2 CAPITAL MARKET DEVELOPMENT PROJECT Page 1 of 3 Project Cost And Financing Plan Net Of Taxes And Duties (US$ million) COMPONENT PROJECT COST ESTIMATES FINANCING PLAN Foreign Local Base Physical Price TOTAL IBRD Bilateral Go|Vt/ I TOTAL Cost Cont. Cont. I COST Sources RFCSCM FINANCE A. REGULATORY INFRASTRUCTURE I. COMMISSION a. Institutional Capacity (i) RFCSCM Staff And Fac;hties 8.9 8.9 0.3 9.2 9.2 9.2 Sub-Total 8.9 8.9 0.3 9.2 9.2 9.2 (n) Organizational Planning & Mgmt Systems 2.4 4.2 6.6 0.2 6.8 2.5 0.3 4.0 6.8 (iii) Policy Advisory Group - 1996 1.7 1.7 0.0 1.8 1.8 1.8 1997/98 3.6 3.6 0.1 3.7 3.7 3.7 (iv) Technical Advisors - 1996 _ 2.3 2.3 0.1 2.4 2.4 2.4 -1997/98 4.7 4.7 0.1 4.9 4.9 4.9 Sub-Total 7.7 11.2 18.9 0.5 19.6 11.1 4.5 4.0 19.6 (v) Training design and administration 0.5 0.5 0.0 0.5 0.5 0.5 -courses - foreign 1.7 1.7 0.0 1.8 1.1 0.7 1.8 courses - local 7.8 7.8 0.2 8.0 8.0 8.0 - intemships - foreign 0.5 0.5 0.0 0.5 0.5 0.5 - internships - local 0.2 0.2 0.0 0.2 0.2 0.2 Sub-Total 2.9 7.8 10.7 0.3 11.1 10.4 0.7 11.1 b. Information Systems (i) Office Equipment consulting 0.3 0.3 0.0 0.3 0.2 0.1 0.3 PCs, copiers, faxes, library equip 4.3 4.3 0.4 0.1 4.9 4.9 4.9 (ii) Computers & Software management & administration support consulting, technical support 0.2 0.2 0.4 0.0 0.4 0.2 0.2 0.4 H/W, S/W, TEL 0.4 0.4 0.8 0.1 0.0 0.9 0.9 0.9 - operational database consulting, design, development 2.1 0.8 2.9 0.1 3.0 3.0 3.0 1-H/W, SfW, TEL 1.5 1.7 3.2 0.3 0.1 3.6 3.6 3.6 - publiL. access database consulting, technical support 0.5 0.5 0.0 0.5 0.5 0.5 H/W, S/W, TEL 0.5 0.2 0.7 0.1 0.0 0.8 0.8 0.8 Sub-Total 9.9 3.3 13.2 0.9 0.4 14.5 14.2 0.3 14.5 c. Programs (i) Legal Reform -policy dexclopmert & legal drafting 6.8 6.8 0.2 7.0 5.0 2.0 7.0 -consultation & testing 3.0 1.6 4.6 0.1 4.7 3.8 0.9 4.7 Sub-Total 3.0 8.4 11.4 0.3 11.8 8.8 2.9 11.7 (ii) Enforcement, Licensing, Finance I I I -policy and operational advice 10.5 | 0.51 | 0.3 10.8 10.0 0.8 10.8 -printing of handbooks | 01 0.1 0.0 0.0 0.1 0.1 [ 0.1 Sub-Total 10.5 0.1 10.6 0.0 0.3 10.9 10.1 0.8 10.9 - 44 - RUSSIA Attachment 2 CAPITAL MARKET DEVELOPMENT PROJECT Page 2 of 3 Project Cost And Financing Plan Net Of Taxes And Duties (US$ million) COMPONENT PROJECT COST ESTIMATES FINANCING PLAN Foreign Local Base Physical Price TOTAL IBRD Bilateral Govt/ TOTAL Cost Cont. Cont. I COST Sources RFSEC IFINANCE (iii) Communications & Public Education __ [ _ _ - communications conferences/workshops 3.1 3.1 0.1 3.2 1.2 2.0 3.2 publicationldistribution official 5.3 5.3 0.1 5.4 _ = 5.4 5.4 mass media 3.1 3.1 _ 0.1 3.2 1.2 2.0 3.2 -public education investor education 2.2 1.0 3.2 0.1 3.2 2.2 1.0 3.2 shareholder rights 2.1 2.1 0.1 2.2 2.2 2.2 library/public reading room 0.8 ___ 0.0 0.8 0.8 0.8 purchase of technical books 0.7 0.7 0.1 0.0 0.8 0.8 0.8 printing of public education material 3.0 3.0 0.3 0.1 3.4 3.4 3.4 Sub-Total 6.8 14.5 21.3 0.4 0.6 22.3 11.0 5.8 5.4 22.2 Total Regubatory Infrastructure: 40.8 54.3 95.1 1.3 2.7 99.3 65.6 15.1 18.6 99.3 B. MARKET ARCHITECTURE - _ _ 1 -- L_ 1. SECONDARY MARKET TRADING __ a. Over the Counter (i) Russian Trading System _ _ _ _ _ __ -institution building advice 2.6 1.6 4.2 0.1 4.3 1.8 2.5 4.3 - technology development consulting, technical support 0.7 0.7 1.4 0.0 1.5 1.0 0.5 1.5 HIW,S/W,TEL 1.5 1.9 3.4 0.3 0.1 3.8 3.3 0.5 3.8 Sub-Total 4.8 4.2 9.0 0.3 0.3 9.6 6.1 3.5 9.6 b. Stock Exchanges I __| __|____ (i) Vladivostok -institution building advice 1.1 1.! __1 0.0 1.1 1.1 _ 1.1 -technology development consulting, technical support 0.5 0.2 0.7 0.0 0.7 0.7 0.7 H/W,S/W,TEL 0.8 0.2 1.0 0.1 0.0 1.1 1.1 1.1 (ii) Other Exchanges -institution building advice 1.1 1.1 0.0 1.1 1.1 _ 1.1 -technology development ___ consulting, technical support 0.1 0.1 |.0 0.1 0.1 0.1 HlW, S/W 0.41 0.4 0.01 0.0 0.5 0.5 0.5 Sub-Tota 3.9 0.4 4.3 0.1 0.1 4.5 4.5 4.5 2. SECURITIES TRANSFER a. Depository, Clearance, Settlement (i) DCC -(institution building advice 0.9 0.8 1.7 1.7 1.7 1.7 (ii) Primorski -2< - institution building advice 0.5 ___ 0.5 0.0 0.5 0.5 0.5 -technology development consulting, technical support 0.3 0.2 0.5 0.0 0.5 05.5 HIW,SIW,TEL 0.4 0.1 0.5 0.1 0.0 0.6 0.6 0.6 - 45 - RUSSIA Attachment 2 CAPITAL MARKET DEVELOPMENT PROJECT Page 3 of 3 Project Cost And Financing Plan Net Of Taxes And Duties (US$ million) COMPONENT PROJECT COST ESTIMATES | FINANCING PLAN Foreign Local Base Physical Price |TOTAL IERD Bilateral Govt/ TOTAL Cost Cont Cont COST Sources RFSEC FINANCE (iii) Other - institution building advice 1.1 1.1 0.0 1.1 1.1 1.1 - equipment 0.5 0.5 0.1 0.0 0.6 0.6 0.6 Sub-Total 3.7 11 4.8 0.1 0.1 5.0 3.3 1.7 5.0 b. Share Registration _ _ j I _ _ _ _ - (i) Registrar Support Center - institution building advice 3.3 2.21 5.5 0.2 5.7 2.7 3.0 5.7 Sub-Total 3.3 2.2 5.5 0.2 5.7 2.7 3.0 5.7 Total Market Architecture: 15.8 7.9 23.6 0.6 0.6 24.8 16.6 8.2 24.8 C. GOVERNMENT SECURITIES TRACKING _ _ __ _ Systems Desigr, and Operationalization 0.6 0. 0.7j 0.0 0.7 0.7 0.7 Technical Support 0 7 0 7 i 0 0 0.7 0.7 0.7 H/W. S/W, TEL 17 06 231 02 01 2.6 2.6 2.6 Total Tracking System: 3 0 0 7 3 7 0 2 0 1 4.0 4.0 4.0 D. PROJECT ADMINISTRATION _ (i) 1996 Project Administration 0.8 0.6 1.4 _ 0.0 1.4 1 .4 1.4 (ii) 1997/98 Project Administration 1.5 1.2 2.7 0.1 2.8 2.8 2.8 Sub-Total 2.3 1.8 4.1 0.1 4.2 2.8 1.4 4.2 Total Project Implementation: 2.3 1.8 4.1 0.1 4.2 2.8 1.4 4.2 TOTAL PROJECT 62.01 64.61 126.61 2.11 3.6 132.4 89.0 24.71 18.6 132.4 r~~~~~~~~~~~~~~~~~~ _ i - j- j _ - 46 - Attacfiment 3 RUSSIA CAPITAL MARKET DEVELOPMENT PROJECT Implementation Plan Activity Name |LOI/Bid lss { ContSign Activity Start Activity Finis Regulatory Infrastructure 1 RFCSCM Institutional Capacity __|| Policy Advisory/Technical Support Group Oct-95 Dec-00 Administrative System Jul-96 Nov-96 Dec-96 Nov-98 Management System Jun-96 Nov-96 Dec-96 Nov-99 Training Design and Administration Jun-96 Nov-96 Dec-96 Dec-00 Foreign Courses Jan-97 May-97 Jun-97 Dec-00 Local Courses Jan-97 May-97 Jun-97 Dec-O0 Internships Jan-97 May-97 Jun-97 Dec-00 ConferencesNVorkshops Feb-97 Jun-97 Jul-97 Dec-O0 RFCSCM Inforrnation SystemsI Databases Oct-96 Apr-97 May-97 Apr-00 RFCSCM Regulatory Programs Legal Policy and Drafting Jun-96 Dec-96 Jan-97 Dec-99 Legal Consultation/Testing Jan-97 Jul-97 Aug-97 Jul-00 Enforcement Jun-96 Dec-96 Jan-97 Dec-00 Licensing Jun-96 Nov-96 Dec-96 Nov-00 Finance Nov-96 Apr-97 May-97 Apr-00 Investor Education Mar-97 Sep-97 Oct-97 Sep-99 Shareholder Rights Nov-96 Apr-97 May-97 Feb-99 Public Information/Media May-97 Aug-97 Sep-97 Aug-00 arket Architecture Secondary Market Trading Russian Trading System Jun-96 Dec-96 Jan-97 Jul-98 Vladivostok Stock Exchange/Primorsky Central Depository Jun-96 Dec-96 Jan-97 Dec-97 Other Exchanges Aug-97 Jan-98 Feb-98 Aug-99 Securities Transfer Settlement Organizations Feb-97 Jul-97 Aug-97 Jul-98 Registrar Support Center Feb-97 Jun-97 Jul-97 Jun-99 |Government Securities Tracking System Design and Establishment Oct-96 Mar-97 Apr-97 Mar-99 Project Administration Project Administration Unit Oct-95 Dec-00 - 47 - Attachment 4 Page 1 of 2 RUSSIA CAPITAL MARKET DEVELOPMENT PROJECT Summary of Major Procurement Activities Complet. Issuance Signin Cost Procur. Bidding of Invit. Subm. of Component Smillion) Method Docun. to Bid of Bids Contrad Goods RFCSCM Office Equipment for Headquarters and Ten Regional Offices a. Computers, Networks, Telecoms, Software 3.5 ICB 12/96 1/97 2/97 4/97 b. Telephone Exchanges, Fax Machines, Copiers (Three Contracts) 0.9 IS 12/96 1/97 2/97 4/97 c. Office Supplies (Ten Contracts) 0.5 NS 12/96 1/97 2/97 4/97 RFCSCM Market Information Database System 4.4 ICB 6/97 7/97 8/97 10/97 RFCSCM Administration Systems a. Hardware, Telecoms, Network (Three Contr) 0.6 IS 12/96 1/97 2/97 4/97 b. Ledger, Payroll , Personnel Software Packages 0.2 DC 12/96 1/97 2/97 4/97 Russian Trading System a. Hardware, Software, Network 1.4 ICB 12/96 1/97 2/97 4/97 b. Telecoms (Two Contracts) 0.6 IS 12/96 1/97 2/97 4/97 c. Expansion of Existing Trading Platform and Software Customization 0.5 DC 12/96 1/96 2/97 4/97 Vladivostok Stock Exchange Trading System a. Hardware, Software, Network 1.0 ICB 1/97 2/97 3/97 5/97 b. Telecoms 0.3 IS 1/97 2/97 3/97 5/97 c. Expansion of Existing Trading Platform 0.2 DC 1/97 2/97 3/97 5/97 Other Exchanges Trading Systems (Two Contracts) 0.4 IS 5/97 6197 7/97 9197 Settlement Organizations Systems (Two Contracts) 0.5 IS 5197 6/97 7/97 9/97 RFCSCM Library a. Document Management System, Equipment (Three Contracts) 0.6 IS 1/97 2/97 3/97 5/97 b. Supplies (Five Contracts) 0.3 NS 1/97 2/97 3/97 5/97 Gpvemment Securities Tracking System a. Hardware, Software 2.6 ICB 6/97 7/97 8/97 10/97 Technical Services Printing of Public Education Material/ Regulatory Handbooks (Three Contracts) 3.5 ICB 1197 219 3/97 5/97 Public Information/Mass Media 1.2 ICB 4/97 5/97 6/97 8/97 Training Design and Administration 0.5 SL 6/96 7/96 9/96 11/96 Foreign Courses 1.1 SL 1/97 2/97 3/97 6/97 Local Courses 8.0 SL 1/97 2/97 3197 6/97 Intemship 0.7 SL 1/97 2/97 3/97 6/97 Conferences/Workshop 1.2 SL 1/97 2/97 3/97 6/97 Consulting Services Policy Advisory Group(from 11/96) 8.6 SL 6/96 7/96 9/96 11/96 Project Administration (from 11/96) 2.7 SL 6/96 7/96 9/96 11/96 RFCSCM Technical Support Group 4.9 SL 6/96 7/96 9/96 11/96 RFCSCM Management System 2.5 SL 6/96 7/96 9/96 12/96 - 48 - Attachment 4 Page 2 of 2 RUSSIA CAPITAL MARKET DEVELOPMENT PROJECT Summary of Major Procurement Activities Complet. Issuance Signing Cost Procur. Bidding of Invit. Subm. of Component (Smillion) Method Docum. to Bid of Bids Contract RFCSCM Regulatory Program a. Legal Policy and Drafting 5.0 SL 6/96 7/96 9/96 12196 b. Legal Consultation/Testing 3.8 SL 1/97 2197 4197 7/97 c. Enforcement 3.3 SL 6/96 7196 9/96 12/96 d. Licensing 3.3 SL 6/96 7/96 9/96 12/96 e. Finance 3.4 SL 10/96 11/96 1/97 4/97 f. Investor Education 2.2 SL 3/97 4/97 6/97 9/97 g. Shareholder Rights 2.2 SL 10/96 11/96 1/97 4/97 RFCSCM Technical Implementation Support a. Admin. System 1.3 SL 6/96 7/96 9/96 11/96 b. Databases 3.5 SL 10/96 11/96 1/97 4/97 Market Architecture a. Russian Trading System 3.6 SL 6/96 7/96 9/96 12/96 b. Vladivostok Stock Exchange Primorsky Depository 4.5 SL 6/96 7/96 9/96 12/96 c. Other Exchanges 1.7 SL 7/97 8197 10/97 1198 d. Other Setdement Organizations 1.7 SL 1/97 2/97 4/97 7/97 e. Registrar Support Center 2.7 SL 4/97 5/97 7/97 10/97 Government Securities Tracking System a. Design and Operationalization 0.7 SL 9/96 10/96 12/96 3/97 b. Technical Support 0.7 SL 4/97 5/97 7/97 10/97 Abbreviations: ICB: International Competitive Bidding IS: International Shopping NS: National Shopping DC: Direct Contracting NCB: National Competitive Bidding SL: Short List - 49 - Attachment 5 Page 1 of 3 RUSSIA CAPITAL MARKET DEVELOPMENT PROJECT SUPERVISION PLAN Staff Mission Week Cost FY Dates Activity Required Personnel Inpu US$ '000 96 6/96 Launch Task Manager 1 4 Mission Capital Market Specialist 1 4 Desk Work Task Manager 2 8 IT Specialist 1 4 Operations Officer ResMis 1 4 Total FY96 6 24 97 9/96 Supervision Task Manger 1 4 Mission Capital Market Specialist 1 4 Procurement Specialist 1 4 Operations Officer ResMis' 1 4 12/96 Supervision Task Manager 1 4 Mission Capital Market Specialist 1 4 IT Specialist 1 4 2/97 Supervision Task Manager 2 8 Mission Capital Market Specialist 2 8 Operations Officer ResMis 2 8 5/97 Supervision Task Manager 1 4 Mission Capital Market Specialist 1 4 Desk Work Task Manager 6 24 Capital Market Specialist 4 16 IT Specialist 5 20 Total FY97 30 120 - 50 - Attachment 5 Page 2 of 3 RUSSIA CAPITAL MARKET DEVELOPMENT PROJECT SUPERVISION PLAN Staff Mission Type of Week Cost FY Dates Mission Required Personnel Input USS '000 98 10/97 Supervision Task Manager 1 4 Mission Capital Market Specialist 1 4 Procurement Specialist 1 4 3/98 Mid-Term Task Manager 2 8 Review Capital Market Specialist 2 8 IT Specialist 2 8 Operations Officer ResMis 2 8 6/98 Supervision Task Manager 1 4 Mission Capital Market Specialist 1 4 IT Specialist 1 4 Operations Officer ResMis 1 4 Desk Work Task Manager 10 40 Total FY98 25 100 99 9/98 Supervision Task Manager 2 8 Mission Capital Market Specialist 2 8 2/99 Supervision Task Manager 2 8 Mission Capital Market Specialist 2 8 5/99 Supervision Mission Task Manager 2 8 Operations Officer ResMis 2 8 Desk Work Task Manager 6 24 Total FY99 18 72 - 51 - Attachment 5 Page 3 of 3 RUSSIA CAPITAL MARKET DEVELOPMENT PROJECT SUPERVISION PLAN Staff Mission Type of Week Cost FY Dates Mission Reauired Personnel US 000 00 9/99 Supervision Task Manager 2 8 Mission Capital Market Specialist 2 8 2/00 Supervision Task Manager 2 8 Mission IT Specialist 2 8 Desk Work Task Manager 4 16 Total FYOO 12 48 01 9/00 Supervision Task Manager 2 8 Mission Capital Market Specialist 2 8 2/01 Completion Task Manager 2 8 Mission Operations Officer ResMis 2 8 Total FY 01 8 32 - 52 - Attachment 6 Page 1 of 4 RUSSIA CAPITAL MARKET DEVELOPMENT PROJECT Output Indicators COMPONENT OUTPUT Mid Term Completion REGULATORY INFRASTRUCTURE RFCSCM Institutional Capacity Staff and facilities HG: refurbishment of premises computer and telecommunications completed; furniture & fittings equipment fully installed and operational installed 8 regional offices established Regional offices: 4 established 360 RFCSCM staff in place in HQ and RFSEC staff: 280 in place in HQ and regional offices regional offices Organizational planning organizational plan completed organization and business plans and management business plan completed implemented through internal policies and systems functional specification completed for procedures manuals and staff training hardware and software for management and administration support Policy advisory group Expert policy advice to RFCSCM (75 Expert policy advice to RFCSCM (150 staff months) staff months) Technical advisors Export technical advice to RFCSCM Expert technical advice to RFCSCM (600 (300 staff months) staff months) Training 200 RFCSCM staff trained for average 370 RFCSCM staff trained for average of of six weeks in introductory and eight weeks in introductory and specialist specialist capital market topics capital market topics Information Systems Computer & software Functional and technical specification Equipment for 360 staff procured and completed installed Equipment for 280 staff procured and installed - 53 - Attachment 6 Page 2 of 4 COMPONENT OUTPUT Mid Term Completion Management & Functional and technical specification Equipment procured and installed to at Administration support complete least 90% of planned capacity Core equipment procured and installed to at least 30% of planned capacity Operational database Functional specification complete Technical specification completed Equipment procured and installed Public access database Functional specification completed Technical specification completed Equipment procured and installed Programs Legal reform Policies adopted and regulations Policies adopted and regulations promulgated covering at least licensing promulgated covering, in addition to of market participants including those listed at left; public offer and brokers, dealers, advisers and secondary market trading of securities, investment managers; licensing market periodic disclosure requirements for institutions including exchanges, public companies; mergers and clearing and settlement organizations acquisitions including acquisition of a and registrars. controlling interest in a public company; public offer and secondary market trading a derivative instruments such as options and futures. Enforcement, licensing, RFCSCM operational units staffed and RFCSCM operational units meeting finance functional established performance targets; Performance targets established Operational manuals 75% complete Production of operational manuals commenced Communications and 6 workshops for market participants 20 workshops for market participants public education conducted conducted Production and distribution of policy organized, widespread print and statements and regulations of the broadcast media program of investors RFCSCM regularly published in education conduced widely read public media and through 6 shareholder rights centers established official channels and operational public library and reading room established in Moscow - 54 - Attachment 6 Page 3 of 4 COMPONENT OUTPUT Mid Term Completion MARKET ARCITECTURE Secondary Market Trading Russian Trading System 2 new regional dealers associations 3 new regional dealers associations formed and connected to new formed and connected to new operational operational hubs hubs First phase software enhancement Hardware procured and installed for completed trading platform upgrade Second phase software enhancement completed Vladivostok Business plan and model rules Remote access gateways procured and International Stock completed and adopted including installed. Hardware and software Exchange timetable and implementation steps for procured and installed. establishing remote access gateways in the Far East region. Functional specifications for hardware and software completed Other Stock Exchanges RFCSCM decision is taken on At least two stock exchanges other than supporting identified stock exchanges Vladivostok authorized and operating on the basis of a study of the optimal with model rules and fair, efficient and number, location and form of such secure trading systems. exchanges. Securities Transfer DCC Business plan adopted including viable financing Functional capacity in all operational areas established to at least pilot state including the adoption of internal rules and procedures for all activities to a standard approaching international practice - 55 - Attachment 6 Page 4 of 4 COMPONENT OUTPUT Mid Term Completion Primorski Central Business plan adopted including viable Provide full depository and settlement Depository financial plan function including a global nominee Existing operational structure and function procedures reformed to improve Settle on T + 3 efficiency and security On track to achieve financial viability Authorization obtained from RFCSCM under adopted business plan and internal rules and procedures adopted for depository function Other depositories RFCSCM decision on taken on Other depositories as identified in the supporting identified depositories on study and decided by the RFCSCM the basis of a study of the optimal authorized and operating with model number, location and form of such rules and fair, efficient and secure depositories systems. Share Registration Registrar Support Publication and education program Center completed 25 small Issues registrars completed training and equipped with handbooks and software GOVERNMENT System installed System fully operational SECURITIES TRACKING SYSTEM Filename: attachm6.419 IBRD 27653 rh.e adara,, colon. deaor,racacs , . UNlIED STATES OF AMERICA cond ony o her moimsooooT cir.c,w onE"' hi cop do COt otimplyoI the porat, aRUSSIAN FEDERATION - -. rhe World Sack Otoop, cr odg.ent 7 <' On Ikee feO9roI toIs o ony lernnwy,r cCAPITAL MARKET DEVELOPMENT PROJECT -uh b-Qd.,-s< * NATIONAL C-APITAL RIVERS seo ECONOMIC REGION BOUNDARIES I U.INITED - - ___ OBLAST, KRA(, OR REPUBLIC BOUNDARIES ,fl KINGDOM -. - -- - AUTONOMOUS OBLAST, OKRUG, OR REPUBLIC BOUNDARIES' r . ,INTERNATIONAL BOUNDARIES E-acS becoo NORWAY., - - - K . N,> -o NETIF"RLOLDS ' < SWEDEN *.iye'1 85~~~~~~~~~~~~~~~5 GERmANY - - 0 o v k 3 / 4? - - S ~ ~ ~ ~ b L -jETONI 1-. 5 . 18 _k , E_\ n POLAND - 9 e _'f iD _ L ,' , ' . , . UZ3E YekTeK\ r2 r. loborgE3 -< g%l> M . OIA >3A- .1,7~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ I~ ~ ~ ~ ~~~~~~1 Arhoge 7 ogrd1 r69k 2 uo{HROzC^^ 3.hce 0Atrko 8Cuoh5.cskrotn 6 lo 0Bro OAu S. ,rons 16 Scno ;28c Tobo 34 4A˝3s%/