Reports on Observance of Standards and Codes

Estonia and the IMF

Estonia ROSC
I.  Banking Supervision
II.  Insurance Supervision
III.  Securities Supervision
IV.  Payment System
V.  Transparency of Monetary and Financial Policies

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III.  Securities Supervision
Prepared by a staff team from the International Monetary Fund and the World Bank in the context of the Financial Sector Assessment Program (FSAP) on the basis of information provided by the Estonian authorities.

June 2000

Observance of the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulations

1. An assessment of Estonia's observance of and consistency with relevant international standards and core principles in the financial sector, was undertaken under the auspices of the Bank-Fund Financial Sector Assessment Program (FSAP). This has helped to place the standards assessments in a broader institutional and macroprudential context, and identify the extent to which the supervisory and regulatory framework has been adequate to address the potential risks in the financial system. The assessment has also provided a source of good practices in financial regulation and supervision in various areas.

2. The assessment covered (i) the Basel Core Principles for Effective Banking Supervision; (ii) the International Association of Insurance Supervisors' (IAIS) Supervisory Principles; (iii) the International Organization of Securities Commissions' (IOSCO) Objectives and Principles of Securities Regulation; (iv) the Committee on Payment and Settlement Systems' (CPSS) Draft Core Principles for Systemically Important Payment Systems; and (v) the IMF's Code of Good Practices on Transparency in Monetary and Financial Policies. This comprehensive coverage of standards was carried out at the request of the Estonian authorities, in light of the rapid development of the financial sector, including nonbank financial institutions. It should be noted that some of the standards are still in draft form, and some do not yet have a complete methodology to systematically assess compliance or consistency.1

3. The assessment of standards and codes draws on the self-assessments by the Estonian authorities and on field work undertaken by a joint IMF-World Bank mission which visited Estonia during February 1–11, and February 29–March 14, 2000. The assessments were based on a peer review process by Stefan Niessner (Deutsche Bundesbank), M. Srinivasan (Reserve Bank of India) and Richard Abrams (IMF) on the Basel Core Principles, Martin Halvorsen (Kredittilsynet, Norway) on the IAIS Insurance Supervisory Principles, Melinda Roth Alexandrowicz (World Bank) on the IOSCO Objectives and Principles of Securities Regulation, and Charlie Garrigues (World Bank) on the Draft CPSS Core Principles for Systemically Important Payment Systems. Jingqing Chai (IMF) prepared the Code of Good Practices on Transparency in Monetary and Financial Policies, with inputs from the sectoral experts. The expert team was coordinated by the IMF-World Bank FSAP mission led by Alexander Fleming (World Bank, mission chief) and Richard Abrams (IMF, deputy mission chief).

4. The assessment, which was based on information available through March 2000, showed that Estonia has made great strides in strengthening its supervisory framework. Progress has been particularly strong in the area of banking supervision. Supervision of insurance firms is also improving, although some concerns remain. On the other hand, oversight in the securities sector is weak. While the payment system itself is viewed as relatively strong, payment system oversight could be improved.

5. The findings regarding transparency practices were quite favorable. No significant weaknesses were identified with respect to either monetary policy or the deposit guarantee scheme, while the shortcomings in banking and insurance supervision and on the payment system were relatively minor. Transparency practices in securities supervision were assessed as somewhat weaker than the others, although the flaws were not serious.

E. Background and Overview

6. The securities market is dominated by the trading operations of Estonia's largest bank. The sharp decline in securities prices in 1997 caused the banks to suffer significant losses on their own trading books, and as a result of their margin lending operations. However, the banks are now far more conservative, and margin lending has virtually ceased.

7. The Tallinn Stock Exchange (TSE) is small, with a market capitalization of about $2 billion (43 percent of GDP). Market turnover is also low, with most of the trading involving the shares of the largest banks and Eesti Telekom. The TSE has signed a letter of intent to join NOREX in order to link Estonia's market with those of Denmark and Sweden.2 There is no functioning bond market in Estonia.

F. Main Findings

Principle 1: The responsibilities of the regulator should be clear and objectively stated.

8. The responsibilities and statutes of the Securities Inspectorate (SI) are set out in the Securities Market Act (SMA), the Investment Funds Act and the Pension Funds Act. As stated in the IOSCO General Principles, the capacity of the regulator to act responsibly, fairly and effectively will be assisted by: (i) a clear definition of responsibilities, preferably set out by law; (ii) strong cooperation among responsible authorities, through appropriate channels; and (iii) adequate legal protection. The revised SMA should reinforce the clear definition of the SI's responsibilities. But the principles in (ii) and (iii) above are not covered in either the current or the proposed revisions of the SMA.

Assessment:Broadly observed. But, as noted above, principles (ii) and (iii) not covered in either the current or the proposed SMA. However, the move to unified supervision should address (ii).

Principle 2: The regulator should be operationally independent and accountable in the exercise of its functions and powers.

9. The SI is an independent authority operating under the administrative oversight of the MOF. While the Minister has no power to interfere in the daily decisions of the SI, the SI is not considered to be independent by market participants. The Minister retains the power to issue and revoke the licenses of market participants. Since the SI is under the auspices of the MOF, it is given a budget allocation within the MOF's budget. A lack of funding undermines the SI's authority. Both the move to unified supervision and the revised SMA should address these fundamental weaknesses.

Assessment:Not observed. In practice, the SI is not operationally independent, since it lacks licensing and delicensing powers and it is dependent on the budget allocation of the MOF.

Principle 3: The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

10. The SI does not currently have (a) adequate powers, (b) proper resources, or (c) capacity to fulfill the position's requirements. Adequate powers include the power of licensing, supervision, inspection, investigation and enforcement. Licensing is retained by the MOF and enforcement is conducted by other entities (economic police or courts). The other areas (supervision, inspection and investigation) appear weak. As noted, proper funding is also lacking. Finally, while the capacity of the SI appears satisfactory given the current (weak) legal and regulatory framework, the SI will face an additional challenge to upgrade skills and retain experienced staff with the increased responsibility under a revised SMA.

Assessment:Not observed. The SI does not have licensing powers, budgetary independence, or the skills needed for the future.

Principle 4: The regulator should adopt clear and consistent regulatory processes.

11. Processes should be consistently applied, comprehensible, transparent to the public and fair and equitable. The SI's lack of authority prevents it from having the ability to apply consistently any process. In addition, IOSCO principles stress consultation with those who may be affected by the policies of the regulator (e.g., market participants) and public disclosure of policy in important operational areas. However, the SI does not regularly consult with the private sector, nor does it publish regular reports. Finally, the SI does not currently play an active role in the education of investors and other participants in capital markets.

Assessment:Not observed. The SI lacks authority and does not consult regularly with the private sector.

Principle 5: The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

12. While the SI is structured so that it may maintain high standards of confidentiality according to the requirements of the SMA, the BSD has been hesitant to share information with the SI because of concerns that confidentiality may not be fully assured. No staff members except the Director General speak with the press, but this is not a written regulation. Members of the staff are not directly prohibited from making direct investments, but at the end of the year each employee must disclose his economic interests. Public servants and employees of the SI, auditors, experts, and other persons acting upon authorization of the SI, are required to maintain the confidentiality of information received in the course of supervision activities. The Anti-Corruption Act provides the legal basis for the prevention of corruption and prosecution of officials involved in corruption.

Assessment:Broadly observed. Limits should be placed on investments by SI employees.

Principle 6: The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence and to the extent appropriate to the size and complexity of the markets.

13. The Tallinn Stock Exchange (TSE) is licensed by the MOF. It is an SRO and issues its own rules and regulations. These rules and regulations include a set of Conduct of Business Rules, which stipulate that the TSE's member firms, employees and members of the supervisory bodies are required to follow the principles of fair and equitable trading, to act knowledgeably and with care, giving priority to the interests of their clients. The Surveillance Committee of the TSE is a supervisory body that oversees the activities of the member firms on the TSE, including transactions, clearing and investment services and other activities pursuant to the rules and regulations of the exchange and legal acts.

Assessment: Fully observed.

Principle 7: SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

14. The SI has little oversight of the TSE. The TSE makes its own rules and regulations independently. The Director General of the SI does serve on the Surveillance Committee of the TSE, but this is insufficient to allow the SI to carry out effective oversight.

Assessment:Not observed. The SI provides little oversight of the TSE.

Principle 8: The regulator should have comprehensive inspection, investigation, and surveillance powers.

15. The SI has the power to require the provision of information and to carry out inspections of business operations when necessary. However, market participants do not always take inspections seriously. The SI can gather information, but the file is usually handed to the economic police, who conduct much of the investigation. The economic police, however, are not as knowledgeable about securities fraud and market violations. Only one SI staff member monitors the market during a trading session.

Assessment: Not observed. In practice, SI inspections have little credibility in the market. The economic police handle most investigations, although they have little expertise and capacity to do so.

Principle 9: The regulator should have comprehensive enforcement powers.

16. The SI does not have comprehensive investigatory and enforcement powers. The main powers the SI does have are to obtain information and to refer matters for criminal prosecution. The TSE may suspend trading, but not the SI. While it is not necessary that responsibility for all aspects of enforcement be given to one agency, neither the SI nor the TSE have the ability to ensure compliance, seek orders from courts, and enter into settlements.

Assessment: Not observed. The SI cannot implement its enforcement powers. Neither the SI nor the TSE can ensure observance, seek orders from the courts or enter into settlements.

Principle 10: The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance, and enforcement powers and implementation of an effective compliance program.

17. As stated above, the SI does not have full inspection, investigation, surveillance and enforcement abilities.

Assessment: Not observed. The SI does not have the ability to carry out full inspections, investigations, surveillance and enforcement.

Principle 11: The regulator should have authority to share both public and nonpublic information with domestic and foreign counterparts.

18. The SI has MOUs with Latvia, Lithuania and Sweden. However, the SI does not currently have any memorandum or agreement with other Estonian financial supervisory authorities. The move toward unified financial supervision should change this in the future.

19. This principle also relates to the supervision of financial conglomerates, an increasing challenge to Estonian financial supervisors. The growing emergence of financial conglomerates that combine the activities of firms in different financial sectors has heightened the need for cooperative efforts to improve the effectiveness of supervisory methods and approaches.

Assessment:Broadly observed. There is no agreement on the exchange of information with other Estonian regulatory agencies. However, this would change if unified financial authority were created.

Principle 12: Regulators should establish information sharing mechanisms that set out when and how they will share both public and nonpublic information with their domestic and foreign counterparts.

20. Confidential information may be exchanged between supervisory authorities on the basis of an agreement, on the condition that the disclosed information shall be used only for the purposes of supervision and that the confidentiality of the information is guaranteed as provided by law. IOSCO principles state that the need for domestic cooperation may extend beyond matters of enforcement and include disclosure of information relevant to authorization to act in a particular capacity and the reduction of systemic risk—for example, where there are divisions in responsibility for the securities, banking, and other financial sectors, as in Estonia. However, as stated above, there are no agreements between the SI and other domestic financial regulators. The dissemination of information to foreign supervisory authorities is permitted if by law or pursuant to a contract these authorities are entitled to receive such information and the confidentiality of such information is ensured.

Assessment: Broadly observed. No information sharing mechanisms have been established with other domestic regulatory agencies.

Principle 13: The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

21. The SI should cooperate with any EU member country. Threats to systemic stability are not confined to domestic factors and may include the behavior of individual financial institutions in another jurisdiction. The SI does not yet have adequate sharing arrangements with a sufficient number of other regulators to be able to identify and address any of these threats.

Assessment: Broadly observed. The SI needs information sharing arrangements with more foreign agencies.

Principle 14: There should be full, accurate, and timely disclosure of financial results and other information which is material to investors' decisions.

22. Notification requirements for issues are stipulated in the SMA. The "Regulations for the Announcement and Registration of Public Securities Issues," "Procedures for the Public Issue of Securities," and the "Procedures for the Registration of a Public Issue of Securities" are approved by government decree and set out the requirements for information in issue prospectuses with the aim of protecting investors. Issuers are obliged to disclose detailed information about their activities and their financial health.

23. The TSE has established its own rules and regulations and supervises listed companies. Issuers are liable for the correctness of information provided or published concerning issues of securities. The TSE also provides real-time news during trading hours.

24. One area where the TSE could improve is in the release of information regarding acquisition of large blocks of shares of listed companies. Investors who acquire more than 5 percent are currently disclosed, but the release of this information is not immediate. In addition, no disclosure is provided for (legal) insider buying or selling. The insider must notify the TSE within three days, but such information is not necessarily made public, although the SMA does permit it to be revealed.

Assessment: Broadly observed. However, the distribution of information regarding the acquisition of large blocks of shares in companies should be improved, as should information on insider trading.

Principle 15: Holders of securities in a company should be treated in a fair and equitable manner.

25. In primary distributions of securities, issuers and securities brokers must provide information to all potential investors on an equal basis. The SMA was amended in January 2000 to require all persons tendering to take over a listed company to tender for the entire amount of the issuer's shares. Until this amendment was approved, minority shareholders were often subject to unfair tenders as they were offered deeply discounted prices for their shares.

Assessment: Fully observed.

Principle 16: Accounting and auditing standards should be of a high and internationally acceptable quality.

26. As of January 1, 1995, all accounting entities, regardless of size or activity are required to apply Estonian Generally Accepted Accounting Principles (GAAP). Accounting and auditing standards are largely in compliance with IAS and EU directives.

Assessment: Fully observed.

Principle 17: The regulatory system should set standards for the licensing and the regulation of those who wish to market or operate a collective investment scheme.

27. The Investment Funds Act was passed in April 1997 and amended in June 1998. It is based on EU Directives. Some remaining amendments are needed, including those regulating investments in derivatives, deposits, money market instruments, and repo transactions. Future amendments will also introduce closed-end contractual funds and code of conduct rules for management companies. In addition, the Pension Funds Act, which regulates third-pillar voluntary pension funds, was passed in June 1999. As stated above, licensing is controlled by the MOF; the SI makes only recommendations on whether a license should be issued.

Assessment: Broadly observed. Rules are needed for closed-end contractual funds, as is a code of conduct for management companies.

Principle 18: The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

28. Both the Investment Funds Act and the Pension Funds Act describe the appropriate legal forms for collective investment schemes. The legal framework prescribes that management companies must keep their own assets (and assets of other funds they may manage) separate from the fund's assets. Each type of fund requires a custodian bank (called a depository in the law). However, there is no regulation that prohibits the same bank from owning a fund management company and serving as the custodian bank.

Assessment: Broadly observed. There is no regulation prohibiting a bank from owning a fund management company and serving as the custodian bank.

Principle 19: Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor's interest in the scheme.

29. Both the Investment Funds Act and the Pension Funds Act provide clear disclosure guidelines to funds relating to their investment policies. The legal framework provides for all fees to be clearly stated.

Assessment: Fully observed.

Principle 20: Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and redemption of units in a collective investment scheme.

30. The MOF has issued a regulation that provides the procedure for the establishment of the net asset value of the fund. This is first described in the Investment Funds Act. The Act also states that the management company must publish the latest issue and redemption prices in at least one daily national newspaper each day that it issues or redeems units, but not less than once every two weeks.

Assessment: Fully observed.

Principle 21: Regulation should provide for minimum entry standards for market intermediaries.

31. The SMA, which was passed in 1993 (and amended in 1995, 1996, 1997, 1998, and 2000) established regulations for professional securities market participants. But even though the SMA was recently amended, it is now obsolete compared with EU requirements and Estonia's needs regarding the development of capital markets. For example, the SMA does not include any regulations on activities of stock exchanges or a central depository of securities.

32. Regulations providing minimum entry standards for market intermediaries are established both in the SMA and by regulation of the MOF. The SI makes a recommendation, but the Minister of Finance retains the power to license intermediaries. Licenses are issued typically for one year (the term is not stipulated in the law).

33. The draft Law on the Estonian Central Depository for Securities (ECDS) envisages a private state register, compulsory registration of defined securities, monopoly rights to register dematerialized securities, services offering via account holders, and clearing via the BoE. The draft of this law has been submitted to the Parliament and had its first reading.

Assessment: Broadly observed. However, the SMA does not meet EU regulatory requirements.

Principle 22: There should be initial and ongoing capital and other prudential requirements for market intermediaries.

34. Professional security market participants (defined as brokerages and exchanges) must have share capital of at least € 400,000 according to the SMA. TSE member firms must hold at least 10 shares in the TSE (with a nominal value of € 100,000) and have a minimum share capital of € 1 million. Before a member firm can begin effecting transactions on the TSE, it must make a contribution to the guarantee fund account of the TSE at the BoE. The SI only checks such requirements during an on-site inspection or when the intermediary is applying or reapplying for a license.

35. The government plans to establish a guarantee fund, which will be formed on the basis of the existing Deposit Guarantee Fund Act in 2000/2001 in order to introduce an investor protection scheme. The guarantee fund will cover deposits, investments, and pension and investment funds and will also include an insurance Guarantee Fund. It will be an industry-funded scheme with a transitional period of implementation and a maximum amount of compensation per depositor per credit institution of € 20,000. Full implementation is envisaged by 2010 at the latest.

36. In addition, the intermediaries set their own margin trading limits. This practice could become risky, should margin buying increase and intermediaries be unable to call these margins in a market downturn. Margin limits are regulated for collective investment schemes. The adequacy of margin requirements should be reviewed periodically. According to IOSCO, margin levels and procedures should be designed to reduce the exposure of market participants, including the clearing house, to credit, market, and other risks—in particular, the risk of default by a market participant as a result of price movements in individual instruments and changes in market volatility.

Assessment: Broadly observed. Margin trading limits should be established.

Principle 23: Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients and under which management of the intermediary accepts primary responsibility for these matters.

37. Regulations for financial reporting by market intermediaries to the SI are not yet in place. Member firms of the TSE must disclose their audited annual reports, semiannual reports, and quarterly reports to the TSE. In addition, member firms must also inform the TSE immediately of any changes in activities that might impact their financial health. TSE Rules also require member firms to execute a client's order at the best possible price available at the time of transaction. Should the client not be satisfied with the actions taken or resolutions offered by a member firm, an appeal can be submitted to the Court of Arbitration of the Exchange. The rules of the TSE include a code of conduct which stipulate that members, their employees, as well as the members of supervisory bodies of the TSE must abide by the principle of fair and equitable trading. However, the rules of the TSE are a contract between the TSE and its members and not directly enforceable by specific Estonian law.

Assessment: Broadly observed. The rules of the TSE are not directly enforceable by law.

Principle 24: There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

38. This is an area of weakness. The SI can only recommend that the license of a market intermediary be revoked; only the Minister of Finance can revoke it. Moreover, the SI is not in the position to make such a recommendation quickly given its weak inspection, investigative and surveillance powers, and capacity. The SMA does not describe a procedure to be followed in the event of a failure of a market intermediary. Investors should be protected since in theory their assets should be segregated from that of the intermediary, but this may not occur in practice.

Assessment: Not observed. The SI can only recommend that a license be revoked. The SMA does not set out a procedure to be followed in the event of a failure.

Principle 25: The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

39. The TSE was established in 1996. It is a self-regulatory organization and licensed by the MOF under the 1993 SMA, which ensures that the TSE operates to the highest international norms. The TSE has issued its own rules and regulations, which in general meet the EC requirements.

40. The trading system of the TSE displays quotes for listed stocks, and the brokers have interactive terminals to enter new quotes for listed stocks, make orders, and change the existing ones. It also distributes news about the issuers of listed securities and gives information on the transactions concluded. All transactions are negotiated over the phone and reported to the TSE through the trading system. Members must report all transactions to the TSE within five minutes after the conclusion of the transaction.

41. The trading system of the TSE is connected to the system of the ECDS, which carries out the settlement of TSE transactions, on the basis of delivery-versus-payment (DVP) at T+3. Member firms are held responsible for the execution of all transactions reported by them to the TSE.

42. All issuers and listed companies enter into a contract that reserves the TSE's right to introduce new regulations and amend existing ones, closely scrutinize the integrity of all dealings, and introduce sanctions when needed.

43. As stated above, the TSE amends its own rules and regulations independently and the SI has little oversight.

Assessment: Broadly observed. The TSE's rules and regulations are not subject to regulatory authorization or oversight.

Principle 26: There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

44. Timely access to relevant information about secondary trading allows investors to better look after their own interests and reduces the risk of manipulative or other unfair trading practices. This risk is amplified by the lack of oversight by the SI and its inability to have any input into the rules of trading.

Assessment: Broadly observed. SI oversight is needed to reduce the risk of TSE companies developing self-serving rules.

Principle 27: Regulation should promote transparency of trading.

45. Since the TSE provides real time quotes along with an order book system, trading is considered to be transparent. However, the secondary market stocks are much less liquid, and thus trading is much less transparent given the lack of market makers. In addition, as stated previously, certain information may not be immediately widely released to the public at large, such as when a shareholder acquires a substantial interest in a company or when there is (legal) insider buying or selling.

Assessment: Broadly observed. Dissemination of information could be improved, including that on insider trading and major shareholder acquisitions.

Principle 28: Regulation should be designed to detect and deter manipulation and other unfair trading practices.

46. Such conduct may be addressed by direct surveillance, inspection, reporting, product design requirements, position limits, settlement price rules or market halts, complemented by vigorous enforcement of the law and trading rules. However, as stated earlier, the SI is unable to enforce the rules in a meaningful way. Constant monitoring is also required, and the SI has only one staff member who monitors the market during trading hours. This capacity should be increased.

Assessment: Not observed. The SI is unable to enforce rules relating to manipulation and other unfair trading practices.

Principle 29: Regulation should aim to ensure the proper management of large exposures, default risk, and market disruption.

47. Market authorities should closely monitor large exposures and share information with one another to permit appropriate assessment of risk. However, while the TSE may monitor its member firms, it does not share information with the SI. Market authorities should promote mechanisms that facilitate the sharing of the information through appropriate channels. In addition, market authorities should establish automatic trigger levels appropriate to their markets and continuously monitor the size of positions. To perform this monitoring function, market authorities should have access to information on the size and beneficial ownership of positions held by direct customers of market members. Market authorities can then take the appropriate action, such as requiring the member to reduce the exposure, or increasing margin requirements. While the SI is unable to accomplish this, the TSE has the right to impose additional prudential and financial requirements on noncredit institution members, including the requirements for minimum capital, capital adequacy, liquidity of assets, compulsory reserves, position risks, and investment exposure. However, the TSE potentially faces pressures from its members to forgo such increases in capital requirements.

Assessment: Not observed. The SI does not receive information that would allow it to ensure proper management of large exposures, default risk, and market disruption.

Principle 30: The system for clearing and settlement of securities transactions should be subject to regulatory oversight and designed to ensure that it is fair, effective, and efficient and that it reduces systemic risk.

48. The Estonian Central Depository for Securities (ECDS) was founded in 1994 by seven commercial banks, the BoE, MOF and the Compensation Fund. The ECDS keeps the register for dematerialized securities, which the MOF supervises.

49. The Statute of the ECDS regulates its activities. It stipulates the order for establishing and keeping the central register of securities and how information should be presented, used, and recorded. In addition, it stipulates how expenses for keeping and liquidating the register should be handled and what data should be registered.

50. All securities transactions are generally conducted against payment, that is, money and the securities move at once, which prevents the risk that the seller may remain unpaid for his securities. The monetary clearing takes place at the BoE. The upcoming upgrade in the payment system could face delays because of slow progress in the area of security clearing.

51. According to the draft Act on the Central Depository for Securities, which has had its first reading in the Parliament and is projected to become effective in 2001, the ECDS will act as a state register, but be privately managed. There will be compulsory registration of publicly traded securities, investment and pension funds, joint stock companies with more than 100 share holders and public securities. The register will have a monopoly right to register dematerialized securities, providing better possibilities for control and increased reliability. The services will still be offered via account holders and clearing will be performed through the BoE.

Assessment: Fully observed.

Priorities for further action

52. The findings of the assessment of observance of the IOSCO Objectives and Principles of Securities Regulation are summarized in Table 3. The results help show why the SI is weak and it lacks credibility in the capital market. The passage of a new Securities Market Law and the move to integrated financial sector supervision should help to address some of the SI's weaknesses, but these measures are beyond the control of the SI, and other important changes are also needed. Highest priority should be given to strengthening the capacity of the SI, for its capabilities in the areas of supervision, inspection, investigation and enforcement are all in need of improvement. As a first step, efforts should be made to attract and retain qualified staff. The SI should also seek to take fuller advantage of the enforcement powers that are available, which will require greater cooperation with the TSE and the economic police. Significant benefits would also accrue from closer cooperation with other domestic financial supervisory authorities. To this end, the SI should take measures to persuade the BSD and the ISA to sign MOUs on information sharing with the SI. The SI should also give high priority to joining IOSCO. Finally, improved market monitoring is required, especially as the internet continues to grow as a trading medium.

Table 3. Estonia: IOSCO Objectives and Principles Observance



FO 1/

BO 2/

NO 3/


Principles Relating to the Regulator


The Securities Inspectorate (SI) does not have independence, adequate powers, resources or the capacity to be effective.



The move to unified supervision and the revised Securities Market Act (SMA) should address these weaknesses, but in the interim efforts should be made to strengthen the SI.

Principles of Self-Regulation (6-7)

The Tallinn Stock Exchange (TSE) appears to be a well managed Self -Regulatory Organization (SRO).




The SI has little oversight of the TSE as the TSE makes its own Rules and Regulations.

Principles for Enforcement of Securities Regulation (8-10)

The SI does not have adequate enforcement power. Cases are handed over to the economic police or courts that lack the knowledge or incentive to implement proper enforcement of security violations. Perception of market participants indicates a lack of credibility by the SI.



The move to unified supervision and the revision of the SMA should address these weaknesses. Training for the economic police and courts should be provided regarding security market violations.

Principles for Cooperation in Regulation


The SI has no MOUs with the other Estonian financial regulators, but has signed MOUs with Latvia, Lithuania and Sweden.




Again, the move to unified supervision will address this weakness, but the SI should reach an interim arrangement with its domestic financial sector counterparts.

Principles for Issuers (14-16)

Both the SMA and the TSE have established rules for listed companies. Accounting standards are in observance with both EU Directives and Generally Accepted Accounting Principles (GAAP).




The TSE could improve disclosure by immediately releasing information on beneficial interests acquired in any listed companies as well as legal insider buying and selling.

Principles for Collective Investment Schemes (17-20)

The Investment Funds Act is based on EU Directives. The Act and the recently passed Pension Funds Act provide a legal basis for collective investment schemes, including segregation of assets, disclosure rules and redemption prices.




Future issues include tightening related party transactions as well as requiring an independent custodian bank.

Principles for Market Intermediaries


The 1993 SMA provides the legal basis for market intermediaries, but must be revised to meet EU requirements.




The TSE has its own reporting and prudential guidelines for member firms, but reporting requirements for market intermediaries to the SI are not yet in place. In addition, the revised SMA should describe the procedure to be followed in the event of failure of a market intermediary.

Principles for the Secondary Market (25-30)

The TSE is modern, effective and well managed, but retains oversight for its own trading systems and activities. There is a potential conflict of interest when a member firm may be involved in unfair practices. The Estonian Central Depository for Securities (ECDS) is also efficient.




The revised SMA should provide additional oversight powers to the SI in this area. The proposed Act on Central Depository for Securities should strengthen the framework for the ECDS.

Source: Mission's assessment.
1/ FO: Fully observed.
2/ BO: Broadly observed.
3/ NO: Not observed.

1 The Basel Core Principles were issued in September 1997; a Core Principles Methodology was released in October 1999 by the Basel Committee on Banking Supervision. The Code of Good Practices on Transparency was adopted by the Interim Committee in September 1999; work on a supporting document is in progress. The IOSCO Objectives and Principles were issued in September 1998, and a detailed self-assessment methodology is being developed. A draft of the Core Principles for Systemically Important Payment Systems was issued for public comment in December 1999. The IAIS Insurance Supervisory Principles were issued in September 1997; a self-assessment program has been developed to assist member countries in evaluating compliance.

2 NOREX is the Nordic Exchanges Alliance, which now links the Stockholm and Copenhagen Exchanges. The Oslo Exchange is soon expected to join as well, and the exchanges in Riga and Vilnius also signed the same letter of intent as Estonia.


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