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New Securities Market Law Draft

September 26, 2012


Sales and Research Team, BDSec Joint Stock Company at www.bdsec.mn

A Potential Game Changer for Mongolian Capital Markets


Nick Cousyn Chief Operating Officer nick.cousyn@bdsec.mn Munkhtulga Ganbold Head of Institutional Sales mganbold@bdsec.mn Next month, Parliament will begin discussions regarding the passage of a new securities law, which will be critical for the future of Mongolian Capital Markets. We have reviewed and summarized the 81 page draft (currently only available in Mongolian) and have come away very impressed by the proposal. This draft has passed through several levels of government, both at the agency level and through political committee. It is remarkable how comprehensive and progressive this draft is, which represents further evidence that Mongolia is moving in the right direction politically. One word of caution, details on how this proposal will be implemented are limited (which is not unusual at this juncture) and we will watch further developments closely. Below is a summary of the proposal with our commentary: The creation of regulation to support the issuance of asset backed securities Mongolian corporations need access to cheaper capital, as borrowing rates from local banks can (and do) exceed 20%. Further, assets in Mongolia are largely unencumbered, making collateralized borrowing a much cheaper and more competitive source of capital for local corporations. Investment funds operations and the creation of ETFs Assuming the regulatory bottleneck at the FRC opens, local companies will be coming to the capital markets in droves to secure capital for growth and to refinance high interest rate bank debt. The capital markets here need investment products to attract more foreign and local investment, which will help fund Mongolias rapid economic growth. Private and state owned pension funds participation in the capital markets Should pension funds be allowed to invest in Mongolias booming economy, via the capital markets, they will experience returns far in excess of what they are receiving currently. Greater returns result in lower future funding costs for these organizations and more generous benefits for their workers. Banks, non-bank financial institutions, and insurance companies participation in the capital markets The financial sector in Mongolia remains very small at the moment. The ability to access and invest in the local capital markets will allow these sectors to grow, which is critical for the long term development of Mongolias economy. The development of non-bank financial institutions and the insurance industry will insure more capital stays in Mongolia.

Institutional Sales & Research Department

Derivatives We will look for more clarity on this one, as the subject of derivatives is both vast and complicated. On a basic level, the use of Warrants as part of local equity and debt offerings would be extremely valuable. Credit Default Swaps will almost certainly be needed going forward, as The Development Bank of Mongolia has announced they will come to market for $5B USD over the next two years. Foreign institutions will also need derivatives to hedge currency risk, though it is unclear what role the local capital markets will play Depository receipts Should help increase liquidity and the number of listed companies in Mongolia Offshore listing of onshore listed companies & onshore listing of offshore listed companies (dual listing) This is another important step to increase the number of listings in Mongolia and allow local companies access to large amounts of capital on foreign exchanges. Up to 90% of total outstanding shares or Depository Receipts can be listed offshore, increasing the profile of Mongolian public companies. New custodial opportunities. Banks their daughter or subsidiary companies, a branch of foreign custodian banks which have officially registered in Mongolia, can act as a custodian This law would allow international banks to partner with local banks to offer institutional quality custodial services. Foreign custodians, combined with the new T+3 settlement structure, will likely serve as a catalyst for meaningful institutional investment in Mongolian capital markets. In conclusion, we applaud the FRC for creating such an ambitious and thoughtful proposal, which will hopefully be passed in its entirety and in the spirit of its original intention. For too long, financial markets here have been unable to function properly due to the restraints of current regulation. Should this proposal become law, the implications for Mongolias capital markets would be historic, likely resulting in a flood of new capital looking for exposure to one of the worlds fastest growing economies.

Institutional Sales & Research Department


phone/fax: 976-11323411 mail: research@bdsec.mn traders@bdsec.mn

Nick Cousyn Chief Operating Officer email: nick.cousyn@bdsec.mn Munkhtulga Ganbold Head of Institutional Sales email: mganbold@bdsec.mn Dagiijanchiv Chuluunbaatar Research email: dagiijanchiv@bdsec.mn Odbayar Oyunbaatar Research email: od@bdsec.mn Sainbayar Jadamba Institutional Sales email: sainbayar@bdsec.mn

BDSec Headquarter Zaluuchuud Avenue 27-1 8th Khoroo, Sukhbaatar District Ulaanbaatar, Mongolia Phone/Fax: 976-11313108 Website: www.bdsec.mn

BDSec Express Branch Express Tower Peace Avenue Ulaanbaatar, Mongolia Phone/Fax: 976-11311128 Email: info@bdsec.mn

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