Final Report: Expanding the ERA's Financial Benchmarking System and Implementing Performance Agreements

The current legal framework for the Mongolian Securities Clearing House & Central Depository Co., Ltd. (MSCHCDC) is inadequate, with the Securities Market Law of 2002 being too general and obsolete. The framework does not apply to the integrated functions of a modern central securities depository, and Articles 24 and 25 posit two separate organizations for clearing and settlement of trades and custody of securities. The Law incorporates Principle 30 of the IOSCO Objectives and Principles for Securities Regulation, which emphasizes the need for regulatory oversight and design of clearing and settlement systems to ensure fairness, effectiveness, and efficiency, and to reduce systemic risk. The Law also adopts key elements of the Recommendations for Securities Settlement Systems of the Basle Committee on Payment and Settlement Systems and the Technical Committee of IOSCO. The Law provides rules for the Mongolian Central Securities Depository (MCSD), including its governance, management, supervision, and funding. However, the detailed rules and procedures for clearing and settlement of securities transactions are considered too technical and complex for a law. Most countries with developed financial markets provide authority to the central securities depository and to stock exchanges to establish their own rules on technical matters. The Law does not include detailed rules for the MCSD's operations, as this would be inappropriate at this time. The London Stock Exchange is assisting the Mongolian Stock Exchange in strengthening its operations, which has significant implications for the clearing and settlement of securities trades on that exchange. The Financial Regulatory Commission is also developing a regulation for second-tier securities custodians, which will have implications for the operations of the MCSD. Additionally, the Mongolian securities market is expanding rapidly, and laws are slow to change while new rules issued by the MCSD for its operations could be adopted rapidly to respond to market developments. The registration of securities in the name of an account holder at a central securities depository or at a sub-custodian provides presumptive ownership of securities but may be in the name of a fiduciary or other intermediary, not of the beneficial owner. There is a need for rules to cover rights to securities, which is not appropriate for a law on a central securities depository or for a securities law. Such rules should be in a separate law or in the civil code, as contained in the Unidroit Convention on Substantive Rules for Intermediated Securities of 2009. The Law on the Mongolian Central Securities Depository aims to provide a sounder legal basis for central securities depository activities in Mongolia, incorporating international best practices and principles. The Law provides rules for the governance, management, supervision, and funding of the MCSD, while leaving the detailed rules and procedures for clearing and settlement of securities transactions to be established by the MCSD itself.