Final Report: Regulatory Impact Assessment of the Georgian Law on Securities Market

This situation is commonly explained by the small scale of the Georgian economy and an almost inexistent corporate population. However, the regulatory framework is also a contributing factor and may require in-depth and thoughtful revision. The immature securities market leaves the majority of local business with limited options for attracting additional capital. Commercial banks have almost fully assumed the role of capital providers for small and medium size businesses. Some of the largest Georgian companies who have needed to obtain financing through the capital markets have sought it through foreign stock exchanges (e.g., Bank of Georgia, Georgian Railway, and TBC Bank). The parties that have been affected directly are the brokerage firms and trade organizers (the GSE and the Depository); however, the absence of a vital, developed securities market has an impact on joint stock companies, investment funds, and individual investors. The RIA team conducted in-depth interviews with representatives of all major stakeholder groups and consulted with the national and international experts and market observers. The goal of the RIA was to assess the costs and benefits of the harmonization of Georgian Law on Securities Market with the EU regulatory framework, which should be completed within a 5-7 year timeframe. Specifically, the EU directive on MiFID was selected for this analysis, based on feedback received from the national regulator of the securities market. The main conflict between the MiFID requirements and the existing law in Georgia, selected by the RIA team, is the pre-trade price transparency regulation. Equal access to information on pre-trade pricing is not guaranteed by the current LSM of Georgia. This particularly concerns transactions conducted off the stock exchange. The RIA team studied the baseline context and developed two scenarios: Option I analyzed how the market would react if there were no future interventions in the regulatory framework of the Georgian securities market; Option 2 projected the impact of introducing new trade transparency requirements in accordance with the MiFID. Both qualitative and quantitative analyses were conducted. The comparison of the scenarios showed that no intervention would have disastrous results for the market; however, the introduction of trade transparency requirements alone will have only a modest positive effect. This indicates that the market is in need of a more complex treatment. The table below presents the results of projected calculations, with the incremental Net Present Value for introducing the Directive in the area of pre-trade price transparency is over GEL 2 billion over a period of 15 years. There are also other benefits (as well as costs) associated with the Option 2, presented in further parts of the Report. The RIA team identified several key drivers of the problem, including the fragmentation of the market, the low quality and lack of financial disclosures from the corporate community, and the absence of centralized data sources. The team also noted that the current LSM of Georgia does not guarantee equal access to information on pre-trade pricing, particularly for transactions conducted off the stock exchange. The RIA team conducted a thorough analysis of the costs and benefits of introducing the MiFID Directive in Georgia. The analysis showed that the introduction of trade transparency requirements alone will have only a modest positive effect on the market. However, the incremental Net Present Value for introducing the Directive in the area of pre-trade price transparency is over GEL 2 billion over a period of 15 years. Based on the analysis, the RIA concludes that the MiFID Directive should be introduced in Georgia. The RIA team also made several key recommendations for the implementation of securities market reform and harmonization of Georgian legislation with the EU directives. These recommendations include the need for increased awareness and education among market participants, the development of a more robust regulatory framework, and the establishment of centralized data sources. The RIA team also noted that the introduction of the MiFID Directive will require significant changes to the current regulatory framework in Georgia. The team recommended that the Georgian government and regulatory authorities work closely with international experts and market observers to ensure a smooth transition to the new regulatory framework. In addition to the main findings and conclusions of the RIA, the team also identified several key areas for further research and analysis. These areas include the development of a more robust regulatory framework, the establishment of centralized data sources, and the need for increased awareness and education among market participants.