Mongolian Stock Exchange (MSE) and London Stock Exchange Group (LSEG) has signed “Strategic Partnership Agreement” on April 7th 2011. Following the Strategic partnership agreement, LSEG is working with high-level objectives as to develop the market infrastructure in line with international standards, install new trading system, and to upgrade Mongolian stock market legislation.

LSEG sent an official letter to the respective government officials explaining how the integration of “Securities Clearing House and Central Depository” LLC and Mongolian Stock Exchange JSC will make Mongolian stock market more efficient. The letter provided details on the positive influences and concerns on Mongolian stock market. Therefore, we are presenting the official letter.

CREATION OF A WORLD CLASS MONGOLIAN FINANCIAL MARKET

The Master services agreement requires us to propose how to create a world class financial market in Mongolia and best implement it. The government of Mongolia has made development of the capital market a priority field, and it will depend on its success in view of the privatization of Tavan-Tolgoi and other strategic deposits in order to improve the livelihood of all Mongolian citizens. Therefore, optimizing capital markets structure is key to reach the Government’s objectives. To that end we are recommending that the international practice of T+3 (Trade Day +3 business days) rolling settlement is introduced. This is an indispensable move to attract international investors, hence increase liquidity of the Mongolian financial market.

We believe that the current pre-funding of trades at MSE is major impediment to market grow. We strongly recommend its elimination and replacement with settlement on T+3. This issue must be resolved prior to implementation of the Millennium IT clearing, settlement and depository software and will be the most effective way to improve the Mongolian financial market.

Furthermore, we believe that both MSE and MSCH&CD should maintain a clear unified goal and single vision in order to achieve stated objectives. Based on working experience, we firmly believe that an integrated model in Mongolia connecting operationally the MSE, the Clearing House and Depository, whereby the Clearing House and Depository are Stock Exchange subsidiaries with separate legal duties provides undisputed benefits to all members and shareholders. As per our Master Service Agreement, we would be happy to help with the successful implementation of this model making Mongolia a world class financial market.

SIX REASONS FOR AN INTEGRATED MONGOLIAN FINANCIAL INFRASTRUCTURE

1. Partner with LSEG to create a Mongolian champion The reason the Mongolian Government selected LSEG as its strategic partner is to leverage on LSEG’s brand to attract the highly needed foreign direct investments to Mongolia. It is therefore of paramount importance that LSEG is in control of the total lifecycle of the securities trade; that is listing, trading, clearing and settlement. This will give foreign investors confidence that the Mongolian capital market will be structured in accordance with the international standards followed by the LSEG. This will also allow the Mongolian stock market to be the national growth engine, repatriate the Mongolian companies listed abroad and be the point of reference for Mongolian issuers such as TT, OT and SOEs and SMEs.

2. Attract international investors’ liquidity One of the key aims of the partnership is to attract foreign direct investments to Mongolia. London is a major financial hub in the world, investing especially in Asia; with institutional flows from organizations such as Blackrock, JPMorgan Asset Management, Fidelity, Moore Capital, Schroders Asset Management, BofNY Asset Management, etc.. This also provides the Mongolian market with the opportunity to attract the 500 member firms that are already connected with London and trading on London technology. As Mongolia will have the same system, it is very attractive for LSEG members as they do not have to incur any investment to connect to the Mongolian system. These factors will help fuel additional listings and enhance new revenue opportunities for the Mongolian financial infrastructure.

3. Provide seamless access to international players with no overburdening membership procedures It is currently essential for international participants to be registered in a single process, rather than requesting them to follow different procedures related to different organizations. Applications and procedures to update the systems automatically should be performed with a single application. This can be only achieved if the pre and post trading activities are integrated. This will also allow the implementation of standardized practices across the entire market and a single set of instructions.

4. Create a strong regional financial hub By using LSEG’s brand name and having a world class system in place, MSE will attract listing in Mongolia from the neighboring countries and will be an easy opportunity to get the much needed capital to their country. The target countries will be Kazakhstan, Siberia, Northern China to name but a few. This will also include sovereign bonds to international institutions. This will also be the best way to trade, clear and settle not only Mongolian stocks but also other regional and international financial markets’ financial instruments.

5. Introduce new financial asset classes easily and quickly One of the key requirements of integration is to introduce new products and services such as government and corporate bonds, ETFs, derivatives (starting with stock index futures). If the organizations are not under one management, it will be difficult to introduce these new instruments within a reasonable time frame. If organizations are separate and governed by two different boards, priorities and objectives may not be aligned.

6. Reduce costs If the two organizations are put under the same management, cost synergies will be considerable and enable the Mongolian financial infrastructure to be more profitable and capital efficient. Cost synergies will achieved through consolidation of overlapping functions including IT, HR and Legal. In addition, asset concentration and easier cross-department training will be achievable. Also, brokers, underwriters, listed companies and market regulators will be dealing with only one organization, not two, within a client-friendly approach. The integrated and leaner Mongolian market infrastructure will be able to leapfrog its competitors by leveraging more easily and quickly on the implementation of LSEG’s Millennium IT cutting edge technology for all markets across trading, clearing and settlement.