Futures & Derivatives

Reprinted with permission from Futures and Derivatives Law Report, Vol- ume 36, Issue 3, K2016 Thomson Reuters. Further reproduction without permission of the publisher is prohibited. For additional information about this publication, please visit www.legalsolutions.thomsonreuters.com. March 2016 ▪ Volume 36 ▪ Issue 3 REPORT DERIVATIVES dence from the Soviet Union in 1991 has started a new chapter in the development REGULATION IN of Azerbaijani securities markets. AZERBAIJAN Soon after gaining independence, Azer- Ulvia Zeynalova-Bockin baijan adopted the Law “On Securities Ulvia Zeynalova-Bockin is a senior as- and Stock Exchanges”3 (now repealed), sociate in the Baku oce of Dentons. which regulated the securities market with Her practice includes banking law, Islamic nance, real estate nance, the objective of protecting the interests of mergers and acquisitions, as well as investors. At the same time the govern- corporate law and nance. She also has ment launched the First State Privatiza- experience in securities and nancial tion Program4, creating a hundreds of joint regulation, including work with the Corporation Finance Division of the stock companies and thousands of share- U.S. Securities & Exchange holders on the basis of privatized state Commission. She has provided legal enterprises. The State Committee on Se- support to local and international curities of the Republic of Azerbaijan (the clientele in high-prole matters, includ- 5 ing advising on the rst IPO to be listed “State Securities Committee”) was estab- on the Baku Stock Exchange and advis- lished in 1998, followed soon thereafter ing major investment banks on by the establishment of the modern Civil Azerbaijani derivatives and securities Code of the Republic of Azerbaijan.6 Not regulation. surprisingly, this period also coincided I. Introduction with signing of the rst production shar- The formation of securities markets in ing agreement in 1994, allowing foreign The Journal on the Law of Investment & Risk Management Products Azerbaijan reportedly dates back to the investment in the hydrocarbon sector of late 19th century, with the establishment the place where the international oil indus- of the Baku Commodities Exchange, on try was born in the mid-19th Century. The which bonds and promissory notes were Baku Stock Exchange was established in traded.1 Further development of the secu- 2000.7 rities markets was followed by creation of However, until very recently, Azerbai- the Baku Trade Bank and several joint jani derivatives regulation remained rather stock companies operating mainly in the fragmented and undeveloped, consisting petroleum industry in independent largely of a few general provisions in the Azerbaijan.2 Civil Code,8 the cornerstone of Azerbai- While prospects of mature securities jani civil and commercial law, together markets were stalled by the annexation of with several pieces of secondary legisla- Futures & Derivatives Law Azerbaijan by the Soviet Union in 1920, tion enacted by the State Securities the restoration of the country’s indepen- Committee. Indeed, there did not seem to March 2016 | Volume 36 | Issue 3 Futures and Derivatives Law Report be any need to regulate the almost non-existent to the holder to buy, sell or swap an underlying local derivatives market, as the country was asset. Finally, swaps are derivative nancial enjoying a steady stream of revenues from hydro- instruments under which two parties exchange carbon exports for nearly a decade, and local the same type of underlying asset.12 investors were free to invest in derivatives prod- The concept of derivative nancial instrument ucts abroad. was strategically included under Chapter 20 of With the recent sharp decline in the price of the Civil Code (Contact Law). Previously, deriva- oil, Azerbaijan has recently stepped up its eorts tives were considered to be securities. Including to develop its nancial sector further. Part of that derivatives regulation in the section of the Civil eort was to modernize the legislation, which has Code pertaining to contracts might possibly lead the Azerbaijani Parliament, the Milli Majlis, signal a legislative intent to exempt non- to adopt a new Securities Market Law in 2015,9 standardized derivative nancial instruments as well as introducing amendments to the key from the existing securities regulations, while sections of the Civil Code dealing with regulating those that are traded over the stock ex- derivatives. In this article we discuss these recent changes in Azerbaijan. legislative developments in derivatives regula- Finally, these amendments to the Civil Code tion in Azerbaijan. expressly excluded derivative nancial instru- II. Recent Developments in Derivatives ments from the scope of the Azerbaijani gaming Regulations laws, clarifying once and for all that derivative nancial instruments have legitimate a economic A. Amendments to the Civil Code and commercial purpose. The most crucial part of the amendments to the B. New Securities Market Law Civil Code was introduction of a new concept of the derivative nancial instrument, dened as a The Securities Market Law, which was ad- contract to buy, sell or swap underlying assets, opted on the same day as the amendments to the securities, foreign exchange, interest spots, prof- Civil Code discussed above, completely over- itability, derivative nancial instruments, com- hauled the regulation of the securities and deriva- modities, nancial indices, credit risk, and the tives market in Azerbaijan. like may serve as underlying assets.10 Despite the fact that derivatives are no longer The law provides for three types of derivative designated as securities, the denition of the nancial instruments - futures, options, and regulated market set forth in the Securities Mar- swaps.11 ket Law includes both securities and derivative nancial instruments that are being traded on a Futures are derivative nancial instruments for stock exchange. (In fact, the State Securities the sale and purchase of a predetermined type and Committee13 has recently adopted the relevant amount of an underlying asset at an agreed date rules, which are discussed later in this article). and price. Options are dened as derivative nancial instruments that grant a unilateral right The Securities Market Law introduced new 2 K 2016 Thomson Reuters Futures and Derivatives Law Report March 2016 | Volume 36 | Issue 3 licensing requirements in relation to certain sis related to securities and derivative nan- activities related to derivative nancial cial instruments; instruments. Namely, engaging in any of the fol- E acting as a security trustee for secured lowing primary and auxilliary investment ser- bonds; and vices in Azerbaijan now requires an investment company license. E foreign exchange activities in relation to conducting primary investment services.15 1. Primary investment services It should be noted that, prior to the adoption of Primary investment services are dened to the Securities Market Law, separate licenses include: were required for brokers, dealers and underwrit- E the acceptance and execution of clients’ ers, which were issued for a period of ve years, orders in relation to transactions with de- while licenses for investment companies are now 16 rivative nancial instruments; issued for an indenite period of time. Primary and auxiliary investment services are subject to E the management of individual investment further reporting, implementation, bookkeeping, portfolios, including those consisting auditing, and other requirements under the Secu- wholly or partially of derivative nancial rities Market Law.17 instruments; The Central Bank of the Azerbaijan is ex- E the management of clients’ accounts, in- pressly authorized to enter into transactions relat- cluding executing transactions related to ing to securities or derivative nancial instru- encumbering derivative nancial instruments on its own behalf without obtaining a ments; license for investment company activities, provided that such transactions are entered into for E lending funds or securities to investors for the benet of the State.18 trading with derivative nancial instruments; and C. Other Relevant Legislation; Use of ISDA Documents E conducting investment and nancial analy- sis related to derivative nancial 1. Advertising Law instruments.14 The new Advertising Law19 contains certain restrictions related to the advertising of securi- 2. Auxiliary investment services ties, as well as nancial, bank, and investment Auxiliary investment services include: services, in Azerbaijan. The act of advertising is dened as information distributed using various E lending funds or securities to investors for means and methods in any form for the purpose trading with securities and derivative nan- of attracting the attention of the consumer to the cial instruments; subject-matter of the advertisement, creating and E conducting investment and nancial analy- maintaining interest in and increasing awareness K 2016 Thomson Reuters 3 March 2016 | Volume 36 | Issue 3 Futures and Derivatives Law Report about the product and stimulating the sale Law, the enforceability of netting provisions of thereof.20 ISDA Master Agreements was based primarily on the fact that Azerbaijani law provided for the These restrictions include, along with a previ- concept of set-o, by which an obligation is ously enacted prohibition against the advertising deemed satised in full or in part by a set-o of unregistered securities, restrictions related to against a counter claim, where such

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