Twinning Project Fiche 1. Basic Information 1.1. Programme: European Neighborhood and Partnership Instrument - National Action Programme 2009 1.2. Twinning Number: AZ11/ENP-PCA/TP/18 1.3. Title: Approximation of the legal and regulatory framework for the securities market of Azerbaijan according to the European Union acquis and capacity building for the State Committee for Securities 1.4. Sector: Finance 1.5. Beneficiary country: Republic of Azerbaijan 2. Objectives 2.1. Overall Objective: The overall objective of the twinning project is to create regulatory and institutional capacities for long-term economic stability and growth by strengthening and upgrading the legal, regulatory and institutional framework of the securities market in the Republic of Azerbaijan 2.2. Project purpose: The project purpose is to improve the legal framework as well as the regulatory and institutional capacities of the State Committee for Securities of the Republic of Azerbaijan to supervise the securities market and financial service providers in line with the European Union acquis. 2.3. Contribution to the EU-Republic of Azerbaijan Partnership and Co-operation Agreement, the European Neighbourhood Policy Action Plan, and the ENP National Indicative Programme for Azerbaijan: The project will contribute to the fulfilment of RA’s obligations stipulated in the Partnership and Cooperation Agreement (hereafter “the PCA”) between the European Union and the Republic of Azerbaijan, which was signed on 22nd April 1996 and entered into force on 22nd June 1999. It establishes the basis for cooperation in the fields of trade, allocation and promotion of investments, trans-border services between the EU and the Republic of Azerbaijan, intellectual property rights, capital investments and ensuring of their free flow, etc. According to the second paragraph of Article 43 of PCA and European Neighborhood Policy Action Plan for strengthening the cooperation between the Republic of Azerbaijan and the European Union, the process of the legal approximation must be implemented in several fields, including the securities market. The European Neighborhood Policy Action Plan, adopted on 14th November 2006 maintains legal approximation and improvement of principles of administrative management as priority fields. Twinning Fiche: Support to State Committee for Securities – Legal Approximation Page 1 of 28 The EU-Azerbaijan Action Plan highlights (p.24) the necessity to elaborate an appropriate strategy to develop the financial markets and financial intermediation in accordance with modern international standards. It mentions as well the need to enhance a prudential regulatory framework for financial services and supervision equivalent to that existing in the EU. This document stresses the importance of an effective implementation of independent advisory authorities in accordance with internationally recognized standards. The ENPI Country Strategy Paper 2007-2013 for Azerbaijan mentions in general terms, that EC assistance is supporting the process of market and regulatory reform in Azerbaijan, as envisaged in the PCA and the ENP Action Plan. It reminds as well that EC assistance will provide support for regulatory approximation in a broad range of areas including the right of establishment and company law, financial services and markets. The Twinning project will assist the State Committee for Securities (SCS) to harmonize securities market legislation with the relevant EU Directives and legal acts (e.g. Markets in Financial Instruments Directive, Transparency Directive, Market Abuse Directive, Prospectus Directive, Undertakings for Collective Investment in Transferable Securities Directive, Anti- Money Laundering Directive, Alternative Investment Fund Managers Directive, Settlement Finality Directive and the Financial Collateral Arrangements Directive, European Market Infrastructure Regulations, CSD Legislation). 3. Description 3.1. Background and justification In the context of the Partnership and Cooperation Agreement (PCA) between the European Union and the Republic of Azerbaijan and based on Article 43 of the latter, the Cabinet of Ministers of the Republic of Azerbaijan decided, in 29 of October 2009, to adopt an Action Plan on legal approximation of the country’s legislation with the EU acquis. One of the main priorities identified within the Action Plan was financial services. The main areas of the national legislation regarding financial services that should be harmonized with the EU acquis are the followings: transparency and disclosure requirements of listed companies, prospectus of equities and debt securities issuers, capital adequacy of capital markets intermediaries, securitization, mergers and acquisitions, takeovers, reorganization and capital maintenance of joint stock companies, protection of shareholders rights, public offerings, as well as definition of powers between authorities. In order to support sector specific regulatory aspects as well as, enhanced development of the securities market from an institutional point of view in accordance with ENP-NIP 2007-2010 several donor funded technical assistance projects such as EU TACIS, FIRST Initiative, EBRD are currently being implemented. These projects cover such areas such as review of the securities market legislation and development of a single capital markets law, strengthening and development of AML/CFT regime, promotion of the securities market awareness through TV programs, financial glossary, competition among journalists for the best securities market and corporate governance articles, capacity building activities, trainings and study tours for the State Committee for Securities, National Depository Center, and the Baku Stock Exchange. However, these technical assistance activities will end by 2011 and the implementation of recommendations by the SCS will require additional assistance through an EU Twinning project. Twinning Fiche: Support to State Committee for Securities – Legal Approximation Page 2 of 28 A FIRST Initiative funded 3-month technical assistance project on capital market development has been prepared in close collaboration with the World Bank. The project purpose was to formulate a comprehensive capital market development strategy for the next 5 years through prioritized sequence of steps, which will i) critically analyze the current market conditions; ii) clearly identify the direction of development and set necessary reform agenda; iii) propose and efficient capital market architecture and; iv) include detailed action plan (road map) In order to fulfill obligations based on Article 43 of PCA and successful implementation of ENP-NIP for Azerbaijan, several EU directives should be transposed into national legislation by the adoption of the single capital markets law. In addition, several capital market institutions need to undergo institutional reforms and capacity building in order to enhance development of securities market. To achieve above mentioned results, the State Committee for Securities (SCS) has decided to request the EU assistance through a Twinning Project. The latter will be the successor of existing donor funded technical assistance projects i.e. USAID, EU TACIS, which are focused on identification of gaps I the best international practices in various fields of the securities market, revision of the securities market related legislation, as well as provision of capacity building activities, trainings and seminars to the capital market institutions. Also Twinning Project will support the possible legislative reform direction indicated in the securities market development strategy to be prepared by the FIRST Initiative. The SCS is attaching high importance on the transposition of EU Directives into the national legal and regulatory framework and expects to gain from the exchange of experience and knowledge with similar EU-based authorities. This twinning project is designed at a time when the country has clearly decided to carry out a systematic approximation of its legal and regulatory framework towards the EU aquis, including the area of securities market regulation and supervision. Additionally, in mid May 2011 the President of Azerbaijan has signed a decree approving the State Program “Development of the securities market of the Azerbaijan Republic for 2011-2020”. The state program was approved with a view to improve the Azerbaijani securities market in accordance with the best international practices and expand financial services to population and economic entities. The State Securities Committee was tasked to coordinate the implementation of measures envisaged in the state program. The current stage of economic development – when the international financial crisis is coming to an end – requires further deepening and development of securities market instruments, a better implementation of international standards in regulation and supervision and an increased awareness and trust among the public as regard to trading securities. The SCS twinning project is considered as a further step towards closer and more effective cooperation between the Republic of Azerbaijan and the European Union. The SCS is committed to a multi-step approach to build stakeholder consensus for the development of a sustainable framework for capital markets development. This approach includes: (i) a public dissemination and adoption of the Capital Market Development Strategic Plan by the SCS Board in early December 2010; (ii) submission by March 2011 to the President of the Republic