OFFICIAL USE Diagnostic report on the Estonian capital market SRSS Local Currency and Capital Markets Initiative TC Framework Estonia - Capital Markets Diagnostic OFFICIAL USE OFFICIAL USE Contents 3.5. Pension Funds ..................................................................................... 49 EXECUTIVE SUMMARY .................................................................................. 4 3.6. Insurances ........................................................................................... 53 KEY RECOMMENDATIONS .............................................................................. 7 3.7. International Financial Institutions .................................................... 55 INTRODUCTION ........................................................................................... 9 4. PRODUCTS .......................................................................................... 56 1. ENVIRONMENT AND RECENT TRENDS ........................................................ 11 4.1. Shares listed on Nasdaq Tallinn .......................................................... 56 1.1. Macroeconomic Environment ............................................................ 11 4.2. Bond market ....................................................................................... 62 1.1.1. Entrepreneurs in Estonia .................................................................. 12 4.3. Mutual Funds, hedge funds and other financial instruments ............ 68 1.1.2. E-Residency in Estonia...................................................................... 14 5. LEGAL AND REGULATORY FRAMEWORK ...................................................... 70 1.2. Evolution of the Capital Market ............................................................. 15 5.1. Key regulations in force ......................................................................... 70 1.3. Regulatory Environment ........................................................................ 17 5.2. Regulatory institutions .......................................................................... 73 1.4. Overview of Market Players and Stakeholders ...................................... 18 5.3. Areas of capital markets currently not regulated ................................. 73 2. CAPITAL MARKET INFRASTRUCTURE .......................................................... 20 6. OVERVIEW OF MARKET GAPS AND BARRIERS AND PROPOSED IMPROVEMENT LEVERS 75 2.1. Nasdaq Tallinn ..................................................................................... 20 7. INTERNATIONAL BENCHMARKING .............................................................. 88 2.2. Nasdaq CSD SE .................................................................................... 27 CONCLUSIONS ......................................................................................... 108 2.3. Alternative Platforms .......................................................................... 29 ANNEXES ............................................................................................... 110 2.1.1. Market Size and Development ......................................................... 29 Annex 1. Methodology ............................................................................... 110 2.1.2. Market Players ................................................................................. 31 Annex 2. The list of the involved market players and stakeholders .......... 114 3. THE INVESTOR BASE .............................................................................. 34 Annex 3. The list of all revealed market gaps and barriers ........................ 120 3.1. Credit Institutions and Creditors ......................................................... 37 3.1.1. Credit institutions ............................................................................. 37 3.1.2. Creditors ........................................................................................... 40 3.2. Private Equity and Venture Capital ..................................................... 41 3.3. Business Angels and HNWI ................................................................. 44 3.4. Retail Investors ................................................................................... 46 OFFICIAL USE OFFICIAL USE List of Acronyms BIF Baltic Innovation Fund IBRD International Bank for Reconstruction and Development CEE Central and Eastern Europe ICSID International Centre for Settlement of Investment Disputes CSDR Central Securities Depositories Regulation IDA International Development Association EAS Enterprise Estonia (Ettevõtluse Arendamise SA) IESE IESE Business School Universidad de Navarra EBRD European Bank for Reconstruction and Development IFC International Finance Corporation EC European Commission IPO Initial public offering ECB European Central Bank ITO Initial token offering ESIOP Economy Development and Innovation Operative Program JEREMIE Joint European Resources for Micro to Medium Enterprises EFSA Estonian Financial Supervision Authority MiFID Markets in Financial Instruments Directive EIB European Investment Bank MIGA Multilateral Investment Guarantee Agency EIF European Investment Fund MSCI MSCI Inc. (Morgan Stanley Capital International) ESMA European Securities and Markets Authority MTF Multilateral trading facility EstBAN Estonian Business Angels Network OECD Organisation of Economic Co-operation and Development EstVCA Estonian Private Equity and Venture Capital Association PE Private equity ETF Exchange-traded fund PwC PricewaterhouseCoopers EU European Union SAFE Survey on the Access to Finance of Enterprises EUR Euro SME Small and medium-sized enterprises GDP Gross domestic product SRSS Structural Reform Support Service GDR Global depository receipt STP Straight-through processing HNWI High-net-worth individual T2S TARGET2-Securities platform ICO Initial coin offering VC Venture capital 3 OFFICIAL USE OFFICIAL USE Executive Summary This capital markets diagnostic was funded by the EU via the Structural The regionally active Nasdaq CSD SE is the only provider of securities Reform Support Programme and implemented by the EBRD, in cooperation settlement services in Estonia. Nasdaq CSD SE uses the EU-wide T2S with the European Commission's SRSS. The aim of the diagnostic was to settlement platform, but direct two-way links with CSDs are currently not in identify market gaps, find alternative solutions via international place. There are, however, plans underway to open the first two-way link in benchmarking and generate recommendations on how to fix them. The the near future in order to improve the situation. diagnostic can be used as a basis for creating a long-term development plan There are 14 companies listed on the main list of Nasdaq Tallinn and a for the Estonian capital market. further 3 listed on the secondary list. The market capitalisation of Nasdaq The diagnostic provides an overview and the main characteristics of the Tallinn is about EUR 2.6 billion (as of May 2018), which is only 13 % of GDP – infrastructure, investors, available products and legal environment of the one of the lowest ratios in the EU. The share of the market capitalization of Estonian capital market. The diagnostic is based on analysis of previous companies listed on an emerging stock exchange is usually dominated by research, statistical data and current laws. The primary data analysis was large banks and telco companies, but this is not the case in Estonia. Currently, complemented with about 40 interviews and 2 workshops with Estonian there is only one publicly traded bank on Nasdaq Tallinn. The largest capital market participants. Additionally, interviews were conducted with companies on Nasdaq Tallinn are Tallink (capitalisation EUR 703 million), foreign institutional investors and supporting bodies to gain an international Tallinna Sadam (EUR 505 million) and Tallinna Kaubamaja (EUR 371 million) perspective of the Estonian equity market, stock exchange and legislative as of June 2018. In addition to listed companies, Nasdaq Tallinn also operates framework. a small bond market, although it has a limited number of listed bonds with very low trading activities. One reason for this is the absence of Estonian The backbone of the Estonian capital market comprises the local Nasdaq government bonds, as Estonia has managed to fund its rather small Tallinn and the Nasdaq CSD SE, which acts as the regional central securities government debt by other means. depository in the Baltics, with a business presence in Estonia, Latvia and Lithuania. Nasdaq Tallinn is the only regulated securities market in Estonia In addition to a steadily improving regulated market, the Estonian capital that manages four market categories for different financial instruments market can boast impressive and advanced alternative financing platforms. (main and secondary lists for equities, bond list and fund list). The Estonian The alternative platforms (crowdfunding, P2P lending, etc.) have gained a stock exchange saw dramatically decreased trading activity following the significant amount of momentum since the 2008-2009 recession, as the total 2008-2009 recession. Although the trading volumes have not returned to the volume of alternative platforms per capita in Estonia was second only to the pre-recession peaks, the volumes have started to increase once more in the UK (2016). While their volumes are not comparable to traditional financing last 3-4 years. One of the issues for the Estonian capital markets