The following is an interview with Dr. S.Davaasuren, the Chairman of the Financial Regulatory Commission, detailing to Undesnii Shuudan about the current state, future outlook, the government policy and regulation of Mongolia’s stock market. Mongolia has long discussed ways to develop its stock market. However, the stock market only accounts for less than five percent of the total financial market and it has been this way for 20 years. Is this due to shortcomings policy wise or has it been caused by an unfavorable legal environment? Around 26 years have passed since Mongolia established a stock market but the liquidity and trade volume is very low. This has been caused by a number of factors including the over centralization of stocks, the inadequacies in the governance of companies, the insufficiency of transparency and financial reports, and the lack of new products and services on the market. In addition to the insufficient legislature, lackluster legal environment and policy management, I personally believe that the spirit to develop the stock market was lacking. The stock market acts as a distributor of capital to other economic sectors, contributing to economic growth. Therefore, it is necessary to state that the underdevelopment of the stock market is a hindrance to the overall economic growth of Mongolia. We have observed an over centralization of stocks in the stock market. Due to this, market participation worsened and the volume of trade decreased. Economists say that the lack of opportunities to profit on the stock market outside of government bonds has been the main factor for today’s situation. What policies must the government implement to improve participation in the stock market? As of 2016, there are seven billion shares of public companies on the securities market. The majority of shareholders at 99.6 percent only own up to a five percent stake. Those who own over a 33 percent stake only account for 0.1 percent of all shareholders. The over centralization of stocks has negatively affected liquidity. This is one reason. Outside of the over centralization of stocks, other factors that cause trading on the stock market to be low is the insufficient number of businesses and individuals involved in the stock market and the inability to attract both domestic and foreign investors. In addition, knowledge of the stock market is relatively low amongst the public and the lack of new opportunities is also a big obstacle. Are there any positive signs or trends? The impetus or the stimulus for development in the stock market seems to be insufficient. What are your thoughts on this? The financial market is affected most by changes in any economic sector. Mongolia’s economy has been performing relatively well compared to a year or two ago and it has been showing signs of revival. In line with this, the stock market has progressed further compared to the past. This year, many companies have been able to successfully issue their stocks and securities. For instance, two of the latest IPOs were oversubscribed by 180 percent and 290 percent, respectively. This just goes to show that the Mongolian stock market has significant capital and has the opportunity to attract more investors. In the past, four companies were not able to raise enough capital and two were rejected by the commission. How many companies have submitted their requests to the Financial Regulatory Commission to issue their IPOs? Never have we had a year in which both the number of IPOs and the success rate of the IPOs have been so high. I believe it is important to note that the fact that none of the IPOs this year have failed is not by accident. The Financial Regulatory Commission looked at its past mistakes and made the decision to pay special attention to the stock market and specific IPOs. The commission has received one more request for an IPO. Raising capital from the public is not something that anyone who wishes or needs to can do. A company must meet a number of requirements before being allowed to release its IPO. As the companies will be using people’s money to expand their operations or to implement certain projects, the commission needs to know how likely it is to be successful, whether they will be able to provide a return on the investments, and if the IPO meets the legal requirements. There are many instances where companies that do not meet requirements and that have a low chance of implementing their intended projects are rejected. In addition, if a professional consultant company such as an underwriter has made the wrong calculations, it leads to an unsuccessful IPO. Mongolia has been taken off the FTSE Russell frontier markets watch list. Will this negatively affect the Mongolian stock market and companies registered on it? How does the Financial Regulatory Commission see this issue? Our goal was to elevate Mongolia to the actual FTSE Russell frontier markets list from just the watch list. Unfortunately, Mongolia was cut from the list. The main reasons for the removal was the inadequacy in the capacity of companies, the lack of capital in the stock market, and the underdevelopment of the stock market’s infrastructure. It is a sign that professionals who have been working in the stock market for almost 30 years have not developed their professional skills. In countries with a developed stock market, the valuation of the market and the number of participants positively affect each other. That is not the case in Mongolia. In the second quarter of 2017, less than 10 percent of publically registered companies distributed dividends to its shareholders. More than 60 percent of public companies do not record profits and some are in deficit. Whether a company will distribute dividends or not first depends on the operations and profit of the company. Even though the economy and the peaks and valleys of the economy are factors, the main factor is the operation of the company. The commission is taking step by step measures to help improve the financial, payment, and professional capacity of both participants and companies involved in the stock market. In addition, we are working to make the legal environment and regulation more comprehensive than what it is today. If participants and companies involved in the stock market improve their operational capacities, it will increase the number of listed companies, helping to lead the stock market to a new level. The Financial Regulatory Commission is receiving feedback from the public on the reform of rules and procedures for the stock market. What ideas has the commission come up with in regards to improving the legislature and legal environment surrounding the stock market? In July 2016, the General Administrative Law came into effect. The law requires all government agencies to abide by articles in this law when drafting acts or implementing action. As a result of this requirement, the Financial Regulatory Commission is currently in the process of changing the current rules and procedures on not only the stock market but the insurance sector, non-banking financial institutions, and savings institutions in line with the law. Currently, the commission oversees the enforcement of 20 different laws and 160 rules and procedures in the sectors that it regulates. In light of the new General Administrative Law, the wording and official use of terms in acts implemented by the commission will be changed. More than half of what will be changed is regarding the stock market. In addition to amending the rules and procedures, there is a need to reform laws and have more interconnectivity between laws regarding the sectors that the commission regulates. Parliament approved a guideline for improving and making Mongolian laws more comprehensive until 2020. In that guideline, more than 10 laws regarding sectors the commission regulates will be reformed. In addition, the national agenda to develop Mongolia’s financial market until 2025 has been approved recently. This agenda determined that the main driving force of development in the financial market will be the stock market. Not only will the commission be working to address current issues, it has set a goal to make the stock market the dominant sector in the financial market by 2025. Since the turn of 2017, has there been any significant changes in the stock market? As of the third quarter of 2017, the total valuation of the stock market is 2.1 trillion MNT. This is a 100 percent or two-fold increase in a span of one year. This is very close to the level that the valuation reached during 2011 when our country’s economic growth reached 17.5 percent. Yet, we know how low the economic growth is today. At that time, the increase was mainly caused by an increase in foreign direct investment because of a mining boom. This time around, this is solely a factor of increasing participation of domestic investors and the increasing interest of the public. In other words, it is a relatively sustainable growth. Last year, the commission made the decision to increase the minimum capital requirement of non-banking financial institutions. This decision has more so helped increase the flow and improve the distribution of capital rather than limit the number of non-banking financial institutions. It is even positively affecting the increase in the valuation of the stock market. People might remember that the commission said at the time that by taking this step, the interest rates would drop. Today, you can say it is a result of the commission’s efforts that the conversation on decreasing the interest rate has become a topic amongst politicians and banks. A temporary list of foreign exchanges that companies are allowed to be dual-listed on was approved by the commission. Currently, there are 34 Mongolian companies listed on five different foreign exchanges. Is it possible to implement the dual listing system? The majority of the 30 companies listed on foreign exchanges that operate in Mongolia are focused on mining. In accordance to the Law on Resources, these companies must offer no less than 10 percent of their stock on the Mongolian stock market. In order to enforce this law, the need to implement a dual-listing system arises. There is an expectation that dual listing will bring the stock market in Mongolia to new heights. Dual listing on a foreign exchange has the benefit of helping improve liquidity, increasing investors, and providing additional source of capital for a company. In addition, Mongolian companies will have the chance to introduce their operations internationally, improve the value, and to increase their sales and profits. However, in order to implement a system of dual listing, Mongolia needs to develop its stock market infrastructure, improve its payment and trading system to international standards, and make the investment environment more comprehensive. In order to contribute to these efforts, the Financial Regulatory Commission released a list of 26 world-leading foreign exchanges approved for dual listing. Right now, the commission is receiving feedback from market participants, investors, the public, and professionals to approve the rules and procedures regarding dual listing. The minimum capital requirement to be listed on the Mongolian Stock Exchange was increased to 20 billion MNT. How will this positively affect the domestic stock market? In 2006, the Commission on State Property set the minimum capital requirement for a company listed on the Mongolian Stock Exchange to be 1.9 billion MNT. It is undeniable that having the requirement this low for so long has played a part in the shrinking participation in the stock market. Therefore, increasing the minimum capital requirement for the Mongolian Stock Exchange to 20 billion MNT was an important decision. Currently, there are two organizations that manage trading on the stock market in Mongolia. One is state-owned and the other is a private exchange. Both of them have been fulfilling the requirement set forth by the commission. The first private exchange in Mongolia, the Mongolian Securities Exchange received their license two years ago but had not conducted their operations until this year. The policy measures taken by the commission helped the Mongolian Securities Exchange to begin their operations and they have successfully conducted their first trade. Today, it is crucial to improve the competiveness of an organization that manages stock trading and exchanges that support small-to-medium enterprises. Only then will the stock market develop, with more companies issuing IPOs and raising capital from the public. You were elected as one of the nine members of Alliance for Financial Inclusion (AFI) board of directors representing 114 central banks and regulatory organizations of 95 countries around the globe. In Mongolia, how do we need to increase equal access to financial products and ensure financial inclusion? Compared to other developing countries, where is Mongolia at? The Alliance for Financial Inclusion is one of the largest financial alliance organizations with the most number of member countries. As a result, its influence on the international financial policy and performance has been increasing rapidly. The nine members on the Board of Directors manage the cooperation and relations between member countries and set the policy of the alliance. In other words, these nine people are essentially directing the financial inclusion of around 100 countries. Regardless of a country’s level of development, increasing financial inclusion and the use of financial products is important. Financial inclusion is ensuring that everyone has access to a wide choice of need-based transparent financial services and products at a low cost. In order to improve financial inclusion, financial services and products based on information technology need to developed and implemented. In addition, implementing RegTech (regulatory technology) has become crucial. Mongolia ranks high in terms of the number of the population that owns a bank account with almost 90 percent. Yet, the reality is that the transactions of those accounts are low, the financial education of citizens is inadequate, most people have not learned habits of long-term financial planning or saving money, and do not account for risks well. As a combination of all these factors, the financial inclusion of Mongolia is insufficient. One of the latest decisions made by the AFI Board of Directors is to sign a memorandum of understanding with the Asian Development Bank. The memorandum opens up the opportunity for both organizations to cooperate more in terms of promoting financial inclusion. Because Mongolia will be a part of these projects and agendas, as a member of the Board of Directors, I have paid close attention to this issue. Moving forward, the FRC will work to develop Mongolia’s financial market, increase financial inclusion, and cooperate with many other countries in this regard.