MARKET OF GOVERNMENT MARKET OF GOVERNMENT SECURITIES IN BHSECURITIES IN BH

Securities in the BH Financial Securities in the BH Financial Market – Preparation for Issuing of Market – Preparation for Issuing of

Government SecuritiesGovernment Securities

Banja Vrućica, 18. May 2006Banja Vrućica, 18. May 2006

KEMAL KOZARIĆKEMAL KOZARIĆ

2

Resolving of old internal debt issue, emphasizing the old Resolving of old internal debt issue, emphasizing the old foreign savings issueforeign savings issue

Resolving of foreign debt issueResolving of foreign debt issue

New investmentsNew investments

Short-term funding of the budget at all levels Short-term funding of the budget at all levels

Government Securities are Useful for:Government Securities are Useful for:

3

Indebtment on the basis of long-term state debt can occur if, at the time of debiting from the long-term direct internal state debt or long-term direct foreign state debt, the amount of servicing of long-term debt being due in any following year, does not pass 18% of regular incomes performed in preceding fiscal year. Limitation on state debt amount of 18% from this Article shall be valid three years since the date of this Law entering in force, and it shall be subject to annual analysis

The CBBH is the fiscal agent for internal securities in accord to the terms defined by credit agreements and BH securities in accordance with the Agreement signed with the BH Ministry of Finance and Treasury

Legal basis:Legal basis:

4

The Law on Debt Issuance, Debt and Guarantees of Bosnia The Law on Debt Issuance, Debt and Guarantees of Bosnia and Herzegovina and Herzegovina

Agreement with the Ministry of Finance and Treasury of Agreement with the Ministry of Finance and Treasury of BH on performing fiscal agent tasks for securities BH on performing fiscal agent tasks for securities

Entity Laws on Debt Issuance, Debt and Guarantees Entity Laws on Debt Issuance, Debt and Guarantees

Contracts with Registry of Securities in FBH and Central Contracts with Registry of Securities in FBH and Central Registry of Securities of RSRegistry of Securities of RS

Contracts with Sarajevo and Banja Luka stock exchanges Contracts with Sarajevo and Banja Luka stock exchanges

Contracts with commercial banksContracts with commercial banks

Operative rules for trading in government securitiesOperative rules for trading in government securities

Legal Framework of the CBBH Legal Framework of the CBBH Engagement in Operations with Engagement in Operations with Government Securities:Government Securities:

5

Participants in the market: Commissions for Securities, Participants in the market: Commissions for Securities, stock exchanges (Sarajevo and Banja Luka); registries of stock exchanges (Sarajevo and Banja Luka); registries of securities, brokerage houses and commercial bankssecurities, brokerage houses and commercial banks

BH Capital Market Council – the body coordinated by the BH Capital Market Council – the body coordinated by the CBBH which unites all the market participants: the CBBH, CBBH which unites all the market participants: the CBBH, Ministry of Finance and Treasury of BH, Entity Ministries of Ministry of Finance and Treasury of BH, Entity Ministries of Finance, Commissions for Securities of both Entities, Finance, Commissions for Securities of both Entities, commercial banks and the stock exchanges.commercial banks and the stock exchanges.

The BH Law on Indebting, Debt and Guarantees was The BH Law on Indebting, Debt and Guarantees was adopted in Parliamentary proceedings on June 29, 2005adopted in Parliamentary proceedings on June 29, 2005

Capital Market :Capital Market :

6

Capital Market: Stock Exchanges in BH Capital Market: Stock Exchanges in BH (1)(1)

0,103,5030,0036,00

100,00

50,00

283,94

142,19

54,8430,36

0

50

100

150

200

250

300

2002 2003 2004 2005 Jan-Mar2006

Turnover by years (in € million)

SASE BLSE

7

Capital Market: Stock Exchanges in BH Capital Market: Stock Exchanges in BH (2)(2)The total turnover on stock exchanges in BH in 2005 was 426.140.785,96

€

Sarajevo Stock Exchange

Banja Luka Stock Exchange

283.946.946,66 € 142.193.839,32 €

Banja Luka Stock Exchange

33%

Sarajevo Stock Exchange

67%

Sarajevo StockExchange

Banja LukaStock Exchange

8

Role of the BH commercial banks – Role of the BH commercial banks – Possibility to invest excess liquidityPossibility to invest excess liquidity

Required reserves and surplus above required reserves

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

by calculation periods

In p

erc

enta

ge

Implicit RRrate

RR rate

9

BH Parliamentary Assembly adopted the Law on Settlement of BH Parliamentary Assembly adopted the Law on Settlement of Liabilities out of old foreign currency savings. The Law sets the Liabilities out of old foreign currency savings. The Law sets the proceeding, way and deadlines of BH liabilities’ settlement proceeding, way and deadlines of BH liabilities’ settlement according to accounts of old foreign savings deposited in local according to accounts of old foreign savings deposited in local banks in BH territory. banks in BH territory.

For the settlement of these liabilities, BH is considered to be For the settlement of these liabilities, BH is considered to be responsible, and assets are provided by FBH, RS (entities) and BH responsible, and assets are provided by FBH, RS (entities) and BH Brčko DistrictBrčko District

Proceeding of claims’ verification is prior to the liabilities’ Proceeding of claims’ verification is prior to the liabilities’ settlement. In the proceedings of verification, banks are required settlement. In the proceedings of verification, banks are required to cooperate with Entities’ Ministries of Finance, District’s Income to cooperate with Entities’ Ministries of Finance, District’s Income Administration, Agencies and Commissions for Verification of Old Administration, Agencies and Commissions for Verification of Old Foreign Savings AccountsForeign Savings Accounts

Deadline for submission of requests on verification of all foreign Deadline for submission of requests on verification of all foreign savings accounts in six months since the day of this Law entering savings accounts in six months since the day of this Law entering in force and the Agencies are obliged to complete the verification in force and the Agencies are obliged to complete the verification proceeding within nine months from the day of this Law entering proceeding within nine months from the day of this Law entering in force.in force.

Old Foreign Savings:Old Foreign Savings:

10

PAYOUT PROCEDUREPAYOUT PROCEDURE: When the verification of individual : When the verification of individual requests is completed and the claimer agrees with the requests is completed and the claimer agrees with the amount verified by the Agencies, the claimer should sign the amount verified by the Agencies, the claimer should sign the verification certificate. Upon signing of the Statement on verification certificate. Upon signing of the Statement on renouncing of plea right, the claimer is paid out the renouncing of plea right, the claimer is paid out the maximum amount of KM 100, or the total amount of claims maximum amount of KM 100, or the total amount of claims up to KM 100. Along with this, each individual claimer up to KM 100. Along with this, each individual claimer recorded in the Register, upon submitting the verification recorded in the Register, upon submitting the verification certificate, is paid out the maximum amount of KM 1.000, or certificate, is paid out the maximum amount of KM 1.000, or total amount of claims up to KM 1.000, including the already total amount of claims up to KM 1.000, including the already paid amount of KM 100 and this by the end of 2007. Cash paid amount of KM 100 and this by the end of 2007. Cash payout shall be done according to the proceeding and in the payout shall be done according to the proceeding and in the way defined by executive regulations of Entites and District, way defined by executive regulations of Entites and District, and the remaining unpaid claims are settled with bonds in and the remaining unpaid claims are settled with bonds in accordance to this Law. accordance to this Law.

Old Foreign Savings(2):Old Foreign Savings(2):

11

Obligations from the old foreign currencies accounts, which Obligations from the old foreign currencies accounts, which have never been recalculated, shall be recalculated in the have never been recalculated, shall be recalculated in the CBBH middle exchange rate on the day of this Law entering in CBBH middle exchange rate on the day of this Law entering in force. force.

Liabilities not paid out in cash are settled with bonds that Liabilities not paid out in cash are settled with bonds that shall be issued no later than March 31, 2008 under following shall be issued no later than March 31, 2008 under following terms:terms:

Maturity date up to 13 years and no later than December 31, Maturity date up to 13 years and no later than December 31, 2020, but the schedule on bonds’ maturity years shall be 2020, but the schedule on bonds’ maturity years shall be defined by the Decision of BH Council of Ministersdefined by the Decision of BH Council of Ministers

Annual interest 2, 5%;Annual interest 2, 5%;Possibility of advanced repurchase.Possibility of advanced repurchase.

Principal capital and interest on securities are directly paid Principal capital and interest on securities are directly paid out from the part of Entities’ assets and of District from the out from the part of Entities’ assets and of District from the Unified Account of BH Treasury. Escrow account and Account Unified Account of BH Treasury. Escrow account and Account for debt servicing according to bonds of all foreign savings for debt servicing according to bonds of all foreign savings shall be opened in CBBH for this purpose, and BH Ministry of shall be opened in CBBH for this purpose, and BH Ministry of Treasury and Finance shall manage it. Treasury and Finance shall manage it.

Old Foreign Savings (3):Old Foreign Savings (3):

12

Old Foreign Savings (4)Old Foreign Savings (4)::

BONDS ON THE BASIS OF OLD FOREIGN SAVINGS  FBH 1.004.000.000

  RS 719.800.000

  10 years 13 years

Year FBH RS FBH RS

2006 30,00 19,55 30,00 19,55

2007 125,22 39,59 115,18 32,39

2008 74,55 53,45 54,72 39,23

2009 93,37 66,94 64,01 45,89

2010 111,70 80,08 73,04 52,37

2011 119,48 85,66 81,83 58,66

2012 137,05 98,25 90,36 64,78

2013 134,03 96,09 98,64 70,72

2014 141,06 101,13 96,64 69,28

2015 147,84 105,99 114,71 82,24

2016 154,37 110,67 112,20 80,44

2017 - - 129,77 93,03

2018 - - 126,76 90,87

2019 - - 133,78 95,91

2020 - - - -

13

Old Foreign Savings (5)Old Foreign Savings (5)::

Total servicing of the debt as the part of the annual incomes

0%

5%

10%

15%

20%

FBH 10 yrs. RS 10 yrs. FBH 13 yrs. RS 13 yrs.,

14

HardwareHardware

SoftwareSoftware

Network InfrastructureNetwork Infrastructure

Hardware and software – donation of the USA Hardware and software – donation of the USA Government, through agency US TreasuryGovernment, through agency US Treasury

Technical Pre-conditions for Operations Technical Pre-conditions for Operations with Government Securities:with Government Securities:

15

Market of Government Securities:Market of Government Securities:The Process of Securities Trading (1)The Process of Securities Trading (1)

BLSE

SASE

Bank A (Buyer)Bank B (Seller)

The Central Bank of BH

Trading Platform

PaymentSingle

Registry

State Ministry of

Finance and Treasury

FBH Registry RS Registry

1. Bank A sells bonds to bank B through the trading platform or trade is performed through the stock exchange. The trade starts by entering data in the trading platform on offer for purchase and sale by the seller and the buyer. In order to effect the trade, the entered data on sale and offer have to match.

1.

16

BLSE

SASE

Bank A (Buyer)Bank B (Seller)

The Central Bank of BH

Trading Platform

Payment Single

Registry

State Ministry of

Finance and Treasury

FBH Registry RS Registry

2. After the parties agree on trade, the transaction is “locked” until the end of the day or until the process of delivery and payment is completed. The information on trade will be sent to the registry (or the registries, if the seller and the buyer are registered in different registries) and at the same time, the payment order will be issued. The ownership of bonds in the registries will not be changed until the payment is fully effected.

2.

Market of Government Securities:Market of Government Securities:The The Process of Securities Trading (2)Process of Securities Trading (2)

17

BLSE

SASE

Bank A (Buyer)Bank B (Seller)

The Central Bank of BH

Trading Platform

PaymentSingle

Registry

State Ministry of

Finance and Treasury

FBH Registry RS Registry

3.After the registry (registries) receives the data on trade, these data are entered in the system of the registry, without changing the ownership status. The transaction then has the unresolved status until the official registry confirms that the payment has been performed.

3.

Market of Government SecuritiesMarket of Government Securities::The Process of Securities Trading (3)The Process of Securities Trading (3)

18

BLSE

SASE

Bank A (Buyer)Bank B (Seller)

The Central Bank of BH

Trading Platform

Payment Single

Registry

State Ministry of

Finance and Treasury

FBH Registry RS Registry

4. After the registries receive confirmation on the effected payments, they check if both banks are registered in their registry. Except for the registration of banks, the Entity registries will open one account for the other registry (for the situations when the buyer and the seller are not registered in the same registry).

4.

Market of Government SecuritiesMarket of Government Securities::The Process of Securities Trading (4)The Process of Securities Trading (4)

19

Every participant in trade is registered in one Every participant in trade is registered in one registry, NOT IN BOTH OF THEM!registry, NOT IN BOTH OF THEM!

Direct participants (banks) in trade have to have Direct participants (banks) in trade have to have accounts in the CBBH for payment and settlement. accounts in the CBBH for payment and settlement.

Other participants (from Sarajevo and Banja Luka Other participants (from Sarajevo and Banja Luka Exchanges) have to perform payment and settlement Exchanges) have to perform payment and settlement through direct participants (banks). through direct participants (banks).

There can be no change of ownership before the There can be no change of ownership before the payment is completed.payment is completed.

Market of Government Securities:Market of Government Securities:Important Rules of the Trading Process Important Rules of the Trading Process ItselfItself

20

And Tomorrow?And Tomorrow?

Issuing of quality government securitiesIssuing of quality government securities

Future initiatives: Development of capital market in BH; Future initiatives: Development of capital market in BH;

To make the capital market attractive to foreign To make the capital market attractive to foreign investors;investors;

Regional connecting of stock exchanges in Regional connecting of stock exchanges in Southeastern Europe;Southeastern Europe;

Developing other capital market instruments: corporate Developing other capital market instruments: corporate securities, entity and municipality securities etc...securities, entity and municipality securities etc...

SEM - an informational platform of the Stock Exchanges SEM - an informational platform of the Stock Exchanges of SE Europe. At the moment, there are 8 participating of SE Europe. At the moment, there are 8 participating Exchanges, which operate markets with more than 2,190 Exchanges, which operate markets with more than 2,190 securities and more than 170 brokerage housessecurities and more than 170 brokerage houses

21

ConclusionConclusion

CBBH is ready for the role of the fiscal agent – it has infrastructure and trained staff members

Also, Commissions for Securities of both Entitles, Registers of Securities of both Entities, Stock Exchanges of both Entities and commercial banks are ready for start of issuing.

We are waiting for the decision of State authorities and issuance of stocks by the State.

It is important to issue the securities of high quality in the very beginning, which will make this market more credible.