Despite the presence of an authoritative exchange operator and favorable legislative environment, Armenia’s capital market nevertheless remains extremely passive. Trying to find a way out of the formed situation, the Exchange has taken upon itself the initiative and has started making suggestions on stirring up the market. Deputy General Director of “NASDAQ OMX Armenia” Stock Exchange Karen Zakaryan speaks of the steps, necessary for development of capital market in Armenia, in an interview to Mediamax Agency and Banks.am portal. 

- During “Direct Foreign Investments in Armenia” forum, which took place recently in Yerevan, you noted in your speech that the task to stir up Armenian capital market should be solved through securing presence of institutional investors in that market, in particular, by allowing them investing in shares, quoted on the stock exchange. Is this suggestion being considered by the regulator?

- We presented this suggestion to the regulator and I assume that the issue is now in the process of discussion. The task is the following: we cannot develop the capital market without attracting all interested parties. Institutional investors (investment companies and funds, pension funds and insurance companies) provide for at least 40% of turnover and investments in developed capital markets. Their share may reach 90% in developing markets.

Banks and insurance companies are institutional investors functioning in Armenia today. As a result of CTP (Compulsory Third-Party Liability Insurance of Motor Vehicles) introduction, the insurance market of Armenia has significantly increased. Despite the fact that they speak of additional turnover of 12bln AMD (USD 33mln), the potential of our insurance market is far more significant and makes about USD 200-250mln. These means should be put into circulation as efficiently as possible, and if there are no effective investment mechanisms in Armenia, this money will flow out of the country.

Here I would like to bring the example of Poland. This country limited foreign investments of its institutional investors (in particular, pension funds) to 5%. That is to say, up to 5% of the means can be invested outside Poland, and the remaining means can be invested in local tools: governmental and mortgage securities, shares, quoted on Warsaw Stock Exchange, etc. As a result, both the capital market and the investment attractiveness of Poland increased abruptly, because the issuers want to build their business in that country, knowing that there they can easily place their securities.

- Launch of the pension funds’ activity is planned for the beginning of 2011 in connection with introduction of voluntary accumulative component of the pension system. Meanwhile, the corresponding legislation has not been approved yet. What can we expect from the start of the funds’ operations in the context of capital market development in Armenia?

- I believe that pension funds will start full-fledged work only after the compulsory accumulative component comes into effect. And this is planned for 2014. Nevertheless, with the arrival of pension and investment funds in Armenia, we raise the issue of their compulsory participation in the local capital market.

Some opponents of the given point of view keep to the opinion that there will be no sufficient investment tools in Armenia, and, consequently, one should not establish quotas in the local market. However, I assure you that if the institutional investors are obliged to invest in the local market, all the necessary tools will undoubtedly appear. This is a two-way process: there are no tools, because there are no investments and there are no investments, because there are no tools.

If a broker company learns that the institutional investors have, let’s say, 50bln AMD, which are meant for the local capital market, it will immediately turn to its customers with the suggestion to carry out initial public offering (IPO) of shares. And it is very easy to convince the issuer of taking that step, if there is the confidence in the prospect of attracting the necessary volume of resources.

If there are no large institutional investors in the market, brokers cannot guarantee full-scale placement of the issue. All companies, which plan IPO, first of all look at the market of institutional investors of the given country. Some experts even believe that the share of individual and retail investors in the sum of the placement should not exceed 30%, otherwise IPO is subject to danger. Thus, if the issuer has the consent of institutional investors for purchase of 50-70% of the issue, it takes up IPO with confidence, being sure that, given competent marketing policy, it will be able to place the remaining part as well.

- A few months ago, “NASDAQ OMX Armenia” Director announced the new strategy of the company, within the framework of which the Exchange was to start working with potential issuers directly, providing them with the necessary consultation support. Has this process already started?

- Work in the given direction will be launched in the nearest future, since 2011. By this we will try to fill the gap, which has formed because of passive behavior of investment companies.

We will meet with possible issuers, which are sufficiently prepared to become public companies and have a wide range of investors. Preparation for IPO is quite a long and at that very useful process, since as a result, the work of the company is brought in compliance with international universal standards.

- “NASDAQ OMX Armenia” planned to shift from T+0 system of mutual settlement of accounts to T+3 system in the nearest future, which, supposedly, would increase the level of market liquidity. When will this take place?

- We do not plan for transition, but for simultaneous launch of the system without preliminary depositing. All preparatory works on introducing the system have already been completed and we are waiting for the signal from the market. Transition to T+3 system is not an end in itself: we will shift to that system if there is the corresponding demand, which we do not see yet.

Launch of T+3 system provides for certain mechanisms of risk insurance, which makes the system more expensive. At the same time, we improve the existing mechanism and our system of preliminary depositing today is far more flexible than before.

- The exchange brought the same arguments, explaining renouncement of soon introduction of derivative tools. Does that mean that so far there has been no corresponding demand for that?

- We consistently get closer to introduction of derivative tools. I consider the exchange platform of interbank credit resources a step, which comes before the launch of derivatives, since here the price of money is being formed: of course, it is formed so far according to the results of 24 hours, but we plan to improve this resource and add the option of credit tools with the repayment term of more than one day.

In order to implement derivative tools, we should solve a number of serious technological tasks. The launch of futures trade may become the next strategic step after introduction of the platform of credit resources with various redemption terms.

- What approach towards business in Armenia do your shareholders - NASDAQ OMX Group – demonstrate? Do they understand Armenia’s economic problems, because of which we do not manage to secure dynamic development of the market?

- NASDAQ OMS has positive approach towards participation in development of the capital market of Armenia, and, using the opportunity, all interested sides should manage to mobilize all necessary resources. Concerning profitability, in 2009, NASDAQ OMX business in Armenia, which includes operations of the exchange and the depository, was at a loss. No profit is expected following the results of this year either.

The vision of “NASDAQ OMX Armenia” is to form a leading capital market in the region. In the course of time, our integration into other markets of the region is inevitable, and we should get ready for that properly, so that after integration we have a proper share.

In this context, I would like to note that notions, such as the size of the country and its geographic location, are of secondary importance for the capital market. As an example, I can bring Singapore, the Stock Exchange of which is purchasing the main exchange operator of a big country, such as Australia.