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CONTROVERSY OVER SECURITY STALEMATES TRANSITION TO NEW DEPOSITORY SYSTEM

Stock market grinds to a halt

FOR the first time ever, Slovakia's stock exchange market has faced paralysis. The freeze began on Monday, March 22 as a result of the transformation of the Securities Centre into the new Central Securities Depository (CDCP).
On that day, the CDCP should have begun offering services, but out of over 500 issues, not a single security has been transferred on the BCPB Bratislava stock exchange, freezing the official share index SAX at the March 19 level of 180.6 points.

FOR the first time ever, Slovakia's stock exchange market has faced paralysis. The freeze began on Monday, March 22 as a result of the transformation of the Securities Centre into the new Central Securities Depository (CDCP).

On that day, the CDCP should have begun offering services, but out of over 500 issues, not a single security has been transferred on the BCPB Bratislava stock exchange, freezing the official share index SAX at the March 19 level of 180.6 points.

Brokers say the new system for the registration of securities and the settlement of transactions was insufficiently prepared for the transition, as it had not been properly tested.

Even though the depository granted membership to 11 entities, only the RM-S Market brokerage company signed a contract with CDCP and could offer services.

Despite their membership, the other 10 banks have refused to sign contracts with the CDCP, claiming that the necessary conditions for them to offer their services had not been fulfilled.

"We can already feel the negative impact of the failure of the depository to function. Every day without trade harms the stock exchange since it is deprived of its main revenues - income from trading," said BCPB director Mária Hurajová.

She added that the credibility of both the banks and the stock exchange had been injured.

According to Zdenko Štefanides, a senior analyst with VÚB bank, the impact of the market's paralysis will depend on its duration.

"If the central depository issue is resolved soon, that is, by the end of this week or Monday [March 29] at the very latest, the impact is likely to be contained. If the new depository, however, is not operational by then, the harm could become serious.

For foreign investors, the BCPB is primarily important for trading in government bonds.

If trading is not resumed soon, one could see foreign investors withdrawing from these bonds and the market altogether," Štefanides told The Slovak Spectator.

"This [development] could negatively impact portfolio inflows and the overall balance of payments, and thus, to some extent, also the currency.

If trading remains paralysed for a longer time, one could also see liquidity premiums added to long-term interest rates, thus increasing the debt servicing costs of both the public as well as the private sector," he concluded.

Ján Tóth, an analyst with ING Bank, has also confirmed for The Slovak Spectator that the freeze might transmit a negative signal to the business world.

"It is an unpleasant situation. Institutional investors holding their state bond portfolios are the most affected. The lack of know-how and management at the central depository is behind the grinding halt," he added.

According to Tóth, the new IT system had not been sufficiently tested to assure banks of the security of their transactions.

Inscribed in the corporate register this January, the CDCP, which operates on a membership principle and shelters brokerage companies and banks, took over the activities of the Securities Centre.

The CDCP was to have transformed its predecessor's book-entry security registration into a new two-level system.

Common on international securities markets, the latter enables individuals to enter the stock market only through entitled bodies - in this case members of the CDCP.

The Securities Centre's roles will now be performed by CDCP members and selected authorities like the National Property Fund, the state privatisation agency.

The CDCP rejected allegations that the switch to the new central depository system was behind the paralysis of the local stock exchange market, the news wire TASR reported.

CDCP spokeswoman Želmíra Habanová said that market participants had been informed well in advance that, if they wanted to offer their services to clients after March 22, they needed a signed contract with a depository member.

Under the law, the CDCP is not authorised to open the accounts of its member's clients and transfer securities from the old register to the new one.

Only members can perform this task, and only under contract.

The list of CDCP members include HVB Bank Slovakia, Tatra banka, ČSOB, Slovenská sporiteľňa, VÚB, Dexia banka, OTP banka, UniBanka, Poštová banka, ING Bank and RM-S Market.

The CDCP is reviewing an additional three applications for membership.

On March 22, the banks demanded that the system be tested before being put into use.

According to the news wire SITA, the banks and the BCPB deemed the March 23 test of the central depository system unsuccessful.

"The repeated failure of the CDCP system prevented members and the BCPB from testing the functionality of the system," reads the official stand of the 11 commercial banks.

Members are ready to continue the testing together with the BCPB in the upcoming days, Slovenská sporiteľňa spokeswoman Eva Guttlerová told SITA.

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