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FEDERATION OF EURO-ASIAN STOCK EXCHANGES ANNUAL REPORT JUNE 2010GEORGIAN STOCK EXCHANGEGeorge LoladzeChairman of the Supervisory BoardWe look with hope on year 2010 andbelieve that it will become a turning point indevelopment of the Georgian securitiesmarket.2009 was quite a busy year both with significantevents and problems. No surprise, the globalfinancial crises affected Georgian Stock Exchangeactivities as well. However, despite the sharpdecline in trading volumes, GSE stably playssignificant role of the only organized securitiesmarket in Georgia. Though, the legislativechanges of 2008, along with some positivefeatures, stimulated rising of “grey” securitiesmarket in Georgia, the large investors and issuersstill prefer to operate at the Georgian StockExchange.As mentioned above, 2009 was remarkable bysignificant events for GSE. First of all, the decisionof GSE shareholders on considering strategicpartnership options with the world-leading stockexchanges shall be mentioned. This became notjust a general line of GSE development strategybut certain practical steps were taken in thedirection of NASDAQ-OMX.Another important event of 2009 for the wholefinancial sector of Georgia was decision of theGeorgian Parliament to move regulation of allfinancial services under auspices of the NationalBank of Georgia (NBG). We strongly believe thatin cooperation with NBG it will be possible toimplement significant reforms and innovations atthe Georgian capital market.Based on all the aforementioned, we look withhope on year 2010 and believe that it will becomea turning point in development of the Georgiansecurities market.HISTORY AND DEVELOPMENTEquity securities first appeared in Georgia in 1991after the declaration of independence thatsignaled the beginning of market-oriented reforms.A vast majority of the newly established joint-stockcompanies were owned by a rather small numberof private shareholders and trading in theseshares was relatively inactive. With the launchingof the Mass Privatization Program in 1994,approximately 1,300 state-owned enterprises wereorganized as joint-stock companies, creatingabout half a million individual private shareholders.However, during a five-year period (1994-1999),the lack of an appropriate legal framework andorganized market infrastructure seriously impededthe secondary trading of these shares and anyover-the-counter market activity was nearlynonexistent.The Georgian Stock Exchange (GSE) wasfounded in 1999 by a group of Georgian securitiesmarket professionals, leading banks, investmentand insurance companies. Today it is the onlyorganized securities market in Georgia. Designedand established with the assistance of the UnitedStates Agency for International Development(USAID) and operating within the legal frameworkof corporate and securities laws drafted with theassistance of American and German experts, theGSE can assert that it is designed and operatedto comply with “global best practices” and offersan attractive investment environment to foreigninvestors.To promote the concept of self-regulation, the GSEmembership adopted new rules. After approval ofthese rules by the National Securities Commissionof Georgia, the GSE was officially recognized as aself-regulatory organization (SRO) and received astock exchange license in January 2000.The GSE utilizes an automated trading facility.Thousands of securities can be traded by itsmembers from the workstations at the GSE flooror remotely from their offices. The GSE adoptedthe platform employed by the Russian tradingsystem (RTS) in Moscow. However, RTS - as anexcellent informational-communication system -was significantly modified to ensure thoserequirements outlined under the GSE trading rulesreflected the peculiarities of Georgian securitiesmarket.Official trading at the GSE began in March 2000.The number of companies admitted for trading atthe GSE trading system increased gradually andby the end of 2004 reached 277. Practically all ofthese companies are former state owned andoperated companies transformed into joint-stockcompanies and then privatized. The growing butstill low trade volumes reflect the nascent stage ofthe Georgian capital market and the level ofdevelopment of the Georgian economy.In 2002, as a result of active cooperation with theNational Securities Commission and the Ministryof State Property Management, the SpecialPrivatization Auctions commenced at the GSE. In2003 the GSE started trading governmentsecurities.2004, was a landmark year for the GSE, due tothe unprecedented increase in basic tradingfigures compared with previous years, reflectingthe overall revitalization of the economy in thewake of the “Rose Revolution” of 2003.In the end of November, 2006 Bank of Georgia(GSE:BOG), the company listed at the GSE since2001, concluded successful IPO at the LondonStock Exchange Main Market and throughissuance of GDRs raised circa US$160 ml. Thebank is the first Georgian company ever and thesecond bank from the CIS since 1999 listed on theLondon Stock Exchange.In 2007 the remote trading system was practicallyimplemented at the GSE and number ofbrokerage companies started remote tradingoperations from their offices via internet and VPNtechnology. Number of trading days increasedfrom two to three days a week.In 2008 significant amendments were made inGeorgian legislation, GSE Charter and Rulesensuring GSE demutualization, stock-exchangemembership for various licensed financialinstitutions, including remote membership forrespective foreign entities.In August 2009 the decision on GSE capitalincrease was taken by GSE General Meeting ofShareholders with purpose of attraction ofNASDAQ-OMX as a strategic partner.FUTURE OUTLOOKBased on the significant interest of a leadingEuropean stock exchange operator, as well as ofthe various financial investors, significant changesin GSE ownership structure is anticipated,entailing, among other, attraction of requiredinvestments for further development of the GSE.Also, in 2010 the GSE plans to:1. Make important changes in its trading systemand trading rules so as to increase the efficiencyof trading and increase the liquidity of the market:• Intensify the trading process. In particular, thetrading sessions will be conducted on daily basisand/or time period of the trading sessions will beextended;• Further improve remote trading system forbrokerage companies;• Establish electronic links between securitiesmarket participants (stock exchange, centraldepository, brokerage companies, banks,securities registrars)• Increase the efficiency of the governmentsecurities trading on the stock exchange;• Introduce partially guaranteed trading ofsecurities;• Introducing of price quotation both in local andforeign currencies.2. Launch a new web-site for the GSE, whichalong with traditional statistics will providecorporate reports database for the companieswho are admitted to the trading system. Inaddition, the creation and publication of acompany database will allow companies topublish their annual, semi-annual and currentreports which are required by law and thusimprove disclosure standards and corporatetransparency;3. Introduce the Georgian Stock Exchange Index.PAGE 84