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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2007BAKU STOCK EXCHANGEIn 2006, trade volumes have grown on allinstruments on the BSE compared to theprevious year.Khayal AbdinovChairmanThe end of 2006 was marked by severalimportant events in the history of the BakuStock Exchange (BSE) as well as thefinancial markets of Azerbaijan on the whole.Particularly, since May of 2006 interbankrepo transactions have been carried out onthe BSE; up to that point, repo transactionswere conducted on the scheme “NBA-bank”and “bank-NBA” (NBA – National Bank ofAzerbaijan). Regarding this instrument itshould also be noted that since July of 2006interbank repo operations have beenconducted with t-bills issued by the Ministryof Finance of Azerbaijan Republic.In 2006, trade volumes have grown on allinstruments on the BSE compared to theprevious year. For example, while in 2006 thetotal turnover on all instruments on the BSEcame to US$ 1.3 billion. The 2005 analogousindicator was 2.56 times less than the 2006figure–US$ 0.49 billion. When consideringthe total volume on each instrument tradedon the BSE, we have the following picture: in2006 t-bills US$ 102.1 million, notesUS$ 784.5 million, corporate bondsUS$ 36.2 million, stocks US$ 78.7 million; in2005 t-bills US$ 63.8 million, notesUS$ 205.9 mililon, corporate bondsUS$ 2.5 million, stocks US$ 43.3 million.All aforementioned facts show that the Azerifinancial market is developing and the keyimportance of the Baku Stock Exchange inthis development is growing from year toyear.HISTORY AND DEVELOPMENTThe establishment of a stock exchange wasa necessary step in the creation of amodern stock market in Azerbaijan. Due toits geopolitical location Azerbaijan is animportant regional center of businessactivity. In this respect the availability of astable and developed securities marketplays a substantial role in the raising ofinvestors' confidence in the economy ofAzerbaijan and the region.The shareholders of the BSE are leadingAzeri and foreign banks and investmentcompanies. The share of one shareholder inthe capital of the BSE is equal toUS$ 61,250. The supreme decision-makingauthority of the BSE is the GeneralShareholders Meeting.The trading floor of the BSE is equipped with30 computerized trading stations, 18 ofwhich belong to the shareholders of theExchange. The other 12 are available fornew members.Legal bodies (banks, investment funds,broker firms) involved in professionalactivities in the securities market with speciallicense from the State Committee forSecurities under the auspices of thePresident of the Azerbaijan Republic canbecome members of the BSE.FUTURE OUTLOOKIn 2007, the BSE plans to apply manyinnovations to its trading activity. Next year anew trading-settlement complex is expectedto be applied. Currently the BSE isconducting negotiations with foreigncompanies specializing in this sphere.The Azeri securities market generallybecomes more and more attractive, andtherefore in 2007 it is envisaged that issuersfrom the non-financial sector will enter themarket.Another important event for the Azerigovernment securities market is thepreparation of the program for theplacement of middle- and long-termgovernment bonds. This program iscurrently being discussed with thegovernment. The expected parameters ofthese bonds will be: a turnover period 1-5years, an issue volume–US$ 100 million, thetype of bonds will be coupon bonds,discount bonds, deep discount bonds.Next year transaction volumes on NBA’snotes and Ministry of Finance’s t-bills areforecasted to grow. Aiming to increaseliquidity of the government securities market,the BSE is working on the mechanisms ofpartially and completely unsecuredtransactions, marginal trading and deferredsettlements.PAGE 46