Issue 6, 2012. December-January

   

GAPS IN LEGISLATION STIFLE ELECTRONIC TRADING MARKET

The Georgian securities market is underdeveloped. Creating a well regulated and organized electronic trading business in Georgia could bolster development in the financial market.

Levan Kokaia - Lawyer

A Legislative Gap

In Georgia all financial institutions are regulated by the securities market law. While this legislation has allowed commercial banks and other financial institutions to develop, it stops short of regulating electronic trading - a gap that handicaps the financial market and creates unnecessary risks for traders.

There are various reasons for the gap, including the lack of a developed securities market, and the absence of open joint stock companies. While there are ample currency exchanges in Georgia, there is no forum for potential traders to trade on the currency changes.

Electronic trading is a method of trading currencies through an online brokerage account. Electronic currency trading involves converting base currency to a foreign currency at the market exchange rates through an online brokerage account. One of the most popular forms of exchange for the global decentralized trading of international currencies is the Foreign Exchange Market (Forex), where a reported $3-3.5 trillion is traded daily, making it the most liquid market in the world.

But in Georgia, due to the lack of legislation and regulation, traders are largely unprotected - and transactions are riskier. Some Georgian individual traders operate through Russian, USA and European brokerage companies - an exception is Admiral Markets, an international financing company that entered the Georgian market in May 2012 with an EU license for trading and brokering in foreign exchange stocks on financial markets. The National Bank of Georgia (NBG) has permitted their activity, even allowing Admiral Markets to open depositary accounts in Georgian private banks instead of just foreign banks.

These positive steps from NBG could be a prelude to creating a more comfortable, stable and rational environment for local traders to operate on the Forex system, preparing the basis for the future legislative regulation of electronic trading market - and a move toward the further development of the financial market in Georgia. By facilitating local traders, the NGB could stimulate regional traders to open online brokerage accounts in Georgian private banks and trade on Forex via Georgian financial trading and brokerage companies.

The Next Step and the Positive Impact of the Regulation

Regulatory bodies for electronic trading in the United States and the European Union are specific governmental institutions, not national banks. Georgia is a small country and all of the financial institutions' activity is licensed and controlled by the NBG. However, it is better to transfer to NBG this exclusive function in order to generally administer electronic trading business in Georgia.

In order to develop a local market for electronic trade, it is necessary to create a secure environment for individual traders and legal entities. That, however, will require improved legislation, specifically a law that oversees a licensing process for local trading companies, and ensures transparency of the company's transactions.

Licensing and administration will result in a lot of positive factors. In particular, the existence of the specific regulation will:

- Integrate Georgia to the global network of electronic trading;
- Create a demand for traders and market analysts;
- Stimulate securities' turnover and capital markets development;
- Ensure a competitive market; and
- Minimize traders' potential risks.