Company Name: Prague Stock Exchange
Public Availability Date: May 28, 2004
Securities Exchange Act of 1933 Reg. S 902
Securities Exchange Act of 1933 Section Reg. S ---
Document Sections: INQUIRY LETTER
STAFF REPLY LETTER
[INQUIRY LETTER]
May 24, 2004 Mr. Alan L. Beller Director Division of Corporation Finance U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 U.S.A. Re: The Prague Stock Exchange Application for Designation as a "Designated
Offshore Securities Market" Dear Mr Beller: The Prague Stock Exchange (Burza cenn|pi|qych pap|pi|qiru Praha, a.s.) (the
"Prague Stock Exchange" or the "PSE") hereby seeks the classification as a
"designated offshore securities market" for purposes of Regulation S
("Regulation S") issued by the U.S. Securities and Exchange Commission (the
"U.S. SEC") under the U.S. Securities Act of 1933, as amended. This designation
is being sought in order to assist market participants who are eligible for the
safe harbor provided by Rule 904 of Regulation S in satisfying the requirements
specified in the rule when reselling securities "in, on or through the
facilities of" the Prague Stock Exchange. As discussed below, the Prague Stock Exchange has the attributes specified in
Rule 902(b)(2) of Regulation S. Further, as demonstrated by these and other
factors discussed below, the Prague Stock Exchange constitutes a market with a
clear "foreign locus," subject to extensive home country regulation, and in
which investors cannot fairly be viewed as relying for protection on U.S.
registration requirements. Accordingly, we are requesting that you, as Director
of the Division of Corporation Finance, exercise the authority delegated to you
by the U.S. SEC to classify the Prague Stock Exchange as a "designated offshore
securities market." A. INTRODUCTION OF THE PRAGUE STOCK EXCHANGE The origins of the first exchange in Prague go back to the 1850's when foreign
securities and currencies were the principal trading products. An exchange
trading securities and commodities was established in 1871. In 1938, official
trading on the Prague Stock Exchange was suspended and it was never resumed
after World War II. In 1948, the Communist party rose to power in Czechoslovakia
and the exchange was officially abolished in 1952. In 1989, the Communist regime was overthrown in the so-called Velvet Revolution,
and a transformation towards democracy and a market economy began. In 1992,
several Czech banks put into effect an initiative aiming to reestablish the
Stock Exchange in Prague. The Prague Stock Exchange was established in November
1992, and trading on the PSE was launched on April 6, 1993. The Prague Stock Exchange is now the country's leading securities market
organizer, covering more than 99% of the total trade value in the Czech
Republic. The PSE is a joint stock company incorporated and organized under the laws of
the Czech Republic. A Czech joint stock company is a legal entity similar to a
corporation organized under U.S. state law. It has its own legal personality
distinct from the personality of its shareholders, it can own property, enter
into contracts, be a party to judicial, administrative, and other proceedings,
etc. A joint stock company is liable for its own debts and is not liable for
debts of its shareholders. Similarly, shareholders are not liable for debts of
the joint stock company. Corporate bodies of a joint stock company are the
General Meeting of Shareholders, Board of Directors (the Exchange Chamber in the
case of the PSE), and Supervisory Board (for details see section B.1 below). Laws of the Czech Republic and internal rules of the Prague Stock Exchange
govern operations of the Prague Stock Exchange, and the Czech Securities
Commission (the "Czech SEC") supervises the PSE. Securities registered on the
PSE are traded on three markets: the main, secondary, and free markets.
Selection of the market for particular securities is upon the issuer. When
applying for admission of securities to trading on the PSE, the issuer must
specify on which market the securities should be traded. The markets differ in
requirements for admission to trading (such as the public float) and in the
level of disclosure obligations (such as whether quarterly reports by the issuer
are required). The least stringent conditions are for the free market: Czech law
stipulates these conditions and the PSE sets no further requirements. More rigid
conditions stipulated by the PSE are for the secondary market and the main
market, which is the most prestigious market. Full text of the PSE Listing Rules
is available on our website at http://ftp.pse.cz/Info.bas/Eng/Rules/list.pdf.
Only members of the Prague Stock Exchange are allowed to trade directly on the
stock exchange, either on their own account or on the account of their clients.
Other persons can only trade indirectly through a member of the stock exchange.
As of January 1, 2004, the PSE had 28 members, many of whom were shareholders of
the stock exchange. The share capital of the Prague Stock Exchange in the nominal amount of CZK 383
million (approx. USD 15 million) is divided into ordinary shares with nominal
value of CZK 1,000 each. As of May 1, 2004, the number of shareholders was 47,
and approximately two-thirds of them were also PSE members. The largest
shareholders are Czech branches of leading European brokerage firms and banks.
For a list of shareholders see section B.1 below. On June 14, 2001, the Prague Stock Exchange was admitted as an associate member
of the Federation of European Securities Exchanges (FESE). This was in effect a
certification that the Czech capital market and the Prague Stock Exchange comply
with the "World Federation of Exchanges 1998 Market Principles" focusing on
necessary regulations. With the accession of the Czech Republic to the European
Union, which occurred on May 1, 2004, the associated membership was
automatically converted into full membership. Concurrently, the PSE is a
correspondent member of the World Federation of Exchanges (WFE/FIBV). Organizational structure of the Prague Stock Exchange The chart below depicts the organizational structure of the Prague Stock
Exchange. In total, as of May 1, 2004 the Prague Stock Exchange has 52
employees. Secretary General manages the work of the PSE staff and facilities and operation
of the stock exchange, and may be considered a chief executive officer of the
PSE (though there is no such official title at the PSE). He is a member of the
Exchange Chamber and chairman of the Listing Committee. He is appointed and
recalled by the Exchange Chamber. SD Administration is responsible for the administrative agenda of the Secretary
General, and also for human resources. Legal Services coordinate drafting, changes, and cancellation of the PSE rules,
process legal opinions, and provide legal services and consultations to
organizational divisions of the PSE. Internal Audit and Security performs audit of the processes of internal
divisions of the PSE, drafts security policies, and checks compliance with these
policies. Services department conducts and coordinates flow of the PSE information,
cooperates with the mass media, organizes press conferences, and is responsible
for foreign relations Trading and Listing Department controls the trading day, monitors and evaluates
trading, informs the Secretary General and the Czech SEC about unusual actions
of the PSE members, checks compliance with rules on trading, prepares materials
for decisions of the Listing Committee, and monitors and evaluates performance
of the listed companies. IT Department is responsible for development and software implementation
according to the PSE strategy, provides services for settlement, organizes
testing of new applications, provides training to employees and market
participants, and maintains web pages of the PSE. Inspections Department performs inspection of the PSE members, draws up methods
and processes for the inspections, processes the inspection records and
discusses findings with the market participants, and prepares reports on
shortcomings identified in the activities of the PSE members. Finance and Administration Department proposes and controls the plan for the
development of the financial situation of the PSE, processes the budget of the
PSE, controls its performance monthly, and prepares financial statements of the
PSE. Stock Trading on the Prague Stock Exchange At the end of 2003, 64 stock issues were registered and traded on the PSE, of
which 5 issues were on the main market, 33 on the secondary market, and 26 on
the free market. At the end of 2003, the total market capitalization of these
issues reached CZK 644.5 billion (approx. USD 25 billion), an increase of 34.8%
from 2002. In 2003, the official PSE index PX 50 increased its value by 43.1%,
and the total trade value reached CZK 257.4 billion (approx. USD 9.2 billion),
an increase of 30.4% compared to 2002. The following table summarizes the number of listed companies, trading volumes,
and stock market capitalization in the last five years: |[NCCDEF] |[UCA1]
|[TDC4,MP1,QL] |[TCC2,M'Companies listed',QC,G0] |[TCC2,M'Trading Volumne',QC]
|[TCC4,M'000.000.0',QC] |[TCC4,M'0.000.0',QC] |[TCC4,M'000.000.0',QC]
|[TCC4,M'00.000.0',QC] |[XT] |[ST]|[LC15]|[TN1,7]|[TU204] |[ST]|[LC3]|[RS2]Year
|[TA]Companies listed (end of year) |[TA]Trading Volume (in millions of pieces)
|[TN4,2]Trading Volume|[EL](in millions)|[QC] |[TN6,2]Market Capitalization-end
of year (in millions)|[QC] |[ST]|[TN4,2]|[TU204]|[TN6,2]|[TU204] |[ST] |[TA]
|[TA] |[TA]CZK|[QC] |[TA]USD|[QC] |[TA]CZK|[QC] |[TA]USD|[QC]
|[ST]|[LC3]|[TN1,7]|[TU204] |[ST]|[LC5]|[RS4]1999|[UL] |[TA]194 |[TA]772,661
|[TA]163,456.7 |[TA]4,705.3 |[TA]479,649.6 |[TA]13,331.4 |[ST]|[VE2]2000|[UL]
|[TA]150 |[TA]822,911 |[TA]264,145.3 |[TA]6,971.1 |[TA]442,893.8 |[TA]11,712.7
|[ST]2001|[UL] |[TA]101 |[TA]546,544 |[TA]128,799.1 |[TA]3,393.5 |[TA]340,250.7
|[TA]9,383.9 |[ST]2002|[UL] |[TA]78 |[TA]804,105 |[TA]197,397.6 |[TA]6,036.9
|[TA]478,038.3 |[TA]15,860.1 |[ST]2003|[UL] |[TA]64 |[TA]830,771 |[TA]257,442.5
|[TA]9,187.4 |[TA]644,483.0 |[TA]25,122.1 |[ST]|[LC3]|[TN1,7]|[TU204] |[ET] The following table shows the same information for the period from January 2004
until April 2004: |[NCCDEF] |[UCA1] |[TDC4,MP1,QL] |[TCC2,M'Companies
listed',QC,G0] |[TCC2,M'Trading Volumne',QC] |[TCC4,M'00.000.0',QC]
|[TCC4,M'0.000.0',QC] |[TCC4,M'000.000.0',QC] |[TCC4,M'00.000.0',QC] |[XT]
|[ST]|[LC15]|[TN1,7]|[TU204] |[ST]|[LC3]|[RS2]Year |[TA]Companies listed (end of
year) |[TA]Trading Volume (in millions of pieces) |[TN4,2]Trading Volume|[EL](in
millions)|[QC] |[TN6,2]Market Capitalization-end of year (in millions)|[QC]
|[ST]|[TN4,2]|[TU204]|[TN6,2]|[TU204] |[ST] |[TA] |[TA] |[TA]CZK|[QC]
|[TA]USD|[QC] |[TA]CZK|[QC] |[TA]USD|[QC] |[ST]|[LC3]|[TN1,7]|[TU204]
|[ST]|[LC5]|[RS4]01|[UL] |[TA]63 |[TA]100,002 |[TA]29,946.1 |[TA]1,154.1
|[TA]674,505.6 |[TA]25,082.9 |[ST]|[VE2]02|[UL] |[TA]63 |[TA]133,772
|[TA]43,077.8 |[TA]1,658.2 |[TA]742,344.4 |[TA]28,420.5 |[ST]03|[UL] |[TA]63
|[TA]118,523 |[TA]48,441.2 |[TA]1,800.3 |[TA]785,544.8 |[TA]29,247.0
|[ST]04|[UL] |[TA]62 |[TA]110,064 |[TA]42,440.0 |[TA]1,564.8 |[TA]781,431.8
|[TA]28,686.9 |[ST]|[LC3]|[TN1,7]|[TU204] |[ET] In the period from January 2004 until April 2004, the trading volume of stocks
increased year-on-year (in CZK terms) by 187%, and the trading volume in pieces
increased by 128%. In the same period, the official PSE index PX 50 increased
its value by 24.1%. Bond Trading on the Prague Stock Exchange At the end of 2003, 81 bond issues were registered on the PSE bond market, of
which 27 issues were on the main market, 20 on the secondary market, and 34 on
the free market. At the end of 2003, the total market capitalization for bonds
reached CZK 505.5 billion (approk. USD 19.7 billion). The share of state bonds
in the PSE bond market capitalization was 62%. In 2003, the total bond trade
value reached CZK 1,110.1 billion (approx. USD 39.2 billion). The share of state
bonds in the trade value was 87%. The following table summarizes bond market capitalization and trading volumes in
the last five years: |[NCCDEF] |[UCA1] |[TDC4,MP1,QL]
|[TCC4,M'0.000.000.0',QC,G.3] |[TCC4,M'00.000.0',QC] |[TCC4,M'000.000.0',QC]
|[TCC4,M'00.000.0',QC] |[XT] |[ST]|[LC15]|[TN1,5]|[TU204] |[ST]|[LC3]|[RS2]Year
|[TN2,2]Trading Volume|[EL](in millions)|[QC] |[TN4,2]Market Capitalization-end
of year (in millions)|[QC] |[ST]|[TN2,2]|[TU204]|[TN4,2]|[TU204] |[ST]
|[TA]CZK|[QC] |[TA]USD|[QC] |[TA]CZK|[QC] |[TA]USD|[QC]
|[ST]|[LC3]|[TN1,5]|[TU204] |[ST]|[LC5]|[RS4]1999|[UL] |[TA]1,024,029.0
|[TA]29,691.6 |[TA]231,116.4 |[TA]6,423.6 |[ST]|[VE2]2000|[UL] |[TA]958,687.6
|[TA]25,153.4 |[TA]280,074.9 |[TA]7,406.8 |[ST]2001|[UL] |[TA]1,858,379.7
|[TA]49,041.9 |[TA]319,399.4 |[TA]8,808.8 |[ST]2002|[UL] |[TA]1,595,673.6
|[TA]49,106.8 |[TA]372,487.7 |[TA]12,358.2 |[ST]2003|[UL] |[TA]1,110,103.9
|[TA]39,246.8 |[TA]505,535.8 |[TA]19,705.9 |[ST]|[LC3]|[TN1,5]|[TU204] |[ET] The Prague Stock Exchange Trading System The PSE is a fully electronic exchange (it has no trading floor) and trading is
based on automated processing of its member's orders and instructions for the
purchase and sale of securities. Only members are allowed to trade on PSE. Price determination strategies Trading on the PSE is segmented into two distinct subsystems with distinct
prices (although the same instruments can be traded in these systems): (i) quote driven system "SPAD" and (ii) order driven system "automatic trades." In general, PSE members send electronic buy or sell instructions to the PSE and
if conditions for matching opposite instructions within the above subsystems are
met, a trade gets immediately recorded. Additionally, PSE members must report their over-the-counter (OTC) trades
concluded without direct usage of either of the above price-determining
mechanisms (usually over the phone). Time and price conditions for concluding
OTC trades for PSE members may apply as described further below. OTC trades must
be registered with the PSE in order to preserve transparency of prices on the
market. From this point of view, OTC trades registered with the PSE should be
regarded as a tool to protect market transparency rather than as another trading
subsystem of its own. PSE databases - audit trails All trades (both those concluded on the PSE within the two subsystems and OTC
trades registered with the PSE) enter a central PSE database of trades that were
concluded on a given day and are immediately published on an anonymous basis
(i.e., no name of the involved members is visible) to PSE members and to
external data vendors such as Bloomberg or Reuters. Daily summaries of trades
are published, too. Dissemination of trading information is provided in real time to all
participants of the market e.g., namely to the members of the PSE, the Czech
SEC, and data vendors. It is also available free of cost on the PSE's web site.
Basic information about the PSE and its trading results is also available on the
teletext service of Czech Television's Channel 1. For investors who need
information in a form suitable for computer processing there is an FTP
paid-service. Since the PSE works on an electronic basis only, its system collects all
electronic data transmitted between the PSE and its individual members, and
archives it for further auditing and surveillance. An internal PSE inspection
unit monitors all instructions, quotes, orders (including their changes and
cancellations) as well as all other communication from member firms in order to
be able to fully reconstruct market activity of member firms and to identify
suspicious patterns in their behavior (the same information is also made
available to the Czech SEC). All inspection findings are submitted to the PSE
Membership Committee and to the Czech SEC. Settlement Settlement of all trades in the PSE database of trades occurs through UNIVYC, a
100% subsidiary of the PSE used for clearing. Trading at the PSE generally
conforms to the T+3 standard settlement cycle. Liabilities and risks arising from the settlement of trades concluded as
automatic trades and through the SPAD system are guaranteed and covered using
the resources of the PSE's Guarantee Fund, which is managed by UNIVYC. Trades in
the SPAD system and automatic trades are settled in T+3 by UNIVYC. Block trades
can be settled in a period from T+0 to T+15, and guarantees by the PSE's
Guarantee Fund do not apply. Trading hours Each of the above-mentioned trading subsystems operates on its own timetable.
Trading through the PSE occurs only during open trading session hours. However,
even outside open trading session hours, PSE members are still required to
report their OTC trades. A typical PSE business day timetable (PSE systems are open 7:30 - 20:00)
|[NCCDEF] |[UCA1] |[TDC4,MP1,QC,VU,I2] |[TCC4,MP1,QC,VU] |[TCC4,MP1,QC,VU] |[XT]
|[ST]|[LC15]|[TN1,3]|[TU204] |[ST]|[LC3]|[RS2]SPAD |[TA]Automatic
Trades|[EL](Auction, Continuous regime) |[TA]Block Trades
|[ST]|[LC3]|[TN1,3]|[TU204] |[ST]|[LC5]|[RS4]Trading session closed 7:30-9:30
|[TA]Pre-open period for Auction regime 7:30-9:45 |[TA] |[ST]|[VE2] |[TA]Fixing
of Auction regime 9:45 |[TA]Block trades registered with PSE 7:30-16:00
|[ST]Open trading session 9:30-16:00 |[TA]Continuous regime 9:45-15:45 |[TA]
|[ST]|[LC3]|[TN1,3]|[TU204] |[ST]|[LC5]|[TN1,3]End-of-day technical system
shutdown. PSE Price list published by 17:00. 16:00-17:00
|[ST]|[LC3]|[TN1,3]|[TU204] |[ST]|[LC5]Trading session closed 17:00-20:00
|[TA]Pre-open period for Auction regime 17:00-20:00 |[TA]Block trades registered
with PSE 17:00-20:00 |[ST]|[LC3]|[TN1,3]|[TU204] |[ET] The time period after 17:00 technically belongs to the following business day;
therefore, all OTC trades concluded from 17:00 to 20:00 and registered within
the PSE database of trades are designated as belonging to the following trading
day rather than to the day just ended at 16:00. (i) Stock and Bond Market Support System (SPAD) The Stock and Bond Market Support System (known as the "SPAD" system) is a
price-driven trading system based on the activity of market makers. As of May
2004, seven securities were traded in SPAD, supported by nine market makers. Trading hours. The SPAD system is open for trading from 9:30 through 16:00
Central European Time. This period is also referred to as the "Open trading
session." Quotes and Market making. A market maker is a PSE member who supports trading in
assigned securities traded in SPAD and thus increases liquidity of the
securities within SPAD. For each security in SPAD, there has to be a minimum of
three market makers quoting prices. Each market maker is required to quote a buy
and a sell price at all times during the Open trading session for a standardized
number of shares (a round lot or its multiple) to be delivered on a T+3 basis.
The Trading Committee also sets a maximum bidoffer spread for quotes of the same
market maker to bring prices of purchases and sales closer. All quotes of all market makers take the form of a buy or sell instruction sent
to the PSE and are immediately displayed via electronic means to all PSE
members. Any member can immediately take the best quote displayed within SPAD,
resulting in instructions being matched and a trade being recorded and
published. Quotes worse than the current best quotes within SPAD are informative
only. Once a given market maker's quote becomes the best bid or offer available within
SPAD, such quote becomes binding for that market maker. This means that the
market maker is obligated to conclude a trade at such bid or offer price quoted
should any other PSE member choose to accept it. On the other hand, the market
maker is free to adjust his quotes up or down based on its assessment of demand
and supply in the stock at any time. Once the best quote is accepted and a trade is thus recorded, the respective
market maker is allowed up to a 3-minute recovery period to recalculate its
positions and reset quotes. The second best indicative quote of another market
maker immediately becomes the best quote and is binding from that moment on,
until that quote is accepted too, or until a better quote appears within SPAD.
Non-market-making members are subject to limitations as to their daily maximum
trading volume with the market makers, as a protection measure for market makers
against excessive settlement risks. Transparency. During the Open trading session, PSE members are allowed to
conclude OTC trades with respect to SPAD securities with each other ("OTC SPAD
trade") only within a narrow price range (the "Permitted Range"). The Permitted
Range is constantly changing as market makers publish their quotes and it is
defined as an up-to-the-minute price range limited by the price 0.5% below the
best SPAD bid at the bottom and by the price 0.5% above the best SPAD offer at
the top. However, OTC SPAD trades with large blocks of shares with total value
larger than CZK 40 million can be registered with any price even outside the
current Permitted Range. Also, OTC SPAD trades must be reported to the PSE within a 5-minute deadline
after such trade is concluded in order to preserve market transparency. The
reason for mandatory reporting of OTC SPAD trades is to direct PSE members to
SPAD and curb OTC trading among them, as OTC is considered less transparent for
the market. Price. The opening price of an instrument traded in SPAD is equal to the
midpoint of the Permitted Range as of the start of the Open trading session,
i.e., it is calculated based on the quotes of market makers at the start of the
session. The closing price of an instrument traded in SPAD is equal to the
midpoint of the Permitted Range at the close of the Open trading session (16:00
CET). Volatility protection. If during the Open trading session the arithmetical
midpoint of the up-to-the-minute Permitted Range deviates by more than 20% from
the arithmetical midpoint of the Permitted Range as of the start of the Open
trading session, all quotes by the market makers become informative only,
including the best quotes. Naturally, trades already concluded are not affected
by this rule. The reason for this rule is to protect market makers against
excessive losses once dramatic price moves occur. Close trading session. The period between two Open trading sessions is called
the "Closed trading session" (see timetable above). During the Closed trading
session, market makers do not quote any prices. However, OTC SPAD trades still
must be reported (and get published), although the reporting limitations are
softer than during an Open trading session. The Permitted Range is a 5% wrap
around the best quotes at the close of the last Open trading session, compared
to a 0.5% wrap during an Open trading session. All OTC SPAD Trades during a
Closed trading session must be reported before a new Open trading session
begins, compared to a 5-minute reporting time limit during an Open trading
session. Unmatched OTC instructions sent to the PSE for registration are
automatically cancelled before an Open trading session begins. (ii) Automatic trades Automatic trades occur in an order-driven system in which trades are concluded
on the basis of matching orders for the purchase and sale of securities in a PSE
order book, as entered via electronic means into relevant PSE subsystem by
member firms. Matching of orders takes place under two regimes: the auction
regime (with price priority queuing), followed immediately by the continuous
regime (queue priority: price first, then order entry time). Trading hours for
Automatic trades are from 7:30 through 15:45. Due to different price defining strategies, securities within the SPAD subsystem
can have different prices from those within the Automatic trades subsystem,
i.e., there is no direct technical interaction between the two subsystems as to
prices. Auction regime. Trading in the auction regime is based on concentrating orders
for the purchase and sale of securities during the pre-open period (7:30 - 9:45)
into an electronic order book run by the PSE and processing all such cumulated
orders at one given moment (fixing at 9:45 a.m.) by price priority. The auction
regime ends with so-called fixing. At fixing, one single price for each security is calculated based on interaction
among the buy and sell orders existing in the order book, queued by price
priority. The price of an order determines its priority for execution, i.e., a
buy order at a higher price has fill priority over other buy orders at a lower
price, and a sell order at a lower price has fill priority over other sell
orders at a higher price, while no entry time priority is taken into
consideration. The following orders can be queued for processing: - an order with a price limit (to be executed at a certain price or better); - a market order (to be executed at the market price); and - an order with an expiration limit (to be executed within a certain time
period). The fixing calculation is made in order to trade a maximum number of securities,
i.e., the price at which the maximum number of securities is traded becomes the
fixing price (if the same number of securities is traded at different prices, it
is preferred to trade at the price at which the net difference between
securities supplied and demanded is smallest). The fixing price can deviate by a maximum of 5% from the previous day's closing
price set in the continuous regime. All executed orders are recorded as trades
within the PSE database of trades and published immediately, while all trading
takes place at that single fixing price. Unmatched instructions get carried over
into the continuous regime that follows immediately after fixing. After trading
hours, it is possible to start entering orders for the following auction (since
no time priority applies). Continuous regime. In the continuous regime that follows immediately after
fixing in the auction regime, trades are concluded on the basis of continuous
matching orders for the purchase and sale of securities that can be sent to the
PSE system by its members. The continuous regime is open for trading from 9:45
through 15:45 CET. When orders are matched, first the price principle and then the time priority
principle are applied, i.e., if several orders at the same price are queued,
priority is given to the orders placed earlier. Matched orders record a trade
and such trade is published immediately. Orders can be filled partially, unless
an order limitation hinders such a fill (see below). The following orders can be queued for processing: - an order with a price limit (to be executed at a certain price or better); - a market order (to be executed at the market price); - an order with an expiration limit (to be executed within a certain time
period); - a minimal fill order (an order can be filled partially, but not below a
minimal level); - an order with partially undisclosed volume (an order has undisclosed volume
when the order enters the market and only discloses a portion of the total
volume to the public to be filled; when that portion is filled, another portion
is displayed with a new time stamp until the order is filled in its entirety);
and - an order with a "fill or kill" limit (the order must be filled at the time of
entry or not at all). The above limitations can be combined so that members can precisely specify
their trading intentions. The opening price of a security in the continuous
regime is equal to the price fixed in the auction regime, while the last trade
concluded in the continuous regime becomes the closing price of the day (for the
Automatic trades subsystem, that is). During the course of the continuous
regime, an up-to-the-minute price is defined as the price of the latest trade
concluded. Trades can be concluded within a price range around the opening price. The range
for securities that are traded also in the SPAD subsystem is set at 20% above
and below the opening price; the range for other securities is set at 8% above
and below the opening price. This rule is to protect members against losses
incurred during excessive price volatility. (iii) Block trades All OTC trades of members must be registered within the PSE database of trades.
Members must report not only OTC trades between them but also trades they make
with non-PSE members. For OTC trading between PSE members in SPAD shares (OTC
SPAD trades), special rules apply (see "Transparency" section in SPAD trading
description above). Other OTC trades are generally referred to as "block trades"
and must be registered within one hour after such trades are concluded (the PSE
system is open for registration between 7:30 until 20:00). No price limitations
apply (except for the OTC SPAD trade limitations described above). For all OTC
trades, members are free to agree on a settlement different from the T+3
standard (including OTC SPAD trades) within the range of T+0 to T+15 (T+1 to
T+15 in case of OTC SPAD trades). OTC trades registered with the PSE are regarded as a tool to protect market
transparency rather than as a special trading subsystem of its own. Thus,
through the OTC trades, PSE members effectively engage in "off-exchange"
transactions with securities listed on the PSE, meaning that these transactions
are concluded outside the PSE price-setting systems. For transparency reasons,
these transactions are reported to the PSE and are registered in the relevant
PSE databases. Additionally, OTC trades are also automatically reported to the
Czech SEC. There are no instances in which transactions in unlisted securities should or
would be reported through the PSE. Trades in listed securities concluded off the
PSE trading subsystems are reported to the PSE only if such trades occur between
two PSE members or between a PSE member and a non-member. Off-exchange trades
with listed securities concluded between non-PSE members are not reported to the
PSE. B. DISCUSSION OF THE ATTRIBUTES SPECIFIED IN RULE 902(b)(2) OF REGULATIONS Rule 902(b)(2) contains a non-exclusive list of the attributes to be considered
by the U.S. SEC in determining whether to classify a particular securities
market as a "designated offshore securities market." As discussed below, the
Prague Stock Exchange possesses those attributes. 1. Grganization under foreign law The Prague Stock Exchange is a joint stock company organized and incorporated
under the laws of the Czech Republic (see above for basic features of a Czech
joint stock company). Corporate affairs of the PSE are primarily governed by
Czech Act No. 256/2004 Coll., on Capital Markets Undertakings (the "Capital
Markets Act") and by Czech Act No. 513/1992 Coll., the Commercial Code, as
amended (the "Commercial Code"). The Prague Stock Exchange is a legal entity
licensed by the Czech SEC to organize, at a certain place and time through
licensed persons, demand for and offers of registered securities, investment
instruments that are not securities, and any other capital market instruments to
the extent stated in the license. The supreme body of the PSE is the General Meeting of Shareholders. It makes
decisions on the increase or reduction of the PSE's registered (share) capital
and elects members of both the Exchange Chamber and Supervisory Board. It
approves (i) annual financial statements, (ii) proposals for appropriation of
the company's profit, or, alternatively, loss sharing, (iii) reports on business
operations, (iv) reports on the state of assets of the PSE, and (v) the
principles governing the PSE's activities in the next accounting period. The
General Meeting of Shareholders also approves the Articles of Association of the
PSE. Its competence further includes decision-making on other principal matters
concerning the development of the PSE. The PSE's executive body is the Exchange Chamber that manages the PSE's
operation and acts on behalf of the PSE. It consists of seven members elected
for a period of three years. From among its members the Exchange Chamber elects
its Chairman and two Vice-Chairmen. Powers of the Exchange Chamber include
approving of PSE rules, appointing and recalling the Secretary General of the
PSE, and establishing the PSE Arbitration Court. It further decides on admission
of new members of the PSE and on the admission to listing of securities; it also
decides on suspension or termination of memberships. The Exchange Chamber has established three Exchange Committees: the Membership
Committee, which deals with the membership issues; the Trading Committee, which
deals with various issues regarding trading on the PSE, and the Listing
Committee, which deals with the admission of new securities for listing on the
PSE. The Procedural Rules governing the meetings of the Exchange Committees are
set in the PSE rules. Each Exchange Committee is headed by a member of the
Exchange Chamber. Other members of the Exchange Committees are representatives
of the PSE members, capital market experts, and financial specialists. The Supervisory Board supervises the Exchange Chamber and the activities of the
PSE. It consists of six members elected for a term of three years. The Exchange Chamber appoints the Secretary General of the PSE on the basis of
selection proceedings. The Secretary General is essentially the chief executive
officer of the PSE, implements resolutions of the Exchange Chamber, submits
information, proposals, and suggestions to the Exchange Chamber for discussion
and decision, signs accounting statements of the PSE, and manages day-to-day
operations of the PSE. The PSE Arbitration Court is an independent body for settlement of disputes
arising from the trades on the PSE. The disputes are usually decided by
independent arbitrators as required by arbitration regulations. In its
decision-making and organizational activities the PSE Arbitration Court is fully
independent. The Guarantee Fund of the PSE (the "GFB") was established to secure obligations
and cover risks ensuing from trades on the PSE and their settlement.
Administration of the GFB has been entrusted by the PSE to a fully owned joint
stock clearing company, UNIVYC. Each member of the PSE must be a member of the
GFB. The table below lists shareholders of the PSE as of May 1, 2004. There are no
limitations as to who can become a shareholder of the PSE; however, the shares
in the PSE are transferable only with the consent of the Exchange Chamber. Under
Czech law, at the General Meeting of Shareholders each shareholder has the
number of votes corresponding to the nominal value of his shares, but in no
event more than 20% of the total number of votes. |[NCCDEF,6] |[UCA1]
|[TDC4,M'00.',QL,VU] |[TCC4,MP1,QL,VU] |[TCC2,M'No. of Shares',QR,G0]
|[TCC4,M'00.000',QR] |[NCCHEAD] |[ST]|[TN1,4]|[TU204] |[ST]|[LC3]|[RS2]
|[TA]Shareholder |[TA]No. of shares|[QC] |[TA]%|[QC] |[ST]|[LC3]|[TN1,4]|[TU204]
|[XT]|[LA5] |[ST]|[RS4]1. |[TA]Patria Finance, a.s.|[UL] |[TA]65,901 |[TA]17.204
|[ST]|[VE2]2. |[TA]Cesk|pi|qa sporitelna, a.s.|[UL] |[TA]34,408 |[TA]8.983
|[ST]3. |[TA]Komercn|pi|qi banka, a.s.|[UL] |[TA]30,429 |[TA]7.944 |[ST]4.
|[TA]BODY INTERNATIONAL BROKERS a.s.|[UL] |[TA]28,607 |[TA]7.468 |[ST]5.
|[TA]Vseobecn|pi|qa |pi|quverov|pi|qa banka, a.s.|[UL] |[TA]22,154 |[TA]5.784
|[ST]6. |[TA]Cesk|pi|qa pojist' ovna a.s.|[UL] |[TA]20,000 |[TA]5.221 |[ST]7.
|[TA]GE Capital Bank, a.s.|[UL] |[TA]17,388 |[TA]4.540 |[ST]8. |[TA]Union banka,
a.s.|[UL] |[TA]15,000 |[TA]3.916 |[ST]9. |[TA]Zivnostensk|pi|qa banka, a.s.|[UL]
|[TA]14,355 |[TA]3.748 |[ST]10. |[TA]eBanka, a.s.|[UL] |[TA]7,640 |[TA]1.995
|[ST]11. |[TA]HVB Bank Czech Republic a.s.|[UL] |[TA]7,612 |[TA]1.987 |[ST]12.
|[TA]Interbanka, akciov|pi|qa spolecnost|[UL] |[TA]6,400 |[TA]1.671 |[ST]13.
|[TA]AB Banka, a.s. v likvidaci,|[UL] |[TA]4,500 |[TA]1.175 |[ST]14.
|[TA]Cesk|pi|qa konsolidacn|pi|qi agentura|[UL] |[TA]4,500 |[TA]1.175 |[ST]15.
|[TA]BH Securities a.s.|[UL] |[TA]3,849 |[TA]1.005 |[ST]16. |[TA]ATLANTA SAFE,
a.s.|[UL] |[TA]3,000 |[TA]0.783 |[ST]17. |[TA]ING Bank N.V., organizacn|pi|qi
slozka|[UL] |[TA]3,000 |[TA]0.783 |[ST]18. |[TA]ATLANTIK financn|pi|qi trhy,
a.s.|[UL] |[TA]2,996 |[TA]0.782 |[ST]19. |[TA]Credit Suisse First Boston (Praha)
a.s.|[UL] |[TA]2,997 |[TA]0.782 |[ST]20. |[TA]Ervn|pi|qi mestsk|pi|qa banka,
a.s.|[UL] |[TA]2,500 |[TA]0.653 |[ST]21. |[TA]CP INVEST investicn|pi|qi
spolecnost, a.s.|[UL] |[TA]2,000 |[TA]0.522 |[ST]22. |[TA]Global Brokers,
a.s.|[UL] |[TA]1,500 |[TA]0.392 |[ST]23. |[TA]EASTBROKERS, akciov|pi|qa
spolecnost|[UL] |[TA]1,166 |[TA]0.304 |[ST]24. |[TA]Citibank, a.s.|[UL]
|[TA]1,000 |[TA]0.261 |[ST]25. |[TA]CYRRUS, s.r.o.|[UL] |[TA]1,000 |[TA]0.261
|[ST]26. |[TA]Ceskoslovensk|pi|qa obchodn|pi|qi banka, a.s.|[UL] |[TA]1,000
|[TA]0.261 |[ST]27. |[TA]CES INVEST, a.s.|[UL] |[TA]1,000 |[TA]0.261 |[ST]28.
|[TA]imAGe GROUP, a.s.|[UL] |[TA]1,000 |[TA]0.261 |[ST]29. |[TA]INVESTKONZULT,
a.s.|[UL] |[TA]1,000 |[TA]0.261 |[ST]30. |[TA]KOMERO s.r.o.|[UL] |[TA]1,000
|[TA]0.261 |[ST]31. |[TA]OESTERREICHER & spol., s.r.o.|[UL] |[TA]1,000
|[TA]0.261 |[ST]32. |[TA]PROCON INTERNATIONAL s.r.o.,|[UL] |[TA]1,000 |[TA]0.261
|[ST]33. |[TA]WOOD & Company Financial Services, a.s.|[UL] |[TA]1,000 |[TA]0.261
|[ST]34. |[TA]Moravia Banka, a.s|[UL] |[TA]500 |[TA]0.131 |[ST]35. |[TA]Stock
Investment, a.s.|[UL] |[TA]500 |[TA]0.131 |[ST]36. |[TA]C.S. Brokers
burzovn|pi|qi, a.s.|[UL] |[TA]120 |[TA]0.031 |[ST]37. |[TA]BBG Finance a.s.|[UL]
|[TA]100 |[TA]0.026 |[ST]38. |[TA]Binensk|pi|qa obchodn|pi|qi, a.s.|[UL]
|[TA]100 |[TA]0.026 |[ST]39. |[TA]DISISOFT, a.s. v likvidaci|[UL] |[TA]100
|[TA]0.026 |[ST]40. |[TA]FIO, burzovn|pi|qi spolecnost, a.s.|[UL] |[TA]100
|[TA]0.026 |[ST]41. |[TA]Sati, a.s.|[UL] |[TA]100 |[TA]0.026 |[ST]42.
|[TA]SOCIETE G|pi|QEN|pi|QERALE, pobocka Praha|[UL] |[TA]100 |[TA]0.026 |[ST]43.
|[TA]DPFR, a.s.|[UL] |[TA]50 |[TA]0.013 |[ST]44. |[TA]KOMERIO, brokersk|pi|qy
dum Konecn|pi|qy, a.s. v likvidaci|[UL] |[TA]50 |[TA]0.013 |[ST]45. |[TA]ICEBERG
A.S.|[UL] |[TA]40 |[TA]0.010 |[ST]46. |[TA]MERX, a.s.,|[UL] |[TA]20 |[TA]0.005
|[ST]47. |[TA]GARFIELD a.s.|[UL] |[TA]10 |[TA]0.003 |[ST]|[LC3]|[TN1,4]|[TU204]
|[ET] 2. Association with a generally recognized community of brokers, dealers, banks,
or other professional intermediaries with an established operating history Under Czech law, all transactions on the Prague Stock Exchange must be executed
through a PSE member. Securities may only be bought and sold directly on the PSE
by or through persons licensed by the Czech SEC for trading of securities (in
case of Czech persons) or persons licensed by the Czech SEC for provision of
investment services in the Czech Republic (in case of foreign persons). In
addition to this requirement, a person may become a PSE member only if he
satisfies conditions set by the stock exchange's rules and regulations and
either (i) is a shareholder of the PSE, or (ii) obtains a license from the
Exchange Chamber to buy and sell securities on the PSE; obtaining such license
is conditioned upon payment of the admission fee. By virtue of law, the Czech
National Bank and the Czech Republic, acting through the Ministry of Finance are
authorized to trade in securities on the PSE, though they have never actually
traded securities on the PSE. A person with a registered office in the Czech Republic may be granted a license
by the Czech SEC for trading of securities if such person fulfills various
requirements stipulated by Czech law. Among the most important requirements are
a minimum amount of own capital (EUR 125 thousand and EUR 750 thousand in
certain cases), a reasonable business plan, transparent funding, sufficient
technical, personal, and organizational resources, reasonable internal rules for
provision of services and dealing with customers, and a transparent shareholding
structure. A person with a registered office in a member state of the European Union or in
another country forming the European Economic Area may provide investment
services in the Czech Republic without obtaining a license from the Czech SEC,
through a branch or directly under the EU principle of free movement of
services. This "EU passport" may be utilized if the person is authorized on the
basis of a license issued by the relevant supervisory authority of his home
country to provide investment services and is subject to supervision in the home
country in accordance with the law of the European Communities. Nevertheless,
apart from the Czech SEC license, the other conditions for admission as a PSE
member must be fulfilled. Entities from non-EU jurisdictions may apply for a special license from the
Czech SEC, provided that they already obtained a similar license in their home
country. To obtain a license from the Czech SEC, these non-EU entities must
comply with substantive and proceduial requirements established and verified by
the Czech SEC, thereby ensuring that the ownership, corporate structure, and
financial resources of those entities do not endanger the integrity of the
market. These requirements include in particular a license issued by the
applicant's home country for provision of investment services, a sufficient
level of regulation of the applicant's activities in its home country,
trustworthiness of the applicant, sufficient and transparent funding for the
applicant's local branch, trustworthy and competent management of the
applicant's local branch, sufficient technical, personal, and organizational
resources, a reasonable business plan, reasonable internal rules for provision
of services and dealing with customers, and a transparent shareholding
structure. Upon obtaining the license and fulfilling other conditions for
admission as a PSE member, non-EU entities may become PSE members. PSE rules stipulate certain other requirement for PSE membership. For instance,
under these rules only a legal entity may become a member of the PSE; such legal
entity must have fully paid-up share capital in the amount of at least CZK 10
million and must maintain sufficient liquid funds in the amount and form
specified by the rules; only a person who is a securities broker for at least
one year and who achieved certain minimum trading levels on the PSE may become a
member of the PSE. Full text of the PSE Membership Rules is available on our
website at http://ftp.pse.cz/Info.bas/Eng/Rules/memb_reg.pdf. A member of the PSE has the right to buy and sell securities on the PSE only if
it is a member of the Guarantee Fund of the PSE. Assets of the Guarantee Fund of
the PSE serve as coverage of risks arising from settlement of trades. The members of the Prague Stock Exchange are mostly subsidiaries of leading
European financial institutions, Czech banks, financial groups, and securities
dealers. As of May 1, 2004, there were 28 members of the PSE: |[NCCDEF,6]
|[UCA1] |[TDC4,M'00.',QL,VU] |[TCC4,MP1,QL,VU] |[NCCHEAD]
|[ST]|[LC5]|[TN1,2]|[TU204] |[ST]|[LC3]|[RS2] |[TA]Name|[QC] |[XT]|[LA5]
|[ST]|[RS4]1 |[TA]ABN AMRO Bank N.V., subsidiary Prague, a subsidiary of ABN
AMRO Bank N.V. |[ST]|[VE2]2 |[TA]Cesk|pi|qa sporitelna, a.s., a member of Erste
Bank Group |[ST]3 |[TA]Ceskoslovensk|pi|qa obchodn|pi|qi banka, a.s., a member
of KBC Banking and Investment group |[ST]4 |[TA]DEUTSCHE BANK Aktiengesellschaft
Filiale Prag, a subsidiary of Deutsche bank A.G |[ST]5 |[TA]HVB Bank Czech
Republic a.s., a member of HVB Bank Group |[ST]6 |[TA]ING Bank N.V.
organizacn|pi|qi slozka, a subsidiary of ING Bank N.V. |[ST]7 |[TA]Interbanka,
akciov|pi|qa spolecnost, a member of Bayerische Landesbank Group (BAWAG) |[ST]8
|[TA]Komercn|pi|qi banka, a.s., a member of Soci|pi|qet|pi|qe G|pi|qen|pi|qerale
group |[ST]9 |[TA]Raiffeisenbank a.s., a member of Raiffeisen group |[ST]10
|[TA]Zivnostensk|pi|qa banka, a.s., a member of UniCredito Italiano S.p.A
|[ST]11 |[TA]Czech National Bank |[ST]12 |[TA]Czech Republic represented by
Ministry of Finance CR |[ST]13 |[TA]Cesk|pi|qa konsolidacn|pi|qi agentura (Czech
Consolidation Agency) |[ST]14 |[TA]Ceskomoravsk|pi|qa z|pi|qarucn|pi|qi a
rozvojov|pi|qa banka, a.s. |[ST]15 |[TA]Patria Finance, a. s., a member of KBC
Banking and Investment group |[ST]16 |[TA]J & T SECURITIES (CZECH REPUBLIC),
a.s., a member of J & T Group |[ST]17 |[TA]PPF Asset Management a.s., members of
PPF Group |[ST]18 |[TA]PPF burzovn|pi|qi spolecnost a.s., members of PPF Group
|[ST]19 |[TA]FIO, burzovn|pi|qi spolecnost, a.s., a member of FIO holding
|[ST]20 |[TA]ATLANTIK financn|pi|qi trhy, a.s. |[ST]21 |[TA]BH Securities, a.s.
|[ST]22 |[TA]BODY INTERNATIONAL BROKERS a.s. |[ST]23 |[TA]CAPITAL PARTNERS a.s.
|[ST]24 |[TA]CYRRUS, a.s. |[ST]25 |[TA]EPIC Securities, a.s. |[ST]26 |[TA]Global
Brokers, a.s. |[ST]27 |[TA]Sati, a.s. |[ST]28 |[TA]WOOD & Company Financial
Services, a.s. |[ST]|[LC3]|[TN1,2]|[TU204] |[ET] 3. Oversight by a governmental or self-regulatory body Supervision of the Prague Stock Exchange by the Czech SEC The Prague Stock Exchange is under the direct supervision of the Czech SEC,
which is the primary governmental regulator of the securities market in the
Czech Republic. The mission of the Czech SEC is to foster investor confidence in
the securities market through contribution to the protection of investors,
development of the capital market, and promotion of public knowledge of this
field. The Czech SEC exercises its supervisory powers through a designated employee
(the "Stock Exchange Commissioner"). The Stock Exchange Commissioner is employed
by the Czech SEC, is independent of the PSE and cannot be a member of the
Exchange Chamber or the Supervisory Board. The Stock Exchange Commissioner is
appointed and recalled by the Czech SEC. Though the Stock Exchange Commissioner
is ordinarily the person who exercises the Czech SEC's supervisory powers;
however, the supervisory powers ultimately belong to the Czech SEC and so the
Czech SEC may always decide to act independently of the Stock Exchange
Commissioner. This principle was recently strengthened in an amendment to the
relevant laws, and as of May 1, 2004 the law expressly states that the
supervisory powers belong to the Czech SEC. When exercising its supervisory powers, the Czech SEC is authorized to (through
the Stock Exchange Commissioner or otherwise):
review compliance of exchange trading with statutory provisions, the PSE rules
and regulations, and the needs of the capital market; non-compliance shall be
reported to the Exchange Chamber and various sanctions described below may be
imposed by the Czech SEC for non-compliance.
participate in meetings of the Exchange Chamber and Exchange Committees, with
the right to suspend the implementation of any of their decisions if such
decisions conflict with the statutory provisions and regulations, or the PSE's
rules and regulations. Such suspension right of the Czech SEC may be exercised
without any formal proceedings prior to the exercise of the right, thus ensuring
its flexibility. On the other hand, implementation of a decision of the Exchange
Chamber or an Exchange Committee may be suspended for no longer than 7 days.
Within this period, the Czech SEC must issue its final verdict, i.e., decide
whether the decision is to be abolished. This final verdict is issued in a
formal administrative proceeding.
request that within a time-limit set by the Czech SEC (acting through the
Stock Exchange Commissioner or otherwise) the Exchange Chamber or an Exchange
Committee arrange to remedy all identified shortcomings. If the shortcomings are
not remedied, the Czech SEC may impose sanctions described below.
require from the bodies of the stock exchange any documents relating to stock
exchange transactions.
request from bodies of the stock exchange information on stock exchange
transactions concluded by the relevant persons. The PSE is obligated to inform the Czech SEC of any suspicion of violation of
securities laws by members of the stock exchange without undue delay. The Czech SEC is authorized to impose various sanctions against the PSE if the
PSE breaches its obligations under applicable laws or decisions of the Czech
SEC. It can issue a cease and desist order requiring the PSE to stop any actions
that are not in compliance with applicable laws or decisions of the Czech SEC.
It can demand from the PSE that appropriate remedying measures be adopted to
remedy any non-compliance. The Czech SEC may request an extraordinary audit of
the PSE or may demand a change in auditor of the PSE. In exceptionally serious
cases, the license granted to the PSE may be suspended for a period of up to one
year, or it can even be completely revoked. When appropriate, a "forced
administration" may be imposed on the PSE. The effect of the forced
administration is that the powers of the Exchange Chamber are suspended and they
are transferred to an administrator appointed by the Czech SEC. The
administrator then takes measures necessary to remedy shortcomings that led to
imposition of the forced administration. The administrator is supervised by the
Czech SEC and can be recalled by the Czech SEC if he fails to exercise proper
care in performance of his duties. Among the powers of the SEC is the ability to
suspend trading in securities on the PSE up to six months if it is necessary for
the protection of investors. The Czech SEC is authorized to impose penalties on
the PSE up to CZK 20 million. Similar sanctions (order to remedy, extraordinary audit, change in auditor,
cease and desist order, forced administration, suspension or revocation of a
license, penalties up to CZK 20 million) may be imposed by the Czech SEC on
other market participants for their misconduct. The Czech SEC is not authorized
to bring civil or criminal actions against market participants. With respect to
criminal actions, however, the Czech SEC may inform the police of suspected
misconduct and a criminal action may be brought by the police or state
prosecutor. All of the above sanctions can only be imposed in a formal administrative
proceeding initiated by the Czech SEC against the market participant or the PSE
in which the market participant or the PSE are given fair opportunity to present
their case. The suspected wrongdder may defend himself, may present evidence,
appoint counsel for his defense, is entitled to present and hear witnesses, etc.
The decision of the Czech SEC is in the first instance issued by the enforcement
department of the Czech SEC. Such decision may be appealed and appeals are
decided by the presidium of the Czech SEC. A cooperation agreement was concluded in February 2003 between three main Czech
supervisory authoritiesthe Czech National Bank, the Ministry of Finance, and
the Czech SECestablishing a Committee for the coordination of Supervision of
Financial Markets as well as cross-sector working groups. In the agreement, the
parties agreed to cooperate in preparation of a common position on future
regulation of Czech financial markets. The underlying idea is to eventually
integrate supervision of Czech financial markets in one institution. Based on
these efforts, on May 12, 2004 the Czech government approved a general plan of
future integration of supervision over Czech financial markets. Under this plan,
in the first phase the Czech SEC should become the supervisory authority for
pension funds and insurance companies by the end of 2005. Currently, the
Ministry of Finance is supervising pension funds and insurance companies. After
the first phase, integration between the Czech National Bank and the Czech SEC
should start with a goal of creating one regulator. No specific deadlines were
stated with respect to this second phase. Self-regulation and the PSE surveillance system An inseparable part of the PSE's regulatory environment and a precondition
ensuring compliance with the legal framework of a regulated market is
supervision exercised by the PSE. The objective of the PSE's supervision is to
protect investors' interests through continuous supervision of compliance with
the requirements of the PSE rules and regulations and applicable Czech laws. The supervisory activities of the Prague Stock Exchange are presently focused
on:
real-time trading surveillance, which focuses on finding noncompliance with
the procedures set by the PSE's rules and regulations and relevant Czech laws
(detection of market manipulation and insider trading are of particular
importance). Each trading day the PSE monitors and supervises quotations put
into the SPAD trading system by market makers (both before the trading session
is open and after it is open), monitors price deviations (see "Transparency"
section in the discussion of SPAD trading system above), and overseas matching
of instructions. The PSE releases important information about trading in the
form of short messages sent via trading system, and continuously monitors news
on issues traded on the PSE; for methods of real-time trading surveillance, see
discussion of Automated Stockwatch System below.
analytical monitoring of trades effected by exchange members (both concluded
on the PSE and OTC trades), which is a continuous activity focused on
identification of those trades effected by exchange members in which
above-mentioned acts and regulations could be breached (ensuring proper
reporting of OTC trades in order to achieve market transparency is of particular
importance).
inspections, both remote and on-site. These are in-depth and repeated
inspections carried out in accordance with the approved inspection schedule or
operative inspection, especially focusing on trades selected by analytical
monitoring and complaints against exchange members' conduct. During the
inspections, documentation of trading activity is reviewed and explanation of
suspicious activities is sought.
control over issuers' compliance with their ongoing information
disclosure/reporting duties. This control is performed through monitoring of
timing and contents of reports submitted by issuers to the PSE and the Czech
SEC, as well as through monitoring outside sources of information about the
issuer and its securities.
analytical monitoring of events concerning issuers and having an impact on the
official price of securities issued by such issuer and admitted to exchange
trading (e.g., monitoring through informational resources such as the Czech News
Agency). Such monitoring supports control over the issuer's compliance with
reporting obligations. The PSE's supervision is considerably supported by a powerful software
(Automated Stockwatch System), approved in an audit performed by the Czech SEC,
which gives the PSE's supervisory personnel direct access to all relevant data
on trading (from members and the trading system). The Automated Stockwatch
System utilizes various software applications for review of trading data,
detection of unusual situations, and identification of suspicious trading
patterns. The main criteria that the system reviews and monitors are prices of
individual trades, price development, volume of individual trades, total trading
volume of an individual PSE member, total volume with respect to a particular
issue, price limit in orders, and time of registration of individual trades (OTC
trades). The system is designed to detect trading activity that may suggest
insider trading or manipulation of price. The priority supervisory activities
are the prompt discovery of breaches of the regulations, minimizing their
harmful consequences, and pinpointing the causes of the breaches so that
appropriate measures can be taken to rectify shortcomings. Approximately 6000
trades per year are selected by the Automated Stockwatch System as suspicious
trades and are further examined by our inspectors. Apart for the above systems that are designed to detect insider trading, the PSE
may occasionally suspend trading in the shares in order to prevent insider
trading and to protect investors; this is usually done in consultation with the
Czech SEC. The Secretary General exercises this authority. For instance, in a
recent case, an important governmental decision was expected to be issued with
respect to an issuer whose securities were traded in the SPAD system. To prevent
any insider trading activities and potential disruption of the trading, the
Secretary General suspended trading in the shares of the issuer for the day when
the governmental decision was to be issued. The Czech SEC also has the authority
to suspend trading if necessary for the protection of the investors. Prevention
and detection of insider trading is further supplemented by various rules
described in the following section. The subject, forms, and methods of the surveillance activities, including the
applicable surveillance procedure, along with the principles, rights, and duties
of the PSE, its members, and issuers of securities, are set forth in the PSE
Surveillance Activity Rules and in the PSE Membership Rules. The PSE Surveillance Activity Rules provide rules for surveillance of PSE
members and rules for surveillance of issuers. Surveillance of PSE members
consists of trading surveillance, analytical monitoring of trades of PSE
members, and inspections. The rules stipulate in detail conditions under which
inspections may be performed by the PSE. The PSE is entitled to enter offices of
its members, request production of documents (both paper and electronic) and
make copies, request explanations of its questions, etc. The inspected PSE
member must provide all reasonable assistance that the PSE inspectors may
require. Inspections can either be announced in advance or may be performed
without prior announcement. The PSE's supervision of an issuers involves control
of the issuer's compliance with its reporting obligations, and analytical
monitoring of events concerning the issuer, both of which are discussed above.
The PSE is entitled to request explanation from the issuer with respect to
potentially material information about the issuer. For instance, if it is
suspected that an issuer is in financial difficulty, the PSE is authorized to
ask such issuer for explanation. With respect to issuers, the PSE is not
authorized to perform inspections. Rather, the PSE would have to request the
Czech SEC to perform an inspection, although the Czech SEC is not obligated to
honor the request. Full text of the PSE Surveillance Activity Rules is available
on our website at http://ftp.pse.cz/Info.bas/Eng/Rules/control.pdf. The PSE Membership Rules stipulate conditions under which a licensed broker may
become a member of the PSE (as summarized above). They further specify certain
informational duties of the PSE members towards the PSE (e.g., regular delivery
of financial statements and other financial information), obligations for
maintenance of records, requirements for documentation of trades and related
instructions, rules for dealing with customers. PSE members are generally
required to avoid any activity that would impair transparency of the market,
such as manipulation of price, artificial trading, or dissemination of
misleading or untrue information. These requirements supplement similar
obligations stipulated by the Capital Markets Act. If a PSE member violates its duties imposed by the relevant laws and
regulations, the PSE is obligated to report such violation to the Czech SEC, and
the Czech SEC may impose the sanctions described above. As of May 1, 2004, the
PSE is no longer entitled to impose sanctions on its own; instead, sanctions may
only be imposed by the Czech SEC. The same applies to the issuer of securities
listed on the PSE. 4. Oversight standards set by an existing body of law The current framework for the regulation of the Czech securities market is
established primarity by the Capital Markets Act, Act No. 15/1998 Coll., on the
Securities Commission, as amended (the "Czech SEC Act"), Act No. 190/2004 Coll.,
on Bonds (the "Bonds Act"), and Act No. 189/2004 Coll., on Collective Investment
(the "Act on Collective Investment"). These statutory regulations are further
supplemented by more detailed regulations issued by the Czech SEC and the Czech
Ministry of Finance. Capital Markets Act. The Capital Markets Act contains the core regulation of
capital markets in the Czech Republic. The Capital Markets Act became effective
on May 1, 2004 and replaced the former Securities Act of 1991 and the Stock
Exchange Act of 1992. The purpose of the new Capital Markets Act was to
implement certain requirements of the European Union into Czech law so that the
Czech law would be fully harmonized with EU law as of the date of accession of
the Czech Republic into the European Union on May 1, 2004. Most provisions of
the Capital Markets Act were copied from the above former acts and capital
markets regulation was consolidated into new law. Certain new standards were
implemented, mainly a comprehensive regulation of activities viewed as market
manipulation. All of the existing EU directives regarding capital markets are
thus incorporated into Czech securities law, including especially EU Directive
93/22/EEC on investment services in the securities field (see licensing of
securities brokers below); EU Directive 2001/34/EC on the admission of
securities to listing and on information to be published on those securities; EU
Directive 89/298/EEC on coordination of the requirements for the drawing up,
scrutinizing, and distribution of the prospectus to be published when
transferable securities are offered to the public (see prospectus regulation
below); and EU Directive 2003/6/EC on insider dealing and market manipulation
(market abuse) (see discussion of insider trading and market manipulation
regulation below). Under the Capital Markets Act, the Czech SEC licenses securities brokers. In
addition to conditions under which a license for trading of securities or a
license for provision of investment services may be obtained (see section B.2
above), minimum required professional standards for their services are
stipulated. In particular, these include capital adequacy rules, rules
regulating qualifications of personnel, rules for transparency of shareholding
structure of regulated brokers, records maintenance requirements, rules for
internal affairs of regulated brokers, rules governing relationships with
customers, and reporting obligations of regulated brokers. Further, the Capital Markets Act extensively regulates listing of securities on
a stock exchange, and sets minimum listing requirements as well as minimum
requirements for a prospectus. Only securities with respect to which the Czech
SEC approved a prospectus may be listed on the PSE. The prospectus must contain
all information necessary for investors and their professional advisors for the
purposes of making an accurate and fair assessment of the securities, the
issuer's assets and liabilities, its financial position, its profits and losses,
and prospects of the issuer's business and financial situation. The Czech SEC
issued a regulation in which it specified a list of information that must be
contained in the prospectus. The Czech SEC will approve a prospectus only if it
contains all required information, unless an exemption is granted by the Czech
SEC with respect to particular information that is not material. A prospectus is
also required for a public offer of securities, although certain information may
be omitted if no listing of the securities is to take place. The Capital Markets
Act does not distinguish between an initial public offering and a subsequent
public offeringin both cases, a prospectus is required. The prospectus is
approved by the Czech SEC in administrative proceeding started upon application
by the issuer for approval of the prospectus. In theory, the Czech SEC should
approve or reject the prospectus in 60 days following the application. In
practice however, the Czech SEC provides informal comments to preliminary drafts
of the prospectus, and thus the final approval of the prospectus may be granted
shortly after formal application for its approval is submitted. The Capital Markets Act specifies reporting obligations of issuers of listed
securities. These include publication of annual reports, semi-annual reports,
and ongoing reporting of material events. The content of an annual report and a
semi-annual report is specified by the Capital Markets Act and by implementing
regulations of the Czech SEC. An issuer is generally required to publish
promptly any information that is relevant for the protection of investors and
for proper operation of the securities market. The standard is rather vague, so
the issuer must analyze whether particular information is material. Certain
information is nevertheless always considered material and must be published,
such as preparation of a general meeting, payment of dividends, and issuance of
new shares. Ordinarily, significant acquisitions, significant legal proceedings,
execution of material contracts, and various other material events affecting the
issuer, its business, or securities would also be considered material and would
have to be published. The Capital Markets Act prohibits insider trading. Inside information includes
any information that is not public and which could materially affect the price
of the issuer's securities if it became public. A person who possesses inside
information (an insider) must not use such information nor distribute such
information, and must maintain its confidentiality. To minimize opportunities
for insider trading, the issuer is generally required to promptly publish any
inside information it becomes aware of. It may postpone publishing of the inside
information as long as this is not misleading for the public, the issuer
maintains confidentiality of the information, and the Czech SEC is immediately
notified thereof. If the issuer provides not-yet-published inside information to
a third party such as an analyst, it must immediately publish such inside
information. The issuer must maintain a list of persons who have an access to
not-yet-published inside information regarding the issuer, and such list must be
provided to the Czech SEC at its request. Further, persons in the management of
the issuer must report to the Czech SEC all their trades in the securities of
the issuer, so that the Czech SEC may publish this information. It is expected
that in the near future the Czech SEC will issue regulations implementing the
above statutory provisions. Any market manipulation is strictly prohibited by the Capital Markets Act.
Certain activities are not considered as market manipulation, such as
repurchases of shares by the issuer and price stabilization of securities. These
activities must however always comply with implementing regulations on timing,
disclosure obligations, and price requirements. Provisions of the Capital Markets Act on regulation of stock exchanges apply to
stock exchanges in general, although only the Prague Stock Exchange is in
operation in the Czech Republic and is actually governed by them. The Capital
Markets Act mandates that any stock exchange must obtain a license from the
Czech SEC prior to commencement of trading on the stock exchange. It further
regulates internal affairs of the stock exchange and trades on the stock
exchange. As explained above, the Czech SEC supervises all stock exchanges,
including the PSE, but the PSE also has its own internal supervision processes.
The Capital Markets Act also regulates entities providing settlement of
securities trades (a license from the Czech SEC is required and rules of
operation are prescribed). The Capital Markets Act generally stipulates an obligation of all providers of
services in the capital market, including the Prague Stock Exchange, to provide
such services with professional care. The Czech SEC supervises the compliance of
regulated persons with all obligations under the Capital Markets Act, and it can
impose penalties, revoke licenses, and adopt other measures ensuring sufficient
protection of investors as discussed in section B.3 above. Czech SEC Act. Under the Czech SEC Act, the Czech SEC was established in 1998 as
a regulator of the Czech capital market. The Czech SEC Act stipulates powers of
the Czech SEC and regulates internal organizational matters of the Czech SEC.
The Czech SEC is headed by a five-member presidium appointed for staggered terms
of five years by the President of the Czech Republic based on a proposal
submitted by the Czech government. Bonds Act. The Bonds Act contains specific regulation of issues regarding debt
securities, such as issuance of bonds, bond prospectuses, repayment of bonds,
meetings of bondholders, governmental bonds, municipal bonds, subordinated
bonds, etc. The Czech SEC supervises compliance with the act. Act on Collective Investment. The Act on Collective Investment comprehensively
regulates collective investment in the Czech Republic. It sets standards for
investment companies and mutual funds, regulates investment funds, stipulates
rules for portfolio diversification, professional care, reporting obligations,
etc. The Czech SEC is authorized to supervise compliance with obligations
stipulated by the act. 5. Reporting of securities transactions on a regular basis to a governmental or
self-regulatory body By virtue of law, every organizer of a public market in the Czech Republic,
including the Prague Stock Exchange, is required to report every transaction in
the organized market to the Czech SEC. The Prague Stock Exchange provides this
information automatically via electronic means after each trade. Additionally,
all members of the PSE are obligated to report each transaction concluded off
the PSE (OTC trades) to the PSE; the same information must be provided to the
Czech SEC. This information is collected through electronic messages and
contains data about identity of the securities, price, volume, and identity of
the members involved. 6. A system for exchange of price quotations through common communications media
The Prague Stock Exchange is one of the electronic exchanges, and its trading is
based on automated processing of its member's instructions for the purchase and
sale of securities. Its automated trading system has been developed as an open
client-server-based system, and this technology allows direct connection of the
PSE members' software to the PSE's automated trading system. The PSE provides a comprehensive package of information on the trading results
to the market participants. It uses either its own information service or
services of other information agencies for this purpose. Basic information about
the PSE and its trading results is available to the wider investing public
through newspapers or by teletext on Czech Television's Channel 1. A more detailed source of information is the PSE's website at http://www.pse.cz,
which is continuously updated. On this website, a price list containing prices,
trade volumes in pieces, trade values, and certain other information is
published at 17:00 each trading day. During trading, selected real time trading
data is displayed: values of indices PX 50 and PX-D are provided without any
delay, whereas trading prices are provided with a delay of 30 minutes. Best bid
and offering prices are not provided on the website; they are only available
through paid services. Thus, the contents of the information provided on the
website is not different from the information available through the paid
services; only the scope of the information available on the website is limited
and certain information is provided with delay. Investors can also obtain information about the PSE trading through the data
vendors who have concluded contracts with the PSE to disseminate the PSE
information. Data vendors directly connected to the PSE's information system
include Bloomberg, Moneyline, Reuters, Tanger, Telekurs, and Thomson Financial.
These data vendors also provide their clients with real-time trading data in
addition to the standard PSE information available at the website. This
real-time trading data include bid and offering prices, volumes in pieces, and
other information which is not available on our website in real-time. For investors who need information in a form suitable for computer processing,
there is the FTP paid service, which the PSE provides via its www and FTP
(ftp://ftp.pse.cz) servers. The information supplied through this service
includes price lists with additional information from trading, data on issues
and the issuers, statistics, and other up-to-date information. 7. An organized clearance and settlement system Responsibility for settlement of the PSE trades lies with UNIVYC, which is a
100% subsidiary of the PSE. The main function of UNIVYC is settlement of stock
exchange transactions in securities for the PSE members. Apart from this, UNIVYC
offers security brokers various other services, including the following:
settlement of over-the-counter-transactions;
securities registration for the purposes of settlement;
keeping records of securities, including all the rights concerned;
safe custody of securities;
settlement of primary issues of securities;
settlement of trades in foreign securities;
securities lending;
arrangement of the Securities Center Register (SCP) services; and
management and control of deposits of the GFB's participants. Settlement of book-entry securities, which are electronically registered by the
stateowned Securities Center Register, is achieved through UNIVYC's instruction
to the Securities Center Register for the transfer of the affected securities
from the account of the seller to the account of the purchaser. Foreign
securities, which are not registered in the Securities Center Register, are
recorded on UNIVYC's client account with Clearstream, of which UNIVYC is a
direct participant. UNIVYC keeps records of these securities in the accounts of
clients of individual brokers in UNIVYC's own securities register. As is the
case of foreign securities, certificated securities are settled in UNIVYC's own
securities register. Delivery of securities ordinarily takes place concurrently with the payment of
the purchase price (delivery versus payment). However, the "delivery free of
payment" settlement method is also possible. On the monetary side of the settlement, for money transfers in Czech crowns,
UNIVYC co-operates with the Clearing Center of the Czech National Bank where
money transfers between the settlement parties' accounts, or between accounts of
their clearing banks, are effected. Trades concluded in Euros are settled
through UNIVYC's account in HVB Bank Czech Republic, a.s. Settlement of trades varies depending on the type of trade. Settlement of trades
in the SPAD system (the system involving market makers) and automatic trades is
guaranteed by the Guarantee Fund of the PSE. Automatic trades are settled in
T+3. Trades concluded in the SPAD system under standard terms (against a market
maker) are settled in T+3. For an OTC SPAD trade in SPAD shares, a member can
opt for a settlement date from T+1 to T+15. For other trades that are not
covered by guarantees, i.e., block trades, brokers can choose the settlement
date of a block trade at intervals ranging from T+0 to T+15. C. CONCLUSION When the U.S. SEC adopted Regulation S, it established a process for the
designation of securities markets as "designated offshore securities markets" in
the context of resales of securities under Rule 904. In the U.S. SEC's view,
transactions in a foreign securities market that had been so designated would
"provide objective evidence of the foreign locus of the transaction" such that
"buyers in such markets may be presumed to rely on the regulatory protections
afforded by local law and not U.S. registration requirements." See Offshore
Offers and Sales, Release No. 33-6863 (April 24, 1990) (final rule). As demonstrated above, the Prague Stock Exchange constitutes a well-established
securities market, subject to extensive home country regulation. Transactions
carried out on the PSE have a clear foreign locus and the parties thereto cannot
fairly be viewed as relying for protection on U.S. registration requirements.
Accordingly, market participants who sell and purchase securities "in, on or
through the facilities of" the PSE in transactions otherwise complying with the
requirements of the safe harbor for resales provided by Rule 904 should be
provided with the additional measure of comfort provided by that safe harbor.
Accordingly, we respectfully request that you confirm the designation of the
Prague Stock Exchange as a "designated offshore securities market" under Rule
902(b)(2). * * * Thank you for your consideration. We would be happy to discuss our request with
you and answer any additional questions you may have about the regulatory or
operational aspects of the Prague Stock Exchange. For any questions concerning
this application, please contact the undersigned as follows: Pavel Hollmann General Director The Prague Stock Exchange Rybn|pi|qa 14, Prague 1, 110 00 Czech Republic Tel.:+420 221 832 202 Fax:+420 221 833 040 E-mail: hollmann@pse.cz Yours sincerely, /s/ Pavel Hollmann General Director The Prague Stock Exchange Cc: Czech Securities and Exchange Commission
[STAFF REPLY LETTER]
May 28, 2004 Pavel Hollmann General Secretary The Prague Stock Exchange Rybn|pi|qa 14, Prague 1, 110 00 Czech Republic Re: The Prague Stock Exchange (Burza cenn|pi|qych pap|pi|qir|pi|eu Praha, a.s.)
Incoming Letter Dated May 24, 2004 Dear Mr. Holmann: This letter will confirm the response of the Division of Corporation Finance to
your request that the Division cesignate the Prague Stock Exchange (Burza
cenn|pi|qych pap|pi|qir|pi|eu Praha, a.s.) as a "designated offshore securities
market" within the meaning of Rule 902(b) of Regulation S under the Securities
Act of 1933. A copy of your letter is enclosed in order to avoid having to
recite or summarize the facts set forth therein. On the basis of the facts
presented, we hereby so designate the Prague Stock Exchange (Burza cenn|pi|qych
pap|pi|qir|pi|eu Praha, a.s.) Pursuant to delegated authority, /s/ Paul M. Dudek Chief Office of International Corporate Finance
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