In 2005, the securities and financial market supervisor - the Hungarian Financial Supervisory Authority (PSZAF) - published a self-assessment on Hungary's compliance with the International Organization of Securities Commission's (IOSCO) Objectives and Principles of Securities Regulation. The PSZAF found Hungary to be fully or broadly compliant with most of the principles. According to the International Monetary Fund's (IMF) 2005 Financial System Stability Assessment Update, based on the 2000 Financial Stability Assessment Program, the regulatory and supervisory framework in Hungary was strengthened and considerable progress was made towards achieving a risk-based approach to supervision. Furthermore, the regulatory and supervisory regime conformed in most material respects with the principles, and was in line with relevant international standards. The extensiveness of securities regulation practices in Hungary was further reviewed in 2004 by the European Bank for Reconstruction and Development Securities Markets Legislation Assessment. This study concluded that securities regulation in Hungary was in "medium compliance" with the IOSCO Objectives and Principles. Weaknesses were identified by both assessments with regards to the PSZAF's lack of powers in issuing binding regulations. The securities markets in Hungary, which are still at an early stage of development, are mainly governed by the 2002 Capital Markets Act. The PSZAF was established in April 2000 as an integrated financial supervisory authority for the securities, banking, and insurance sectors.

General Overview

An assessment of Hungary's observance of the International Organization of Securities Commission's (IOSCO) Objectives and Principles of Securities Regulation was carried out by the Financial Stability Assessment Program (FSAP) mission in 2000, and updated in the context of the 2002 Financial System Stability Assessment (FSSA). According to the IMF's 2005 FSSA Update, "Hungary's securities regulatory regime conformed in most material respects with the principles" (p. 33). Following the 2000 FSAP, per the 2005 report, the regulatory and supervisory framework in Hungary was strengthened and considerable progress was made towards achieving a risk-based approach to supervision. A Memorandum of Understanding (MoU) was concluded between the Hungarian Financial Supervisory Authority (Pénzügyi Szervezetek Állami Felügyelete, or PSZAF), the Ministry of Finance (Miniszterelnöki Hivatal, or MoF), and the National Bank of Hungary (Magyar Nemzeti Bank). In its 2005 FSSA Update, the IMF noted that the regulatory and supervisory framework was in line with relevant international standards. The extensiveness of securities regulation practices in Hungary was further addressed in 2004 by the European Bank for Reconstruction and Development (EBRD) Securities Markets Legislation Assessment. The EBRD concluded that securities regulation in Hungary was in "medium compliance" with the IOSCO Objectives and Principles of Securities Regulation. However, weaknesses were identified by both the IMF and EBRD assessments with regards to the PSZAF's lack of powers in issuing binding regulations. The 2002 IMF assessment, as reported in the 2005 FSSA Update, recommended improving the adequacy of staff resources, and coordinating sanctioning measures of the PSZAF and the Self Regulatory Organizations (SROs). It further advised the authorities to enhance the implementation and enforcement of international principles and ensure more stringent reporting standards for investment service providers (ISPs). In 2005, the PSZAF published a self-assessment on Hungary's compliance with the IOSCO Principles, and found Hungary to be fully or broadly compliant with most of the principles.

The main law governing the securities markets in Hungary is the 2002 Act CXX on Capital Markets (hereafter referred to as "Capital Markets Act"), which replaced the 1996 Securities Act, the 1994 Commodities Exchange Act, and the 1991 Investment Funds Act. According to the EBRD's 2004 assessment, the Capital Markets Act was amended on July 1, 2005, to improve investor protection, encourage new listings on the BSE, and align Hungarian legislation with relevant EU directives on investment services, public offering and trading of securities, investment funds, investor protection, and financial sector supervision.

The PSZAF was established in April 2000 as an integrated financial supervisory authority for the securities, banking, and insurance sectors. The PSZAF is modeled on the UK's Financial Service Authority, and the World Bank's 2003 report found it to be independent and self-financing. At the time of the IMF's 2005 FSSA Update, the PSZAF had supervisory authority over the Budapest Stock Exchange (Budapesti Értéktõzsde, or BSE), the Budapest Commodities Exchange (BCE), securities intermediaries, and investment fund managers. In September 2005, the BCE was integrated into the BSE. In 2003, the BSE became a shareholder company, with the Vienna Stock Exchange and the HVB Bank Hungary (now "Unicredit Bank Hungary") as majority shareholders. After a strong decline in 2002, the market capitalization of the BSE recovered to 26 percent of GDP, as noted in the IMF's 2005 FSSA Update. The 2008 U.S. Department of Commerce (DoC) report noted that although capital markets in Hungary have grown and diversified since 2000, the stock exchange remains illiquid due to the low trading volume, and domestic bond markets are still underdeveloped. As of 2008, there are 61 listed companies on the BSE.

The IOSCO multilateral memorandum of understanding (MMoU) is based on the thirty IOSCO Principles of Securities Regulation adopted in 1998 and the experience gathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU. Hungary's PSZAF is a signatory to the MMoU and an ordinary member of IOSCO.

The Principles

1. The responsibilities of the regulator should be clear and objectively stated.

II

In its 2005 self-assessment based on IOSCO Principles, the PSZAF reported that this principle is fully implemented. According to the IMF's 2002 assessment, supervisory responsibilities of the PSZAF over the securities markets are regulated under the 1999 PSZAF Act, as amended following the 2002 Capital Markets Act. While the 2002 IMF assessment found that Hungary's securities regulatory regime conformed in most material respects with the IOSCO Principles, as noted in the IMF's 2005 FSSA Update, it did not directly address Hungary's compliance with this principle.

2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.

CP

According to the PSZAF's 2005 self-assessment based on IOSCO Principles, this principle is fully implemented. As stated in the IMF's 2002 FSSA, "the PSZAF's organizational structure, operations, and authority are generally consistent with the relevant portions of the IOSCO Principles" (p. 51). Furthermore, according to the World Bank's 2003 report on Corporate Governance, "the PSZAF is independent and self-financing, and is sufficiently empowered and staffed to carry out its supervisory functions" (p. 2). However, weaknesses were identified by the 2005 IMF FSSA Update with regard to the PSZAF's lack of power in issuing binding regulations.

3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

CP

This principle is broadly implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles. As a follow-up to the IMF's 2002 FSSA recommendations, the PSZAF made efforts to improve its capacity to perform its functions and exercise its powers by increasing the number of staff and establishing a comprehensive IT system, as noted in the IMF's 2005 FSSA Update. Furthermore, according to the World Bank's 2003 report on Corporate Governance, "the PSZAF is independent and self-financing, and is sufficiently empowered and staffed to carry out its supervisory functions" (p. 2). However, weaknesses were identified by the IMF's 2005 report with regard to the PSZAF's lack of power in issuing binding regulations.

4. The regulator should adopt clear and consistent regulatory processes.

II

This principle is broadly implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles. According to the IMF's 2002 FSSA, "the PSZAF's organizational structure, operations, and authority are generally consistent with the relevant portions of the IOSCO Principles" (p. 51). While the 2002 IMF assessment found that Hungary's securities regulatory regime conformed in most material respects with the IOSCO Principles, as noted in the IMF's 2005 FSSA Update, it did not directly address Hungary's compliance with this principle.

5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

II

According to the PSZAF's 2005 self-assessment based on IOSCO Principles, this principle is fully implemented. While the 2002 IMF assessment found that Hungary's securities regulatory regime conformed in most material respects with the IOSCO Principles, as noted in the IMF's 2005 FSSA Update, it did not directly address Hungary's compliance with this principle.

6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.

EN

According to the PSZAF's 2005 self-assessment based on IOSCO Principles, this principle is fully implemented. As reported in the 2005 FSSA Update, the 2002 IMF assessment indicated that there was a shared competence between the PSZAF and the self-regulatory organizations (SROs), in which the SROs sanctioned market participants and major offenses were reported to the PSZAF. Furthermore, the PSZAF was in regular contact with the SROs by approving their internal rules. The IMF report advised the PSZAF to conduct a detailed oversight of the SROs at least once a year. It further recommended coordinating the sanctioning measures of the PSZAF and the SROs. While the 2002 IMF assessment found that Hungary's securities regulatory regime conformed in most material respects with the IOSCO Principles, as noted in the IMF's 2005 FSSA Update, it did not directly address Hungary's compliance with this principle.

7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

II

See Principle 6.

8. The regulator should have comprehensive inspection, investigation and surveillance powers.

FC

As noted in the PSZAF's 2005 self-assessment based on IOSCO Principles, this principle is fully implemented. By law, according to the IMF's 2002 assessment, "the PSZAF is authorized to inspect and investigate organizations subject to its regulatory oversight" (p. 51). It is also responsible for the prudential supervision of ISPs. Furthermore it has legal powers "to inspect books, documents, and other relevant information or to request the submission of extraordinary reports, statements and audit reports" (p. 51). The 2002 IMF assessment, as reported in the 2005 FSSA Update, encouraged the authorities to enhance the implementation and enforcement of international principles, and ensure more stringent reporting standards for ISPs. Amendments to the law in 2003 empowered the PSZAF to conduct risk-based inspections, enhancing the overall effectiveness of the supervisory framework. Furthermore, comprehensive inspections are carried out twice a year.

9. The regulator should have comprehensive enforcement powers.

FC

According to the PSZAF's 2005 self-assessment based on IOSCO Principles, this principle is fully implemented. Enforcement powers of the PSZAF were strengthened under the Capital Markets Act, as stated in the IMF's 2002 assessment. Furthermore, per the World Bank's 2003 report on Corporate Governance, "enforcement of company and securities laws is relatively strong in Hungary" (p. 2). Following amendments to the Capital Markets Act in July 2005, new regulation on the PSZAF's sanctioning policies were also enacted.

10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

FC

This principle is fully implemented, as reported in the PSZAF's 2005 self-assessment based on IOSCO Principles. The IMF's 2002 assessment noted that PSZAF had the authority to "assess fines, temporarily revoke a license or appoint a supervisory commissioner, and initiate and conduct full-scale administrative proceedings/inquiries" (p. 51-52). Furthermore, enforcement powers of the PSZAF were strengthened under the Capital Markets Act. Amendments to the law in 2003 empowered the PSZAF to conduct risk-based inspections, enhancing the overall effectiveness of the supervisory framework. Furthermore, comprehensive inspections are carried out twice a year. Per the World Bank's 2003 report on Corporate Governance, "enforcement of company and securities laws is relatively strong in Hungary" (p. 2).

11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

FC

This principle is fully implemented, as reported in the PSZAF's 2005 self-assessment based on IOSCO Principles. Per the report, "the PSZAF may enter into cooperation agreements and exchange information with foreign financial supervisory organizations so as to improve facilities to carry out its duties, to achieve supervision on a consolidated basis, and to promote integration programs." Following amendments to the Capital Markets Act in July 2005, as noted in the EBRD's 2004 assessment, new regulation on international cooperation requirements was enacted. Furthermore, according to the IMF's 2005 FSSA Update, the PSZAF has enhanced its cooperation with foreign counterparts in recent years. It also concluded bilateral MoUs with Belgium, Bulgaria, Cyprus, Greece, the Netherlands, and the Slovak Republic, and joined the IOSCO MMoU in 2003.

12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

FC

This principle is fully implemented, according to the PSZAF's 2005 self-assessment based on IOSCO Principles. The IOSCO MMoU is based on the thirty IOSCO Principles adopted in 1998 and the experience gathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU. Hungary's PSZAF is a signatory to the MMoU and an ordinary member of IOSCO.

13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

II

This principle is only partly implemented, according to the PSZAF's 2005 self-assessment based on IOSCO Principles. Following an appropriate request, in line with international agreements, as stated in the IMF's 2002 assessment, the PSZAF "may immediately transmit all information that is not qualified as a business secret and/or security secret" (p. 52). While the 2002 IMF assessment found that Hungary's securities regulatory regime conformed in most material respects with the IOSCO Principles, as noted in the IMF's 2005 FSSA Update, it did not directly address Hungary's compliance with this principle.

14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.

FC

As noted in the PSZAF's 2005 self-assessment based on IOSCO Principles, this principle is fully implemented. According to the IMF's 2002 assessment "Hungarian disclosure, accounting, and auditing standards are in their formal aspects largely compliant with the relevant international standards" (p. 52). Per the same report, issuers are required to publicly disclose financial results and other information on a regular basis, as well as changes in the ownership structure. In its 2002 assessment, the IMF recommended improving the monitoring and enforcement of reporting requirements. Following amendments to the Capital Markets Act in July 2005, disclosure of information to the PSZAF was strengthened and new regulation was enacted on the issuance of prospectuses prepared for public offerings and the listing of securities. The 2005 IMF FSSA Update notes that disclosure of financial statements for publicly traded companies has been increased from yearly to twice a year.

15. Holders of securities in a company should be treated in a fair and equitable manner.

CP

This principle is fully implemented, according to the PSZAF's 2005 self-assessment based on IOSCO Principles. According to the IMF's 2002 assessment, "the provisions of applicable laws as well as the protections afforded to minority shareholders are in line with those in other developed international markets" (p. 52). Furthermore, as noted in the World Bank's 2003 report on Corporate Governance, most basic shareholder rights are protected under the law and practice. However, common shareholders do not always have equal voting rights, and Hungary does not follow the "one share/one vote" principle. The World Bank report recommended "moving further toward this principle by phasing out golden shares and veto shares and removing the possibility for issuance of preferred shares with multiple voting rights" (p. 8).

16. Accounting and auditing standards should be of a high and internationally acceptable quality.

FC

This principle is broadly implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles. According to the IMF's 2002 assessment "Hungarian disclosure, accounting, and auditing standards are in their formal aspects largely compliant with the relevant international standards" (p. 52). The 2002 IMF assessment noted that the PSZAF had legal powers "to inspect books, documents and other relevant information or to request the submission of extraordinary reports, statements and audit reports" (p. 51). Furthermore, according to the World Bank's 2003 report on Corporate Governance, the PSZAF has been particularly active in conducting audits of market participants in every sector of the financial and capital market. As reported in the 2005 IMF FSSA Update, "there has been no evidence of problems with compliance with accounting and auditing standards" (p. 34).

17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.

FC

According to the IMF's 2002 assessment, no action was required with regards to this principle. Furthermore, this principle is broadly implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles. The IMF assessment noted that the PSZAF had supervisory authority over investment fund managers, and that specific entry requirements were set up for each type of investment firm.

18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

FC

According to the IMF's 2002 assessment, no action was required with regards to this principle. Furthermore, this principle is fully implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles.

19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

FC

This principle is fully implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles. According to the IMF's 2002 assessment, no action was required with regard to this principle. At the time of the 2002 assessment, disclosure requirements of investment funds under the 1996 Securities Act comprised the issuance of a prospectus containing prescribed information. Per the same report, "the prospectus must contain all information necessary to enable an assessment of the operation, investment principles and management of the investment fund, as well as of the risks associated with the investment fund" (p. 52). The Securities Act was replaced by the Capital Markets Act in 2002.

20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

FC

According to the IMF's 2002 assessment, no action was required with regards to this principle. Furthermore, this principle is fully implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles.

21. Regulation should provide for minimum entry standards for market intermediaries.

EN

This principle is fully implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles. While the 2002 IMF assessment found that Hungary's securities regulatory regime conformed in most material respects with the IOSCO Principles, the IMF's 2005 FSSA Update did not directly address Hungary's compliance with this principle.

22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

EN

According to the PSZAF's 2005 self-assessment based on IOSCO Principles, this principle is fully implemented. Per the IMF's 2002 assessment, capital requirements in Hungary "are generally consistent with the Principles and similar requirements in place in other developed markets" (p. 54). Furthermore, both initial and ongoing minimum capital requirements are imposed on market intermediaries. The EU Capital Adequacy Directive was fully transposed into Hungarian law in early 2001. While the 2002 IMF assessment found that Hungary's securities regulatory regime conformed in most material respects with the IOSCO Principles, as noted in the IMF's 2005 FSSA Update, it did not directly address Hungary's compliance with this principle.

23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.

EN

This principle is fully implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles. While the 2002 IMF assessment found that Hungary's securities regulatory regime conformed in most material respects with the IOSCO Principles, as noted in the IMF's 2005 FSSA Update, it did not directly address Hungary's compliance with this principle.

24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

EN

This principle is broadly implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles. According to the IMF's 2002 assessment, "the PSZAF may appoint one or more supervisory commissioners to assume control of any distressed investment if the firm appears unable to meet its obligations; its board of directors, (or any executive) is not capable of fulfilling its responsibilities and it poses risks to investors or the markets; or the deficiencies in the firm's accounting or internal control systems are of such gravity that assessing accurately the financial position of the enterprise becomes unlikely"(p. 53). While the 2002 IMF assessment found that Hungary's securities regulatory regime conformed in most material respects with the IOSCO Principles, as noted in the IMF's 2005 FSSA Update, it did not directly address Hungary's compliance with this principle.

25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

CP

According to the IMF's 2002 assessment, no action was required with regards to this principle. Under the Capital Markets Act, per the IMF's 2002 assessment, the BSE is a self-regulating, and self-governing body. Furthermore, the rules applicable to the BSE trading system are adopted by the BSE itself. At the time of the IMF's 2005 FSSA Update, the PSZAF had supervisory authority over both the BSE and the BCE. In September 2005, the BCE was integrated into the BSE. However, this principle is only broadly implemented, according to the PSZAF's 2005 self-assessment, which notes that the practical incorporation of trading rules of the BSE into the IT environment remains outside of the PSZAF's on-site examinations. Furthermore, regulation of the stock exchange does not include rules or mechanisms on market dispute resolutions.

26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

FC

According to the IMF's 2002 assessment, no action was required with regards to this principle. Furthermore, this principle is fully implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles. The 2002 IMF assessment noted that the PSZAF monitored market activity independently of the BSE, and did not rely exclusively on information obtained from the BSE.

27. Regulation should promote transparency of trading.

FC

According to the IMF's 2002 assessment, no action was required with regards to this principle. Furthermore, this principle is fully implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles. As reported in the World Bank's 2003 assessment, Hungary has a comprehensive system of information disclosure, where companies must adhere to the Capital Markets Act requirements and present all information investors need to make informed decisions.. Furthermore, listed companies are required to comply with the BSE's more detailed disclosure rules.

28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

FC

According to the IMF's 2002 assessment, no action was required with regards to this principle. Furthermore, this principle is fully implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles. In its 2005 FSSA Update, the IMF noted that there had been significant improvements in the detection and enforcement capabilities of the PSZAF, given the limited monitoring activities by the BSE. Per the same report, market abuse and insider trading activities are under the surveillance of the Market Conduct Oversight Department of the PSZAF. As reported in the EBRD's 2004 assessment, amendments to the Capital Markets Act extended the scope of the definitions of "insider," "insider trading," and "market manipulation" in line with EU directives.

29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

FC

According to the IMF's 2002 assessment, no action was required with regards to this principle. Furthermore, this principle is fully implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles.

30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.

FC

According to the IMF's 2002 assessment, no action was required with regards to this principle. Furthermore, this principle is fully implemented, as noted in the PSZAF's 2005 self-assessment based on IOSCO Principles.