In 2001, the International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) on Latvia's adherence to the Objectives and Principles of Securities Regulation promulgated by the International Organization of Securities Commissions (IOSCO). The IMF team concluded that Latvia had largely implemented the principles but recommended certain policy and legislative changes to further improve the country's securities regulation. These included stronger enforcement mechanisms, technical upgrades, and enhanced international cooperation. At the time of the assessment, the Latvian securities sector was regulated and supervised by the Securities Market Commission (SMC), which was replaced in 2001 by the Financial and Capital Market Commission (FCMC)--an integrated regulatory body responsible for banking, insurance and securities supervision. Combining supervision of all three sectors under one umbrella agency was thought to promote efficiency and consistency. The 2006 Article IV consultations confirmed these expectations, noting that the Latvian authorities have addressed many of the recommendations of the FSSA and that the establishment of the unified regulator was proceeding smoothly. However, a 2004 European Bank for Reconstruction and Development (EBRD) Securities Markets Legislation Assessment, published in 2005, found Latvia to be only in "medium compliance" with the IOSCO principles, showing major weaknesses in Self-Regulatory Organizations (SRO) legislation and Investment Service Provider areas.

General Overview

In 2001, the International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) on Latvia's adherence to the Objectives and Principles of Securities Regulation promulgated by the International Organization of Securities Commissions (IOSCO). The IMF mission published its report in 2002, concluding that Latvia had "largely implemented" the principles but recommended certain policy and legislative changes to further improve the country's securities regulation (p.22). These included stronger enforcement mechanisms, technical upgrades, and enhanced international cooperation. In the 2006 Article IV consultations, the IMF noted that "the establishment of a unified supervisory agency proceeded smoothly. Since then, the authorities have addressed many technical FSSA recommendations to further strengthen supervisory capacity" (p. 5).

The Latvian securities sector was previously regulated and supervised by the Securities Market Commission (SMC). In 2001 this agency was replaced by the Financial and Capital Market Commission (FCMC), an integrated regulatory body responsible for banking, insurance and securities supervision. The combined supervision of all three sectors under one umbrella agency was thought to improve efficiency and consistency. To be sure, the IMF 2002 FSSA stated that information sharing and cooperation mechanisms had improved under the FCMC, and the regulating agency enjoyed increased operational independence and additional resources for supervision. A 2004 European Bank for Reconstruction and Development (EBRD) Securities Markets Legislation Assessment, published in 2005, found Latvia to be in "medium compliance" with the IOSCO principles, showing major weaknesses in Self-Regulatory Organizations (SRO) legislation and Investment Service Provider areas (p.6).

In spite of its generally positive assessment, the 2002 IMF FSAP had several recommendations for improving securities regulation in Latvia. At the time of the assessment, licensing was the principle enforcement tool of securities regulations, as the removal of licenses was the only effective penalty for violation of the law. Fines, in contrast, were small and rarely imposed. Securities infractions were not considered criminal offenses under Latvian law, and the punitive measures at the SMC's disposal were thus relatively mild. However, the IMF advised the authorities to make insider trading and market manipulation criminal violations, and recommended that Latvia require the disclosure of all insider buying and selling, in addition to indemnifying domestic financial sector supervisors against any actions arising from the normal discharge of their duties. A further recommended step to improve supervision was that the regulator should shift to an electronic filing and reporting system for all market participants and issuers and improve internet surveillance. The 2002 FSSA also found Latvia's investment and tax regulations were also weak. Finally, the Fund recommended that FCMC staff be required to secure a waiver prior to buying or selling securities for their personal accounts.

In addition to discrepancies in enforcement and administration, the 2002 IMF report noted several structural hurdles facing the Latvian securities regulator. It found that securities markets are small in Latvia, and lack liquidity and investor confidence. It also found that the bond market was dominated by government and newly issued mortgage bonds, while public corporate and municipal bonds were absent from the market. The IMF suggested that this problem could be mitigated by fostering closer ties with other Baltic states as well as with other Western European stock exchanges. Such cooperation would broaden securities markets, aiding Latvian companies to attract additional portfolio investments.

The IMF's 2002 FSSA noted that Latvia's SMC merged in July 2001 into a unified financial sector regulator, the FCMC. According to the 2004 Bank of Latvia Annual Report, the FCMC is to operate pursuant to the internationally recognized principles. Moreover, the IMF's 2002 FSSA suggested that the unified regulatory agency would offer a more efficient supervisory framework by employing a coordinated approach to supervision of the various emerging financial institutions. The FSSA argued that the consolidation of three separate regulatory authorities for each of the sectors (banking, insurance and securities) to the integrated supervisory body is expected to provide greater independence, more resources and stronger institutional capacity for the institution governing securities regulation. A 2002 report by the Commission of the European Communities supported this claim, maintaining that Latvia had improved its overall quality of supervision by integrating these separate institutions.

As of 2002, the FCMC was reportedly seeking re-approval for existing legislation and regulations on financial market supervision (IMF 2002). Key legislation included the Law on Investor Protection, adopted in November 2001, which led to the establishment of a special scheme to compensate up to 90% of losses incurred by investors resulting from irrevocable loss of financial instruments or non-executed investment services by providers of those services (EC 2002). The Law on the Financial Instrument Market, effective as of January 2004, required that financial instruments be listed on a regulated market to be considered in public circulation (FCMC 2005).

In 2005, the FCMC reported that it sought to harmonize domestic legislation with that of the EU and to establish a unified database. In light of rapidly changing capital markets impacted by globalization and new technologies, the 2002 IMF FSSA report stressed the importance of providing sufficient resources and capacity in order for the FCMC to carry out effective supervision of Latvian markets. The IMF also recommended developing a financial institution rating system and risk-based supervisory approach.

In addition to appropriate legislation, effective securities supervision requires the proper infrastructure and policy environment. Sound macroeconomic policy that promotes investment and savings is critical to a thriving securities market. Moreover, solid institutions, including an effective judicial system, entrenched property rights, and appropriate corporate governance and insolvency mechanisms enhance effective securities regulation. Finally, securities regulation is strengthened by a stable political environment with minimal corruption. The IMF's FSSA was upbeat about Latvia's standing on these key measures.

The Principles

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

II

Regulation and supervision of the securities sector in Latvia has been entrusted to the FCMC since July 2001, as stipulated by the Law on the Financial Capital Markets Commission adopted that year. Additional laws outlining the FCMC's responsibilities include the Law on Financial Capital Markets, Law on Securities, Law on the Financial Instrument Market, and the Law on Investment Companies. The IMF's 2002 FSSA expected that, with the enactment of these laws, Latvia would fully comply with the principles relating to the regulator, though a more recent assessment has not yet been made.

Prior to 2001, the SMC oversaw regulation and supervision of the Securities market. A series of laws, including that of Securities, the Securities Market Commission and Investment Companies, laid out the responsibilities of the SMC, whose mission was to protect the interests of the public when investing in securities. The IMF's 2002 assessment of Latvia's adherence to IOSCO's Objectives and Principles of Securities Regulation found that the SMC, by and large, observed the principles.

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

II

Previously governed by the SMC, securities regulation and supervision in Latvia have, since 2001, been the responsibility of the FCMC, a unified financial sector regulator. According to the 2002 IMF assessment, constraints due to reliance on the state budget and supervision by the Ministry of Finance -- which decreased the operational independence of the SMC -- will likely be corrected under the new commission. Indeed, the IMF assessment asserted that consolidation of domestic regulators should enhance the commission's independence, resource allocation and institutional capacity. Nonetheless, the publicly available information does not directly address the FCMC's compliance with this principle.

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

II

The consolidation of domestic regulators, implemented in 2001 through the establishment of the Financial Capital Markets Commission, is expected to provide greater independence, more resources and stronger institutional capacity for the institution governing securities regulation, according to the 2002 IMF assessment of Latvia's adherence to IOSCO Principles on Securities Regulation. In light of rapidly changing capital markets impacted by globalization and new technologies, the 2002 report stressed the importance of providing sufficient resources and capacity in order for the FCMC to carry out effective supervision of Latvian markets. The EBRD noted in 2005 that in July 2005, the Law on Financial Conglomerates, which transposes the EU Directive 2002/87, the so-called Financial Conglomerates Directive, was enacted, extending the supervisory powers of the FCMC. Nonetheless, the publicly available information does not directly address the FCMC's compliance with this principle.

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

II

The FCMC makes publicly available a host of information on its regulatory processes. All regulations and orders, in addition to statistics, relating to the FCMC are published on the internet via the FCMC website and available at the premises of the commission, as required by the FCMC Law. However, there is insufficient information to assess Latvia's compliance with this principle.

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

II

The FCMC is headed by a Board of the Commission with a consultative council and chairman overseeing several divisions (FCMC 2005). Information on the agency's structure is publicly available. However, no assessment has been made as to the professional standards of its employees.

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.

II

The IMF's 2002 FSSA observed that the SMC, the Latvian institution previously in charge of securities regulation and supervision, had largely adhered to IOSCO principles. According to the FSSA, the SMC supervised both the Latvian Central Depository (LCD) and the Riga Stock Exchange (RSE), granting a license to the latter. These nonprofit joint stock companies are considered SROs. Although the organizations issue their own rules and regulations and delineate the rights and responsibilities of members, these regulations and by-laws are contingent upon SMC approval. To date, there is no publicly available information on the FCMC's compliance with the IOSCO principles on Self-Regulatory Organizations. The 2005 Bank of Latvia Annual Report states, however, that the FCMC is to operate pursuant to the internationally recognized principles.

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

Charged with establishing and enforcing standards of conduct for its members, the RSE, has, since 2001, set standards for trading practices, fair and orderly operation of trading facilities and financial responsibility of its members, according to the 2002 IMF assessment. Moreover, the IMF reports, the RSE enforced the listing rules for the three organized markets. The IMF concluded that "the RSE operates efficiently" (p.40). A 2004 European Bank for Reconstruction and Development (EBRD) Securities Markets Legislation Assessment, published in 2005, found Latvia to be in "medium compliance" with the IOSCO principles, showing major weaknesses in Self-Regulatory Organizations (SRO) legislation and Investment Service Provider areas (p.6). In addition, the assessment noted the new Riga Stock Exchange Rules on Listing and Trading of Financial Instruments on Exchange Regulated Market, which entered into force in October 2004 as part of the measures intended to integrate the Riga Stock Exchange into the existing Baltic's Exchanges system (OMX). The OMX controls and operates the stock exchanges in Latvia, Lithuania, Estonia, Finland and Sweden. The new rules set stricter requirements for issuers wishing to list financial instruments on the Stock Exchange. Nonetheless, the publicly available information does not directly address Latvia's compliance with this principle.

Also according to the 2002 FSSA, the LCD coordinated clearing and settlement for trades conducted on the stock exchange and OTC market. As LCD participants held corresponding securities accounts with the LCD, the LCD settled securities positions and could debit/credit a participant's corresponding cash account with the Bank of Latvia (BoL) for settlement of securities trade. In accordance with LCD instructions, cash positions were cleared in the BoL. In addition, the LCD supervised participants, informing the SMC of any problems that may arise.

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

II

According to the 2002 FSSA, the SMC conducted supervision of the securities market through regular reporting requirements of all market participants. In addition, the SMC carried out limited inspections of licensed participants in cases of a suspected irregularity. The IMF cautioned that the FCMC may need to strengthen the areas of inspection, investigation and surveillance. Indeed, the FCMC Law stated that, as its principle objective is to promote stability in the financial and capital market, the Commission would devote greater attention to the surveillance of risks confronting market participants. Nonetheless, the publicly available information does not directly address the FCMC's compliance with this principle.

9. The regulator should have comprehensive enforcement powers.

II

The FCMC Law calls for the Commission to use all legal and regulatory means and resources at its disposal to adopt punitive measures against market participants engaging in unfair competition by methods not justified according to an economic or business perspective. The 2002 IMF assessment concluded that strengthening the FCMC's powers of inspection, investigation, and surveillance may bolster the commission's enforcement powers. Nonetheless, the publicly available information does not directly address the FCMC's compliance with this principle.

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.

II

According to the 2002 IMF FSSA, under the prior system for securities regulation, supervision was conducted through regular reporting requirements of all market participants and occasional inspections of licensed participants suspected of irregular behavior. However, the IMF pointed to reliance on small fines and revocation of licenses as signs of the weak enforcement powers of the SMC. Moreover, the lack of criminal sanctions and limitation on fines severely constrained the SMC's abilities. In terms of human resources, the IMF report rated SMC enforcement staff as adequate, but warned that support staff may have to be increased in light of the internet's increasing allure as an investment and information dissemination tool, including for fraudulent purposes. However, the assessment does not directly address Latvia's compliance with this principle.

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

II

An agreement for mutual cooperation signed by the Securities Market Commission, Bank of Latvia (BoL), and the Insurance Agency obliged domestic supervisory authorities to inform each other of any irregularities uncovered during the supervisory procedure if such irregularities were relevant to the work of other supervisory authorities. The IMF's 2002 FSSA urged better coordination between domestic financial sector regulators, though, concluding that this discrepancy would be resolved with the full establishment of the FCMC. However, there is insufficient information to assess Latvia's compliance with this principle.

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.

II

Latvian securities regulation has made some progress toward establishing information sharing mechanisms with domestic and foreign counterparts, both under the previous and current regulatory systems. The 2002 IMF assessment noted that, under the pre-2001 system, the SMC met quarterly with other Baltic commissions, as all Baltic countries sought to harmonize their regulatory frameworks with European Union directives. As of 2001, the IMF added, the SMC had signed Memoranda of Understanding (MoUs) with Denmark, Estonia, Lithuania, and Sweden. Other MoUs were also underway with Iceland, Luxembourg and Norway.

The FCMC signed the Memorandum of Understanding on Cooperation between the Banking Supervisors, Central Banks, and Finance Ministries of the European Union in Financial Crisis Situations. Effective since 2005, the memorandum includes principles and procedures on sharing information, views and assessments. The goal is to enable authorities to more smoothly carry out policy functions as well as to preserve the overall stability of the financial system of individual Member States and of the EU as a whole. In 2005, the FCMC signed five multilateral cooperation agreements and 18 bilateral cooperation agreements with foreign financial market supervisory authorities (FCMC 2005).

Since it was established in 2001, the FCMC claims it has expanded its sphere of cooperation with foreign financial market supervisory institutions (FCMC 2004). For instance, the 2004 signing of an information exchange agreement with the Swiss Federal Banking Commission constituted the FCMC's 18th information exchange agreement with other financial market supervisory authorities (FCMC 2004). However, publicly available information is not sufficient to assess Latvia's compliance with this principle.

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

Party to several information exchange agreements with foreign financial market supervisory authorities, the Latvian securities regulator is expected to assist with the inquiries of foreign regulators. However, no assessment has been made to date on the FCMC's compliance with this regulation.

Prior to 2001, the SMC met regularly with other Baltic Commissions seeking to harmonize their regulatory frameworks with EU directives and signed Memoranda of Understanding with several European countries. However, to what extent these agreements have led to assistance to foreign regulators has not been determined.

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

II

The 2005 Bank of Latvia Annual Report notes that the FCMC is to operate pursuant to the internationally recognized principles. The Law on the FCMC requires participants of the financial and capital market to publish timely information on their financial standing and all operational risk related to their activities, thus facilitating customer trust and market transparency and discipline. Despite comprehensive legislation, however, the 2004 EBRD Corporate Governance Assessment of Latvia revealed weaknesses with regard to disclosure and transparency as well as the protection of shareholders.

The 2002 IMF FSSA reported that the prospectus for public offering presented information to enable investors to assess an issuer's legal status, financial standing and prospects, and the rights of the securities. Public corporations were also subject to certain requirement, such as disclosing information on matters or events that might have material effects on the value of securities traded on the exchange. The IMF noted that, with the exception of a seven-day lag in reporting acquisitions over 10%, disclosure requirements were fairly comprehensive. However, disclosure of legitimate insider buying and selling should be made mandatory, according to the Fund.

The 2002 FSSA also concluded that Latvia's corporate governance framework either fully observed or largely observed the OECD Principles of Corporate Governance, including standards of disclosure and transparency. Similarly, in 2004, Latvia achieved "high compliance" in the EBRD's 2005 Corporate Governance Sector Assessment, which assessed law relating to corporate governance against the OECD Principles of Corporate Governance. Moreover, the 2005 EBRD Legal Indicator Survey, which tested how corporate governance legislation works in practice, rated Latvia 'highly compliant'.

Latvian law prohibits insider trading and market manipulation, particularly by employees, brokers, and the Central Depository. The FCMC's 2005 report stated that Latvian legislation also provides for provisions requiring disclosure of conflicts of interest. For example, a board member shall not have voting rights on an issue involving a conflict of interest. Board members have to provide notice to the board. If they fail to do so, they are liable for losses the company incurs. However, according to the IMF's 2002 assessment, there was no mechanism to proactively ensure compliance with the disclosure requirement. /The IMF went on to recommend that disclosure of sales and purchases of company shares by members of the company's management and supervisory boards be required.

Legislation passed since the establishment of the FCMC in 2001 includes a Law on the Financial Instruments Market. Enacted in January 2004, the law stipulates that only those financial instruments that are listed on a regulated market will be considered in public circulation. A 2005 amendment to the law established a transition period allowing the issuers of financial instruments to restructure public circulation of shares in compliance with the new law, and subsequent amendments established liability for infringement. The law also imposes certain obligations on holders of inside information to do with capital companies' financial instruments that are traded on a regulated market. According to the FCMC's 2005 report, in order to verify whether holders of inside information had complied with the provision, the Commission commenced several administrative proceedings in 2005. However, since the publication of this report, no decisions had been made with regard to the cases. An addition to this legislation -- drawn from requirements of the European Commission Directives 2003/124/EC1 and 2004/72/EC2--delineates detailed provisions for preventing insider dealing and market manipulation as well as liability for violation of the legislation.

Publicly available information is not sufficient to assess Latvia's compliance with this principle.

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

CP

According to the World Bank's 2002 Report on the Observance of Standards and Codes (ROSC) -- Corporate Governance Country Assessment, four sub-principles of principle II were largely observed and two sub-principles were materially not observed. (pp. 4-7) Latvia achieved "high compliance" in the EBRD's 2005 assessment of corporate governance-related "laws on the books" against the OECD Principles of Corporate Governance (p. 10). Moreover, the 2005 EBRD Legal Indicator Survey, which tested how corporate governance legislation works in practice, rated Latvia "highly compliant" (p. 11).

Regular meetings of shareholders must be convened by the board of directors every year. Extraordinary meetings can be convened by the board of directors or at the request of the council, the auditor or shareholders representing at least 5% of the company's capital. With regard to general shareholder meetings, notice should be given at least 30 days in advance in case of annual meetings and two weeks in case of extraordinary meetings. Proxy voting is possible. Also, if the procedures for convening a meeting were not followed, shareholders may appeal to the court within three months of the required date.

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

EN

According to the 2005 World Bank ROSC on Accounting and Auditing, Latvian Accounting and Auditing Standards were generally in line with EU directives, but some fundamental differences with International Financial Reporting Standards (IFRSs) existed. Latvia complies with the European Commission (EC) Regulation No. 1606/2002, which requires all EU listed companies to prepare their consolidated financial statements by using IFRSs endorsed by the EU from January 1, 2005. Moreover, in accordance with the option for the extended use of IFRSs provided for in the EC regulation, Latvia requires the application of IFRSs in the annual and consolidated accounts of banks, insurance companies, and other supervised financial institutions and permits the use of IFRSs for the consolidated accounts of all other companies.

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.

II

Latvia's Law on Investment Companies outlined all conditions and processes of licensing for investment funds. The Law on Investment Companies defines the conditions and processes of licensing for investment funds. This law complies with the relevant European Union Directive in the field of investment funds and investment companies, according to the 2002 IMF FSSA. Rather than a legal entity, investment funds were considered a pool of assets belonging to the investors in the fund, managed by an investment company and held by a custodian bank. The SMC granted permits to investment funds to publish their prospectuses and offer their units for sale to the public. The commission also required semiannual reports and annual audited reports in order to supervise the funds' activities. However, there is insufficient publicly available information to assess current compliance levels with this principle.

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.

II

Since 2001, the FCMC has administered licensing and supervision for second pillar pension funds. In its 2002 FSSA, the IMF foresaw a needed increase in resources for handling activities associated with pension fund supervision. According to the FCMC's 2005 Annual Report, that year Latvia adopted legislation included in the EU directive on joint requirement for all Member States' pension funds, thereby broadening options for private pension funds to expand their operations within domestic and international markets. In addition, the Commission is party to the Committee of European Insurance and Occupational Pensions Supervisors, which established the Occupational Pensions Committee to generate a more thorough implementation of the directive's requirements in Member States. The report, though, does not address compliance with the law to verify compliance with Principle 18.

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.

II

According to the FCMC's 2005 Annual Report, the commission requested regular financial reports from both managers of personal assets of private pension funds and State-funded pension schemes, the former obliged to submit quarterly operation reports and the latter monthly investment plan reports. Moreover, the FCMC conducted on-site inspections of both types of funds. However, there is not enough information to assess Latvia's compliance with this principle.

Prior to 2001, the SMC, responsible for supervision of collective investment schemes, granted permits to investment funds to publish their prospectuses and offer their units for public sale. In order to supervise mutual funds, the SMC requested the submission of semiannual reports and annual audited reports.

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.

II

Private pension fund managers and state-funded pension schemes are required to submit regular financial reports, in order to allow the commission to assess the financial situation of the fund, according to the FCMC's 2005 report. These requirements also assisted the commission in evaluating the operations of pension fund management, the composition and valuation of the pension plan's assets, and the structure of its income and expenses. Financial reports also aided the FCMC in assessing the compliance of the pension fund, its custodian bank, and the fund's manager with the regulations and instructions issued by the commission and other legal requirements. However, there is not enough information to assess Latvia's compliance with this principle.

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

II

Entry criteria, capital and prudential requirements, supervision, and other relevant standards for market intermediaries are defined under Latvia's Law on Securities and Law on Investment Companies and other related regulations. As Latvia's former securities regulator, the SMC licensed mutual funds and pension funds, setting minimum entry requirements. Since 2001, the FCMC has taken on this role. Publicly available information does not address Latvia's compliance with Principle 21.

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

II

Capital requirements for investment banks will become stricter in the near future, when the implementation of Basel 2 requires all European Union members to conform to the EU's Capital Requirements Directive. The 2006 IMF assessment suggested that there were certain advantages to shifting credit risk to less risk-averse offshore banks, but recommended some degree of policy flexibility on the matter. The FCMC acknowledged the importance of collaborating with relevant foreign supervisors to ensure that banks maintain adequate capital to shield risks in their portfolios. As reported by the 2006 IMF assessment, the FCMC has insisted that, although the home regulator ultimately governs internal risk models applied in host countries, the commission would oversee the domestic financial sector and cooperate closely with other Nordic regulators. However, there is insufficient information to assess Latvia'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.

II

There is insufficient information to assess Latvia's compliance with this principle. However, the IMF's 2002 FSSA noted that the segregation of assets was a key responsibility of each market intermediary. The custodian bank maintained individual accounts for its clients and held corresponding accounts with the Latvian Central Depository. The IMF did note, however, that "The relationship between the banks and their financial intermediary subsidiaries, off-balance sheet affiliates and related parties render (compliance levels of market intermediaries) difficult to assess. However, regulation cannot remove risk from the marketplace, but only ensure that proper management of that risk occurs" (p.39).

The Insurance and Reinsurance Intermediaries Law, enacted in compliance with the EU Directive 2002/92/EC on Insurance Mediation, set forth legal regulation of insurance mediation. The law delineates rules on cooperation between a customer and insurance intermediary and on the roles of relevant players.

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.

II

There is insufficient publicly available information assessing compliance with the standard on procedures for dealing with the failure of a market intermediary.

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

II

According to the IMF's 2002 FSSA, under the previous securities regulation system, the SMC enforced the fair and orderly operation of the Riga Stock Exchange (RSE), as stipulated by the Law on Securities. The FSSA further noted that the regulator licensed the RSE, as mandated by Article 30 of the law, and the right to conduct stock exchange transactions was reserved exclusively for Riga members. Orders for trades were entered into an automated system, which listed at varying prices all securities in the ongoing daily exchange. Regulatory authorization and oversight of trading systems is now the duty of the FCMC as per the 2001 law on the Financial Capital Markets Commission. However, the publicly available information does not directly address the FCMC's compliance with this principle.

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.

II

As of 2001, the FCMC has taken responsibility for the supervision of the secondary market in Latvia. To that end, the commission conducted an inspection in 2005 in order to monitor banking transactions in financial instruments via the RSE e-broker trade system, according to the 2005 FCMC report. The commission found that manipulative transactions had taken place and, in compliance with the law, informed the Economy Police, who initiated a criminal case. However, the publicly available information does not directly address the FCMC's compliance with this principle.

27. Regulation should promote transparency of trading.

II

With regard to transparency of trading, there is insufficient publicly available information for Latvia's securities regulation system. However, according to the IMF's 2002 FSSA, the trading system did allow an audit trail of all members' trading actions.

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

II

At the time of the IMF's 2002 FSSA regarding Latvia's compliance with IOSCO standards on securities regulation, insider trading was not considered a criminal act. The IMF urged the Latvian authorities to reverse this policy and to increase maximum fines permitting the regulator to disgorge illegal profits gained from market manipulation. However, the assessment does not directly address Latvia's compliance with this principle.

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

II

Capital adequacy regulations adopted in 2001 establish risk-rating guidelines for various securities, in addition to required capital for market intermediaries, according to the 2002 FSSA. Although exposure of banks is mandated under banking legislation, regulations for exposures for brokerages are lacking, the FSSA stated. However, the assessment does not directly address Latvia's compliance with this principle.

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.

EN

The IMF's 2002 FSSA states that the Latvian Central Depository regulates clearing and settlement for trades conducted on the stock exchange and OTC market and marginally supervises its participants, informing the SMC of any complications. LCD participants, according to the assessment, retain corresponding securities accounts with the depository, which settles securities positions. The Bank of Latvia, in turn, clears cash positions according to LCD instructions. The assessment reports that to settle securities trades the LCD will debit/credit a member's corresponding cash account with the Bank. However, the assessment does not directly address Latvia's compliance with this principle.

In addition to clearing and settlement, the LCD offered custody services and performed the role of a central securities depository, according to the 2002 FSSA. However, some legal aspects of secondary market oversight are unclear, the report stated, such as rules for finality settlements and the rights of the holders of collateral securities in the event of insolvency. These legal uncertainties stem from the system of multilateral netting in the LCD and the pledge of securities in both the LCD and the BoL systems, according to the FSSA.