The Danish securities market was reformed by the Danish parliament in December 1995. The Act on Securities Trade and the Act on Stockbroker Companies (together with amendments to the Banking Act and the Mortgage Credit Act) implemented the Investment Services Directive (93/22) and the Capital Adequacy Directive (93/6). The Act came into force in 1996 and the relevant executive orders under the Act have been issued, so that we also now have some impression of the first effects of the reform.
Act on Securities Trade
The Act on Securities Trade now constitutes a single piece of legislation regulating the securities market. The Act regulates the trade, clearing and registration of securities as well as the regulation of the entities which constitute the infrastructure of the securities market.
The main points are the following:
- the existing monopoly of the Copenhagen Stock Exchange (CSE) is abolished;
- stock exchanges shall be incorporated as public limited companies (Aktieselskaber) with a minimum paid-up share capital of Dkr40 million (US$6.7 million);
- ownership of 10% or more of the share capital (or votes) shall be notified to the Financial Supervisory Authority (FSA);
- no specific requirements apply in terms of nationality or domicile of the shareholders in a stock exchange.
The Act establishes a new body, the Securities Council (Fondsrådet) which oversees the market functions of the stock exchange companies. The Securities Council will issue regulations regarding requirements for listing securities on the stock exchanges. The stock exchanges will themselves, among other things issue 'ethical rules' for the trade in securities. The FSA retains its supervision of the business functions of the stock exchanges.
The Act includes a number of provisions which have been applied as part of the existing CSE Ethical Rules. These rules, which are now statutory, include the following:
- The obligation to notify shareholdings in excess of 5% (share capital or votes) to the listed company and to the stock exchange. Notification must be made immediately.
- A similar notification requirement applies at 5% intervals and when thresholds of 1/3 or 2/3 are reached.
- A shareholder acquiring a controlling shareholding in a listed company must make an offer to the remaining shareholders to acquire their shares on identical terms.
All shares in listed companies are issued in non–paper form (dematerialized) and the issue of shares is done by way of entries on each shareholder's account in the Securities Clearing Centre (Værdipapircentralen).
The Act includes provisions regarding the 'issue' of shares and the registration of third party rights over such shares. Clearing and settlement rules were already included in the existing regulations and the Act now adds provisions which make general netting agreements possible.
Effect of the reform
The Copenhagen Stock Exchange (CSE) has become a public limited company, Københavns Fondsbørs A/S, while the Guarantee Foundation for Danish Options and Futures will most likely become a subsidiary of the CSE (the Fut Op Clearing Centralen A/S).
The reform made it possible for stock exchanges to conduct business related to their core business and the close cooperation between CSE and the Fut Op makes it for the CSE to maintain the derivatives market as a supplement to the spot market.
The Securities Clearing Centre retains its present structure.
When the CSE became a public limited company, 60% of the shares were subscribed to by members of the CSE (stockbroker companies), bond issuers subscribed 20% and share issuers the remaining 20%.
The establishment of the Securities Council originates from the owner structure of the CSE becuse investors are not shareholders in the CSE or members of its Board of Directors. The Council is made up of representatives of the investors, the stockbrokers, the issuers, the Danish Central Bank and a chairman and a vice-chairman appointed independently.
CSE is still the only stock exchange in Denmark and the competition to the CSE is therefore unchanged — foreign stock exchanges and the electronic systems. The CSE is probably the fifth or sixth largest in Europe in terms of issued bonds, not least because of the large number of circulating mortgage credit institution bonds. Shares have a turnover of about a third or fourth of that in Stockholm and the number of shares issued is roughly the same as in Oslo. There are more companies quoted on the CSE than on the Stockholm Stock Exchange, due to many medium-size corporations being listed.
Competition inside the area will probably be related to the development of the Scandinavian market. Even though Denmark will not immediately join European monetary union, the Danish stock exchanges — including the CSE — will nevertheless be able to list Eurobonds. It is likely that Eurobonds will quickly form part of the large turnover of bonds listed in Copenhagen.
Act on Stockbroker Companies
This Act implements both the ISD and CAD directives. The 'European passport' now makes it possible for stockbroker companies and the like domiciled within the EU to carry out their activities in Denmark.
Effect of the reform
Until the implementation of the Securities Market Reform in 1996, only stockbrokers who were authorized to trade on the CSE were required to have a licence to do so from the FSA as well as being a member of the CSE. Other stockbrokers, including those trading in non–CSE listed derivatives based on both shares, bonds and currencies and also dealing in non–CSE-listed securities (usually through foreign stockbrokers) required no licence. They were under no specific capital adequacy or management rules, were not supervised by the FSA and regulation was minimal. The effects of the reform on the existing CSE member stockbroker companies have been limited. These stockbrokers are almost exclusively owned by financial institutions, regulated by the Banking Act.
Sixty out of an estimated 180 independent stockbrokers, which were not members of the CSE, applied — before the end of 1995 — for licences from the FSA. It is therefore clear that the Act on Stockbroker Companies in itself has meant that several of the so-called 'side-street stockbrokers' have ceased trading. The FSA has so far refused to give licences to several applicants, but has issued some licences. The transitional rules have allowed the applicants to continue trading inside Denmark until their application had been processed, but the transitional rules have not included the European passport for those applicants. The European passport only becomes effective in allowing those new stockbroker companies to trade cross-border from Denmark into other EU countries when they receive a licence. By the beginning of 1997 we will know what the decisions on all applications are.