BNP Paribas Securities Services anticipates a burst of new business in Mongolia as asset managers attempt to tap into its commodities growth story.
The MSE also has no delivery v. payment system, making it difficult to ensure a broker delivers cash to the depositary. Au got around this by devising a system allowing BNPP SS to monitor payment deliveries itself.
Another hurdle involved persistent lobbying Mongolia's Financial Regulatory Commission to permit BNPP SS to open a direct account as a depositary on the stock exchange in the name of the fund.
"The regulators have now recognised foreign interest in the country and are quite open to listen… and accept in principal a trust concept," Au explains.
Au believes the regulators and Mongolian government are keen to find new ideas and improve capital markets.
In 2009, the Business Council of Mongolia established a working group to advocate for the "sound development of Mongolia's embryonic capital markets", including stock markets, debt and mortgage markets, private equity, venture capital and insurance. BNPP SS has since been invited to become a member of the working group.
The board of the MSE has noted the need for change, saying there is an "absolute necessity" to create a favourable legal framework for capital markets, improve the market infrastructure and introduce a competitive trading platform to upgrade MSE and the clearing, settlement depositary system in line with international standards.
Eventually, as global custodians develop their relationship with Mongolian regulators, more asset managers should be able to access the market directly. Au believes it will continue to provide valuable opportunities as "the prospects of these companies are very promising and they have low private equity ratios."
Harvest may therefore represent the tip of the iceberg in terms of clients seeking securities services in Mongolia.
Au adds that within a few hours of BNPP SS announcing its mandate with Harvest, inquiries about the deal started flowing in from other asset managers.
• Capital: Ulan Bator
• Mongolia GDP: $6.2bn
• Population: 2.7 million
• Mongolia is a net exporter, with minimal import of electricity and no import of natural gas. CO2 emissions are 11.28 (measured as metric tonnes of CO2 equivalent)
Source: EBRD, World Bank