Twinning Project Fiche

1. Basic Information Twinning Project Fiche 1.1. Programme: European Neighborhood and Partnership Instrument - National Action Programme 2009 1.2. Twinning Number: AZ11/ENP-PCA/TP/18 1.3. Title: Approximation of the legal and regulatory framework for the securities market of Azerbaijan according to the European Union acquis and capacity building for the State Committee for Securities 1.4. Sector: Finance 1.5. Beneficiary country: Republic of Azerbaijan 2. Objectives 2.1. Overall Objective: The overall objective of the twinning project is to create regulatory and institutional capacities for long-term economic stability and growth by strengthening and upgrading the legal, regulatory and institutional framework of the securities market in the Republic of Azerbaijan 2.2. Project purpose: The project purpose is to improve the legal framework as well as the regulatory and institutional capacities of the State Committee for Securities of the Republic of Azerbaijan to supervise the securities market and financial service providers in line with the European Union acquis. 2.3. Contribution to the EU-Republic of Azerbaijan Partnership and Co-operation Agreement, the European Neighbourhood Policy Action Plan, and the ENP National Indicative Programme for Azerbaijan: The project will contribute to the fulfilment of RA s obligations stipulated in the Partnership and Cooperation Agreement (hereafter the PCA ) between the European Union and the Republic of Azerbaijan, which was signed on 22 nd April 1996 and entered into force on 22 nd June 1999. It establishes the basis for cooperation in the fields of trade, allocation and promotion of investments, trans-border services between the EU and the Republic of Azerbaijan, intellectual property rights, capital investments and ensuring of their free flow, etc. According to the second paragraph of Article 43 of PCA and European Neighborhood Policy Action Plan for strengthening the cooperation between the Republic of Azerbaijan and the European Union, the process of the legal approximation must be implemented in several fields, including the securities market. The European Neighborhood Policy Action Plan, adopted on 14th November 2006 maintains legal approximation and improvement of principles of administrative management as priority fields. Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 1 of 28

The EU-Azerbaijan Action Plan highlights (p.24) the necessity to elaborate an appropriate strategy to develop the financial markets and financial intermediation in accordance with modern international standards. It mentions as well the need to enhance a prudential regulatory framework for financial services and supervision equivalent to that existing in the EU. This document stresses the importance of an effective implementation of independent advisory authorities in accordance with internationally recognized standards. The ENPI Country Strategy Paper 2007-2013 for Azerbaijan mentions in general terms, that EC assistance is supporting the process of market and regulatory reform in Azerbaijan, as envisaged in the PCA and the ENP Action Plan. It reminds as well that EC assistance will provide support for regulatory approximation in a broad range of areas including the right of establishment and company law, financial services and markets. The Twinning project will assist the State Committee for Securities (SCS) to harmonize securities market legislation with the relevant EU Directives and legal acts (e.g. Markets in Financial Instruments Directive, Transparency Directive, Market Abuse Directive, Prospectus Directive, Undertakings for Collective Investment in Transferable Securities Directive, Anti- Money Laundering Directive, Alternative Investment Fund Managers Directive, Settlement Finality Directive and the Financial Collateral Arrangements Directive, European Market Infrastructure Regulations, CSD Legislation). 3. Description 3.1. Background and justification In the context of the Partnership and Cooperation Agreement (PCA) between the European Union and the Republic of Azerbaijan and based on Article 43 of the latter, the Cabinet of Ministers of the Republic of Azerbaijan decided, in 29 of October 2009, to adopt an Action Plan on legal approximation of the country s legislation with the EU acquis. One of the main priorities identified within the Action Plan was financial services. The main areas of the national legislation regarding financial services that should be harmonized with the EU acquis are the followings: transparency and disclosure requirements of listed companies, prospectus of equities and debt securities issuers, capital adequacy of capital markets intermediaries, securitization, mergers and acquisitions, takeovers, reorganization and capital maintenance of joint stock companies, protection of shareholders rights, public offerings, as well as definition of powers between authorities. In order to support sector specific regulatory aspects as well as, enhanced development of the securities market from an institutional point of view in accordance with ENP-NIP 2007-2010 several donor funded technical assistance projects such as EU TACIS, FIRST Initiative, EBRD are currently being implemented. These projects cover such areas such as review of the securities market legislation and development of a single capital markets law, strengthening and development of AML/CFT regime, promotion of the securities market awareness through TV programs, financial glossary, competition among journalists for the best securities market and corporate governance articles, capacity building activities, trainings and study tours for the State Committee for Securities, National Depository Center, and the Baku Stock Exchange. However, these technical assistance activities will end by 2011 and the implementation of recommendations by the SCS will require additional assistance through an EU Twinning project. Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 2 of 28

A FIRST Initiative funded 3-month technical assistance project on capital market development has been prepared in close collaboration with the World Bank. The project purpose was to formulate a comprehensive capital market development strategy for the next 5 years through prioritized sequence of steps, which will i) critically analyze the current market conditions; ii) clearly identify the direction of development and set necessary reform agenda; iii) propose and efficient capital market architecture and; iv) include detailed action plan (road map) In order to fulfill obligations based on Article 43 of PCA and successful implementation of ENP-NIP for Azerbaijan, several EU directives should be transposed into national legislation by the adoption of the single capital markets law. In addition, several capital market institutions need to undergo institutional reforms and capacity building in order to enhance development of securities market. To achieve above mentioned results, the State Committee for Securities (SCS) has decided to request the EU assistance through a Twinning Project. The latter will be the successor of existing donor funded technical assistance projects i.e. USAID, EU TACIS, which are focused on identification of gaps I the best international practices in various fields of the securities market, revision of the securities market related legislation, as well as provision of capacity building activities, trainings and seminars to the capital market institutions. Also Twinning Project will support the possible legislative reform direction indicated in the securities market development strategy to be prepared by the FIRST Initiative. The SCS is attaching high importance on the transposition of EU Directives into the national legal and regulatory framework and expects to gain from the exchange of experience and knowledge with similar EU-based authorities. This twinning project is designed at a time when the country has clearly decided to carry out a systematic approximation of its legal and regulatory framework towards the EU aquis, including the area of securities market regulation and supervision. Additionally, in mid May 2011 the President of Azerbaijan has signed a decree approving the State Program Development of the securities market of the Azerbaijan Republic for 2011-2020. The state program was approved with a view to improve the Azerbaijani securities market in accordance with the best international practices and expand financial services to population and economic entities. The State Securities Committee was tasked to coordinate the implementation of measures envisaged in the state program. The current stage of economic development when the international financial crisis is coming to an end requires further deepening and development of securities market instruments, a better implementation of international standards in regulation and supervision and an increased awareness and trust among the public as regard to trading securities. The SCS twinning project is considered as a further step towards closer and more effective cooperation between the Republic of Azerbaijan and the European Union. The SCS is committed to a multi-step approach to build stakeholder consensus for the development of a sustainable framework for capital markets development. This approach includes: (i) a public dissemination and adoption of the Capital Market Development Strategic Plan by the SCS Board in early December 2010; (ii) submission by March 2011 to the President of the Republic of Azerbaijan the State Program for Capital Markets Modernization for 2011 2020; and (iii) introduction of the Capital Markets Law to Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 3 of 28

Parliament by early 2012. Supporting by-laws or implementing regulations would be put in place upon passage. It is planned that the EU funded Twinning Project will significantly contribute to timely design and implementation of the required secondary regulation. An overview of the securities market of Azerbaijan is provided in Annex 4. 3.1.1. Legal framework Securities Market Laws harmonized with EU Directives Capital Markets Law: it is planned that the new Capital Markets Law, which was drafted in the frame of the EU Tacis Project Support for the Improvement of the Investment and Export Climate in Azerbaijan, will be submitted to the Parliament of the Republic of Azerbaijan in early 2012. Securities Market Laws as of May 2011 54 th Chapter of the Civil Code of the Republic of Azerbaijan, relating to Securities (12/2003) 4 th Chapter of the Civil Code of the provisions regarding joint stock companies (12/2003) Law on Investment Funds of the Republic of Azerbaijan (12/2010) Law on the protection of Rights of Investors in Securities Market (06/2000) Decree of the President of the Republic of Azerbaijan on improvement of rules of granting license to some type of activities, No 782, September 2, 2002 Decision of the Cabinet of Ministers on additional conditions required for granting license depending on characteristics of type of activities, No 174, November 7, 2002 Regulations of SCS Related Documents Decree of the President of the Republic of Azerbaijan on approval of the Charter and Structure of the State Committee for Securities of the Republic of Azerbaijan Action Plan on Legal Approximation of the Legislation of the Republic of Azerbaijan with the EU acquis 2010-2012 3.1.2. Institutional set up, responsibilities and organizational structure Beneficiary institution for the twinning project is the State Committee for Securities (SCS) of the Republic of Azerbaijan, which is responsible for the regulation of the securities market in Azerbaijan. The Chairman of SCS is appointed and removed by the President of the Republic of Azerbaijan. The Chairman s first deputy and two ordinary deputies are appointed and removed by the President of the Republic of Azerbaijan. SCS has no income and relies exclusively on Government subvention. The activities of SCS are financed by an allocation from the State Budget of the Republic of Azerbaijan. These funds are disposed of independently from other authorities and commercial structures. SCS has around 80 employees and is organised along functional areas (SCS organizational chart is provided in the Annex). Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 4 of 28

The SCS is a central executive authority regulating the activity regarding securities: conducting state policy in the sphere of forming and development of the securities market; regulating activities of professional participants of the securities market; protecting rights and interests of investors, shareholders and other owners of securities. Main duties of the SCS are the following: Regulating the appropriate supply and demand framework of securities in the Republic of Azerbaijan; Developing policy papers for securities market development in the Republic of Azerbaijan; Registering all equities and debt securities issues, as well as Investment funds; Providing continuous upgrading to the securities related legislative framework via the integration of latest best international practices within the national framework; Licensing, regulation and supervision of professional capital markets participants, i.e. brokers, dealers, asset managers; Licensing, regulation and supervision of capital markets operators, i.e., the Baku Stock Exchange and the National Depository Centre-Regulation and surveillance of daily transactions in order to detect market manipulation and insider trading cases; Creating an environment of healthy competition in the securities market; Protecting investors and shareholders rights of the securities market; Providing campaign awareness for the securities market development in the Republic of Azerbaijan 3.2. Linked activities EU TACIS Project: Support for the Improvement of the Investment and Export Climate in Azerbaijan (02/2009 07/2011) The key objectives of the project were a) the promotion of economic diversification and exports in non-oil sectors, including through increasing share listing and the country private sector attractiveness for FDI, and b) fostering the development of capital markets and promote portfolio investment. In the securities market the direct beneficiaries were the State Committee for Securities, National Depository Centre and the Baku Stock Exchange. Under the activity Reviewing the legal framework for securities market development the Project has focused its interventions on the legal approximation of the Republic s of Azerbaijan capital markets framework with the EU acquis. As a result, a number of existing normative acts of the SCS on Issuance & Registration, Investment Funds Supervision, Licensing of professional capital markets professional participants, enforcement and surveillance, were reviewed in order to approximated to the EU acquis. As a result, 17 new draft normative acts incorporating the related EU Directives (i.e. Transparency, Disclosure, UCITS, MiFID, Capital Adequacy and Market Abuse) were submitted to the SCS. A major achievement of the project was the draft of the new EU-legislation based Capital Markets Law. The new draft law is intending to modernize the current legal framework, i.e. Chapter 54 of the Civil Code by incorporating the EU Directives within the national framework of the Republic of Azerbaijan. As such, the final deliverable will constitute the legislative basis on which the SCS reform priorities will be based in order to create a modern and robust environment for the development of primary and secondary markets. The draft law includes provisions on the role of the supervisory authority, securities exchanges, clearing houses, clearing fund, depositories, investment firms, business conduct, securities, market manipulation, and insider trading. Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 5 of 28

As far as possible the SCS Twinning Project will build its activities upon the outputs and legal approximation achievements of the EU TACIS project. It is expected that the new Capital Markets Law will be submitted to the Parliament of the Republic of Azerbaijan in early 2012. FIRST Initiative Project: Azerbaijan Capital Market Development Plan (05-11/2010) The purpose of the 3-month project was to formulate, in close collaboration with the State Committee for Securities (SCS), a comprehensive capital market development strategy in Azerbaijan for the next five years in the form of a time-bound implementation action plan. The key project deliverables were: (a) a comprehensive market assessment report, including a report on optimal capital market architecture in Azerbaijan, and (b) a market development strategy with the implementation plan for the period 2011-2015. EBRD Project: Baku Stock Exchange: Capital Markets Training & Advisory (10/2010-03/2011) The goal of the six month EBRD funded project was a) to provide BSE s senior management with general advice on strategic planning, trading mechanisms, exchange structure and risk management, and b) to provide an abbreviated CFA Level I training for BSE and selected securities market participants. SECO and IFC: Azerbaijan Corporate Governance Project (2005 ongoing) The Azerbaijan Corporate Governance Project (ACGP) works to improve corporate governance practices in Azerbaijan. Funded by the Swiss Governments State Secretariat for Economic Affairs (SECO) and implemented by International Finance Corporation (IFC), the Project has been helping local companies and banks to enhance operations and increase their ability to attract financing and investment. In addition to general corporate governance consulting on issues of Supervisory and Management Board functions, shareholders rights protection, transparency and disclosure, the Project provides consultations on topics related to risk management, internal control and internal audit, financial reporting and other related topics. One of the Projects achievements in 2009 was assistance to the Baku Stock Exchange in adopting new listing rules designed to develop a corporate securities market in Azerbaijan. The two-tier system requires companies listed in the first tier to comply with higher financial reporting and disclosure standards, as well as good corporate governance practices such as transparent and fair nomination procedures to the Supervisory Board. In January 2011, the Ministry of Economic Development of the Republic of Azerbaijan adopted the Azerbaijani Corporate Governance Standards. Upcoming World Bank Project: Capital Market Modernization Project (CMMP) The goal of the upcoming World Bank funded Capital Market Modernization Project (CMMP) is to modernize the securities market s organizational and operational infrastructure based on the activities proposed under the Government of Azerbaijan s Capital Market Development Strategic Plan adopted by the State Commission for Securities (SCS) Supervisory Board. The Strategic Plan (SP) envisages development of the securities market through, inter alia, strengthening the legal and regulatory framework, as well as improving the capacity of the regulatory body and the underlying trading architecture. The CMMP consists of four components: Component 1: Streamlining and Automating Market Infrastructure, Component 2: Updating and Strengthening the Legal and Regulatory Framework, Component 3: Stimulating Supply and Component 4: Capacity Building. It has Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 6 of 28

to be noted that it is planned that CMMP s Component 2 will support adoption of a robust legal and regulatory environment that promotes transparency and the establishment and maintenance of investor confidence and protection. This Component of the Project will largely build on the Capital Market Law drafted in the frame of the EU TACIS Project and on other EU initiatives (e.g. the SCS Twinning Project) to approximate the Azerbaijan capital market regulatory framework to the EU Directives. 3.3. Results The mandatory results to be achieved by the project and their related measurable indicators are the following: Component 1: Legal Drafting Support and Advice Mandatory result 1: A prudential regulatory and supervisory framework for the securities market approximated with the relevant EU Directives, legal acts and best practices and approximated with the EU aquis is effectively introduced in the Republic of Azerbaijan. Indicators: (a) Securities market laws, by-laws, regulations and operations of the SCS are aligned with EU Directives and best practices and implemented. (b) At least 50% of SCS personnel (operational departments) was trained on the relevant EU Directives and their transposition into the regulatory framework of the securities market of the Republic of Azerbaijan within eighteen months of project commencement. (c) At least 30 securities market participants were trained on the new regulations, their application and expected effects on the securities market and its participants Component 2: Upgrading regulatory and supervisory skills Mandatory result 2: Improved capacity and operation of SCS to regulate, control and supervise the securities market in the Republic of Azerbaijan according to EU standards and best practices. Indicators: (d) New or improved guidelines and operational manuals for licensing, supervision and inspection of securities market participants, issuer registration and trading supervision are in place within twelve months of project commencement. (e) Relevant SCS departments are trained in corporate finance, issuance registration procedures and investor protection (f) Improved off- and on-site supervision standards and procedures according to EU best practices are implemented and fully operational within eighteen months of project commencement. (g) Standard forms and working papers according to the new regulatory framework are in place and used by the personnel of SCS. (h) Improved data collection procedures from market participants are designed and implemented (i) SCS personnel (incl. selected personnel from BSE and NDC) was trained in supervision/inspection procedures, fund management & asset allocation, ETFs, Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 7 of 28

derivatives, risk management, clearing & settlement (incl. CCP) and apply their knowledge in daily work. Component 3: Raising awareness of securities market participants in Azerbaijan Mandatory result 3: Securities market participants are well aware of the new regulatory framework of the securities market, which was approximated to the relevant EU Directives. Indicators: (j) At least 500 copies of four SCS leaflets/brochures indicative topics include Securities market s legal environment in the Republic of Azerbaijan (bilingual English/Azerbaijani version), Securities trading: risks and opportunities (Azerbaijani version), Investor rights: investor protection (Azerbaijani version), Licensed investment service providers (bilingual English/Azerbaijani version) were produced and promoted via a press release and the Internet-site of SCS. (k) At least 50 participants attended the Securities Market Conference Securities market s legal environment in the Republic of Azerbaijan Opportunities for Investors and Issuers Impact on Economic Growth and Employment. 3.4. Activities: The activities mentioned in this Twinning fiche and the number of allocated working days per activity are only of indicative nature and can be later adjusted by agreement between the partner administrations. 3.4.1. General Activities In addition to the activities related to the three core components of the twinning assignment, the project will also rganize two general activities in order to ensure visibility at project start and present the project s impact at the stage of completion. Furthermore, in order to ensure an effective management and monitoring mechanism, regular meetings of the Steering Committee will be organized. Activity 0.1: Project Inception and Kick-off Workshop The first month of the project will be used for kick-off activities as well as establishment of the Project Office by the Resident Twinning Adviser (RTA) in the premises of the State Committee for Securities. The RTA will also hire an Assistant (RTA Assistant) through an appropriate selection procedure. During the inception period, the RTA will organise a kick-off meeting, with the purpose of providing a first official contact to all stakeholders involved in the project and presenting the project to the media and the public at large. In order to guarantee large public information about the start of the project, the meeting will be concluded with a press conference and a press release. The nature of this meeting will be operational, and will be attended by the EU Delegation to the Republic of Azerbaijan, the PAO representative, the Chairman of the SCS, the Project Leader, the RTA and representatives of key capital market participants (e.g. NDC, BSE) as well as representatives from the MS Embassy in Azerbaijan. The Kick-off Meeting will give the participants the opportunity to receive detailed information about the project objectives, purposes and implementation plan. Indicative number of allocated expert working days: Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 8 of 28

MS: MS Expertise (w/d): RTA, Project Leader (PL) 3 w/d (1 PL mission x 3 days) Project Completion Conference (see Activity 3.2) During the last two months of the project, a closing conference will be organised at which the results of the project will be presented. Aim of this activity is to disseminate the project results and create public awareness. The roundtable will take place in Baku and all project stakeholders as well as key capital market participants will be invited to participate. The roundtable will be concluded with recommendations for follow-up actions and lessons learned for similar projects. A description is given in Activity 3.2. 3.4.2. Component 1: Legal Drafting Support and Advice Aim of Component 1 is the approximation of national securities market legislation of the Republic of Azerbaijan with the corresponding EU Directives based on the new Capital Markets Law, which was drafted by the TACIS project Support for the Improvement of the Investment and Export Climate in Azerbaijan and will be indicatively submitted to the Parliament of the Republic of Azerbaijan in early 2012. Activity 1.1: Review of legislation and gap analysis Review of existing securities market legislation, by-laws, rules and regulations Review of rules & regulations of SCS, NDC and BSE) Gap analysis with focus on approximation to EU legislation Indicative number of allocated expert working days: MS: RTA MS Expertise (w/d): 30 w/d (3 STE missions x 10 w/d) Activity 1.2: Assistance in drafting by-laws, rules and regulations based on the stipulations of the new Capital Markets Law with respect to: the details and application procedures for granting an authorization to regulated persons; the terms and conditions for the suspension or revocation of an authorization to regulated persons; the details and application procedures for the Registration, issuance and listing of Securities; the details and application procedures for the authorization, suspension or revocation of public offers of Securities; the trading, clearing and settlement of Securities and incidental matters; the qualifications, experience and training requirements for authorized market professionals, including the applicant authorized persons, professional certification requirements and possible exceptions from them; the information content of financial and non-financial disclosure requirements as well as the details of the disclosure procedures of authorized persons, Issuers and market agents; the content of and means for record-keeping requirements of authorized persons, issuers and market agents; the content of auditor reports required to be filed under the new Law; the conduct details of take-over bids, merger, acquisition, splitting and liquidation; Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 9 of 28

the content, form and procedures of market promotions relating to Investment Services business and Securities; prevention of market abuse and insider information, securitization procedures other legislation as identified in the legal review/gap analysis Indicative number of allocated expert working days: MS: RTA MS Expertise (w/d): 130 w/d (13 STE missions x 10 w/d) Activity 1.3: Advice on implementation of approximated legislation Advice on implementation of new laws, by-laws, rules and regulations (indicatively on the topics listed in Activity 1.2) Development of standard forms and working papers needed for implementing the harmonized securities market regulation Indicative number of allocated expert working days: MS: RTA MS Expertise (w/d): 40 w/d (4 STE missions x 10 w/d) Activity 1.4 Training Training of SCS personnel on new regulations and their application App. 6 one-day workshops Topics: new regulation and their application Training of market participants on new regulations and their application 2 one-day workshops for app. 10 participants each Topics: new regulations, their application and expected effects on the securities market and its participants Indicative number of allocated expert working days: MS: RTA MS Expertise (w/d): 32 w/d (8 STE missions x 4 w/d) 3.4.3. Component 2: Upgrading regulatory and supervisory skills Aim of Component 2 is to upgrade the regulatory and supervisory skills of SCS personnel to ensure that the laws, by-laws, rules and regulations are implemented and applied according to EU standards and best practices. Activity 2.1: Conduct organizational review and assist SCS in its institution building efforts Review of organizational set-up Optimization of SCS procedures and processes Indicative number of allocated expert working days: MS: RTA MS Expertise (w/d): 20 w/d (2 STE missions x 10 w/d) Activity 2.2: Developing procedural manuals and guidelines on supervision Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 10 of 28

Manual on licensing Manual on off- and on-site inspections and supervision of investment firms and ancillary services providers Manual on risk management (e.g. for NDC) Manual on trading supervision Manual on issuer registration Manual on enforcement Indicative number of allocated expert working days: MS: RTA MS Expertise (w/d): 90 w/d (9 STE missions x 10 w/d) Activity 2.3: Assist SCS in improving the management information system Assist SCS in designing and implementing procedures for optimizing SCS data/information collection efforts (SCS management information system) to assure transparent market Indicative number of allocated expert working days: MS: RTA MS Expertise (w/d): 30 w/d (3 STE missions x 10 w/d) Activity 2.4: Designing and delivering training Designing and delivering training for SCS personnel and subordinated institutions (MDM, BSE), focusing on regulatory and supervisory functions App. 6 two-day workshops Topics: corporate finance, fund management & asset allocation, ETFs, derivatives, risk management, clearing & settlement (incl. CCP) Indicative number of allocated expert working days: MS: RTA MS Expertise (w/d): 30 w/d (6 STE missions x 5 w/d) Activity 2.5: Organization of two study visits (app. Five participants at each study visit) to EU-based regulators with focus on: Application of EU directives and their transposition in national legislation Regulation and supervision of securities market participants Issuer registration, trade supervision Capital market development and investor protection Pre- and post-trading activities Enforcement mechanisms and statutory power Cross-border supervision and international cooperation 1 MS per study visit Indicative number of allocated expert working days: MS: RTA MS Expertise (w/d): Provided on institutional level by MS authorities No. of study visits: 2 Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 11 of 28

Duration of study visits: 5 w/d each Activity 2.6: Organization of Internship Organization of 3-weeks internships for two SCS staff members in an EUbased securities market regulator with focus on supervision, issuance registration/corporate finance, and market development Indicative number of allocated expert working days: MS: RTA MS Expertise (w/d): - No. of Participants: 2 Duration of Internship: 15 w/d each 3.4.4. Component 3: Raising awareness of securities market participants in Azerbaijan Aim of Component 3 is to assist SCS in developing and promoting investor participation in the securities market by improving the general awareness on the new legal framework for the securities market and communicating investor rights in the Republic of Azerbaijan Activity 3.1: Assist in drafting information material/information leaflets/brochures/web-site content on following indicative topics Securities market legal environment in the Republic of Azerbaijan Securities trading risks and opportunities Investor rights investor protection Licensed investment service providers Indicative number of allocated expert working days: MS: RTA MS Expertise (w/d): 10 w/d (2 STE missions x 5 w/d) Activity 3.2: Organization of a Securities Market Conference Topic: Securities market s legal environment in the Republic of Azerbaijan Opportunities for Investors and Issuers Impact on Economic Growth and Employment Project achievements Follow-up actions Number of participants: at least 50 Target group: Azerbaijan s securities market participants and high level decision makers (government representatives, investment banks, brokers/dealers, investment funds, institutional investors, issuers, SoEs, companies) Duration: 1 day Indicative number of allocated expert working days: MS: RTA, PL MS Expertise (w/d): PL 3 w/d Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 12 of 28

3.5. Means/input from MS Partner Administration 3.5.1. Profile and tasks of the Project Leader (PL) The Project Leader is supposed to coordinate the activities, disseminate project information among stakeholders, take part in discussions with the high level officials, present and defend project input and expected outputs, manage the project team, prepare project management reports, help overcome project related problems, and assist the RTA for continuous development of project initiatives. The PL will be expected to devote a minimum of 3 days per month to the project in his home administration. In addition, he will coordinate, from the MS side, the Project Steering Committee (PSC), which will meet in Azerbaijan every three months. Project Leader Profile: The Project Leader must be a high-ranking civil servant with at least 15 years of professional experience, including at least 5 years of general management experience Minimum of 10 years of financial sector/capital markets experience Specific experience in project management with focus on EU funded projects and in particular twinning would be an advantage. Very good command of written and spoken English. Strong leadership and problem solving skills. Project Leader Tasks: Overall coordination, guidance and monitoring of the project; Preparation of project progress reports with support of RTA; Timely achievement of the project results; Co-chairing of project steering committees; Provision of legal and technical advice and analysis whenever needed. 3.5.2. Profile and tasks of the Resident Twinning Advisor (RTA) The Resident Twinning Advisor (RTA) will be based in Azerbaijan to provide full-time input to the project for the entire duration of the project. RTA Profile: University degree in law; Minimum of 3 years professional experience, with experience in drafting capital market related laws, by-laws, rules and regulations on regulatory level; In-depth knowledge of EU Directives and capital market legislation Knowledge of transposition of EU legal acts into national legislation Excellent communication skills, with fluency in written and spoken English language; Knowledge of Russian/Azerbaijani language would be an asset; RTA Tasks: To manage the day-to-day coordination and progress of activities of the project in Azerbaijan; Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 13 of 28

To provide technical inputs in some areas of project implementations, particularly in legal approximation with the EU acquis; To liaise with the BC Project Leader and RTA counterpart; To report to the MS Project Leader. The RTA, in his daily work in Azerbaijan, will be supported by an RTA Assistant, to be recruited and funded by the project. 3.5.3. Profile and tasks of the short-term experts (STE) The RTA will be assisted by short-term experts so as to cover the full range of expertise required. These will be suitably qualified and capable to provide the necessary skills according to the activities mentioned above. STE Profiles: A university degree in a relevant subject; A minimum of five years experience in their respective field; An excellent command of written and spoken English; Experience in ENP countries as well in other projects would be an advantage. Knowledge of Russian/Azerbaijani language would be an asset; STE Tasks: To provide technical inputs in specific areas of project implementation of the activities listed in the twinning fiche, including organization of workshops, training, coaching, drafting of methodological and handout materials as per the terms of reference provided by the RTA prior to each mission; To liaise with the RTA, the RTA counterpart and beneficiary component leader; To report to the RTA; 3.5.4. Profile and tasks of RTA Assistant RTA Assistant Profile: A university degree in a relevant subject; An excellent command of written and spoken English; Experience and skills in translation of written documents; Experience and skills as an interpretor; Proven experience in filing systems; Good communication skills; Knowledge of Russian and Azerbaijani language; RTA Assistant Tasks: General project duties; Support of the RTA in day-to-day project administration and planning Translation and interpretation for the RTA; Filing project documents; Organizing meetings with project stakeholders; To report to the RTA; Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 14 of 28

3.5.5. Profile and tasks of the permanent interpreter/translator Interpreter/Translator Profile: Excellent skills for simultaneous and consecutive interpretation; Excellent skills for translation of documents; Excellent knowledge of English, Russian and Azerbaijani languages; Good understanding of capital market s terminology; Interpreter/Translators Tasks: Translation of reports, guidelines, training materials and any other project related documents; Interpretation (simultaneous and consecutive) for project experts; To report to the RTA. 4. Institutional Framework The direct beneficiary of the Twinning Project will be the State Committee for Securities (SCS). The SCS, as main beneficiary institution, will play a crucial role in implementing the Twinning project s activities in all its components. The Azerbaijani Project Leader will be the Head of the Research and Market Development Department of the SCS, Mr Emin Muradov. The PL will hold the responsibility for all project components implemented in SCS including the activities dealing with approximation of legislation with EU acquis. The Azerbaijani Project Leader is committed together with the MS Project Leader to achieve the mandatory results. This commitment includes ensuring a high level of political commitment and a more practical commitment at the level of the SCS. The RTA counterpart will be Mr Ilkin Aliyev, Head of the International Relations Division within the Research and Market Development Department. The RTA counterpart will be in charge of co-ordinating smooth and efficient implementation of project activities together with the RTA in the three components. He will ensure, on a daily basis, that SCS Departments and staff are ready to carry out together with MS experts all the planned activities, including workshops, preparation of legislative and methodological documents, study visits, internships, Final Conference. He will make sure that a proper level of ownership on project outputs and mandatory results is achieved by the beneficiary institution. He will be responsible together with the Azerbaijani Project Leader for enabling a high level of sustainability of achieved results after project completion. The Component Leader for Component 1 will be Mr Kamran Babayev, Head of the Legal Department. The Component Leader for Component 2 and 3 will be Mr Ilkin Aliyev, Head of the International Relations Division within the Research and Market Development Department. The tasks of the SCS Component Leaders are to (a) ensure smooth collaboration with the twinning experts in their respective field, (b) availability of SCS personnel according to the work plan agreed in the twinning contract, (c) well targeted component activities and that (d) the outputs and results of the twinning project are timely introduced and applied. Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 15 of 28

A Project Steering Committee (PSC), consisting of the SCS, the PAO representatives and representatives of the Delegation of the EU to the Republic of Azerbaijan will be established upon project start. 5. Budget The maximum total budget available of the action is 1,000,000. The beneficiary will provide in kind contribution in the form foreseen in the twinning manual. 6. Implementation Arrangements 6.1. Contracting Authority responsible for tendering, contracting and accounting The Contracting Authority responsible for tendering, contracting and accounting is the Delegation of the European Union to Azerbaijan. The person in charge of this project is: Mr. Frederico BERNA, Head of Operations Section Delegation of the European Union to Azerbaijan Office Address: Landmark 111, 11 th floor, 96, Nizami street, AZ 1010 Baku Telephone: + 394 12 497 20 63; Fax : + 994 12 497 20 69 E-mail : federico.berna@eeas.europa.eu PAO will support the twinning project implementation process with the EU Delegation. The person in charge of this project in the PAO is: Mr. Sahil Babayev, Head of the Department of Cooperation with International Organizations, Ministry of Economic Development, Office Address: Project Administration Office (PAO) in Azerbaijan Ministry of Economic Development, 40. U. Hajibayov str., Government House, 4 th entrance, 6 th floor, Republic of Azerbaijan Tel: +994 12 598 95 30 E-Mail: s.babayev@economy.gov.az 6.2. Main counterpart in the BC The counterpart in Azerbaijan will be the State Committee for Securities (SCS) of the Republic of Azerbaijan. 6.2.1. Azerbaijani Project Leader The Azerbaijani Project Leader will be: Mr. Emin Muradov, Head of Department for Research and Market Development Tel: +994 (12) 498 7045 E-Mail: emin.muradov@scs.gov.az SCS address: 19, Bulbul Ave., AZ1001, Baku Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 16 of 28

Tel: +994 12 498 70 45; Fax: +994 12 493 41 88; 6.2.2. Counterpart to the Resident Twinning Advisor The counterpart to the Resident Twinning Advisor will be: Mr Ilkin Aliyev, Head of the International Relations Division within the Research and Market Development Department, E-Mail: ilkin.aliyev@scs.gov.az SCS address: 19, Bulbul Ave., AZ1001, Baku Tel: +994 12 498 70 45; Fax: +994 12 493 41 88 6.2.3. Steering Committee A Project Steering Committee (PSC), consisting of the SCS, the PAO representatives and will be established upon project start. The representatives of the Delegation of the EU to the Azerbaijan will attend the PSC meetings as observer. The PSC will be established for the control and supervision of the project activities and the mandatory results. The Steering Committee will meet at regular intervals and will assess the progress of the project, verify the achievements of the outputs and mandatory results and discuss any other issues which might affect a smooth implementation of the project. The PSC will submit by the end of the meeting (as recorded in the minutes of meeting) an approval/not approval of the project reports. Official minutes of the PSC meetings will be kept in English and distributed to all parties within 15 days after the PSC meeting. The exact composition of the Steering Committee is to be defined in the Twinning Contract. However, the following persons should at least be a member: BC Project Leader, MS Project Leader, BC counterpart to the RTA, and the RTA. The representative of the Delegation of the European Union to Azerbaijan and the representative of the Twinning Programme Administration Office, Ministry of Economy, will attend the PSC meetings as observer. Representatives of other donors and relevant projects may be invited to participate as observers in the Steering Committee meetings. 6.3. Contracts Only one twinning contract is foreseen for this project. 7. Implementation Schedule (indicative) Project duration: 20 months Launch of the call for MS Twinning proposals: September 2011 Reception of the proposals: End of November 2011 Notification to MS: Min January 2012 Signature of the contract: Mid-June 2012 Start of Twinning Project Activities: July 2012 (implementation) Project Completion: March 2014 8. Sustainability Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 17 of 28

The achievements of the Twinning Project (mandatory results) should be maintained as a permanent asset to the Beneficiary administration even after the end of the Twinning project implementation. This assumes inter alia that effective mechanisms are put in place by the Beneficiary administration to disseminate and consolidate the results of the project. Long term effect of the Twinning Project will be a well regulated securities market in Azerbaijan approximated to the EU legal framework as far as possible. Through the institution and capacity building efforts SCS will be sustainably developed in an internationally highly respected and reputable securities market regulator according to international standards. Studies have shown that the better capital markets and financial sectors are regulated and developed, the more efficient the allocation of economic resources and long-run economic performance is. Well-functioning securities markets contribute significantly to economic growth, poverty reduction and employment. The value of savings and pensions, the cost of mortgages and the cost of capital are ultimately determined in financial markets. A deep, liquid, and well regulated securities market will ensure the most efficient allocation and provision of capital throughout Azerbaijan s economy. 9. Crosscutting issues (equal opportunity, environment, etc.) Each Twinning partner is required to comply with the equal opportunities requirements of the European Union. The principal of equal opportunity will be integrated into all stages of the project implementation. 10. Conditionality and Sequencing There is no precondition set for this twinning project. Nevertheless, full commitment and support is required from SCS and the Government, including their readiness to establish and take active part in a Steering Committee that will coordinate the implementation of the twinning project. SCS should in particular: Nominate the counterpart personnel; nominate the relevant staff to participate in legal drafting, capacity building and training activities in accordance with the approved twinning programme; provide appropriate premises, facilities and work space Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 18 of 28

ANNEXES TO PROJECT FICHE Annex 1 Logical Framework Matrix Annex 2 Indicative Work Plan Annex 3 Organisational Chart of SCS Annex 4 Brief Overview of the Securities Market in Azerbaijan Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 19 of 28

Annex 1 Logical Framework Matrix Approximation of the legal and regulatory framework for the securities market of Azerbaijan according to the EU acquis and capacity building for the State Committee for Securities Contracting period expires: Total maximum budget: 1,000 000 Disbursement period expires: Budget year: Overall Objective Objectively verifiable Indicators Sources of Verification Assumptions To create regulatory and institutional capacities for the long-term economic stability and growth by strengthening and upgrading the legal, regulatory and institutional framework of the capital market in the Republic of Azerbaijan. Improve the regulatory and institutional capacities of the State Committee for Securities of the Republic of Azerbaijan to supervise the capital market and financial service providers in line with the EU acquis. A better regulated and more developed capital markets and financial sector in Azerbaijan will allow a more efficient allocation of economic resources and a higher long-run economic performance. A well-functioning securities market in Azerbaijan will contribute significantly to economic growth, diversification in industry and service sectors, poverty reduction and employment. EU Commission Country Progress Reports. Project Steering Committee reports. SCS annual reports; Annual reports from IMF and other key financial sector institutions. Annual statistics and reports from key international institutions Majority of politicians in the Government and the Parliament are strongly supporting the effort of approximating legislation to EU acquis in the capital markets area and the development of the securities market in Azerbaijan by various means Project Purpose Objectively verifiable Indicators Sources of Verification Assumptions Legal and regulatory framework Laws and regulations in place according approximated to the EU acquis was to EU acquis submitted to the parliament (laws) or Annual statistics and reports from key issued by the SCS (regulations). international institutions (EBRD, IMF, SCS is in a stronger position to regulate EC, FSAP, ROSC); the securities market and has strengthened Several internal SCS publications and its supervision functions in line with EU external articles and reports assess the best practices; extent to which the new approximated Institutional capacity of SCS has been legislation has been properly strengthened, the organization reviewed implemented. and operational processes adjusted Sample survey on the impact of Adjusted organizational set-up and/or awareness raising (covering brokers, new workflow processes had been investors and the wider public) introduced and contributed to Articles were published in newspapers, strengthening SCS. internet and other sources in Azerbaijan SCS staff has been trained on the on various aspects of capital markets approximated new legislation development, regulation and supervision Public awareness has been raised among and SCS the population as regard to investing in securities. Full understanding of the role of the project and active involvement by governmental authorities. The new Capital Market Law will be adopted by the Parliament of the Republic of Azerbaijan near the start of the twinning project SCS issues/submits the newly drafted regulations within the project duration Twinning Fiche: Support to State Committee for Securities Legal Approximation Page 20 of 28