Overview (March 2003) - International Law Office

Legal Framework
The Vienna Stock Exchange
Admission of Securities and Listing Requirements
Investment Funds
Securities Transactions Outside the Vienna Stock Exchange
Supervision, Rules of Conduct and Insider Trading
Market Participants

Legal Framework

Capital markets and derivatives are regulated and administered at federal level. The most important piece of legislation is the Stock Exchange Act 1989, which implements several EU directives. According to the provisions of the act:

• insider trading is criminalized;

• issuers must disclose price-sensitive information immediately;

• stringent reporting obligations apply to changes in the significant shareholdings of stock companies; and

• market liquidity is increased.

Credit institutions and investment firms from non-EU countries may now become members of, and trade on, Austrian stock exchanges. Moreover, the act allows for listing prospectuses to be submitted in English and other languages commonly used in financial centres, subject to the approval of the Vienna Stock Exchange.

The Vienna Stock Exchange

The Vienna Stock Exchange is operated by Wiener Börse AG, a public stock company owned by Austrian banks, insurance companies and other industry groups. The exchange:

• is authorized to act as a public agency for certain tasks (eg, the admission of securities to listing);

• is Austria's main licensed stock and general commodity exchange (alongside the New European Exchange (NEWEX)); and

• acts as a general consultant and information provider to the financial sector.

The introduction of the Electronic Exchange Trading (XETRA) system in 1999 was a significant stage in the modernization of Austria's stock markets. With over 400 participants worldwide, XETRA offers foreign investors and traders simplified access to the Austrian stock markets. Its introduction was accompanied by the establishment of NEWEX jointly with Deutsche Börse, on which Central and Eastern European securities have been traded since 2000.

The Vienna Stock Exchange's most recent innovation is Energy Exchange Austria (EXAA). Founded in 2002 and based in Graz, EXAA serves as a spot market for energy trading in Austria, pursuant to the liberalization of domestic energy markets.

Trading
The cash and derivatives markets are the two securites markets on the Vienna Stock Exchange.

Trading on the cash market is effected through XETRA. Traded securities include:

• domestic and foreign stocks;

• investment fund certificates;

• index certificates;

• participation certificates;

• profit-sharing certificates;

• subscription rights; and

• fixed-income securities (eg, bonds).

Trading on the derivatives market is effected through the OMEX trading platform. Traded derivatives include warrants, futures and options.

Legal classification under the Stock Exchange Act
The Stock Exchange Act recognizes:

• the official market;

• the semi-official market; and

• the third market.

The official market is the most important, with the majority of securities traded on the Vienna Stock Exchange meeting all of its preconditions. The minimum nominal amount of securities to be listed on the official market is €2.9 million for stock corporations and €725,000 for all other securities. No-par stocks must have a total value of at least €725,000 and at least 20,000 must be issued. The minimum nominal amount for preferred stock is €1 million.

Companies seeking to list securities must have published annual financial statements for at least three years prior to application. All securities must be negotiable and free of any encumbrances. In order to attain an appropriate spread, stocks must have a free float with a nominal value of at least €725,000 or 10,000 no-par stocks.

The semi-official market has less strict listing preconditions and is comparable to the US over-the-counter market. The minimum amount of securities listed is €725,000 for all types. No-par shares must value at least €362,500 and at least 10,000 no-par stocks must be issued.

Companies that apply for listing must have published annual financial statements for at least one year. All securities must be negotiable and free of any encumbrances. In addition, a free float with a nominal value of at least €181,250 or 2,500 no-par stocks is required.

Securities and products that do not meet the aforementioned listing requirements can be listed and traded on the third market. Applications must be submitted by a member of the Vienna Stock Exchange and the issuer must comply with all prospectus requirements under the relevant regulations, particularly the Capital Markets Act.

Membership of the Vienna Stock Exchange
The following institutions may enjoy membership of the Vienna Stock Exchange, provided that they have the necessary personnel and technical equipment to ensure continuous trading (Section 15 of the Stock Exchange Act):

• Austrian credit institutions, credit institutions of European Economic Area (EEA) member states and credit institutions domiciled in other countries that are licensed to conduct trading securities under Section 1(1)(7) of the Austrian Banking Act or equivalent;

• investment firms from EEA member states and recognized investment firms domiciled in other countries with equivalent licences; and

• local firms from EEA member states and enterprises domiciled in other countries that are licensed to conduct trading securities in their country of origin.

All companies must:

• be authorized to provide investment services in their home country;

• be a member of a regulated market in their home country; and

• be subject to the supervision of their local competent authority.

Settlement and clearing
All members of the Vienna Stock Exchange are subject to settlement and clearing systems.

All securities traded on the cash market must be settled and cleared under its system, for which Oesterreichische Kontrollbank AG (OeKB) is responsible.

The Vienna Stock Exchange is responsible for settlement and clearing in the derivatives market. As a neutral clearing house, it guarantees the completion of transactions in derivatives and requires clearing members to deposit margins for all binding positions. The Vienna Stock Exchange maintains principal, agent and market maker accounts. Margin and clearing accounts for euro-denominated instruments are run by OeKB, and for US dollar-denominated instruments by Euroclear.

The rules for the clearing of dealings on the Vienna Stock Exchange apply to all securities admitted to its official or semi-official market.

OeKB
The OeKB is a financial and information service provider for the capital markets and export sectors. It has operated since 1946 and its main shareholders are Austrian banks.

Besides handling settlement and clearing, the OeKB acts as a notification office for the submission of prospectuses under the Capital Markets Act. In addition, it:

• is the principal paying agent for bond issues;

• administers government bond auctions;

• is Austria's central depository for securities;

• is a member of the European Central Securities Depositary Association; and

• acts as the domestic export credit agency, and the state's agent in providing customized risk management instruments for a variety of export trade and transactions.

Admission of Securities and Listing Requirements

Securities and derivatives listed on the Vienna Stock Exchange are divided into various categories but follow two systems. Under one system, all securities and products traded on the Vienna Stock Exchange must meet the criteria set forth in Sections 66 to 72 of the Stock Exchange Act. The other system, the so-called 'new market segmentation' specified by the Vienna Stock Exchange, aims to improve the marketing and communication of securities and products traded on it. Generally, the two systems are independent.

New market segmentation
Since January 2 2002 securities trading has been grouped into the following five market segments:

• equity market.at (for stocks);

• bond market.at;

• otob market.at (for derivatives);

• warrants.at; and

• other listings.at.
  

Equity market.at is the sector of the Vienna Stock Exchange in which stocks and participation certificates are traded using the XETRA system. It is divided into prime and standard markets, which in turn are divided into 'continuous' or 'auction trading' sub-categories. All stocks traded in the equity market must meet the criteria laid down for the official or semi-official markets. Prime market stocks must meet additional listing criteria regarding market making, trading form, capitalization and transparency. All other stocks meeting official or semi-official market criteria are traded in the standard market, either continuously or by auction.

Bonds are traded on the bond market regardless of whether they belong to the official, semi-official or third market. Bonds include government, corporate, bank and convertible bonds, and treasury certificates and notes. Trading is effected by XETRA.

Futures and options are traded on the otob market.at. The OMex system is used and a continuous trading procedure applies. The market is sub-divided into Austrian and Central European Clearing House and Exchange (CECE) derivatives.

All admitted warrants are traded at 'warrants.at'. The OMex system is used and a continuous trading procedure applies.

'Other listings.at' comprises all securities that cannot be allocated to any other sector, including:

• profit-sharing rights;

• investment and index certificates that are admitted to listing on all markets; and

• stocks and participation certificates admitted to the third market.

The XETRA trading system is used and a continuous trading procedure applies.

Corporate governance code
The Corporate Governance Code was introduced on October 1 2002, setting guidelines for the management and control of Austrian companies with a view to improving the transparency of Austrian companies listed on the Vienna Stock Exchange. The code is based on domestic regulations as well as the Organization for Economic Cooperation and Development's guidelines for corporate governance.

A prospectus must now be attached to applications for the admission of securities to the official or semi-official market, and submitted to the stock exchange. The listing prospectus must be signed by the issuer and those responsible for its contents. The prospectus may be prepared in German, English or another language commonly used in other financial centres (subject to the approval of the Vienna Stock Exchange).

The prospectus must contain all relevant information and must be published in a national newspaper or made available to the public at the premises of the issuer and issuing bank. Publishing the prospectus exclusively on the Internet is insufficient.

Specialists and market makers
A system of specialists and market makers has been implemented to enhance the Vienna Stock Exchange's trading procedure. Specialists are trading participants who enter competitive, binding and firm buy-and-sell orders, thereby redressing temporary imbalances in supply and demand. In return, they pay no transaction fees and participate in the turnover of all securities/products in which they specialize. All securities listed in the prime market.at require a specialist, as do all Austrian derivatives.

Specialist functions are appointed by auction. The trading participant who makes the best bid in terms of minimum size and maximum spread is appointed for the security/product for a one-year period during which all obligations must be fulfilled. Specialists are supervised by the Vienna Stock Exchange. Sanctions apply when a specialist fails in his or her obligations (including revocation of the title of specialist). In no case may a specialist engage in fewer obligations than market makers.

Market makers place binding buy-and-sell orders in the trading system for every instrument listed, pursuant to the requirements of the Vienna Stock Exchange. Their function is similar to the specialist in terms of ensuring sufficient market liquidity.

Derivatives market
Derivatives are treated in the same way as stocks for regulatory purposes. Accordingly, they are subject to similar regulations as other traded securities. Derivatives are dealt almost exclusively on the otob market.at sector of the Vienna Stock Exchange.

The Austrian derivatives sub-sector contains both options on stocks admitted to the official market, which are subject to specific admission criteria, and Austrian traded index futures and options, which are defined as independent products to which special criteria apply.

The CECE derivatives sub-segment contains CECE index products that are admitted for listing on the official market. At least three market makers are required for listing in this sub-sector.

Investment Funds

In principle, investment funds in Austria are governed and defined by the Investment Funds Act 1993. The act defines three types of investment fund:

• Austrian funds;

• undertakings for collective investment in transferable securities (UCITs), such as investment funds harmonized under EU Law; and

• funds from other countries.

These three types of investment fund can be sub-categorized into (i) funds for the public, and (ii) special funds, for which investment certificates may be issued to a maximum of 10 entities. The entities must be known to the investment fund company.

Pursuant to the act, investment funds must meet strict criteria regarding risk spread and investment strategy. Provisions are particularly restrictive in respect of derivatives; investment funds may invest only in certain derivatives listed in Section 21 and only up to a small percentage of the fund's capital.

The issuing and redemption of investment certificates, as well as custody of securities and derivatives owned by the investment fund company, must be handled by a designated credit institution as depository. Prospectus requirements include detailed information on the investment company, investment fund, investment strategies and depository bank. Financial statements must be provided on request.

Other funds
Foreign investment funds that do not qualify as UCITS can market their investment certificates in Austria under restrictive provisions set forth in the act. Investment companies must notify the Austrian Financial Markets Authority of an intention to market a fund. The most important preconditions of this notification are:

• nomination of an Austrian credit institution acting as representative;

• custody of fund assets, to be carried out by a depository bank;

• nomination of one or more credit institutions as paying agents;

• special requirements in respect of fund rules; and

• extensive disclosure requirements.

All publications, advertisements and relevant documents must be prepared in (or translated into) German. In case of language discrepancies, the German version will prevail. Distribution may commence without further notice four months after notification, unless the Financial Markets Authority rules otherwise.

UCITS
In accordance with the UCITS Directive (85/611), UCITS need not obtain separate approval from the Austrian authorities for the public offering of investment certificates in Austria. The investment company need only notify the Financial Markets Authority of its intention. Notification must include the following documents (or translation thereof into German):

• confirmation from the relevant authority of the home country that the investment fund complies with the UCITS Directive;

• the investment company's bylaws and most recent prospectus; and

• details of the designated means of distribution of the fund shares in Austria.

Distribution may commence within two months of notification unless the Financial Markets Authority rules otherwise. In case of incomplete or erroneous notification, the distribution of investment certificates will be prohibited.

Hedge funds
Due to restrictive provisions in respect of investing in derivatives, the establishment of traditional hedge funds (ie, funds that invest mainly in high-yield derivatives) is given short shrift by the Investment Fund Act.

However, there are ways to market risks and earnings of hedge funds, for example by means of indirect investment in companies which, in turn, invest in hedge funds. Mostly, such companies offer index and participating certificates, whereas index certificates are a type of bond (usually a zero bond) with a repurchase price linked directly to the indexed value of one or more hedge funds.

The investor does not become co-owner of the invested securities and derivatives products of the investment company, but is merely a bearer of an obligatory right and is thus subject to the investment company's risk of bankruptcy. Both securities are usually combined with a minimum keeping term, thus greatly reducing their fungibility.

Securities Transactions Outside the Vienna Stock Exchange

Most securities and products transactions in Austria (including those listed on the Vienna Stock Exchange) occur outside the stock exchange. Austrian credit institutions, which are usually licensed to deal in securities and products for others on a commission basis or in their own names, tend to handle such transactions rather than trading on the stock exchange.

All securities transactions (regardless of whether they are concluded on the stock exchange) are governed by the provisions of the Capital Markets Act 1991 if and when a public offering is made. Placements qualified as 'public offers' are subject to prospectus and filing requirements.

Section 1(1) of the act defines a 'public offer' as "an expression of intent to sell securities or investments which is not addressed to specific persons". An offer that is addressed to at least 250 persons is considered to be public unless the offerer proves otherwise.

No further legislation or case law defines a 'public offer' more precisely. Generally, it is accepted that the definition cannot be construed to mean that any offer directed at specific persons is a non-public offer. In 1992 the Ministry of Finance (as the former capital markets supervisory authority) published several non-binding opinions to the effect that (i) the question of whether an offer is public depends on qualitative as well as quantitative criteria, and (ii) an interrelation exists between these criteria in the sense that if the offer is restricted to persons selected by criteria relating to their sophistication as investors, an offer may be made to a larger number of offerees without becoming public.

If a transaction is within the rule of the Capital Markets Act, then a detailed prospectus must be published in German or English and submitted to the OeKB before an initial public offering can be made in Austria. Exceptions apply to prospectus requirements, private placements for institutional investors, employee share programmes and bonds with a maturity of less than one year.

Supervision, Rules of Conduct and Insider Trading

Financial Markets Authority
In April 2002 the Austrian Financial Markets Authority was authorized to supervise all financial activities in respect of the banking, insurance, capital markets and investment funds sectors.

The Financial Markets Authority takes over from the Ministry of Finance (in terms of banking, insurance and pension funds) and the Austrian Securities Authority (in terms of securities supervision).

The new system of supervision was adopted to modernize domestic standards, particularly in light of the Basel Core Principles for Effective Banking Supervision and new legislation proposed under the Basel 2 proposal.

The new approach to financial services supervision concentrates on core functions rather than institutions or sectors, and has considerable potential for increased cost-effectiveness and efficiency. In addition, the new system ensures a level playing field for all financial institutions doing business in Austria.

The new authority has administrative penal power and the power to enforce its supervisory rulings. Moreover, it has authority to issue ordinances. Appeals against the authority's rulings are permitted only in certain circumstances, and only to the Constitutional Court and Administrative Court.

The cost of supervision is borne by the supervised institutions.

The main task of the Financial Markets Authority is to ensure that the institutions abide by the law, especially the Security Supervisory Act. The authority oversees trading standards on the Vienna Stock Exchange and ensures that the rules of conduct of the Security Supervisory Act are observed by all participants in investment transactions.

Standard compliance code
In addition to the rules of conduct as set out in the Security Supervisory Act, Austrian credit institutions have agreed on a new Standard Compliance Code regulating the use of information that is not accessible to the public by employees of credit institutions.

Insider trading
Insider trading is a criminal offence under the Stock Exchange Act and is sanctioned by monetary fines and imprisonment for up to one or two years, depending on whether the insiders are primary or secondary. 'Primary' insiders have access to insider information in the course of their job or through holding a stake in the capital of the issuer. 'Secondary' insiders merely make use of insider information. All issuers, credit institutions, insurance companies and pension funds are required to implement organizational measures to prevent insider trading.

Market Participants

Credit institutions are the most important participants in the Austrian financial markets, due to the fact that most activities (and especially security-related activities) require a banking licence, and because they hold a predominant share of Austrian capital.

In accordance with the Credit Institutions Directive (2000/12/EC), credit institutions resident in the EEA do not require an Austrian banking licence provided that they are licensed in their home country. They may conduct activities covered by the licence of the supervisory authority of their home country by making a cross-border arrangement in Austria or establishing an Austrian branch (although they will be subject to various organizational and disclosure requirements as well as most of the provisions of the Austrian Banking Act).

For further information on this topic please contact Tibor Fabian at Binder Grösswang Rechtsanwälte by telephone (+43 1534 80) or by fax (+43 1534 808) or by email (fabian@bgnet.at). The Binder Grösswang Rechtsanwälte website can be accessed at www.bgnet.at.