Macro economic policies

116. The Currency Board Arrangement (CBA) introduced in July 1997 tightly constrains the monetary policy of the Bulgarian National Bank (BNB). The CBA fixes the Bulgarian Leva to the Euro, and the BNB does not operationally target interest rates. Following the introduction of the CBA, a conservative fiscal stance has been maintained. In order to reduce a high public debt burden and to avoid fiscal stimulus that would put pressure on the external position, the authorities adopted consistently prudent deficit targets in the 1998–2001 budgets. Fiscal policy was tightened in response to external shocks in 1999–2001, containing the deficit to around 1 percent of GDP in each year. The fiscal reserve account of more than BGN 2 billion provides a cover for major fiscal contingencies. While fiscal deficits are expected to be modest over the medium-term, high current account deficits are a potential source of vulnerability, which may result in loss of reserves and a need for additional borrowing to support the CBA.

117. In 1999–2000, Bulgaria recorded external current account deficits of more than 5 percent of GDP. The 2001 trade deficit exceeded 10 percent of GDP and the current account deficit was close to 7 percent of GDP. Lower FDI inflows, a wider current account deficit and external debt service reduced international reserves to around four months of imports at end 2001. However, Bulgaria has felt little impact of pressures in international emerging debt markets, and retains access to these markets to cover its financing needs. In the medium-term, public debt management in Bulgaria faces several major challenges. These include further reducing public debt to GDP, and reducing the external, dollar-denominated, and floating-rate debt component. Real GDP growth picked up from 3½ percent in 1998 to almost 6 percent in 2000 driven by industrial production and the services sector. Real GDP grew by a robust 5 percent in the first half of 2001 and is expected to reach about 4½ percent for the year as a whole. Inflation amounted to 4.8 percent at the end of 2001.

Public infrastructure

118. The legal framework in which banks operate is quite good. However, the judiciary system is not efficient, and banks experience delays in foreclosing on collateral, which can take up to several years. This should be addressed urgently. Financial statements are based on National Accounting Standards, which differ from International Accounting Standards (IAS) in some respects. Banks and financial institutions are to adopt the IAS from January 1, 2003, and other firms from January 1, 2004, though most banks have also been preparing their accounts by IAS for some time now.

Market discipline

119. Markets are not effectively able to exercise discipline over banks, and the responsibility for a sound banking system lies primarily with the authorities. Financial markets in Bulgaria are at an early stage of development. Bank intermediation is low, and other securities and insurance markets are not well developed. There is very little stock market activity. Pension funds are not subject to adequate regulation and supervision. The public has few sources of information on the functioning of the financial markets. The accounting system is still in a process of conversion to IAS, and corporate accounts are unreliable.

Resolution of problem banks

120. The bank resolution system in Bulgaria has proven effective in the actual closing of insolvent banks, and the protection of small depositors, but not in the liquidation and dissolution of the closed banks, due to the slow process of liquidation. Total assets of the banks currently under liquidation amounts to some US$195 million.²⁶ Realizable value could be as low as 10 percent of this amount.²⁷ Bankruptcy and liquidation of a bank is currently performed by a Court-appointed trustee, selected by the Court from a list maintained by the BNB. The draft Law on Bank Bankruptcy, currently before Parliament, provides for a more expedient liquidation process, with more effective oversight. BNB has been effective in addressing subsequent potential threats to bank stability. During the Turkish banking and financial crisis, which broke out in late 2000, the BNB succeeded in keeping Turkish banks in Sofia open without losses to depositors.

Objectives, autonomy, powers, and resources (BCP 1)

123. The BNB has clear responsibilities and objectives, as well independence and adequate resources, which are laid out in the law. The Banking Supervisory Department (BSD) located within the BNB and headed by a Deputy Governor, is responsible for supervisory action. The conditions for the appointment and removal of the Deputy Governor are also laid out in law. The BSD has the required budget and ample powers to enforce laws and regulations and address safety and soundness concerns. The BNB is authorized to issue regulations covering a wide range of subjects including prudential regulations. The law also gives ample power to the BSD to obtain information in the form and frequency necessary to fulfill its supervisory tasks.

124. The Law on Banks provides legal protection for banking supervisors provided the action in question was not “ultra vires” nor grossly negligent. However, like other public officials, they can be prosecuted under Section 282 of the Penal Code for abuse of official powers. The legal basis for co-operation between the financial regulatory agencies is in place to some extent and is stated to work in practice. Cooperation and information sharing with other domestic regulators has been strengthened through a recently concluded formal agreement between the financial sector regulators.

Licensing and structure (BCPs 2–5)

125. The activities which a bank may undertake are laid out in the Law on Banks which also prohibits the use of the word ‘bank; or any of its derivatives to those entities not licensed to carry out banking activities. It also stipulates that only those persons who have been granted a bank (foreign bank branch) license by BNB are allowed to carry on ‘bank activity,’ including taking deposits from the public.

126. Applicants are required to submit relevant documents on the organization, management and capital and funding structure of the proposed bank and the BSD is required by law to check the validity of all documents and the financial status of the applicant before ruling on the application. Within six months of the receipt of the application, the central bank must notify the applicant of the decision. The law also lays down the situations in which the BNB may refuse a license. Foreign banks applying for branch licenses are also required to submit details of the parent bank and written consent of the home supervisor. The BNB may refuse a license if the home supervisor is not considered effective.

127. Acquisition of 10 percent or more of the voting shares in an operating bank requires written permission of BNB. Information can be requested by the BNB on all shareholders, and is mandatorily provided for shareholders above 3 percent. If the shares are acquired on the stock exchange or other regulated markets, the owner cannot exercise his voting power over these shares without obtaining the permission of BNB. (If permission is withheld, he must sell these shares.). Further, when the shareholder transfers his voting shares in a domestic bank, and the result of this transfer is that his stake falls below 50, 33, 20, and 10 percent, he is required to notify the BNB within 10 days. Although the criteria for rejection of transfer are not specifically laid down, in practice the BNB applies the same criteria as at the licensing process to refuse the transfer. As part of its portfolio of remedial actions, BNB is also empowered to order the shareholder holding qualified equity in a bank to transfer his shares within 30 days and to prohibit the exercise of voting power. Although the BNB has sufficient authority to refuse transfer of significant ownership, it did not have adequate authority to identify the ultimate beneficial owners in the case of transfer or licensing. Amendments to the Law on Banks, passed in December 2001, have enhanced the BNB’s powers in this area.

128. BNB has the authority to establish criteria for reviewing acquisitions or investments by a bank. No bank may acquire equity in a company (other than a bank) the value of which exceeds 15 percent of the bank’s own funds, without obtaining written permission from BNB. Further, the total amount of a bank’s investment in real estate and other tangible fixed assets is capped at 50 percent of its own funds. However, tangible fixed assets and equity participation in companies other than banks acquired from mortgages, pledges and other collateral for the purpose of preventing losses from its bank operations, are exempted from this rule provided they are transferred within two years following the acquisition. Banks are required to submit the details of investment to the BNB which may refuse to grant a permit for the acquisition for reasons such as breach of prudential regulations, sharp increase in credit risk or doubts on the bank’s ability to finance the acquisition.

Prudential regulations and requirements (BCPs 6–15)

129. The Law on Banks and the supporting regulation require all banks to calculate and maintain a minimum capital adequacy ratio for credit risk on the lines of the Basel Accord. The BNB currently prescribes a minimum CAR of 12 percent, which is expected to be sufficient to cover market risks under current conditions. Detailed instructions have been issued for the management of liquidity and foreign exchange risks but interest rate risk and operational risks have not been given adequate regulatory attention. From July 2001, banks are also required to put in place systems to identify and measure country risk but no specific system for provisioning against country risk has been imposed. Further, the procedures for the supervisory assessment of this risk, both on and off-site, are still being developed.

130. Banks are required to adopt and submit to BNB the policy and rules governing their credit activities. They must also establish a credit committee as a specialized internal body for monitoring, assessment, classification and provisioning of their risk exposures. While asset quality assessment under the CAMELS model includes the loan and investment policies and procedures, the rating on management evaluates banks’ ability to oversee the credit and investment process.

131. Banks are required to periodically assess (at least quarterly) their loans and other risk assets, including off-balance sheet liabilities, and to allocate provisions to cover the risk of losses. The supervisors may require from the bank to enforce a stricter evaluation and classification.

132. Banks are required to report large exposures, which are defined as exposures equal or more than 10 percent of the bank or the banks group, as part of the quarterly reporting system, although there is no separate reporting for sectoral concentrations. The limit on large exposures (the sum of the balance-sheet assets and off-balance-sheet commitments to one person or “related persons”) stands at 25 percent of the bank’s own funds. “Related persons,” are defined by regulation and the supervisor has the discretionary power to include persons into the category of related groups. Banks/bank groups are also required to create and maintain adequate administrative and accounting procedures, as well as effective internal control to identify and record all large exposures and subsequent changes to them as well as to place internal caps on concentration of exposures to an economic sector and/or geographic region.

133. Decisions on connected lending beyond a threshold can only be made by a unanimous decision of the bank’s managing body and with the approval of the head of specialized internal control office. The threshold has been kept at the annual remuneration of the connected natural persons including bank supervisors; twice the annual remuneration for employees and at one percent of the paid in capital for loans made to connected legal persons or major shareholders. The total amount of the loans made to connected persons shall not exceed ten percent of the bank’s own funds, and unsecured loans provided by the bank to its employees shall not exceed three percent of the bank’s own funds.

134. The BNB has issued detailed guidelines for managing liquidity and foreign exchange risks. Further, even though banks are allowed to trade in commodities, in fact no bank actually does so. Thus, equity price risk and commodity price risk are absent. As far as interest rate risk is concerned, although this is evaluated as part of the on-site examination as part of the test of market risk sensitivity (the S component of the CAMELS system), there has not been any specific guidance to banks on this issue.

135. Some banks are in the process of putting in place state of the art risk management systems and are investing in technology for this purpose. There are no capital requirements at present for operational and other risks. Management of these risks is largely in the domain of banks’ internal audit systems, which are required to assess the risk management techniques and the technical facilities against breaches of the law, and to make recommendations for improvement.

136. The scope and coverage of the internal control and audit function has also been defined in Regulation, and its efficacy is evaluated as part of the on-site inspection. A new regulation is being developed on a priority basis. The draft sets out detailed requirements not only for internal control but also for the management control over basic banking risks. However, banking laws are not explicit on the responsibilities of the board of directors nor does the commercial code cover them adequately though these do find mention in the on-site inspection manual.

137. In Bulgaria, the Financial Investigations Bureau, under the Ministry of Finance, is the central agency for the implementation of Law on Measures against Money Laundering. The LMML requires banks, among other financial and commercial institutions, to report all suspicious transactions over the amount of BGN 30,000. The LMML requires banks to have internal rules and procedures to prevent money laundering and to train staff. The FIB has circulated models for banks’ internal rules. The BNB verifies banks’ anti-money laundering (AML) systems and procedures through on-site inspections and sometimes-joint inspections with the FIB. To further enhance the quality of compliance, the FIB should promote an amendment to the LMML to protect individual staff that may report incidents of money laundering and criminal abuse of the banking system. Further, the Bankers’ Association is contemplating preparation of a code of conduct for banks, which would promote ethical standards. The BNB should encourage this process.

Methods of ongoing supervision (BCP 16–20)

138. A system of off-site reviews based on quarterly/monthly returns has been introduced which is analyzed to provide updated information on the financial condition of banks and to serve as an input to on-site inspection. Manuals have been prepared for both on-site inspection and off-site monitoring. The BNB is undergoing a program to further build supervisory capacity with the help of international consultants under a technical assistance program. BNB supervisors maintain regular contact with the bank management. The findings of on-site inspection are discussed first by inspection team with the bank’s management. The overall CAMELS rating is communicated to the bank management. At the same time, banks are also required to inform the BNB of major events such as changes in capital, insider loans and large exposures; interruptions in activities, change in auditors, change in board of directors, opening and closure of branches and amendments to the Articles of Association. The quality and competence of management is evaluated as part of arriving at the Management (M) rating as part of the CAMELS ratings.

139. A system of off-site reporting is in place, which calls for quarterly reporting on both a solo and consolidated basis. The frequency of the reporting can be increased to monthly in view of enhanced risk to an institution. The reports are used to evaluate the bank on a CAEL rating (Capital, Asset quality, Earnings and Liquidity). An analytical framework has been built for the analysis of the statistical and prudential information.

140. The validation of supervisory information is primarily done through the on-site inspections, which are conducted using in-house examiners. External auditors are not used for this purpose, although the BNB has the authority to do so and in fact does require certain prudential reports to be certified. The planning process, responsibilities of examiners, objective of examination and procedures to be followed are well documented in an on-site manual, which is disclosed to banks.

141. All banks are supervised on a consolidated basis, which includes the operations at foreign locations. As of now there are no complex structures or bank groups or bank holding companies in Bulgaria with the exception of an insurance company, which owns a bank. However, the BNB has put in place the components of a regime of consolidated supervision. The parent bank in a bank group or the bank in a financial holding company is also obliged to submit to the BNB information on the structure, size of participations and the changes made therein. Further, the central bank is authorized to inspect other banks and non-bank enterprises on issues related to the inspection. In the on-site inspection manual, there is a separate chapter on related organizations, the procedures under which require the inspector to evaluate these risks.

142. The BNB has recently entered into a MoU with the other major domestic financial supervision agencies other than the DIF, with which it already had an agreement. The agreement creates a framework for cooperation, coordination and exchange of information. As regards locations abroad: branches of domestic banks require licenses, subsidiaries and joint ventures do not require similar permission. The law provides an exception for the application of consolidated supervision, i.e., for subsidiaries in countries where there is an impediment to the flow of information. This exception should be reconsidered.

Information requirements (BCP 21)

143. Banks are required to have their annual accounts audited by external auditors chosen by them from among a list maintained by the BNB. The format of the audited accounts and the disclosures are laid down by the BNB. Banks are also required to publish half yearly balance sheets and the BNB on its own publishes balance sheet data on a quarterly basis based on off-site data. The law requires banks to use National Accounting Standards (NAS), which are different from the International Accounting Standards (IAS) in some respects. However, most banks have begun preparing accounts by IAS. Banks will move to International Accounting Standards from January 1, 2003. Auditors are obliged to inform the central bank about any circumstances that may put the bank’s activity at risk though there is no protection available in the banking law to auditors for such disclosure. Promoting such protection for the auditors should be considered.

Formal powers of supervisors (BCP 22)

144. The BNB can take a range of remedial measures against banks and penalize the banks, its administrators or major shareholders. Triggers of remedial action or the penalty are laid down in law and include actions such as violation of the law or regulations, posing a threat to depositors’ interests, money laundering, hindrance of bank supervision, etc. Supervisory actions range from the issue of written instructions and cease and desist orders, to prohibition of dividend payments, dismissal of managers and revocation of license, etc. These BNB has been taking timely action as evidenced by the Quarterly Report on Enforcement and Compliance Action.

Cross border banking (BCPs 23–25)

145. Banks are supervised on a consolidated basis, including the operations of foreign branches. Domestic banks require prior approval of the BNB for opening branches abroad, though no similar permission has been contemplated for subsidiaries. Currently, there are no foreign subsidiaries of Bulgarian banks. BNB may refuse the permit for instance if host country supervision is not considered sufficiently effective or if there are legal or administrative obstacles to supervision exercised over the branch by the BNB. The operations of the overseas branch are reviewed through on-site inspection of the parent bank, which includes an evaluation of management competence to oversee the global operations of the banks.

146. The law authorizes BNB to conclude bilateral agreements with other central banks or foreign supervising agencies on exchange of information on a reciprocal basis and a commitment to keep bank secrecy. Sharing of information with overseas supervisors is on an ad hoc basis, and is in the process of being formalized through MoUs and exchanges of letters, in which BNB has taken a proactive stance.

147. Currently Bulgarian banks have overseas branches only in Cyprus and Albania. The BNB has entered into a Memorandum of Understanding with Cyprus, Austria and the U.S. and is negotiating MoUs with Greece and Albania. Banks are required to obtain BNBs permission before opening a branch abroad. It may refuse the permit if it considers the overseas supervisors to be ineffective or if there is an impediment to supervision.

148. Foreign banks operate in Bulgaria both as branches and as subsidiaries and are subject to the same supervisory and prudential regime as domestic banks, with minor exceptions, which reflect the control of the parent bank and the supervisory regime of the host country, in the case of foreign bank branches.

Recommended action plan

Table 6.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

Table 6.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

Reference Principle	Recommended Action
Principle 1.6 Information sharing	The information sharing arrangements with other domestic supervisors should be formalized through appropriate agreements or structures.
Principle 4. Ownership	BNB should establish a system for identification of all eventual owners including beneficial owners of banks.
Principle 6. Capital Adequacy	BNB should introduce regulatory capital for market risk based on the Basel requirements. (It is understood that this is being contemplated for 2004.)
Principle 11. Country Risk	Guidance should be given to banks on specific provisioning for country risk and supervisory oversight should be developed to assess the country risk management practices of banks.
Principle 12. Market Risks	BNB should develop the supervisory capacity to assess interest rate risk (and market risk in general) and the also test and eventually validate the risk management systems of banks, and the assumptions made by them in this regard, and also to provide necessary guidance to them on the subject. It is understood that a special unit is being contemplated which would be trained for this purpose.
Principle 13. Other Risks	BNB should both issue guidance and develop capacity to assess the risks and controls in banks IT systems (and in the e-banking products being offered)
Principle 14. Internal Control and Audit	The responsibilities of the Boards of banks should be clearly laid out in law or regulation.
Principle 20. Consolidated Supervision	The exemption from consolidated supervision in the exceptions to consolidation laid out in Art. 8 of Regulation 12, subsidiaries situated in countries where there are legal impediments for supplying required information can be exempted from submitting consolidated reports. This exemption should be reconsidered.

View Table

Table 6.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

Reference Principle	Recommended Action
Principle 1.6 Information sharing	The information sharing arrangements with other domestic supervisors should be formalized through appropriate agreements or structures.
Principle 4. Ownership	BNB should establish a system for identification of all eventual owners including beneficial owners of banks.
Principle 6. Capital Adequacy	BNB should introduce regulatory capital for market risk based on the Basel requirements. (It is understood that this is being contemplated for 2004.)
Principle 11. Country Risk	Guidance should be given to banks on specific provisioning for country risk and supervisory oversight should be developed to assess the country risk management practices of banks.
Principle 12. Market Risks	BNB should develop the supervisory capacity to assess interest rate risk (and market risk in general) and the also test and eventually validate the risk management systems of banks, and the assumptions made by them in this regard, and also to provide necessary guidance to them on the subject. It is understood that a special unit is being contemplated which would be trained for this purpose.
Principle 13. Other Risks	BNB should both issue guidance and develop capacity to assess the risks and controls in banks IT systems (and in the e-banking products being offered)
Principle 14. Internal Control and Audit	The responsibilities of the Boards of banks should be clearly laid out in law or regulation.
Principle 20. Consolidated Supervision	The exemption from consolidated supervision in the exceptions to consolidation laid out in Art. 8 of Regulation 12, subsidiaries situated in countries where there are legal impediments for supplying required information can be exempted from submitting consolidated reports. This exemption should be reconsidered.

Authorities’ response

149. The authorities are in agreement with the assessment.

Regulator (Principles 1–5)

166. The powers of the Bulgarian National Securities Commission (BNSC) are clearly set out in the Law on Public Offering of Securities (LPOS) (see Art. 15). The LPOS also sets out the objectives of the Commission, which are to provide protection of investors and create prerequisites for development of a transparent and efficient capital market. All LPOS based ordinances are made upon recommendation of the BNSC and are submitted to the Council of Ministers for adoption.

167. The LPOS specifically provides that the BNSC is an independent State body (Art. 8 LPOS). Members are appointed for a term of five years by the Council of Ministers and must have a university education, professional qualifications, experience in the field of securities and must comply with reputational and absence of conflict requirements. The chairman must have a university degree in law or economics, and ten years of working experience (Art. 10 LPOS). Once appointed, members may be removed only on the grounds of gross breach of law, conviction of a premeditated crime, or inability to carry out duties for more than six months (Art. 12 LPOS). The Commission is required to submit an annual report to the Council of Ministers containing information specified in the law (Art. 15 LPOS).

168. There is no requirement to disclose the financial statements of the BNSC in the Annual Report although it does include some summary figures. There is no legal requirement to have the report laid before Parliament but the Annual Report is published in print and on the website of the Commission. There is no explicit protection for the Commission members and staff from liability in the proper exercise of their powers and functions. It would be preferable to have staggered terms of appointment of members to allow some continuity of policy and experience.

169. The BNSC does not have budgetary independence, although it has adequate powers and sufficient qualified staff to carry out the BNSC’s mandate. The BNSC is funded through a State Budget account (Art. 9 LPOS), which is credited with fees collected by the Commission, fines, and revenues from publications of the Commission. Remuneration and working conditions should be set at a level to retain experienced and qualified staff. The BNSC employed an average 124 persons in the year ended 2000, mainly economists and lawyers. The LPOS gives specific powers to the BNSC to obtain information in relation to the operation of bodies involved in market activities as well as the right to require documents and written explanations from all persons.

170. The BSE is required to provide documents and information on its operations to the BNSC. The Central Depository is obliged on request to present similar information to the Minister of Finance, the BNB and the Commission. Updated information about the Commission’s activities and the securities market in general is provided to the general public by means of the publication of a news bulletin once a month and a Bulletin (Art. 15 LPOS) once every two months.

171. The chairman, members of the Commission and staff must sign an agreement binding them to confidentiality. Also, the Law on the Access to Public Information provides protection of personal information. The chairman, members of the Commission and employees must disclose information about securities held by them as well as those of their spouses and under-age family members, and of their contractual relationships with entities controlled by the Commission. Any person with a personal interested in the outcome of administrative proceedings, is prohibited from taking part in the consideration of the matter.

Self-regulatory organizations (Principles 6–7)

172. There is one self-regulating organization under the jurisdiction of the BNSC, i.e., the Bulgarian Stock Exchange. The LPOS allows for the licensing by the BNSC of other trading bodies if that should be desirable. The Bulgarian Stock Exchange Rules and Regulations authorize the imposition of sanctions by the Board of the Exchange after consultation with the Commission of the Exchange for breach of the law or the Rules and Regulations ranging from a warning to suspension or removal of a member from stock market trading.

173. Creating new SROs, other than the Stock Exchange, is not appropriate given the size and stage of development of the market. The limited experience and expertise for now is more conveniently concentrated in the BNSC.

174. The LPOS standards for licensing a stock exchange include capital and other structural requirements as well as governance and operating systems (Arts. 20–27 LPOS). The Stock Exchange is licensed by the BNSC and its rules must be approved by the BNSC (Art. 28 LPOS). Powers to impose sanctions for non-compliance are laid down in the Stock Exchange Rules and Regulations (Art. 127 LPOS and Arts. 126–128 Rules and Regulations) Sanctions can be imposed by the Board of the Stock Exchange after consultation with the Commission of the Exchange (Art. 129). The Commission comprises representatives of the commercial banks, investment intermediaries, stockbrokers and shareholders of the Exchange (Art. 9 Stock Exchange Rules and Regulations).

Enforcement (Principles 8–10)

175. The Commission has the powers necessary to supervise, investigate and enforce relevant regulations and to obtain data information, documents, statements and records from persons subject to supervision. The Commission receives and files regular reports from companies, investment intermediaries and other regulated bodies.

176. It can also obtain information and carry out inspections of other persons on issues relating to those inspections (Art. 16 LPOS). In cases of crimes in connection with securities such as frauds and misappropriation the Commission instructs the prosecutor’s office and the police authorities to take necessary actions. The BSE can impose sanctions under its own powers pursuant to Art. 26 of the LPOS. The Commission carries out inspections of regulated entities by reviews of filed documents and reports. It also carries out other inspections, based on signals from the affected entities and reports periodically filed with the Commission. There are no restrictions on the ability to obtain information or access to documents (see Art. 16 LPOS)—the Commission and its employees carry out these inspections themselves. There is no requirement of suspicion of a breach as a precondition to the exercise of these powers.

177. The Commission conducts periodic routine inspections and carries out inspections for cause as a result of reports filed with the Commission. Inspections of organizations will also be based on an assessment of risk. There is no obligation on the Commission to give advance notice of inspection. The Commission maintains records of its findings and presents an annual report of its operation to the Council of Ministers each year.

178. There were over 400 inspections relating to documents submitted by public companies about obligations for disclosure of information, 600 inspections of documents about general meetings requirements as a result of which the Commission took administrative action against 35 companies as well as reminder or preventative action letters to other companies. The Commission carries out on-site inspections (118 on investment intermediaries and 10 on investment companies in the year ended 2000). Inspections are carried out by Commission staff, which includes economists and lawyers.

179. The BNSC has the ability to impose a variety of sanctions including corrective measures, suspension of business, removal of persons from management, fines, confiscation in favor of the state of incomes acquired from activities unlawfully carried out and revocation of licenses in appropriate cases. (LPOS Art. 212). The BSE can require a temporary halt to trading (Art. 64 Rules and Regulations of the Bulgarian Stock Exchange).

180. The ability of individuals to bring actions is limited and this is being addressed in amendments to the law now under consideration.

Cooperation (Principles 11-13)

181. Under Art. 15 of the LPOS, the Commission has authority to obtain and share with other domestic regulators information on matters of issuing and revoking licenses, investigation and enforcement, determinations, surveillance, market conditions and client identification. Recently, an agreement has been concluded between the financial sector regulators, including the BNB, on cooperation, coordination and information sharing. The Commission has authority to share information with regulators from other jurisdictions.

182. The Commission has not, except for an MoU with the Greek Capital Market Commission, developed any formal mechanism for cooperation in the detection and deterrence of cross-border misconduct or for cooperation in the issuance of licenses and exercising of supervisory responsibilities. Decisions on the mode of cooperation are made on an “ad hoc” basis. Although the requirement to assist is set out in legislation it would be preferable to have the working criteria in writing between the various authorities. There is no restriction on the ability of the Commission to provide information to foreign regulators.

183. MoUs need to be signed between the BNSC and those foreign regulators where there is regular exchange of information, to clearly define the scope of the cooperation and the procedures to be adopted in the use of any such information.

Issuers (Principles 14—16)

184. The objective of the rules on the conduct of issuers is to ensure investor protection and to promote the development of a transparent and efficient securities market. Mandatory disclosure requirements are set out in the LPOS and associated regulations. The LPOS and the Ordinance on the Prospectus For Public Offering of Securities And Disclosure By Public Companies and Other Issuers of Securities require full, accurate and timely disclosure of financial results and other material information. However, companies listed on the Stock Exchange are not required to immediately report matters that may have a material effect on the value of the shares. The Commission must approve all prospectuses before issue. In cases of non-approval the securities cannot be offered publicly.

185. Although the offering information required for prospectuses complies with IOSCO Principles, public offerings by the State are exempt from these disclosure requirements. The State offering documents do not include full financial statements or prospective statements as are required by the prospectus requirements.

186. There are no general provisions requiring directors to act in the best interests of all shareholders including minority shareholders and not in their own interests. Although there are some specific and limited provisions contained in the LPOS protecting the interests of minority shareholders in public companies, these cover only some particularly designated actions such as disposal of assets and requirement to issue new shares pro rata. While these rules are intended to protect shareholders, they are too specific to effectively prevent instances of unfair allocation of new shares in favor of majority holders and transfer of company assets by major holders. See Art. 112 and 114 of the LPOS. Persons holding at least 5 percent of the capital may take action in court under the LPOS and other individual action may be possible under Art. 71 and 74 of the Commerce Act.

187. Certified or audited financial statements and half-yearly reports must be filed for all securities issued through a primary public offering or admitted for trading on a regulated market. Accounting standards are not fully compliant with international standards. Notably, there is no requirement to report transactions with affiliated companies, which can lead to major misrepresentations. There will be full compliance with the International Accounting Standards for public companies by 2003. Lack of experience and training of accountants and auditors could initially reduce the effectiveness of the international standards.

Collective investment schemes (Principles 17–20)

188. Investment companies must be licensed by the BNSC. They are required to be joint stock companies and therefore subject to the general provisions of Chapter 14 of the Commerce Act. In addition to those rules, the special provisions of the LPOS apply.

189. A licensed investment company must comply with specific criteria as to its capital, technical equipment and facilities, organization and qualification of its directors and staff. All directors and the management company must meet criteria of professional experience, place of residence, lack of criminal convictions or regulatory suspension. These requirements apply also to the directors of fund management companies.

190. The LPOS and associated regulations i.e., the Ordinance on the Requirements for the Activities of Investment Companies, Ordinance on the Prospectuses and Ordinance on the Licenses, set specific standards for managers of an investment company. Responsibility for compliance rests with the Board of Directors or the Managing Board in the case of a two-tier system of governance, and with the company, which manages the activities of the investment fund and carries out the sale and redemption of shares of an open-ended fund on behalf of the company. Open-ended investment funds must be managed by a company licensed by the BNSC.

191. The LPOS and Ordinances prescribe requirements for minimum capital of investment companies, prohibitions on investment in assets in which managers have an interest, separation of custody of assets, requirements for asset valuation disclosure, control of ownership, liquidity requirements, reports and publicity and other matters.

192. Apart from the information provisions specific to investment companies in the LPOS and the Ordinance, there are conduct of business rules in the Ordinance on the Requirements of Investment Intermediaries Activities and in the Stock Exchange Rules, which govern sales by brokers and other investment intermediaries. Fundamental rules about asset valuation, pricing and redemption of shares are set out in the LPOS and in the Ordinance on the Requirements for the Activities of Investment Companies. The Articles of Association of an investment company must set out the detailed rules and procedures for determination of the net asset value of the shares. Valuation and disclosure for open-ended investment companies must occur at least twice per week at equal intervals.

193. The BNSC has the authority to conduct inspections and impose administrative sanctions. In the year ended 2000 the Commission carried out ten inspections and issued seven statements of administrative violation.

Market intermediaries (Principles 21–24)

194. All market intermediaries are licensed. Licenses are granted by the Bulgarian National Securities Commission except in the case of banks, where licenses are issued by the Bulgarian National Bank. The criteria for licensing covers capital adequacy, qualification of personnel, proper business plan and publicity of information. These requirements are set out in the Law on Public Offering of Securities and the ordinances and regulations made pursuant to that law. Individual brokers and investment advisers must satisfy integrity and competence requirements and pass an examination set by the BNSC.

195. The general standards imposed on investment intermediaries are set out in Art. 70 and following of the LPOS. In addition market intermediaries must have internal organizational rules to supplement those and to require observance of all the requirements by employees. The Ordinance on the Requirements for Investment Intermediaries Activities imposes specific obligations in relations with clients.

196. Art. 56 of the LPOS set out capital and other prudential requirements for investment intermediaries, including the establishment and maintenance of a reserve fund. Specific rules are set out in the Ordinance on the Capital Adequacy and Liquidity of the Investment Intermediaries. Initial capital, which must be maintained is 90000 BGN for intermediaries executing transactions for client accounts only and 250000 BGN for those executing transactions for both own and client accounts. The intermediary must also establish a reserve fund, which must be at least 10 percent of the capital.

197. Other prudential requirements cover position, currency and other risks. Capital adequacy requirements take into account balance sheet items, off balance sheet transactions and activities of affiliated companies. Monitoring is carried out through on site inspections, monthly reports by the intermediary to the BNSC and by a requirement to advise immediately if prudential standards threaten to be breached.

198. The BNSC can require remedial action against breach of capital or liquidity rules. Actions can range from an agreed financial plan to mandatory instructions by the BNSC. The BNSC has the power to transfer client accounts to another investment company in the case of need, and may suspend the sale or carrying out of transactions in certain securities (Art. 212) and may withdraw a license. The Stock Exchange has established a guarantee fund against broker default.

Secondary market (Principles 25–30)

199. Regulated securities markets must be licensed by the BNSC pursuant to the LPOS. That law sets out some broad criteria for the objectives of an exchange, ownership, capital rules and operating procedures. The BNSC has power to withdraw a stock exchange license in appropriate cases including where systematic offenses are committed or if the exchange ceases to satisfy the requirements of the LPOS or its implementing instruments. Brokers must be investment intermediaries licensed by the BNSC. The rules of an exchange must receive prior approval by the BNSC as must any amendments and supplements to the stock exchange rules (Art. 33 LPOS).

200. There is ongoing supervision of the Exchange and its members through on-site inspections. The Exchange must submit half yearly and annual reports to the BNSC including an accountancy report and other information and documents on request (Art. 34 LPOS). Stock exchange records must be kept for 50 years. (Art. 34 LPOS).

201. The trading system is fully electronic and provides transparency and market information. A stock exchange must ensure to its members and their clients equal access to market information and equal conditions for participation in trading (Art. 20 LPOS). The trading system provides markets users with real time information. There is an on-line connection between the Exchange and the BNSC providing all trading and other information on monitors in the Exchange.

202. The LPOS prohibits insider trading and market manipulation. The BNSC can use its investigation and enforcement powers to monitor these provisions. There are broad definitions of insider trading and market manipulation in the LPOS. The Stock Exchange carries out inspections of members and of trades.

203. All transactions in shares in public companies are dematerialized and must be effected through the Central Depository. The LPOS provides for oversight of the Central Depository by the BNSC. The Central Depository Board of Directors must include a representative of the Bulgarian National Bank and the Ministry of Finance.

Recommended actions

Table 7.

Recommended Actions to Improve Compliance with the IOSCO Objectives and Principles of Securities Regulation

Table 7.

Recommended Actions to Improve Compliance with the IOSCO Objectives and Principles of Securities Regulation

Reference Principles	Recommended Actions
Principles relating to the regulator (CPs 1–5)	The annual report should contain the audited financial statements of the BNSC. The LPOS should be amended to provide explicit legal protection for members and staff of the BNSC in the exercise of their functions. The members should be appointed for staggered terms. Remuneration and working conditions for staff should be increased and improved to retain experienced and qualified staff. Create spending autonomy within an agreed budget.
Principles for cooperation in regulation (CPs 11–13)	The BNSC should enter into MoUs with domestic regulators and, where appropriate, foreign regulators.
Principles for issuers (CPs 14–16)	The Government, when it sells paper through public offerings, should do so by way of prospectus. An obligation should be created to report material matters that can influence share values. Reporting of transactions with affiliated parties should be required. Minority shareholder rights should have increased protection through amendments to the Commercial Law and the LPOS. Assure proper training of accountants and auditors to obtain full benefit of the introduction of IAS. Include a general fiduciary duty for managers and Board members of issuers.

View Table

Table 7.

Recommended Actions to Improve Compliance with the IOSCO Objectives and Principles of Securities Regulation

Reference Principles	Recommended Actions
Principles relating to the regulator (CPs 1–5)	The annual report should contain the audited financial statements of the BNSC. The LPOS should be amended to provide explicit legal protection for members and staff of the BNSC in the exercise of their functions. The members should be appointed for staggered terms. Remuneration and working conditions for staff should be increased and improved to retain experienced and qualified staff. Create spending autonomy within an agreed budget.
Principles for cooperation in regulation (CPs 11–13)	The BNSC should enter into MoUs with domestic regulators and, where appropriate, foreign regulators.
Principles for issuers (CPs 14–16)	The Government, when it sells paper through public offerings, should do so by way of prospectus. An obligation should be created to report material matters that can influence share values. Reporting of transactions with affiliated parties should be required. Minority shareholder rights should have increased protection through amendments to the Commercial Law and the LPOS. Assure proper training of accountants and auditors to obtain full benefit of the introduction of IAS. Include a general fiduciary duty for managers and Board members of issuers.

Authorities’ response

204. The authorities are in agreement with the assessment.

Organization of an insurance supervisor (CP 1)

218. Information systems would need to be improved in order to appropriately collect the statistical data for the off-site monitoring and the early warning system. The remuneration of ISA staff would need to be more comparable to the private insurance industry and their training needs to be improved. ISA should be independent with its own budget. Furthermore, the position of director of the agency would need to be for a specific term and dismissal should be based on professional reasons.

219. Supervision is organized on two levels: the National Insurance Council (NIC) and the Insurance Supervision Agency (ISA), as laid down in the Insurance Act, the Regulation on the Structure and Activity of the ISA and the Regulation on the Operation of the NIC.

220. The laws and regulations on the NIC and of the ISA guarantee independence and a certain transparency in supervision and exercising control over insurers. Most of the NIC and ISA staff is inexperienced as most of their experienced colleagues went back to the industry for better remuneration. ISA’s staff training and budget is seriously limited by oversight of the Ministry of Finance. Last year, ISA spending was limited to 43 percent of the fees collected from insurers, reinsures and brokers, the remainder being allocated to the government budget. Legal protection for staff should be clarified.

Licensing and changes in control (CPs 2–3)

221. The Insurance Act would need to be amended to provide legal provisions for ISA to be able to seek information from foreign supervisors (home supervisors) at the time of licensing. Then, ISA would need to work on agreements with foreign supervisors to exchange information. There also should be criteria for the assessment of the changes in control of insurance companies. Given the important share of Bulgarian companies that are owned or controlled by foreign companies, it would also be advisable to obtain agreements for the exchange of information on an ongoing basis for the monitoring of foreign owners.

222. The legislative framework on licensing procedure is established by the provisions of the Insurance Act, the Regulation on the Structure and Activity of the ISA, the Regulation on the Operation of the NIC, the Commercial Law and number of instructions issued by the ISA. The third component of this core principle on the sharing of information with foreign supervisors is non-observed, but this is not considered sufficient ground for a lower grading.

223. Supervision on changes in control of insurance companies is considered in the Insurance Act (Art. 9, par. 3), the Regulation on the Structure and Activity of the IGSA (Art. 13), the Commercial Act and a number of instructions.

224. No person, natural or legal, on its own or through related persons, may hold more than 5 percent of the shares of an insurance company, without the approval of ISA. The legal framework gives sufficient powers to ISA to take any appropriate measures.

Corporate governance (CPs 4–5)

225. The legislative framework has few dispositions concerning corporate governance in the Commercial Law and the Insurance Act, and ISA has no specific authorities in this area. This core principle is not addressed in the law, regulations or instructions. Market participants confirmed that ISA does not include this aspect in its off-site or on-site supervision process. A draft amendment to the Insurance Act, which is currently pending, will address shortcomings in this field.

226. The ISA has no clear authorities with regard to internal controls of insurance companies.

227. IAIS core principles expect that the insurance supervisor would have the authority (by law or regulation) to review the internal controls that the board of directors and management apply, and to require strengthening where necessary.

Prudential rules (CPs 6–10)

228. The legislative framework consists of the Insurance Act (Art. 51) and the Ordinance on the procedures and methods of setting-up insurance reserves (Art. 1–16). According to the Regulation on the Structure and Activity of the ISA (Art. 33), ISA assesses compliance with the standards during on-site supervision. Standards and monitoring are in place, but ISA should more strongly promote sound accounting and actuarial principles. The draft amendments to the Insurance Act include definitions of “insurance group,” “mixed activity holding company,” as well as measures for supervision on a consolidated basis. Implementation of these amendments will address concerns in these areas.

229. The Insurance Act contains some provisions and restrictions on the investment of assets, related to amount of the reserves, as well as separate dispositions on the relationship between assets and capital. ISA requires that insurers maintain appropriate capital and solvency under the Insurance Act and the Ordinance for determining the own resources, solvency margin and its calculation by insurers. ISA has established standards as to the composition of liabilities.

230. Bulgaria currently has no requirement with respect to the use, disclosure or controls of derivatives and off-balance sheet items. Although ISA states that this is done in practice, there are currently no formal regulations and/or instructions in place to require insurers to have an investment policy, comprehensive risk management policies and risk management systems, internal controls, procedures for the accountability of boards of directors, as well as rigorous audit procedures. Derivatives are not explicitly forbidden.

231. ISA approves reinsurance plans of insurers according to Art. 22, par. 1 of the Insurance Act. Reinsurance contracts can also be reviewed at the time of the on-site inspection as per Art. 33 of the Regulation on the Structure and Activity of the ISA. ISA should introduce requirements with respect to reinsurance contracts or reinsurance companies, addressing the amount of the credit taken for reinsurance ceded and the reliance on foreign reinsurance supervisors. Moreover, it should have more precise authorities on the supervision of reinsurers (e.g., in the Insurance Act, there is no definition of a reinsurer and there is no special requirements for reinsurers’ supervision). ISA should have agreements with foreign reinsurers’ supervision for the exchange of information.

Market conduct (CP 11)

232. The Insurance Act, regulations, policies, guidelines or procedures contain no provisions with regard to market conduct. Only Art. 10 of the Ordinance for Insurance Brokers and Insurance Agents imposes a few obligations on agents. On-site inspections include the review of complaints, but there is no specific procedure.

233. There should be specific standards of market conduct and procedures to review compliance. Instructions should clearly require insurers to have procedures to deal with conflicts of interest and to deal effectively and fairly with complaints of customers.

Monitoring, inspection, and sanctions (CP 12–14)

234. Audited information on insurers’ financial condition and performance is to be provided annually under the Insurance Act. Instruction No 12 of 27 of January 2000 specifies additional reports to be submitted annually to the ISA. Financial information is verified through on-site inspections, under Art. 33 of the Regulation on the Structure and Activity of the ISA.

235. The ISA should also have clear legal powers to force insurers to hire, at their costs, independent auditors or actuaries to audit or review the financial statements, or elements thereof.

236. Under the Insurance Act (Art. 22) and the Regulation on the Structure and Activity of the ISA (Art. 33), ISA has a clear legal mandate to perform on-site inspections of insurance companies. However, some insurers mentioned that they have had no full inspections in many years. Focused inspections also seem to be sporadic, but nevertheless more frequent.

237. ISA should have more frequent (at least every two years) full-scale inspections for every insurer. When internal controls, actuary reviews and external audits have become better, on-site inspection should be more risk based and should cover more processes than compliance.

238. A range of possible available sanctions exists under Art. 22, 31, 43, 50 and Chapter Thirteen of the Insurance Act. NIC can refuse or revoke a license under Art. 30 and 31 of the Insurance Act. ISA can take remedial action under Art. 50 of the Act and Art. 38 of the Regulation on the Structure and Activity of the ISA. Representatives of the insurance industry believe that the reputation of the industry suffers because some companies are charging premiums that are too low for the risk taken. They believe that these are not supervised closely enough by ISA. ISA should have clear intervention procedures that are well communicated and published. They must be able to take control over the affairs of an insurer and appoint an administrator. It should also improve and reinforce intervention methods and powers, along a graduated scale of responses.

Recommended actions

Table 8.

Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles

Table 8.

Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles

Reference Principle	Recommended Action
Organization of an Insurance Supervisor
CP 1	Information systems (hardware and software) need to be improved in order to collect appropriately the statistical data for an off-site monitoring and early warning system. The remuneration of ISA’s staff needs to be closer to the private sector in order to attract qualified and experienced prospects. A continued training program must be instituted to ensure that the staff maintains its competency. The agency must be more independent with its budget, staffing and have a director with a specific term of office.
Licensing and Changes in Control
CPs 2–3	The Insurance Act would need to be amended to provide legal provisions for ISA to be able to seek information from foreign supervisors (home supervisors) at the time of licensing and on an ongoing basis. ISA should have clear criteria for the assessment of changes in control of an insurance company.
Corporate Governance and Internal Controls
CPs 4–5	Provisions on minimum corporate governance and internal controls need to be added to the Insurance Act. Compliance review procedures also need to be developed.
Prudential Rules
CPs 6–10	Sound accounting and actuarial principles should be implemented. Controls must be introduced on the capital requirements of insurance groups, to prevent double/multiple gearing or other techniques. Instructions should be issued with respect to the use, controls and disclosure of derivatives and other off-balance sheet items. ISA should introduce specific requirements with respect to reinsurance contracts or reinsurance companies, and Have agreements with foreign reinsurers’ supervision for the exchange of information.
Market Conduct
CP 11	Specific standards of market conduct need to be introduced as well as procedures to review compliance. Instructions should be issued to require insurers to introduce policies and procedures on fair treatment of customers, and delaying with complaints.
Monitoring, Inspection, and Sanctions
CPs 12–14	ISA should have clear legal power to force insurers to hire, at their costs, independent auditors or actuaries to audit or review the financial statements, when there is doubt as to their accuracy. On-site inspections should be more frequent and should be risk-based. ISA must be able take control over the affairs of an insurers and name an administrator. It should also improve and reinforce properly graduated intervention methods.
Cross-Border Operations, Supervisory Coordination and Cooperation, and Confidentiality
CPs 15–17	The Insurance Act should provide that international insurers, insurance groups and conglomerates active in Bulgaria be subject to continuing effective prudential supervision—irrespective of any licensing requirement. ISA should first obtain legal rights to share information with other supervisors, then conclude information sharing agreements with other supervisors abroad.

View Table

Table 8.

Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles

Reference Principle	Recommended Action
Organization of an Insurance Supervisor
CP 1	Information systems (hardware and software) need to be improved in order to collect appropriately the statistical data for an off-site monitoring and early warning system. The remuneration of ISA’s staff needs to be closer to the private sector in order to attract qualified and experienced prospects. A continued training program must be instituted to ensure that the staff maintains its competency. The agency must be more independent with its budget, staffing and have a director with a specific term of office.
Licensing and Changes in Control
CPs 2–3	The Insurance Act would need to be amended to provide legal provisions for ISA to be able to seek information from foreign supervisors (home supervisors) at the time of licensing and on an ongoing basis. ISA should have clear criteria for the assessment of changes in control of an insurance company.
Corporate Governance and Internal Controls
CPs 4–5	Provisions on minimum corporate governance and internal controls need to be added to the Insurance Act. Compliance review procedures also need to be developed.
Prudential Rules
CPs 6–10	Sound accounting and actuarial principles should be implemented. Controls must be introduced on the capital requirements of insurance groups, to prevent double/multiple gearing or other techniques. Instructions should be issued with respect to the use, controls and disclosure of derivatives and other off-balance sheet items. ISA should introduce specific requirements with respect to reinsurance contracts or reinsurance companies, and Have agreements with foreign reinsurers’ supervision for the exchange of information.
Market Conduct
CP 11	Specific standards of market conduct need to be introduced as well as procedures to review compliance. Instructions should be issued to require insurers to introduce policies and procedures on fair treatment of customers, and delaying with complaints.
Monitoring, Inspection, and Sanctions
CPs 12–14	ISA should have clear legal power to force insurers to hire, at their costs, independent auditors or actuaries to audit or review the financial statements, when there is doubt as to their accuracy. On-site inspections should be more frequent and should be risk-based. ISA must be able take control over the affairs of an insurers and name an administrator. It should also improve and reinforce properly graduated intervention methods.
Cross-Border Operations, Supervisory Coordination and Cooperation, and Confidentiality
CPs 15–17	The Insurance Act should provide that international insurers, insurance groups and conglomerates active in Bulgaria be subject to continuing effective prudential supervision—irrespective of any licensing requirement. ISA should first obtain legal rights to share information with other supervisors, then conclude information sharing agreements with other supervisors abroad.

Authorities’ response

243. The authorities are in agreement with the assessment, but have the following comments:

• There is an on-going project for establishing complex information systems. First stage has been accomplished. The possibilities of the established software product are to process the statistical information from the Annual Accounts of the insurers and from other sources as well as to calculate the necessary indices and figures.

• The prepared Draft law amending the Insurance Act is in the Parliament following the undergoing procedures. After the adoption of the amendments new by-laws shall be developed. These will include broad regulation of the on-site and off-site intervention procedures. (The present Regulation on the Structure and Activity of the ISA comprises the regulation of the on-site inspections but it shall be widened and improved).

• A project of introducing a composite supervision over the financial market is in a process of development. The scope of its responsibilities is planned to be very wide. It is planned that the supervisor will oversee the insurers, the pension funds, the health assurance and the securities market. The composite supervision will be more independent, possibly with its budget, staffing and a head with a specific term of office.

• There are provisions in the Draft law which give new possibilities of ISA to control and monitor - the changes in control where the criteria have been set more clear and transparent; the insurance groups and non insurance groups owing insurance companies; the market conduct. All new provisions are connected with relevant sanctions and also the sanction mechanism has been improved as a whole.

• Most of the other recommendations and the respective objectives will be achieved upon accession of Republic of Bulgaria in EU by means of adoption of the new legislative framework.

Express Service

BISERA 3

Central bank responsibilities in applying the CPs

275. The BNB does not comply in full with its responsibilities for applying the Core Principles to BISERA 3. This is demonstrated by the fact that the scheme complies in full with less than half of the applicable Principles. Moreover the BNB has initiated bilateral discussions about the safety and efficiency of the scheme with only one central bank, out of the four central banks, which have commercial bank branches in Bulgaria.

Recommended Actions to Improve Observance of CPSS Core Principles and Central Bank Responsibilities in Applying the CPs, in respect of the Proposed RTGS System

Recommended Actions to Improve Observance of CPSS Core Principles and Central Bank Responsibilities in Applying the CPs, in respect of the Proposed RTGS System

Reference principle		Recommended action
Legal foundation
	CP I—The system should have a well-founded legal basis under all relevant jurisdictions.	The Settlement Finality Directive and the Bank Insolvency Law should be implemented as soon as possible.
		Potential conflicts of law with the home country legislation of the foreign bank branches in Bulgaria should be identified, and steps should then be taken to seek to control and minimize the impact of such conflicts.
Understanding and management of risks
	CP III – The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and control those risks.	The BNB should establish the Credit Reserve Fund with a clear mandate to assist the timely and complete daily settlement through the RTGS system of transactions in BISERA 4, BORICA and the CDAD.
		The BNB should monitor the banks’ use of their minimum reserve balances as sources of intra-day liquidity, and should if necessary consider relaxing the penalties on banks falling below 50 percent of their required reserves on a few days during each maintenance period.
Security and operational reliability, and contingency arrangements
	CP VII-The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.	The BNB should regularly inspect and verify the security and integrity of each bank’s internal systems for processing and releasing large-value payments.
Efficiency and practicality of the system
	CP VIII – The system should provide a means of making payments, which is practical for its users and efficient for the economy.	The BNB should establish with the banks agreed, equitable and transparent bases for their contributions to the ongoing and the replacement costs of the RTGS system.
		The BNB should ensure that banks receiving customer payments through the RTGS system are obliged to give the beneficiary customers value the same day.
Governance of the payment system
	CP X – The system’s governance arrangements should be effective, accountable and transparent	The BNB should establish an on-going governance structure for the RTGS system which will promote stability and efficiency, and at the same time will protect the interests of the smaller banks.
Central Bank Responsibilities in applying the CPs
	Responsibility B—The central bank should ensure that the systems it operates comply with the Core Principles	The BNB should establish an on-going oversight structure for the RTGS system that is within the BNB, but independent from both the supervision and the operational areas.
	Responsibility D—The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.	The BNB should establish detailed contacts with the central banks, and the banking supervisors, in Greece, the Netherlands, Turkey and the USA, with a view to exchanging information in respect of the commercial banks from their countries in the RTGS system.

View Table

Recommended Actions to Improve Observance of CPSS Core Principles and Central Bank Responsibilities in Applying the CPs, in respect of the Proposed RTGS System

Reference principle		Recommended action
Legal foundation
	CP I—The system should have a well-founded legal basis under all relevant jurisdictions.	The Settlement Finality Directive and the Bank Insolvency Law should be implemented as soon as possible.
		Potential conflicts of law with the home country legislation of the foreign bank branches in Bulgaria should be identified, and steps should then be taken to seek to control and minimize the impact of such conflicts.
Understanding and management of risks
	CP III – The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and control those risks.	The BNB should establish the Credit Reserve Fund with a clear mandate to assist the timely and complete daily settlement through the RTGS system of transactions in BISERA 4, BORICA and the CDAD.
		The BNB should monitor the banks’ use of their minimum reserve balances as sources of intra-day liquidity, and should if necessary consider relaxing the penalties on banks falling below 50 percent of their required reserves on a few days during each maintenance period.
Security and operational reliability, and contingency arrangements
	CP VII-The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.	The BNB should regularly inspect and verify the security and integrity of each bank’s internal systems for processing and releasing large-value payments.
Efficiency and practicality of the system
	CP VIII – The system should provide a means of making payments, which is practical for its users and efficient for the economy.	The BNB should establish with the banks agreed, equitable and transparent bases for their contributions to the ongoing and the replacement costs of the RTGS system.
		The BNB should ensure that banks receiving customer payments through the RTGS system are obliged to give the beneficiary customers value the same day.
Governance of the payment system
	CP X – The system’s governance arrangements should be effective, accountable and transparent	The BNB should establish an on-going governance structure for the RTGS system which will promote stability and efficiency, and at the same time will protect the interests of the smaller banks.
Central Bank Responsibilities in applying the CPs
	Responsibility B—The central bank should ensure that the systems it operates comply with the Core Principles	The BNB should establish an on-going oversight structure for the RTGS system that is within the BNB, but independent from both the supervision and the operational areas.
	Responsibility D—The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.	The BNB should establish detailed contacts with the central banks, and the banking supervisors, in Greece, the Netherlands, Turkey and the USA, with a view to exchanging information in respect of the commercial banks from their countries in the RTGS system.

Authorities’ response

276. The authorities are in broad agreement with the assessment.

General

277. The objective of this assessment is to review the degree of transparency and public disclosure of the monetary policy operations of the Bulgarian monetary authorities. Under the currency board arrangement (CBA), the BNB has a limited role in monetary policy operations. The Currency Board Arrangement (CBA) principles, incorporated in Arts. 20, 29, and 45 of the Law on the BNB, limit the BNB’s ability to use new monetary instruments. The Law prevents extension of credit to State or State agencies, and limits credit to the banking system to very narrowly defined lender of last resort situations involving systemic risks. BNB maintains full foreign exchange cover for its monetary liabilities. The Law on the BNB and the associated regulations clearly delineate the BNB’s role in monetary policy actions.

Information and methodology used for the assessment

278. This assessment is based on extensive interviews with BNB officials and staff, as well as study of the Law on the BNB, other financial sector legislation and regulation, as well as review of the BNB website and other documentary sources. Discussions were also held with commercial banks and other market participants.

Main findings

279. While some improvements are possible and recommended, BNB maintains a very high standard of disclosure and transparency in its conduct of monetary policy operations.

Clarity of roles, responsibilities, and objectives of the Bulgarian National Bank

280. The ultimate objective of monetary policy is clearly defined in Art. 2 of the Law on the BNB, which states that “the main task of the BNB shall be to contribute to the maintenance of the stability of the national currency through implementation of the monetary and credit policy.” The objectives of the BNB are clearly defined in the Law on the BNB, in force since July 1, 1997, which, inter alia, provides that (i) that the BGN will be fixed against the Euro, (ii) the BNB will maintain full foreign exchange cover for its monetary liabilities, (iii) the BNB will be independent of from the Council of Ministers and other state bodies and will not extend any credits to the State or State agencies, and (iv) the roles, responsibilities, and limited objectives of monetary policy are clearly specified in the Law on the BNB as well as the BNB’s regulations. These are published in the Official Gazette. The BNB also maintains an excellent website (www.bnb.bg) which provides, in Bulgarian and English, all relevant laws and regulations; weekly, monthly, quarterly, semi-annual and annual balance sheets, income statements, as well as BNB research.

281. Art. 49 requires the BNB to publish weekly the balance sheet of the Issue Department, showing the BNB’s foreign exchange reserves and its monetary liabilities. It also requires the BNB to publish monthly in the State Gazette the balance sheets of the Issue and Banking Departments. Art. 50 and 51 require the BNB to submit to Parliament Annual and Semi-Annual Reports, which also cover a review and assessment of the BNB’s activities during the previous period. All of these reports are also available on the BNB’s website.

282. Procedures for appointment, terms of office, and removal of member of the BNB governing bodies are publicly disclosed in Art. 10–14 of the Law on the BNB. The BNB’s Managing Board consists of seven members including the Governor, the three Deputy Governors, and three other members. Art. 11 requires that all must be Bulgarian citizens, and must possess the highest integrity and prominent qualifications in economics, finance or banking. They must not have been adjudicated insolvent, or have been the principal owner or manager of an insolvent business. The Governor and the Deputy Governors may not engage in any other remunerative activity, other than teaching, or be members of the bodies in companies where the BNB participates or in international organizations related to the BNB activities. The other three members of the Managing Board may not engage in any other activity at the BNB, or work for banks or in the executive.

283. The mandate of any member of the Managing Board is terminated before the set term only on any of the following grounds: resignation; practical inability to perform his functions for more than six months; enforcement of an imprisonment sentence for a premeditated crime; adjudication in insolvency in a capacity as a sole proprietor or general partner in a commercial company; and previous membership of a managing or controlling body of a company or cooperative, which has been dissolved by insolvency.

284. All the amounts and terms of credits to the government (in so far as the Law allows), and the amounts and terms of deposits of the government with the BNB are publicly disclosed through publication of Annual and Semi-Annual Reports submitted to the Parliament, and the Monthly Bulletin of the BNB. Art. 43 of the Law on the BNB provides that the BNB will act as the agent for public debts under terms agreed with the MoF. The activities concerning public debt registry, settlement, and debt service are reported in the Annual and Semi-Annual Reports of the BNB submitted to the Parliament.

285. The agency roles performed by the BNB are clearly defined in the Law on the BNB (Art. 43), the Annual Budget Law (Transitional and Final Provisions, para. 17), the Organic Budget Law (Art. 29), Regulation 5 on the Terms and Procedure for Issuance, Acquisition and Redemption of Book-entry Government Securities (Art. 2), and in the contract between MoF and the BNB. This contract specifies the agency functions of the BNB (concerning mainly the monitoring and servicing of the domestic and foreign public debt). This contract is not yet publicly disclosed. The activities concerning public debt registry, settlement, and debt service are reported in the Annual and Semi-Annual Reports of the BNB submitted to the Parliament.

286. The provisions relating to the BNB’s own capital and its profit are disclosed in Chapter two of the Law on the BNB—Statutory Fund and Reserves (Art. 7–9 and 36). The statutory fund (capital) of the BNB is BGL 20 billion (equivalent to BGN 20 million after currency conversion). To cover uncollectable and doubtful receivables, the BNB allocates provisions in the amount specified by the Managing Board, which is item of expense and an adjustment for the balance sheet assets. Of the annual profit of the BNB, 25 percent is allocated to a reserve fund, which is used for covering the BNB’s losses. From the remainder of the profits, necessary amounts may be allocated to special funds set up under the decisions of the Managing Board.

287. According to Art. 29 of the Organic Budget Law, the cash performance of the state budget is organized and performed by the BNB in accordance with the provisions of the Law on the BNB. Paragraph 17 of the transitional and final provisions of the Annual Budget Law 2001 specifies the agency functions of the BNB. According to Art. 2 of Regulation 5, the BNB organizes the activities in relation to the sale of government securities on behalf and for the account of the government according to a contract signed with the MoF. The BNB is the government securities depository.

288. The BNB acts as a manager of the foreign exchange reserves as disclosed in Art. 20, 28 and 31 of the Law on the BNB.

289. The responsibility of the BNB as a banker to the government is specified in the Law on the BNB (Art. 43), Organic Budget Law (Art. 29), Annual Budget Law (transitional and final provisions, para. 17).

290. Under Art. 3 of the Law on the BNB, the BNB and the Council of Ministers shall inform each other of their intentions and actions in the formulation of the general outlines of the monetary and credit policy. Experts from the BNB participate in discussions and in preparation of written statements concerning the government’s economic program, the credit rating of the country and programs for financial support from international financial institutions. These activities are not stated in any legal act and are not publicly disclosed. The BNB reports to the public on overall economic developments through publication of its annual and semi-annual reports.

Open process for formulating and reporting of financial policies

291. In keeping with the Currency Board nature of the BNB, and as disclosed in the Law on the BNB, the BNB has a very limited number of monetary policy instruments. In particular, the Law forbids credit to the State or the State agencies, open market operations, and restricts lending to the banking system. The BNB does not attempt to manage interest rates. The BNB’s limited and somewhat indirect instruments with monetary policy consequences are the minimum reserve requirements and a Lender of Last Resort (LOLR) facility. The relevant law and regulations are fully disclosed.

292. As disclosed in Art. 41 of the Law, the BNB sets the minimum reserve requirements and the method of their calculation and compliance. While variation in reserve requirements cannot be, and the BNB does not use it as, an active monetary policy tool within a CBA, Regulation 21 on the Minimum Required Reserves, provides the banks with some flexibility in meeting their normal liquidity fluctuations within a monthly cycle.

293. As disclosed in Art. 33 of the Law, the BNB provides a strictly limited Lender of Last Resort (LOLR) credit to solvent banks against high quality collateral for a period of no more than three months, in the event of systemic liquidity risks. The operation rules for such credit are defined in Regulation 6.

294. More generally, the BNB can contribute to greater financial market transparency by providing more comprehensive information on the financial status of individual banks than the summary information currently published. It could also make a greater disclosure of its LOLR assistance to distressed banks ex-post, and after a suitable “cooling off’ period. And the BNB could provide more qualitative information concerning the banking system and the economy more generally.

Public availability of information on monetary policy

295. As stated, the BNB has a very limited role in monetary policy in keeping with the currency board nature of the BNB. Nevertheless, full information concerning such decisions is widely disseminated.

296. Art. 46 of the Law on the BNB provides that the BNB must maintain its accounts in compliance with the Law on the Accountancy and in connection with the International Accounting Standards.

297. The weekly and monthly balance sheets of Banking and Issue Departments, and semiannual and annual reports are all publicly disclosed through publication in the State Gazette, Monthly Bulletin, and the BNB’s website. Art. 50 of the Law requires that the BNB must provide a Semi-annual and Annual Report to the National Assembly concerning its operations, which includes its financial statements. The annual financial statement of the BNB must be certified by an independent auditor and shall be published together with the auditor’s report in accordance with the requirements of the international accounting standards. The Annual Report also contains a report of the Chamber of Auditors on the budget of the BNB.

298. The BNB publishes a weekly balance sheet of the Issue Department showing aggregate foreign exchange reserves. Data for the external sector (in particular foreign exchange reserves and other balance of payments indicators) is published monthly together with short notes in a press release. Monthly and weekly dissemination is in hardcopy and website format, which facilitates further analysis and comparison over time.

299. Aggregate information on emergency financial support is contained in the aggregate items of the balance sheets of Issue and Banking departments. Detailed information on emergency financial support by the BNB is not publicly disclosed.

300. The Protocol and Press Office Division of the BNB is responsible for the public relations of the BNB.

301. The BNB maintains a broad range of public information services as follows:

• Publication of Annual Report, Semi-Annual Report, Quarterly Bulletin Commercial Banks in Bulgaria”, Monthly Bulletin; Monthly Bulletin “Government Debt Management” (issued jointly by the MoF and the BNB), Monthly Bulletin “Secondary Market of Government Securities”, balance sheets of Issue and Banking Departments, research publications (discussion papers) and information brochures; Maintenance of a website of the BNB which is accessible free of charge;

• Interviews given by senior the BNB officials on TV and radio programs; and

• Press releases of the BNB’s Press Office.

302. The website of the BNB has two independent addresses: www.the BNB.bg and www.theBNBank.org. It contains official publications, statistical information, legislative framework of the banking system (Laws and Regulations), texts of speeches of senior the BNB officials discussion papers (research materials), organizational structure of the BNB, information about EU integration issues concerning the BNB, information and links to websites of the commercial banks, daily information about exchange rates of foreign currencies against Bulgarian Lev, fixed exchange rates of Euro and the EMU legacy currencies against Bulgarian Lev, etc.

303. Senior BNB officials explain the BNB’s objectives of the BNB through the following means: public appearances before the Parliament, speeches made at public meetings, media interviews (TV and radio programs), written statements published in the main daily newspapers and specialized magazines, publications (of speeches) at the web-site of the BNB, and publications of discussion papers. The latter are not published on a regular basis.

Accountability and assurance of integrity by the central bank

304. Most provisions in respect of accountability and assurance of integrity of the BNB are exemplary. Provisions relating to the appointment of the BNB’s Governing Board, independence from the State, accountability to parliament and the public, observance and disclosure of observance of the currency board rules, use of IAS in presentation of the BNB’s accounts, requirements under the Law for the appointment of the Chief Auditor and external auditor, and the frequency of financial reporting are generally excellent and are disclosed to the public.

305. According to Art. 49, para. 3 of the Law on the BNB, the annual financial statement of the BNB is certified by an independent auditor and is published together with the auditor’s report in accordance with the requirements of the international accounting standards. Under Art. 49, para. 4 of the Law on the BNB, the Managing Board shall elect the independent auditor for a term of three years on the basis of a public tender procedure.

306. The Law on the BNB requires it to appoint a Chief Auditor, reporting directly to the Managing Board of the BNB, to perform the following functions:

• Evaluate the quality of the internal controls systems, test the operation of these systems, their reliability and completeness of information;

• Examine the adequacy of the existing systems for protection of the BNB’s assets and, where necessary, take stock of the said assets;

• Examine the compliance of conduct of the BNB’s operations with law and other legislative acts and with the regulations issued by the BNB’s managing bodies;

• Assess whether the BNB’s funds are properly used and, where necessary, make recommendations to the Managing Board;

• Perform inspections concerning different risks in the BNB’s activity; and

• Coordinate his activities with the external auditor of the BNB.

307. The BNB’s Managing Board adopts internal rules and guidelines for internal control over the financial activities of the BNB, which are not publicly disclosed.

308. The reports on the budget outlays of the BNB are examined by the National Audit Chamber, which prepares a special report on the results of the examination. The report on the budget expenses of the BNB is submitted to the Parliament simultaneously with its Annual Report, but it is not published.

309. At inauguration, and at the end of each year, any member of the Managing Board has to declare to the Board his and his family members’ property status and other business interests. The declarations are kept in a special register at the BNB and are not disclosed to the public.

310. According to Art. 17, para. 4 of the Law on the BNB, members of the Managing Board shall not participate in the deliberation and shall abstain from decision-making on issues in which they or members of their families may have interest. They must notify the Managing Board in advance of any such interests.

311. According to Art. 23 of the Law on the BNB, the employees of the BNB when taking office sign a declaration taking an oath of allegiance and observance of law, of performing the functions entrusted in connection with the BNB activities, and of keeping bank and commercial secrecy.

312. While satisfactory requirements exist for personal financial disclosure by members of the Governing Board, it would be appropriate to extend similar requirements to the top managers, i.e., Directors of Directorates or equivalent (about 30).

313. Art. 28 of the Penal Code envisages criminal prosecution of the BNB officials who act beyond their authority. The wording of Law on Banks is evidently not sufficient to prevent lawsuits against supervisory staff. The BNB also does not have policy to provide legal assistance, or financial means to do so, for their official actions. In practice, the BNB takes over any lawsuits brought against its staff with regard to civil and criminal liability arising from their official actions. However, such staff protection is not adequately formalized in the BNB’s internal policy manuals or employment contracts. It is recommended that the BNB fully establish and document an adequate policy for providing the staff with legal assistance and protection in case of lawsuits arising from of their official responsibilities.

Table 9.

Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code—Monetary Policy

Table 9.

Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code—Monetary Policy

Subject	Recommended Action
Clarity of roles, responsibilities and objectives of financial; supervisory agency	The MoF and BNB should publicly disclose the agency contract between the MoF and the BNB pertaining to domestic securities registration, issuance, and settlement.
Open process for formulating and reporting of financial policies	The BNB should make a greater disclosure of the BNB’s LOLR assistance to distressed banks ex-post, and after a suitable “cooling off” period; and provide more qualitative information concerning the banking system and the economy more generally.
Accountability and assurance of integrity by financial supervisory agency	The BNB should publish the agenda and minutes of the Governing Board meetings; Disclose personal financial information by senior managers; Report daily foreign exchange reserves, separate funds under investment management from the BNB’s balance sheet (and thus from the foreign exchange reserves); and Value daily at market prices securities comprising foreign exchange reserve assets.

View Table

Table 9.

Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code—Monetary Policy

Subject	Recommended Action
Clarity of roles, responsibilities and objectives of financial; supervisory agency	The MoF and BNB should publicly disclose the agency contract between the MoF and the BNB pertaining to domestic securities registration, issuance, and settlement.
Open process for formulating and reporting of financial policies	The BNB should make a greater disclosure of the BNB’s LOLR assistance to distressed banks ex-post, and after a suitable “cooling off” period; and provide more qualitative information concerning the banking system and the economy more generally.
Accountability and assurance of integrity by financial supervisory agency	The BNB should publish the agenda and minutes of the Governing Board meetings; Disclose personal financial information by senior managers; Report daily foreign exchange reserves, separate funds under investment management from the BNB’s balance sheet (and thus from the foreign exchange reserves); and Value daily at market prices securities comprising foreign exchange reserve assets.

General

314. The objective of this assessment was to review the degree of transparency of banking supervision policies and practices in Bulgaria and to identify opportunities for development. For the purposes of this assessment, detailed discussions were held with the Banking Supervision Department (BSD) of the Bulgarian National Bank (BNB), commercial bankers from different domestic and foreign banks and bank auditors. Publications of the different agencies including their accounts, laws and regulations and the inspection manuals of the BSD have also been perused in the course of the assessment. Written responses to questionnaires were received from the BSD prior to the assessment. Together with the previous assessment made by IMF staff, these have also been key inputs into the exercise.

Main findings

315. There is a high degree of transparency in the functioning of banking supervision. The laws clearly lay out the objectives of banking supervision and the role and responsibilities of supervisors, providing them with effective instruments to exercise supervision. The regulatory process includes consultations with the banks, although generally not with the general public. The BSD also plays a proactive role in the education and training of bankers. Data and analysis on an aggregated basis is put out in the public domain at frequent intervals. Individual institution data is available less frequently and without analytical content, because of the perceived impact on relatively weak institutions.

Recommended action plan

Table 10.

Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code—Banking Supervision

Table 10.

Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code—Banking Supervision

Reference Practice	Recommended Action
VI. Open Process for Formulating and Reporting of Financial Policies
6.1.5 Where applicable, formal procedures for information sharing and consultation between financial agencies (including central banks), domestic and international, should be publicly disclosed.	Formal procedures for information sharing and consultation between domestic supervisors have been put in place, as well as with some overseas supervisors; the contents of the arrangements with foreign supervisors could be disclosed. If the contents of the agreements are subject to confidentiality requirements, then their objectives can be disclosed.
VII. Public Availability of Information on Financial
Policies
7.1 Financial agencies should issue a periodic public report on the major developments of the sector(s) of the financial system for which they carry designated responsibility.	The periodic data put out on the banking sector could be supplemented by analysis, and the research department of BNB could also expand its scope to cover banking sector issues, and to disclose the results.
7.3.1 Consistent with confidentiality and privacy of information on individual firms, aggregate information on emergency financial support by financial agencies should be publicly disclosed through an appropriate statement when such disclosure will not be disruptive to financial stability.	Disclosure of liquidity support should be considered in due course, when in the BNBs opinion the markets have strengthened and mature enough to absorb such information.
VIII. Accountability and Assurance of Integrity by Financial Agencies
8.4 Standards for the conduct of personal financial affairs of officials and staff of financial agencies and rules to prevent exploitation of conflicts of interest, including any general fiduciary obligation, should be publicly disclosed.	The code of conduct for supervisors is a laudable effort and could be disclosed to further enhance assurances of integrity and accountability.

View Table

Table 10.

Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code—Banking Supervision

Reference Practice	Recommended Action
VI. Open Process for Formulating and Reporting of Financial Policies
6.1.5 Where applicable, formal procedures for information sharing and consultation between financial agencies (including central banks), domestic and international, should be publicly disclosed.	Formal procedures for information sharing and consultation between domestic supervisors have been put in place, as well as with some overseas supervisors; the contents of the arrangements with foreign supervisors could be disclosed. If the contents of the agreements are subject to confidentiality requirements, then their objectives can be disclosed.
VII. Public Availability of Information on Financial
Policies
7.1 Financial agencies should issue a periodic public report on the major developments of the sector(s) of the financial system for which they carry designated responsibility.	The periodic data put out on the banking sector could be supplemented by analysis, and the research department of BNB could also expand its scope to cover banking sector issues, and to disclose the results.
7.3.1 Consistent with confidentiality and privacy of information on individual firms, aggregate information on emergency financial support by financial agencies should be publicly disclosed through an appropriate statement when such disclosure will not be disruptive to financial stability.	Disclosure of liquidity support should be considered in due course, when in the BNBs opinion the markets have strengthened and mature enough to absorb such information.
VIII. Accountability and Assurance of Integrity by Financial Agencies
8.4 Standards for the conduct of personal financial affairs of officials and staff of financial agencies and rules to prevent exploitation of conflicts of interest, including any general fiduciary obligation, should be publicly disclosed.	The code of conduct for supervisors is a laudable effort and could be disclosed to further enhance assurances of integrity and accountability.

Authorities’ response

331. The authorities are in agreement with the assessment.

General

332. This assessment was performed to assess the degree of transparency of deposit insurance policies and practices in Bulgaria. The current system of deposit insurance was set up with the assistance of foreign advisors in early 1999, after the banking crisis. The Deposit Insurance Fund (DIF) is an independent financial agency regulated by the Law on Bank Deposit Guaranty (LBDG). Its accumulated reserves were sufficient to pay out the insured deposits of two small failed banks in 1999 and 2000. The coverage is targeted to be 5 percent of the total amount of insured deposits compared to the present 1.5 percent. A draft law on bank bankruptcy is under consideration, which seeks to assign the DIF new oversight over bank liquidations.

333. The relevant laws clearly lay out the objectives. The DIF is a well-regulated and managed agency. The internal assessments of the DIF showed that under the initial coverage ceilings under the law, the Fund could have covered deposits in the case of a simultaneous bankruptcy of 17 smaller banks and some combinations of smaller and medium size banks. Now that a much higher ceiling of BGN 10.000 has been introduced to meet EU standards, these figures have decreased.

334. The LBDG does not allow the DIF to provide any financial support to ailing banks.

Information and methodology used for the assessment

335. For the purpose of this assessment, detailed discussions were held with the Deposit Insurance Fund (DIF) and the Banking Supervision Department of the Bulgarian National Bank. Publications of different agencies including their accounts, laws and regulations were perused. Draft legislation and recent amendments to the legislation were also taken into account. Written responses to questionnaires were received from DIF prior to the FSAP mission and these, together with the previous assessment made by IMF staff, have also been essential inputs in the course of preparation the report.

Main findings

336 There is a high degree of transparency in the functioning of deposit insurance in Bulgaria.

Clarity of roles, responsibilities, and objectives of financial agencies responsible for financial policies

337. The roles, responsibilities and objectives of deposit insurance are disclosed in the Law on Bank Deposit Guarantee (LBDG) which deals with the role of the Deposit Insurance Fund (DIF) as the agency responsible for paying out the guaranteed amounts of bank deposits. The LBDG is supported by BNB Regulation 23 on the Terms and Procedure for Payment of Insured Amounts on Deposits with Banks with Revoked Licenses. Certain other responsibilities are also laid out in the Law on Banks. According to this the DIF has some control over the assignee in bank bankruptcy and may table proposals to the BNB and the Court. Under the draft Bank Bankruptcy Law, the DIF will be given substantial oversight responsibilities over the bank bankruptcy process.

338. The LBDG clearly lays out the scope of deposit insurance, the role of the DIF in the financial system, and the circumstances under which the DIF may use its resources. It discloses the objectives of deposit insurance, i.e., to (i) determine and collect entry and annual premiums from banks; (ii) invest its assets; and (iii) pay out the guaranteed amount of deposits. The DIF’s broad objectives derive from the LBDG, but are not directly defined in the legislation. These have been defined in the mission statement of the DIF, adopted by the DIF’s Management Board, i.e. to promote financial stability, to protect the depositors’ interests and to enhance public confidence and trust in the banking system.

339. As laid out in the law, the Management Board of DIF is responsible to the Council of Ministers, to the Bulgarian National Bank (BNB) and the National Audit Chamber. The annual budget for the DIF’s administrative expenses together with a report on its performance is presented for approval to the BNB Managing Board; the approved budget and report are presented to the National Audit Chamber.

340. The procedures for appointment, terms of office, and general criteria for removal of the heads and members of the governing body of DIF are disclosed in the LBDG. The chairperson of the Management Board is appointed by the Council of Ministers, and the Deputy Chairperson is appointed by the BNB. One Board member is appointed by the Association of Commercial Banks. The Board members are appointed for four years and can be re-elected without any restriction. The terms of office and the reasons for which they may be dismissed from office are laid out in the law.

341. The relationship between the DIF and the BNB is laid down in law. The DIF presents its annual report to the BNB; its annual budget together with a report on its performance is subject to approval by the BNB Managing Board; the DIF Management Board prepares draft regulations for the implementation of the LBDG and presents them to the BNB for discussion and approval; the Deputy Chairperson of DIF is appointed by the BNB. The LBDG requires the BNB to provide data to the DIF. The DIF has a formal MoU with the BNB, the objectives (not the content) of which have been disclosed.

342. The Association of Commercial Bankers plays a consultative and coordinating role in the interaction between banks and the DIF but does not have any supervisory or regulatory role.

Open process for formulating and reporting of financial policies

343. The conduct of policies by the DIF is defined in the legislation and regulations. It is compatible with confidentiality considerations. The regulatory framework of the DIF and its operating procedures governing the conduct of financial policies are defined in legislation and regulations.

344. Regulation 23 sets the terms and procedures for reimbursement of guaranteed deposits. The DIF levies premiums from banks. The premium structure has been disclosed in the LBDG. Information on: annual premium contributions, the deposit base, and the size of insured amounts, reimbursement of insured deposit amounts is publicly disclosed.

345. The LBDG authorizes the DIF to invest in short-term deposits with commercial banks that are authorized dealers of government securities. The “DIF Investment Policy”, adopted by the DIF’s Management Board, requires that deposit accounts with commercial banks be fully secured by government securities. The annual reports of the DIF portray the type of investments made by the DIF but not the specific institutions with which the DIF maintains relations. Data on the investment activity of the DIF is published on the DIF web site.

346. The DIF is allowed to exercise certain control over the bank liquidation activities of liquidation trustees (Art. 89a of the Law on Banks). The Draft Law on Bank Bankruptcy clarifies the roles and responsibilities of the DIF and the Court in controlling the activities of the trustees.

347. The agency has formal procedures for sharing information with other domestic financial agencies, especially the BNB. These have been established in the LBDG and Regulation 23, and have been disclosed in written reports to the legislature and the State Gazette, in the agency’s annual reports. The Memorandum of Understanding, signed between the BNB and the DIF, has facilitated the regular exchange of information. The objectives of the Memorandum of Understanding have also been publicly disclosed to the media. The full text of the memorandum has not been publicly released. Under the memorandum, the BNB provides the DIF with banks’ financial statements on a monthly basis, and, on a quarterly basis, with detailed analysis reports. Information on distribution of deposits by size for each bank is provided twice a year. Additional data (such as ad hoc reports, sanctions imposed on banks, results from on-site inspections, conclusions regarding deposit base calculation, and premiums’ determination) are also received.

348. The Letter of Cooperation, signed between the Association of Commercial Banks (ACB) and the DIF establishes the framework to facilitate the information sharing and cooperation on matters of mutual interest to the two institutions. This was announced through the media immediately after signing the agreement between the ACB and the DIF. The full text of the Letter of Cooperation has not however been publicly released.

349. Significant changes in financial polices are publicly announced immediately after the decision to change policy, and explained in written reports submitted to the legislature, in official government publications (such as the State Gazette), in published reports (i.e., the DIF’s annual reports), and through the media (i.e., press releases, interviews and articles). Changes in financial policies will also be announced on the DIF web site, which has become operational recently.

350. There is the presumption in favor of public consultations when substantial changes to the structure of financial regulations are proposed. However, the length of the consultation period depends on the changes proposed. Consultations can be organized in the form of public discussions.

Public availability of information on financial policies

351. The DIF issues annual reports, which are submitted to national authorities and are also available to the public in hard copy or on the web site of DIF. Detailed information—data and analysis of deposit distribution, premium contributions of banks, and reimbursement of insured deposit amounts—are published in the DIF’s annual report, which is widely distributed. Detailed analysis of developments in the banking sector is also presented in the annual report. In addition, information is provided on a regular basis to the media and reports are published in specialized publications. Information and data on developments of deposit insurance is provided on the DIF web site.

352. The DIF’s Management Board may publish information on the DIF’s activities, with the exception of confidential data (banking or commercial). Consistent with confidentiality requirements, aggregate data related to DIFs responsibilities is disclosed in reports, in the State Gazette, and through the media. Data on premiums, contributions paid by commercial banks, reimbursement of insured deposit amounts with failed banks, and the DIF’s investment activities is also published on the DIF web site.

353. The annual balance sheet of the DIF is published in the State Gazette by March 31, as laid down in the LBDG, and in the DIFs Annual Report. Although the LBDG does not require it, the DIF Management Board has adopted a formal policy to have an independent audit of its financial statements.

354. The DIF maintains different channels for public information. Since its establishment the agency has had a public affairs office. To encourage public support for the DIF the Management Board adopted Public Relations Rules in January 2000. The functions performed by the public information service include: to disseminate policy decisions and announcements; to disseminate information on the operating framework, targets and objectives; to disseminate data; to maintain contact with media representatives; to disseminate texts of speeches by senior officials. Public information services include a publications program—annual report; Q&A Brochure on deposit insurance; publications about the nature and form of deposit protection, the operating procedures of the scheme, the performance of the protection arrangement; press releases. Information about repayment of insured deposit amounts with failed banks is distributed on a regular basis through the media. The DIF has opened a telephone hot line in order to provide additional information on deposit reimbursement and other issues associated with the Bulgarian deposit insurance system.

355. To enhance transparency, senior officials stand ready to explain the DIF’s objectives and performance to the public in speeches made at public and private meetings, and media interviews. The timing of statements by senior DIF officials depends on the frequency of changes and developments in the deposit guaranty environment. Thus, statements are made on an irregular basis, but in practice have occurred at least once a month. The release of the texts of speeches of senior officials is the task of the public relations unit.

356. Effective legal and regulatory provisions on deposit insurance are disclosed in the State Gazette. New legal acts are published also in specialized economic publications. The LBDG, Regulation 23 and the Law on Banks (Art. 89a) are also published on the DIF web site.

357. The DIF has no function in overseeing consumer protection arrangements.

Accountability and assurances of integrity by financial agencies

358. The LBDG requires the DIF to present the annual report on its activities also to the National Audit Chamber. The annual report includes information on the conduct of financial polices, the policy objectives of the institution, description of the agency performance in pursuing its objectives, description of developments of deposit insurance in Bulgaria, as well as in the banking system. The annual budget for the DIF’s administrative expenses together with a report on its performance is presented for approval to the BNB Managing Board; the approved budget and report on its performance are presented to the National Audit Chamber. Operating expenses of the DIF are made in compliance with a budget approved by the BNB. The report on the budget performance is presented to the BNB and the National Audit Chamber annually. Along with the DIF’s annual report, the report on budget expenses is submitted to the BNB and the National Audit Chamber. Aggregate data on expenses and revenues is published in the annual report. Data on resources accumulated is presented on regular basis to the media.

359. Although it is not required by the LBDG, the DIF’s Management Board has adopted a formal policy to have an independent audit of the DIF’s financial statements. For a third consecutive year, the DIF has engaged an independent financial auditor for this purpose. The DIF’s internal governance procedures for insuring integrity of its operations are not currently publicly disclosed. However the DIF is presently discussing disclosure of certain internal corporate governance procedures. The DIF has no internal audit function. However, the setting up of an independent internal audit arrangement has been suggested by the National Audit Chamber, and DIF is actively considering instituting such an office.

360. Disclosure of conflict of interest and the obligation to confidentiality are defined in the LBDG, in the DIF Management Board’s Rules of Procedure and other internal documents. According to the LBDG any member of the DIF’s Management Board and its administrative staff is bound to disclose in writing to the Management Board any trading, financial or other business interest, which impairs the DIF’s interests.

361. In addition, in the middle of 2000, the DIF’s Management Board adopted “Internal Rules for Ethical Behavior,” setting the general criteria and standards for employees’ ethical behavior in fulfilling their duties. Under these rules the DIF has designated an ethics code officer and all employees sign an entry declaration and annual declaration. Thus, requirements to prevent exploitation of conflict of interest are publicly disclosed in official government publications (i.e., in the State Gazette), in published reports (i.e., the DIF’s annual reports) and to the media. The full text of the Internal Rules for Ethical Behavior has not been publicly released.

362. DIF management and staff are not legally protected in exercising their duties under the LBDG.

Recommended action plan

Table 11.

Recommended Action Plan to Improve Observance of the IMF’ MFP Transparency Code—Deposit Insurance

Table 11.

Recommended Action Plan to Improve Observance of the IMF’ MFP Transparency Code—Deposit Insurance

Reference Practice	Recommended Action
6.1.5 Where applicable, formal procedures for information sharing and consultation between financial agencies (including central banks), domestic and international, should be publicly disclosed.	The formal procedures for information sharing between the Fund and the banking supervisor are laid down in a Memorandum of Understanding, the content of which, if it is not subject to confidentiality requirements, can be disclosed.
7.7 Where financial agencies oversee consumer protection arrangements (such as dispute settlement processes), information on such arrangements should be publicly disclosed.	DIF could consider setting up a system to deal with consumer complaints. Depositors with complaints about the payout of deposits have recourse under the law, which is disclosed.
8.2.2 Internal governance procedures necessary to ensure the integrity of operations, including internal audit arrangements, should be publicly disclosed.	DIF should disclose its internal governance procedures, which ensure the integrity of operations.
8.3 Where applicable, information on the operating expenses and revenues of financial agencies should be publicly disclosed, annually.	Operating expenses are disclosed in an aggregated form. However, the majority of the expenses were in the category of ‘Other financial expenses’, the contents of which are not obvious.
8.4 Standards for the conduct of personal financial affairs of officials and staff of financial agencies and rules to prevent exploitation of conflicts of interest, including any general fiduciary obligation, should be publicly disclosed.	The main rules are in the law. Besides that the DIF Management Board has approved internal rules, however these are not publicly available. The publication of internal rules on ethical behavior would foster the increase of public confidence in the DIF.

View Table

Table 11.

Recommended Action Plan to Improve Observance of the IMF’ MFP Transparency Code—Deposit Insurance

Reference Practice	Recommended Action
6.1.5 Where applicable, formal procedures for information sharing and consultation between financial agencies (including central banks), domestic and international, should be publicly disclosed.	The formal procedures for information sharing between the Fund and the banking supervisor are laid down in a Memorandum of Understanding, the content of which, if it is not subject to confidentiality requirements, can be disclosed.
7.7 Where financial agencies oversee consumer protection arrangements (such as dispute settlement processes), information on such arrangements should be publicly disclosed.	DIF could consider setting up a system to deal with consumer complaints. Depositors with complaints about the payout of deposits have recourse under the law, which is disclosed.
8.2.2 Internal governance procedures necessary to ensure the integrity of operations, including internal audit arrangements, should be publicly disclosed.	DIF should disclose its internal governance procedures, which ensure the integrity of operations.
8.3 Where applicable, information on the operating expenses and revenues of financial agencies should be publicly disclosed, annually.	Operating expenses are disclosed in an aggregated form. However, the majority of the expenses were in the category of ‘Other financial expenses’, the contents of which are not obvious.
8.4 Standards for the conduct of personal financial affairs of officials and staff of financial agencies and rules to prevent exploitation of conflicts of interest, including any general fiduciary obligation, should be publicly disclosed.	The main rules are in the law. Besides that the DIF Management Board has approved internal rules, however these are not publicly available. The publication of internal rules on ethical behavior would foster the increase of public confidence in the DIF.

Authorities’ response

363. The authorities were in broad agreement with the assessment, but provided comments of a technical and factual nature.

General

364. The Bulgarian capital market is still at an early stage, is still very small and not very active at this time. The objective of this assessment was to assess the degree of transparency of securities markets supervision policies and practices. This assessment was based on pre-FSAP self-assessments performed by the Bulgarian authorities, extensive interviews with staff of the BSE the BNSC and market participants, as well as study of the rules and regulations.

Main findings

365. Bulgaria is observant or broadly observant of the great majority of the transparency practices with regard to capital markets supervision policies and practices.

Clarity of roles, responsibilities and objectives of financial agencies

366. The institutional framework and the objectives of the Bulgarian National Securities Commission (BNSC) are defined by the Law on Public Offering of Securities (LPOS), in effect as of January 31, 2000, and the Rules for the Organization and Operation of the Bulgarian National Securities Commission, in effect as of May 5, 2000. The objectives are providing protection to investors and creating prerequisites for the development of a transparent and efficient capital market. The LPOS and the Rules are public documents.

367. The BNSC’s responsibilities are disclosed in Art. 8 and 15 of the LPOS, which is a public document. As these are set out in legislation, changes to the BNSC’s responsibilities can be made through the adoption of amendments to the law. The LPOS requires the BNSC to submit an annual report to the Council of Ministers.

368. The BNSC informs the public through the publication of a monthly bulletin, press releases, conferences and investor awareness meetings. According to Art. 15 (6) of the LPOS, the BNSC is obliged to submit to the Council of Ministers an annual report on its activities by March 31 of the following year. The report contains information on the situation on and the prospects of the securities market, the adequacy of the regulations related to the securities market, the ordinances issued and the proposals made by the BNSC for amendments to the regulatory framework. Furthermore, it contains information on administrative actions, cooperation with domestic and international bodies, and the organizational, financial and human resources policies of the Commission. The annual report of the BNSC is published and disseminated via its Web site (http://www.ssec.bg).

369. The criteria for appointment and dismissal of members of the BNSC are set out in the LPOS. The BNSC is composed of a chairman and six members who are appointed for a term of five years and discharged by the Council of Ministers on a proposal from the Minister of Finance.

370. The BNSC’s relationship with the other financial agencies has been publicly disclosed in legislation, publications in Bulletins, the media, the web site, and in particular, in the LPOS and the Rules for the Organization and Operation of the BNSC. According to Art. 15(1) 5 of the LPOS, the BNSC is empowered to exchange information indispensable for its activities with the Bulgarian National Bank, other state institutions and bodies, bodies of local self-governance and administration, as well as with non-governmental organizations related to the securities market. The provisions about supervision of the Central Depository are set out in the LPOS.

371. The relationship between the BNSC and the Bulgarian Stock Exchange (BSE) is set out in the LPOS. Operational information is disclosed publicly through the monthly Bulletin of the BNSC, press releases, the web site, and in the BNSC Annual Report. The BSE has adopted a set of policies on transparency of its activities, which are set out in the BSE Rule Book. The Rule Book is a publicly available document.

372. BSE discloses information to the public through its Official Bulletin and its web site.

Open process for formulating and reporting of financial policies

373. The conduct of the BNSC’s policies is transparent to the public as information on the conduct of its policies is published in the monthly Bulletin of the BNSC, the web site and the annual report.

374. The LPOS and the Rules for the Organization and Operation of the BNSC were promulgated in the State Gazette, and published in the monthly Bulletin of the Commission. They are also available on the web site of the BNSC. These measures ensure publicity of the regulatory framework and the operating procedures governing the conduct of the BNSC. They are also publicly disclosed and explained through press releases and conferences, round tables and seminars, meetings with shareholders and issuers, letters in response to shareholders’ or other bodies’ inquiries relating to the BNSC’s activities.

375. Securities market participants—issuers, investment intermediaries, including when acting as underwriters, investment companies, and management companies—are under a statutory obligation to submit financial reports to the BNSC on a regular basis. The LPOS and the regulations on its implementation provide for this obligation. Both the primary and the secondary legislation relating to financial reporting are promulgated in the State Gazette and published in the BNSC Bulletin. They are also available on the web site of the BNSC. Further explanation is given via letters addressed to the market participants where amendments or instructions to these regulations have been adopted.

376. The LPOS and the regulations on its implementation provide for the mode of operation of the organized financial markets in Bulgaria. Both the primary and the secondary legislation relating to the operation of organized financial markets are promulgated in the State Gazette and published in the BNSC Bulletin. They are also available on the web site of the BNSC. Further explanation is given via letters addressed to the market participants where amendments or instructions to these regulations have been adopted.

377. The disclosure of the fee-structure is through publication of the Tariff in the State Gazette and the BNSC Bulletin, as well as through its availability on the web site of the Commission.

378. Recently, an agreement has been concluded between the BNB and other financial sector supervisory agencies on cooperation, coordination and exchange of information. The content of this agreement has been disclosed, but not the full text. There are no formal procedures for sharing information with foreign financial agencies. Instead, official letters from the Commission are commonly used for this purpose. The LPOS (Art. 15(5)) authorizes the BNSC to exchange information with the BNB, other state institutions and bodies, bodies of local self-governance and administration and with non-governmental organizations.

379. Significant changes in financial policies are publicly disclosed and explained immediately after the decision is taken through official publications (such as the State Gazette, the BNSC Bulletin and Annual Report), the media, and the web site. Announcements appear as needed and are not made according to a set schedule.

380. There is a presumption in favor of public consultations for proposed substantive changes to the structure of financial regulations. This is required by the Law on Statutory Acts and Ordinances as all Ordinances must be adopted by the Council of Ministers. Changes in legislation, such as those that were adopted in 2000—new securities law and regulations thereon—are subject of broad public discussion. The latter take place through online comments and discussions via the web site of the Commission, at conferences and workshops, through letters addressed to the Commission.

381. There is a legislative requirement requiring public consultation and it is observed in practice.

Public availability of information on financial policies

382. The BNSC is under a statutory obligation to prepare and submit an annual report to the Council of Ministers. According to Art. 15 (6) of the LPOS, the report shall contain information on:

• The situation on and the prospects of the securities market;

• The adequacy of the regulations related to the securities market, the ordinances issued and the proposals made by the Commission for amendments to the regulatory framework;

• The licenses, confirmations and approvals given, and the refusals to grant approval, registrations performed, and acts of the Commission appealed against and confirmed by the court;

• The effects of the control exercised over the securities market participants;

• The information policy, local and international co-operation;

• The organizational, financial and human resources policy of the Commission; and

• Any other information determined by the Council of Ministers.

383. In its Annual Report 2000 the Commission made an analysis of the condition of the Bulgarian capital market and proposed measures for the promotion of its development.

384. The BNSC provides information consistent with its jurisdictional responsibilities on a monthly and annual basis. According to Art. 16 (7) of the LPOS, all data and documents for offences under the LPOS, which may result in disclosing the identity of the person who has provided them, shall only be submitted by the Commission to third parties with the consent of that person, unless otherwise provided in the law.

385. The BNSC does not release its balance sheet on a pre-announced schedule. Data on market transactions are provided by the BSE. Financial data submitted by the BNSC to the Ministry of Finance are reported to the National Audit Office, which is required by law to audit these data. The law does not require the BNSC to publicly release its financial statements on a pre announced schedule. However, the ability of a securities regulator to carry out its functions depends amongst other things on its funding and the way in which it is applied. When the regulator levies fines or other monetary sanctions there should be public accountability for those functions. Mandatory public disclosure of the audited financial statements should help raise the level of confidence in the activities of the regulator and raise the level of confidence in investors.

386. The General Administration directorate of the BNSC is responsible, inter alia, for the maintenance of public information services.

387. Senior officials are ready to explain the BNSC’s objectives and performance to the public. The text of the public statements is released in the Bulletin and other publications, the media, the web site, and through participation in seminars, discussions, and conferences. The frequency of appearances by senior BNSC officials depends on the frequency of changes and developments in the securities markets’ legal framework.

388. Consumer complaints dealing with securities markets which are addressed to the BNSC are considered and responded to after either making the necessary inquiry into the problems or forwarding the complaint to the relevant institution for its consideration. There are no investor protection guarantees.

Recommended action plan

Table 12.

Recommended Action Plan to Improve Observance of the IMF’s MFP Transparency Code—Securities Supervision

Table 12.

Recommended Action Plan to Improve Observance of the IMF’s MFP Transparency Code—Securities Supervision

Reference Practice	Recommended Action
Public Availability of information on Financial Policies
Accountability and Assurances of Integrity by Financial Agencies	The BNSC should include its audited financial statements as part of its Annual Report. Financial statements of the BNSC should be made public on a pre-announced schedule.

View Table

Table 12.

Recommended Action Plan to Improve Observance of the IMF’s MFP Transparency Code—Securities Supervision

Reference Practice	Recommended Action
Public Availability of information on Financial Policies
Accountability and Assurances of Integrity by Financial Agencies	The BNSC should include its audited financial statements as part of its Annual Report. Financial statements of the BNSC should be made public on a pre-announced schedule.

Authorities’ response

397. The authorities are in agreement with the assessment.

General

398. The objective of this assessment was to assess the degree of transparency of insurance supervision policies and practices in Bulgaria. This assessment was performed using the IMF Code of Good Practices on Transparency in Monetary and Financial Policies, and the associated Supporting Document. The assessment was based on a review of: (i) the self-assessment prepared by ISA, (ii) the Insurance Act, the regulations and instructions, and (iii) discussions with the ISA, market participants, the Association of Bulgarian Insurers, external auditors, actuaries and brokers. The supervisory staff of the ISA cooperated extensively in the assessment, by providing answers to the FSAP questionnaires, preparing a self-assessment of IAIS Core Principles, and making themselves available to meet with mission members when needed.

399. ISA operates under a strict rule of confidentiality under Art. 23 of the Insurance Act. In cases not covered by the Law, ISA provides information to interested parties upon request, as well as through the Annual Report and the public register. Market participants and the Association of Bulgarian Insurers provided insightful advice on industry matters.

Main findings

400. Bulgaria observes the great majority of the practices of the Transparency Code on insurance supervision.

Recommended action plan

Table 13.

Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code—Insurance Supervision

Table 13.

Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code—Insurance Supervision

Reference Practice	Recommended Action
VI. Open Process for Formulating and Reporting of Financial Policies	On-site, off-site and intervention procedures should be published in regulations. Formal procedures for information sharing and consultation with international financial agencies (including central banks) should be introduced and publicly disclosed. ISA should have the ability to hold public consultations itself to discuss technical changes to the structure of financial regulations.
VII. Public Availability of Information on Financial Policies
	ISA should publicly disclose its balance sheet.
VIII. Accountability and Assurance of Integrity by Financial Agencies	ISA should publicly disclose audited financial statements of their operations. The information on the operating expenses and revenues should be publicly disclosed annually. Legal protection should be provided to ISA’s staff and publicly disclosed.

View Table

Table 13.

Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code—Insurance Supervision

Reference Practice	Recommended Action
VI. Open Process for Formulating and Reporting of Financial Policies	On-site, off-site and intervention procedures should be published in regulations. Formal procedures for information sharing and consultation with international financial agencies (including central banks) should be introduced and publicly disclosed. ISA should have the ability to hold public consultations itself to discuss technical changes to the structure of financial regulations.
VII. Public Availability of Information on Financial Policies
	ISA should publicly disclose its balance sheet.
VIII. Accountability and Assurance of Integrity by Financial Agencies	ISA should publicly disclose audited financial statements of their operations. The information on the operating expenses and revenues should be publicly disclosed annually. Legal protection should be provided to ISA’s staff and publicly disclosed.

Authorities’ response

422. The authorities agree with the assessment, but have the following comments:

• “The on-site inspection’s procedures are disclosed in the newly adopted regulation on the Organization and Structure of the Insurance Supervision Agency (ROSISA) particularly in articles 33–36 thereof;

• Formal procedures for information-sharing were introduced by means of the establishment of The Financial Supervision Advisory Council including the national financial sector supervisors; and

• The other objectives (the competence of holding public consultations; the disclosure of the balance sheet and of the financial statements; as well as the legal protection of the supervisor’s staff) will be achieved upon accession of Republic of Bulgaria in EU by means of adoption of the new legislative framework concerning the insurance market and the insurance supervision.”

General

423. The assessment of the SIPS in Bulgaria against the MFP Transparency Code took the form of a review of the previous assessment, which had been undertaken in late 2001. The assessment mission, over a period of three days from 19 to 21 June 2002, involved discussions with a Director and senior officials from several departments of the Bulgarian National Bank (BNB), with officials of BankService (the inter-bank payment processing company), and with a director and senior officials of two large commercial banks.

424. Since the aim of the review was to clarify and to substantiate some of the conclusions and assessments of the previous mission, the approach adopted was to work through a detailed questionnaire, on specific issues raised by those conclusions and assessments, which had been sent to the BNB in early June. Use was also made of the responses of the BNB to the questionnaires prepared by the previous assessment mission. All the officials met during the assessment mission were open and co-operative.

Main findings—summary

425. In all but 2 particulars, the oversight regime operated by the BNB in respect of the payment systems in Bulgaria appears to comply with the MFP Transparency Code, at least in so far as concerns its relationship with the commercial banks—the members of the payment systems—and with the two inter-bank payment service companies. There was no opportunity during the mission to assess how far, in practice, bank customers in Bulgaria, whether individuals or corporates, are aware of or indeed interested in the subject.

Recommended action plan

Table 14.

Recommended Actions to Improve Observance of IMF’s Monetary and Financial Policies Transparency Code Practices—Payment System Oversight

Table 14.

Recommended Actions to Improve Observance of IMF’s Monetary and Financial Policies Transparency Code Practices—Payment System Oversight

Reference practice	Recommended action
VI. Open process for formulating and reporting of payment system oversight policies
6.1.5 – Where applicable, formal procedures for information sharing and consultation between financial agencies (including central banks), domestic and international, should be publicly disclosed	The BNB should publicly disclose the basis on which it will consult and share information with the home country central banks and banking supervisors of the foreign commercial bank branches that are members of the RTGS system.
VIII. Accountability and assurance of integrity by payment system oversight agencies
8.3 – Where applicable, information on the operating expenses and revenues of financial agencies should be publicly disclosed annually	The BNB should publicly disclose the operating expenses and revenues relating to its provision of the RTGS system.

View Table

Table 14.

Recommended Actions to Improve Observance of IMF’s Monetary and Financial Policies Transparency Code Practices—Payment System Oversight

Reference practice	Recommended action
VI. Open process for formulating and reporting of payment system oversight policies
6.1.5 – Where applicable, formal procedures for information sharing and consultation between financial agencies (including central banks), domestic and international, should be publicly disclosed	The BNB should publicly disclose the basis on which it will consult and share information with the home country central banks and banking supervisors of the foreign commercial bank branches that are members of the RTGS system.
VIII. Accountability and assurance of integrity by payment system oversight agencies
8.3 – Where applicable, information on the operating expenses and revenues of financial agencies should be publicly disclosed annually	The BNB should publicly disclose the operating expenses and revenues relating to its provision of the RTGS system.

Authorities’ response

430. The authorities are in broad agreement with the assessment.