Mission: Iraq for Volunteers

By Maria Trombly | Securities Industry News | February 23, 2004

February 23, 2004 - How do you get high-powered Wall Street executives to go to struggling countries to share their expertise?

Try offering them no money.

That's what the Financial Services Volunteer Corps has been doing for 14 years, and the strategy has somehow been paying off. There's never been a bigger pool of volunteers than today, said John Walker, FSVC's president and a partner at the law firm of Simpson Thacher & Bartlett.

"We've found that there's an increased interest as the organization has moved to different parts of the world," he said. "It's opened up more interest among the volunteers."

The latest--and perhaps highest-profile--mission for the group is Iraq. The Baghdad-based Iraq Stock Exchange is scheduled to reopen in a matter of weeks, and the FSVC has played a major role in renovating the market.

For FSVC volunteer William Bautz, a trip to Baghdad was slated for November. "We were planning on going in, but just before we got there, the Al-Rasheed hotel was bombed," said Bautz, who is a former CTO of the New York Stock Exchange.

That by itself wouldn't have stopped him, but the bombing took 200 hotel rooms out of service. "There was no room," Bautz said.

Instead, he and the other volunteers met with Iraqi officials in Amman, Jordan. "It was much better for them to come out than for us to go in. We had plenty of time to meet. It was a much better way to do it than for us to physically go into Baghdad."

The other volunteers were Ann Exline Starr, former chief regulatory officer at the Philadelphia Stock Exchange; William Jaenike, former Chairman and CEO of the Depository Trust & Clearing Corp., and Robert Strahota, assistant director of international affairs at the U.S. Securities and Exchange Commission. They were accompanied by Salvatore Pappalardo, managing director of the FSVC, as well as director Caryn Young.

They group spent a little over a week in the Middle East helping officials of the former Baghdad Stock Exchange and the Coalition Provisional Authority, as well as Iraqi brokers, issuers and registrars rebuild an entire securities industry.

"They're in the process of drafting a new securities law, a new charter law for the exchange and an implementation plan to get the thing into business," Bautz said. "We discussed the best way to trade, the issues that are going to be faced with trying to automate trading that was basically not automated at all, and suggestions for the kind of people who should be on the exchange commission and the head of the actual exchange itself. They left the room with a plan of things they needed to do to get it going again."

The White Board
Before the war, the exchange traded about 130 stocks. This was accomplished by the use of 130 white boards, on which traders would cross out old bids and offers and write in new ones.

"If there was a match between a bid and an offer that was written on the board, that constituted a trade," Bautz said.

Of course, the stock exchange didn't see a lot of volume in those days, and stocks were valued at a penny or penny-and-a-half a share, he added. When the exchange reopens, the system will be modernized by the addition of a computer in which all trades will be entered. There will also be a line into the exchange so that the computer has access to telecommunications. Electric power has already been restored, Bautz said.

The white boards, however, will remain. After all, the system works.

"From an economic standpoint, there's not enough volume to make the investment at this time in hardware and software," Bautz said. The new exchange will probably even use the same white boards that it had before the war--the chairman of the stock exchange had stored them in his basement during the conflict.

But it takes more to reopen a stock exchange than plugging in a computer, carrying white boards upstairs and buying new markers.

"We have to train staff, have to make sure that everybody understands the rules, how to enter information into the screen," Bautz said. "Forms have to be designed, all that kind of business. And we have to involve the registrars of the listed companies."

Another change is that the settlement cycle will increase--from one day to three. The reason the old exchange had such a short cycle was that all trades were on a cash basis. A three-day cycle will allow for added safeguards, Bautz said.

Hammers and Saws
Iraq is the latest in a long line of ambitious projects since the FSVC was founded in 1990 by John Whitehead and the late Cyrus Vance, at the request of President George H. W. Bush. FSVC's board is currently co-chaired by Whitehead and Paul Volcker. Over the past 14 years, more than 5,500 experts from the financial, legal and regulatory communities have taken part in more than 1,100 FSVC missions, reaching over 30,000 counterparts in 30 countries. FSVC currently operates its largest programs in Russia, the Balkans and Indonesia.

"It's a pick-up-the-hammer-and-saw type of organization that tries to leave a finished product behind," said Walker. "The advice that is given is totally objective--there is no benefit or gain to the volunteer. Once the counterparty understands this, the advice is generally well received because it comes with no hidden agenda, no strings attached, just the best advice that the expert in his or her daily profession can give."

The volunteers typically get time off from their employers, Walker said, and FSVC covers all travel-related expenses, sets up all the meetings and provides interpreters and other logistical support.

"It is extraordinarily rewarding for the volunteer, based on my own experience," he said. "You work with very interesting people, both in the host countries and as volunteers. Often, you get involved in policy issues and you have some input and some impact on how these countries develop their financial systems."

For example, the Prague Stock Exchange recently needed help with surveillance and investigative techniques so it could catch securities law violators. They got Cameron Funkhouser, SVP of the market regulation department at NASD.

"I was there for a week," he said. "I had a whole agenda of topics. For six to nine hours a day, I would be holding classroom-type seminars and answering questions, and going through case studies on various areas of surveillance and securities law violations."

He and his NASD staff members have also traveled to Slovenia, Portugal, Poland, Egypt, Bulgaria and the Philippines on behalf of the FSVC and similar organizations.

"It is almost overwhelming, how hungry the regulators in these countries are to learn and do it right in terms of investor protection," he added. "It's really amazing, their thirst for knowledge and their desire to provide really solid investor protection programs. It's really gratifying when you can help another regulator in another country."

But Funkhouser said that the warm and fuzzy feelings aren't the only reward he gets out of the work.

"In my role here at NASD, one of the important aspects of my job is to have a network of people I can call on if I need them," he said. "As markets get more and more global, it helps me do my job better."

Give and Take
Frank Spalding said that going to Slovakia and Macedonia helped him understand U.S. laws better. Spalding, who's worked extensively as an arbitrator with the NASD and the NYSE, has served as chairman of the NASD national arbitration and mediation committee.

"The comparative approach is very enlightening about understanding your own system," he said.

Spalding helped create a dispute resolution mechanism for the Macedonian Stock Exchange, which went into law last month. "I've gotten great satisfaction out of [the experience]," he said. "I enjoyed my contacts with professional colleagues in other countries, and learned a great deal about other countries."

Dispute resolution is a new field in Macedonia, said Anthony Randazzo, FSVC's regional director for the Balkans. "They asked us to help them develop a dispute resolution mechanism for the stock exchange, because the court systems in Macedonia are very weak," he said. "The system is slow, there is a huge backlog of cases and evidence of corruption. Every time you try to settle something in the courts, you're facing a delay of several years."

The legal systems aren't the only institutions still in their formative stages in Eastern Europe. For the most part, the securities industries in FSVC's host countries are also just starting to develop.

Lithuania's securities industry is currently small-there are only 45 listed companies, said FSVC regional director Aideen Mannion. In Macedonia, annual turnover has ranged between EUR50 to EUR100 million, which is less than 5 percent of the gross domestic product. In Croatia, which has one of the most developed markets in the region, turnover is in the range of 7 to 8 percent of GDP.

In the spring, he said, the FSVC will be looking for volunteers to come to the Balkans to teach financial analysis and portfolio management.

"There's growing demand for these skills in Macedonia in particular," he said. "Pension reform is going to start in 2005, and there will be private pension schemes starting up and they will need to find and train pension fund managers."

In the Middle East, FSVC's efforts aren't limited to Iraq. Volunteers also visited the stock exchanges in Jordan and Egypt during their recent trip. There, the trading process is completely automated and traders work behind computer screens, Bautz said.

That doesn't mean that the Iraqis are backward, he added.

"The people that operate the exchange are very sophisticated, very well educated, very bright," Bautz said. "The head of the brokerage association has a PhD, and most of the people there have Masters' degrees and speak multiple languages. They just don't have a lot of infrastructure there to assist them in doing this stock exchange."