Denmark: Financial System Stability Assessment with reports on - IMF

2439. In contrast to the other Nordic countries, the Danish capital market isdominated by mortgage bonds (Table 7). With public debt declining, mortgage bonds nowaccount for about two thirds of the total bond market capitalization. The market forgovernment securities is quite liquid and benefits from the setup of electronic tradingplatforms, and a sound issuance policy.40. The medium-size Danish equity market faces a number of structural issues. Untilrecently, the market has outperformed the major international markets, but has low turnover.In recent years the Copenhagen Stock Exchange has also experienced significant delistingsand difficulties in attracting new listings. The structure of the market, where small- andmedium-size enterprises (SMEs) constitute the vast majority of listed companies, but activityis concentrated among a handful of large corporations, including the dominant globalcontainer shipping concern, Maersk, adds to the difficulty of maintaining adequate marketliquidity. The concentration of liquidity and activity in a limited number of shares canultimately be seen as a major obstacle by investors, in particular institutional investors.41. Initiatives have been launched by the Exchange to address these issues, but theireffectiveness remains to be seen. The launch of the alternative market place, FirstNorth,aiming at small companies and imposing reduced listing requirements, is too recent to allowto draw meaningful conclusions. However, similar experiences in other European countriesappear to confirm the potential for such organized but unregulated markets to attract newcategories of companies to the stock market. A potential risk, however, is that more opaquemarkets would ultimately weaken investor protection and reduce the benefits of the newtransparency and corporate governance frameworks.42. The creation of a common regional market place <strong>with</strong> common trading would bean important step toward integration in the broader European capital market. Thestrategic alliance (Norex) and the consolidation of OMX have resulted in the creation of anincreasingly homogeneous regional trading environment offering investors, issuers, andexchange members cost-effective access to an increased range of investment opportunitiesand increased liquidity, thereby increasing the attractiveness and visibility of the region tointernational investors. However, the integration of clearing and settlement infrastructureshas lagged developments on the trading side, primarily due to cost considerations.43. The investment fund industry has experienced steady growth and significanttransformation in recent years (Table 8). However, assets in relation to GDP are still lowerthan in Sweden and the average of the EU-12. Hedge fund-type investment vehicles haveprogressively been allowed in <strong>Denmark</strong>. Effective July 2005, a new regulatory regime hasbeen introduced, setting the ground for the development of regulated onshore hedge funds(hedge associations). Rather than imposing specific constraints on the investment policy ofthe funds, the regulations establish extensive information obligations and frequentredemption windows and rely primarily on investors to control the fund managers. It isimportant, that the supervisory authority establishes a clear jurisprudence in key areas such asasset valuation practices, which remains under the responsibility of the funds.