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“Piata Financiara” Conferences FORUM - Capital Market September 17, 2002, Bucharest. BUCHAREST STOCK EXCHANGE. N EW F INANCIAL I NSTRUMENTS AND T RADING T OOLS AT THE B UCHAREST S TOCK E XCHANGE Septimiu Stoica Board of Governors, Vice-president. TOPICS FOR DISCUSSION.
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“Piata Financiara” Conferences FORUM - Capital Market September 17, 2002, Bucharest BUCHAREST STOCK EXCHANGE NEW FINANCIAL INSTRUMENTSAND TRADING TOOLSAT THE BUCHAREST STOCK EXCHANGE Septimiu Stoica Board of Governors, Vice-president
TOPICS FOR DISCUSSION • PREEMPTIVE RIGHTS • WARRANTS • SHORT SELLING • REPOS • FIXED INCOME • ROMANIAN DEPOSITORY RECEIPTS
PREEMPTIVE RIGHTS • A very short term option to buy shares from the issuer at a specific price: • usually a time period of approximately one month; • exercise price at a small discount from the market price; • due to short exercise period and small discount, preference rights rarely have much value; • Preference rights must be issued by the company in conjunction with an offering of new shares; • Designed to protect investors against dilution; • Required by the company law and the new securities law; • Trading in rights gives investors the means for realizing some value from the dilution of the offering; • Reduces the profitability of investment bankers and underwriters; • Rights trading will never be a significant portion of exchange volume;
WARRANTS • A longer term option to buy shares in an issuer at a specific price: • term can extend for many years; • price usually at a small discount from market at time of issuance; • usually issued in conjunction with a bond or stock offering to make the deal more attractive: • a sweetener; • an alternative to convertibles; • sold by the issuer, not granted to holders like preference rights; • Warrants can be traded separately from the shares or bonds with which they were issued; • As longer term instruments, the option value of the instrument is greater than rights; • The shares of the issuer should be consistently traded; • Can be a useful, but probably small product for the market;
SHORT SELLING • Borrow shares and replace them later; • Sell the borrowed shares now hoping to buy them back later at a lower price; • Advantages: • Improves market liquidity; • Gives investors more investment choices; • Allows hedging and market making; • Can reduce market volatility; • Disadvantages: • Another tool that can be abused to manipulate the market and defraud investors; • Much larger risks for investors due to unlimited loss potential; • Short selling is not an important product for most markets; • Uptick rule has reduced manipulation and fraudulent abuses; • Requires important infrastructure improvements: • Securities lending and guarantees; • Financing of transactions; • Enhanced surveillance;
REPURCHASE AGREEMENTS - “REPOS” • Definition:A money market instrument that represents the present sale of securities linked to a simultaneous repurchase of securities of the same sort at a specified or unspecified date. Repo markets usually have very short term maturities, one, seven, 30 or 60 days. Repos are sold on a discount basis; • Issuers/Borrowers: • Generally used by commercial banks as a liquidity management tool; • Can be used to finance inventories (e.g. broker/dealer inventories of unsold securities) as a cost-effective price; • Sells asset to buyer in exchange for cash with agreement to repurchase at later date; • Investors/Lendors • An alternative investment to treasury bills, with a slightly higher yield; • Lends unutilized cash to borrower on a collateralized basis;
CORPORATE BONDS • Definition: • Investment or issuance alternative with a maturity of more than one year; • Can have fixed or floating interest rates; • Used to finance longer term investments; • Advantages - Investor: • Longer term investment for institutional investors to match existing liabilities; • Longer term instruments have higher returns; • Advantages - Issuer: • Financing longer term investment projects, e.g. construction of a new building; • Can be more cost-effective financing alternative than bank borrowing (all-in costs); • Disadvantages – Investor: • Market risk if needs to sell; • Lack of secondary market in Romania; • Disadvantages – Issuer • Need to file with regulator (and potentially rating agencies); • Corporate governance issues;
ROMANIAN DEPOSITORY RECEIPTS • Marketable certificates representing ownership interest in foreign securities – most or all of the aspects of share ownership; • Efficient, low cost product for diversification into other markets; • Allows Romanian investors to own and trade world class companies with high standards of disclosure and corporate governance; • RDR’s will create investment competition for Romanian issuers; • Can attract more Romanians to invest in the market creating more liquidity; • Very useful products for pension funds who need safe investments; • Requires strong local custodian with links to international custodians; • Program manager, a local broker, handles the market functions; • An issuing prospectus for the RDR’s discloses the key details; • Flexible – can represent ownership in stocks, bonds, investment funds.