NEW FINANCIAL INSTRUMENTS AND TRADING TOOLS AT THE BUCHAREST STOCK EXCHANGE

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BUCHAREST STOCK EXCHANGE

• NEW FINANCIAL INSTRUMENTS AND TRADING TOOLS AT
  THE BUCHAREST STOCK EXCHANGE
• Septimiu Stoica
• Board of Governors, Vice-president

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TOPICS FOR DISCUSSION

• PREEMPTIVE RIGHTS
• WARRANTS
• SHORT SELLING
• REPOS
• FIXED INCOME
• ROMANIAN DEPOSITORY RECEIPTS

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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

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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

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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

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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

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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

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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
• RDRs 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 RDRs discloses the
  key details
• Flexible can represent ownership in stocks,
  bonds, investment
• funds.

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THANK YOU !