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BUCHAREST STOCK EXCHANGE

Join the discussion on preemptive rights, warrants, short selling, repos, fixed income, and Romanian depository receipts at the Bucharest Stock Exchange conference. Learn about innovative investment options shaping the capital market.

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BUCHAREST STOCK EXCHANGE

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  1. “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

  2. TOPICS FOR DISCUSSION • PREEMPTIVE RIGHTS • WARRANTS • SHORT SELLING • REPOS • FIXED INCOME • ROMANIAN DEPOSITORY RECEIPTS

  3. 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;

  4. 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;

  5. 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;

  6. 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;

  7. 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;

  8. 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.

  9. THANK YOU !

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