1 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 BUCHAREST STOCK EXCHANGE “Piata Financiara” Conferences FORUM - Capital Market September 17, 2002, Bucharest

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 !