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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
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2 TOPICS FOR DISCUSSION PREEMPTIVE RIGHTS WARRANTS SHORT SELLING REPOS FIXED INCOME ROMANIAN DEPOSITORY RECEIPTS
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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;
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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;
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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;
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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;
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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;
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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.
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9 THANK YOU !
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