The next frontier
03 June 2015
The Romanian market is improving at a gallop, but Andrei Mezdrea of Raiffeisen Bank explains why it still has a way to go if it’s to graduate from the frontier
Image: Shutterstock
The progress made in aligning the Romanian capital markets with international standards is remarkable.
In a joint effort to obtain reclassification from ‘frontier market’ to ‘emerging market’ from Morgan Stanley Capital International (MSCI), market participants and authorities have teamed up. The Romanian government is strongly supporting this initiative, which is aimed at creating greater visibility of Romania but also at attracting a whole new range of investors, namely those who are not currently allowed to invest in frontier markets.
The working group, including the Bucharest Stock Exchange (BSE), the Financial Supervisory Authority, the National Bank of Romania and the Romanian government, identified a list of eight systemic barriers for the creation of the modern capital markets in Romania, and committed itself to removing them.
Regulatory framework in place
A number of bold initiatives promoted by the authorities and the government during the last two years have qualified Romania as one of the European markets with the fastest progress. Market procedures and infrastructures have been aligned with international standards in various fields:
Major improvement in corporate governance and shareholders’ rights regulations, for example, in the introduction of ex- and pay-dates, general representation for shareholders meetings, and centralisation of income distribution at the local CSD;
Segregation of trading and settlement infrastructure;
Reduction of market fees as an incentive for liquidity providers; and
Reduced fiscal reporting obligations for non-resident investors.
BSE officials estimate that, from a regulatory and infrastructure perspective, the market is already compliant with MSCI requirements as of today. However, we are still missing a consistent pool of well-capitalised companies and we need improvement of the free float and liquidity criteria.
Opening up for additional trading
Apart from regulatory and functional enhancements, a number of initiatives took place in recent months, underling the market’s intention to implement and accept thorough changes that have come along with the application of the MSCI standards, as well as with the intent to boost the capacity to absorb additional volumes.
We have seen market opening for depository receipts (DRs). Following the introduction of global depository receipts (GDRs) in Romania in late 2013 and the successful initial public offerings of natural gas producer Romgaz and the Romanian electrical power distributor Electrica, one of the top five most liquid issuers at the BSE, Fondul Proprietatea, has opted for trading on the Specialist Fund Market of the London Stock Exchange, through GDRs by means of a non-capital raising listing.
There has also been an increase in remote membership at the BSE. In the last year, two brokers from Central and Eastern Europe obtained membership at the BSE, despite the fact that the Romanian market is not rendering the services of a central counterparty (CCP), and that the settlement setup in relation to the local CSD is quite complex. This is a clear indication of confidence in the market’s potential.
Finally, there has been development on the bond market. In May 2015, the Bucharest City Hall issued municipal bonds worth €500 million in order to refinance a previous bond issue of €500 million, maturing in June 2015. As they premiere, the bonds are available for settlement through Clearstream.
An ambitious agenda
The Romanian market has undertaken major steps forward, but a lot of work still lies ahead to enforce further improvements, such as:
Automation of the operations: A significant part of the operations still implies manual intervention into applications, requiring paper-based or human processing;
Settlement risk management: the creation of a local CCP will have to be put on the agenda once again. In order to evolve, the market needs to address the settlement risk by creating a CCP.
New listings: state officials’ ambitious statements about further listings and privatisations need to be backed up by a master plan, and relevant milestones will need to follow.
Increasing the liquidity at BSE: the Romanian market is a buy-and-hold market. The regular turnover is still small compared to the market’s potential. In our view, this could have to do with the fact that the numerous regulatory and system changes so far have not yet been entirely internalised by small-medium investors.
Developing the retail market: financial education is the key for the creation of a pool of domestic long-term investors. They are needed to cushion the effects of movements of the large players and provide solid demand for Romanian instruments.
Aligning taxes to business realities: Once approved, the amendments to the Fiscal Code planned to become effective as of January 2016 will significantly improve the fiscal treatment of the capital markets investments.
About Raiffeisen Bank Romania
Raiffeisen Bank Romania is an agent for promoting and realising new setups and projects on the domestic market.
The group securities services Romania business has actively been taking part in the development of the Romanian capital market. At the same time, product and service quality for global clients is key in an increasingly automated and standardised business environment.
Virtually all market developments of the last few years were either initiated or supported by Raiffeisen, including the permission of settlement of municipal bonds via Clearstream; the start of trading of newly issued shares within three days following the capital raising through an IPO; the introduction of DRs on the market; the introduction of over-the-counter turnaround trades; the introduction of a global accounts structure, market making and short selling; and remote broker access to the BSE.
We are confident that, despite the fact that the Romanian market is still small and needs further investments, the improvements of the last few years prove it will remain one of the European markets with the fastest progress, and an example of growth in the region.
In a joint effort to obtain reclassification from ‘frontier market’ to ‘emerging market’ from Morgan Stanley Capital International (MSCI), market participants and authorities have teamed up. The Romanian government is strongly supporting this initiative, which is aimed at creating greater visibility of Romania but also at attracting a whole new range of investors, namely those who are not currently allowed to invest in frontier markets.
The working group, including the Bucharest Stock Exchange (BSE), the Financial Supervisory Authority, the National Bank of Romania and the Romanian government, identified a list of eight systemic barriers for the creation of the modern capital markets in Romania, and committed itself to removing them.
Regulatory framework in place
A number of bold initiatives promoted by the authorities and the government during the last two years have qualified Romania as one of the European markets with the fastest progress. Market procedures and infrastructures have been aligned with international standards in various fields:
Major improvement in corporate governance and shareholders’ rights regulations, for example, in the introduction of ex- and pay-dates, general representation for shareholders meetings, and centralisation of income distribution at the local CSD;
Segregation of trading and settlement infrastructure;
Reduction of market fees as an incentive for liquidity providers; and
Reduced fiscal reporting obligations for non-resident investors.
BSE officials estimate that, from a regulatory and infrastructure perspective, the market is already compliant with MSCI requirements as of today. However, we are still missing a consistent pool of well-capitalised companies and we need improvement of the free float and liquidity criteria.
Opening up for additional trading
Apart from regulatory and functional enhancements, a number of initiatives took place in recent months, underling the market’s intention to implement and accept thorough changes that have come along with the application of the MSCI standards, as well as with the intent to boost the capacity to absorb additional volumes.
We have seen market opening for depository receipts (DRs). Following the introduction of global depository receipts (GDRs) in Romania in late 2013 and the successful initial public offerings of natural gas producer Romgaz and the Romanian electrical power distributor Electrica, one of the top five most liquid issuers at the BSE, Fondul Proprietatea, has opted for trading on the Specialist Fund Market of the London Stock Exchange, through GDRs by means of a non-capital raising listing.
There has also been an increase in remote membership at the BSE. In the last year, two brokers from Central and Eastern Europe obtained membership at the BSE, despite the fact that the Romanian market is not rendering the services of a central counterparty (CCP), and that the settlement setup in relation to the local CSD is quite complex. This is a clear indication of confidence in the market’s potential.
Finally, there has been development on the bond market. In May 2015, the Bucharest City Hall issued municipal bonds worth €500 million in order to refinance a previous bond issue of €500 million, maturing in June 2015. As they premiere, the bonds are available for settlement through Clearstream.
An ambitious agenda
The Romanian market has undertaken major steps forward, but a lot of work still lies ahead to enforce further improvements, such as:
Automation of the operations: A significant part of the operations still implies manual intervention into applications, requiring paper-based or human processing;
Settlement risk management: the creation of a local CCP will have to be put on the agenda once again. In order to evolve, the market needs to address the settlement risk by creating a CCP.
New listings: state officials’ ambitious statements about further listings and privatisations need to be backed up by a master plan, and relevant milestones will need to follow.
Increasing the liquidity at BSE: the Romanian market is a buy-and-hold market. The regular turnover is still small compared to the market’s potential. In our view, this could have to do with the fact that the numerous regulatory and system changes so far have not yet been entirely internalised by small-medium investors.
Developing the retail market: financial education is the key for the creation of a pool of domestic long-term investors. They are needed to cushion the effects of movements of the large players and provide solid demand for Romanian instruments.
Aligning taxes to business realities: Once approved, the amendments to the Fiscal Code planned to become effective as of January 2016 will significantly improve the fiscal treatment of the capital markets investments.
About Raiffeisen Bank Romania
Raiffeisen Bank Romania is an agent for promoting and realising new setups and projects on the domestic market.
The group securities services Romania business has actively been taking part in the development of the Romanian capital market. At the same time, product and service quality for global clients is key in an increasingly automated and standardised business environment.
Virtually all market developments of the last few years were either initiated or supported by Raiffeisen, including the permission of settlement of municipal bonds via Clearstream; the start of trading of newly issued shares within three days following the capital raising through an IPO; the introduction of DRs on the market; the introduction of over-the-counter turnaround trades; the introduction of a global accounts structure, market making and short selling; and remote broker access to the BSE.
We are confident that, despite the fact that the Romanian market is still small and needs further investments, the improvements of the last few years prove it will remain one of the European markets with the fastest progress, and an example of growth in the region.
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