University of Business and Administration in Gdynia

Financial markets in Romania

Student: Patranoiu Andreea Coordinator: Ewa Mazurek-Krasodomska

2011

I. An investor should have over 18 years old and also have a certain amount of money that he intends to place on the capital market by purchasing and/or selling financial instruments. What can an investor find on the Romanian capital market? The financial instruments can be purchased with an expectation of favorable future gains. issuers) and operations (investment services. governments or public sector institutions can obtain funding through the sale of a new financial instrument.e. Overview of the Romanian Capital Market What is the capital market? The capital market is the general term for the market where financial instruments are bought and sold. investment firms. It includes all the entities and operations which support this process. it is important to note that the term can relate to a rather broad range of products and services that are associated with finances and investments. The primary market is that segment of the market where new issues of financial instuments are at investor‟s disposal. Who can be an investor on the Romanian capital market? The investor represents a person who owns money and intends to use it in transactions with financial instruments. bonds and other types of securities (rights on shares). public offers) as well as collective investment schemes (investment funds) creating for the investors a regulated and supervised framework to invest in financial instruments. called risk factors. . The secondary market is the market for trading the financial instruments that have already been issued. The capital market consists of the primary market and the secondary market. such as shares. When referring to the capital market. Their derivatives (futures contracts. options) and fund units are also included. Financial instruments are any form of ownership that can be easily traded on the capital market. The future incomes depend on several factors. Companies. The Romanian capital market includes markets in financial instruments with their specific institutions (i.

• the third market is the market in which trading occurs in shares outside the exchange. depending on the investment firm he choose:    providing him with recommendations on investments. and other residual revenues issuers. common stock trading market and the types of actions that grant rights  bond market is trading market for any requires periodic coupon payments and repayment fund loan due date claims that  government securities market is the market of securities available for sale to population and to legal entities by the state. This market is subject exchange activities and their mechanisms. Depending on trading procedures: . Market transactions are repeated. either an intermediary or an asset management company. It is called stock market. Depending on the type of securities:  equity market is the preferences. Classification of financial markets Depending on the level of trading: • primary market is the market in government securities which are traded for the first time. depending on capital supply and demand expressed. issuers of securities obtain funds necessary to develop their business. through a specialized network of investment financial companies.What kind of investment services do the investors receive? In broad terms. products and courses of action (investment advice) buying and selling financial products. • secondary market is the market in which the securities are traded are already in circulation. on his behalf. without investment advice management of his investments by a firm on his behalf (investment management) Any investment services on the capital market must be performed through an authorized entity. • fourth is the market or direct market transactions in which titles are sold in bulk through a network of financial institutions. an investor is likely to receive one or more of the following types of investment services.

the borrower is not charged interest. Depending on how the money may be purchased and traded: • debt markets are markets characterized by tools that generally report interest at fixed periods. These markets are mainly negotiated markets. usually after working principles of the auction market at a certain location central office. Instead. bonds being the main purpose of the transactions. these markets are also known as fixed income markets. brokers‟s and secondary securities issuers‟s offices (commercial banks. which can cause fluctuations in the market for auction-term. it is made by telephone. • securities markets are markets that also require to take a medium or a long term loan. Therefore. If a transaction is completed by the dealer or broker. Transactions are made at those prices for which demand exists offer. Depending on the intensity of daily turnover: •permanent market is the market in which. until there will be plenty of orders on the other side of the market. meaning that the identities of those who sell or purchases are unknown. insurance companies). computer. Negotiating market is also called inter-dealer market. the identity of the other part remains unknown. Depending on the place where trading takes place:  organized market is the market with trading rules established. there is a sequence of stock quotes during a .  negotiating market is the market in which those who sell or buy negotiate the volume and the price of the securities directly or through an agent: broker or dealer. telex. In order for these transactions to take place in many places.  Over the Counter market is made up of dealers‟s. Shares are traded in such a type of market. auction market in which trading market is controlled by a third party (called agent market).in other words they become holders of the capital interest in a company. but in this case. for a title. the company that takes the loan issues shares to investors who become co-owners of that company . for granted loans the period between 12 months and 30 years. depending on the overlapping price of buy or sell orders for certain titles. The market is impersonal. This is useful for inactive titles market and high value transactions. These markets involve engaging medium and long term loans.

Investment Opportunities What are the types of instruments that one can invest in? Shares are financial instruments issued by companies. it will be called prior contract. A share is one of a finite number of equal portions in the capital of a company. When someone owns shares in a company. The income received from shares is called dividend a person owning shares is called a shareholder. Immediately is defined by the market and has various forms depending on the types of securities. If a futures contract is traded Over the Counter through negotiation. these four classes daily public markets: opening price. closing price. named maturity. •market option is the market in which securities are traded after delivery and the commercial tool is called option contract. meaning they do or not carry the right to vote in the general shareholders meetings and on corporate policy. Depending on the dynamics and risk transactions: •spot market or cash market is the market where securities are traded for delivery and immediate payment. •early market is the market that allows the most various transactions with securities. The main feature of this market is immediate adjustment of transactions. highest price of the day. Bonds are debt securities. on the liquidation. The principle of this market is the execution of commands in time and quoted various courses throughout the day. in which the authorized issued owes the holders debt and is obliged to repay the principal and interest (the coupon) at a later date. •call market is the market quotations in which transactions are effected by a price equilibrium at a time of balance. Typically. the lowest price of the day. Its major feature consists in the fact that the sale and purchase transactions are paid once a month. Transactions are performed for a certain amount of securities called quotation. The tool is called futures trading. Shares can be voting or no-voting. that person is also entitled to a portion of the value of that company. •market "futures" in which securities are traded for future delivery and payment. in case of liquidation. securities sold that are stipulated in the contract are already in circulation or may be issued before the due date specified in the contract. A bond is simply a loan in the form of a security with different terminology: The bond issued is equivalent to .session (call-over).

you will receive from the issuer a specified rate of interest during the entire life of the bond and at the maturity of the bond the issued will repay you its value. Stock exchange index is a basket of securities aimed at tracking the market changes. Among the types of forms you can choose from the Romanian capital market are: corporate. International bonds are bonds issued in a country by a non-domestic entity. Common derivatives are futures and options. The price of the underlying asset on the delivery dat is called the settlement price. issued on short term. they can be used to manage risk. reduce cost and enhance returns. and the coupon to the interest. Pre-emptive rights are negotiable apart from the shares to which they entitle for subscription. In other words. Bonds and shares are both transferable securities but the major difference between the two is that share-holders are the owners of the company. at a specified price. Fund units are financial instruments issued by collective investment schemes at a price established according to the net asset value of the respective undertaking. but not the obligation. Corporate bonds are bonds issued by a company. The future date is called the delivery date or final settlement date. whereas bond-holders are lenders to the issuing company. . countries and other governamental entities issue to raise money for public purposes. certifying the right of the owner to receive a share at the moment of listing the shares of a company on the market. the bond holder to the lender. The pre-set price is called the futures price. When you buy a bond. to buy or sell a certain underlying instrument at a certain date in the future. foreign currency exchange rate etc. but both parties of a “futures contract” must fulfill the contract on the settlement date. Rights on shares (pre-emptive eights and allocation rights) Pre-emptive rights are financial instruments that give the shareholder the right to subscribe newly issued shares before the respective shares are offered for subscription to other shareholders or third parties. In return for the loan. Allocation rights are negotiable securities. such as an interest rate. the owner of an options contract may exercise the contract. Futures and options contracts are standardized contracts. Municipal bonds are debt securities that cities. municipal and international. you are lending money to an issuer such as municipality or corporation. Derivatives Derivative financial instruments are financial contracts whose values are determined by the fluctuations of the underlying asset or index.the borrower. A futures contract gives the holder the right.

the central depository issue the account statement in proof of: ҉ ҉ ҉ his holdings the changes performed to his accounts the percentage held by him of the total securities of the same class issued by the issuer. The players on these markets should observe transparency and reporting obligations required by CNVM. ROL/EUR.Romanian capital market institutions Bucharest Stock Exchange (BVB) was set up in 1995 as a public interest institution and was transformed in a joint stock company in July 2005. cleared and settled through a Clearing House. the market is called SIBEX and includes two segments: futures market and options market. At present. Central Depository The operations related to securities transactions on BVB are made through the Central Depository. EUR/USD). interest rate (BUBOR 3) or shares. In Romania are two clearing houses performing these services:  The Romanian Clearing House (CRC) – for BMFMS/SIBEX derivatives market  Bucharest Clearing House (CCB) – for BVB derivatives market . Sibiu Monetary Financial and Commodities Exchange (BMFMS) was set up in 1994 as a joint stock company and is currently dedicated to trading of derivative financial instruments. aimed at invertor‟s protection by assuring equal treatment for all the investors and best execution parameters. Now. BVB is the market operator that administrates two regulated markets: a SPOT market and a derivatives market. guaranteed. Clearing Houses and Central Counterparty Derivatives transactions are recorded. The derivatives traded on Sibex include futures and options contracts having as underlying assets the exchange rate (ROL/USD. On the investor‟s request.

S. ICF does not compensate investors in case of loss caused by assumed risk in relation with financial instruments transactions.07 mil.206. Lei (2. in 2010 The cumulated value of transactions on the regulated markets managed by B.85 mil. Lei). Transaction structure at B.957 mil. fund units (22. Lei).E. shares (6. Lei at the end of the previous year. being of 102. .76 mil. Of the total of transactions.143 mil.571.E. Lei.‟s represented 28. Lei). Lei).After the execution of buy and sell orders. compared to 80 bl.07 mil. Figure 1. The transaction structure is shown in Figure 1.28 mil. Lei). rights (4. The evolution of the capitalization of the markets managed by B.S.E. respectively: debt securities (2. EUR). Investors’Compensation Fund (ICF) is an independent entity.E.37%.44 bl.66 mil. in 2010 was of 8. at the end of 2010 increased significantly over 28%. is shown in Figure 2.C. structured products (45. The cumulated capitalization of the markets managed by B. futures (107. created under the CNVM* regulation as a tool to protect investors against financial loss when authorized intermediaries are unable to pay claims against them in case of being into default. transactions are processed in preparation for the transfer of the ownership of the derivatives and the fulfillment of the obligations.S. the shares transactions of the five I.S. Lei).

Lei. shares. MOLDOVA with 588 mil.S. Lei. I. Lei. With regard to the traded value. OLTENIA with 1. followed by OMV PETROM (SNP). Lei. followed in decreasing order by. BRD-GROUPE SOCIETE GENERALE with 666 mil.C.C. on the first place were the bonds issued by the State due on March 2014.E. Transaction structure at B.C. with a total value of 1. DAFORA (DAFR) and AMONIL (AMO). Lei and ROMPETROL RAFINARE with 455 mil. OLTENIA (I. I. with over 6 bl.5). Table 1. I.Figure 2. Futures and options contracts in 2010 .175 mil.257 mil. in 2010 Rompetrol Rafinare (RRC) was the issuer with the highest volume of traded shares in 2010.C.

M.47 mil.F. The percentage variation of the open interests in 2010 compared to 2009 is of -35%. In this context. the Communist period (1947-1989) was preceded by other events that also influenced the investors‟ behaviour. in December 1882.C. it must be considered that between 1941 and 1945. were disturbed for a very long period of time. was in 2010 of 6. the Romanian capital. 2004). The highest number of derivative financial instruments (D. One different issue that can offer some explanations regarding the evolution of capital market is related to the attitude of the Romanian people against the communism.427. in 2010.596 in 2009 to 390. before the Second World War.794 in decrease compared to 2. In 2007.F.C.E. this state has to be analysed cautiously as long as the mechanisms of the markets and. The value of the derivatives traded at S. Moreover. was of 5.M. traded on S.F.C. However. Romania was under a royal dictatorship (1938-1940) and. for this country. After . at least in the region (at that time. was in 2010 of 1.E.M. The number of D. representing approximately 1379.I. which was re-opened in 1995. in decrease with 34% compared to the average of 2009.324 in 2010. some of the mechanisms of market economy are still not functional even today. After it became independent (in 1877).) traded on S. was exterminated or marginalized over the Communist period (1947-1989). Bucharest.I. Romania evolved inconstantly over time. It has to be taken into account that political agreements do not follow every time the facto state. Romania developed into one of the best performing countries in economic terms. Romania became a member of the European Union. In June 1948. This state was also determined by the limited access to the information related to the market economy instruments.The daily average of derivatives‟ contracts number traded on S. Moreover. it can be concluded that the Romanian people were almost unfamiliar with the market economy system. especially. in decrease from 600.823. Thus. which had no relations to capitalism.89 mil EUR. the nationalization of almost the entire private property determined the closing of the Bucharest Stock Exchange (Anghelache.F. Romania was taking part in the Second World War. Moreover. Lei.F. and it was closed only during the First World War (1914-1918).E. it became a fascist country (1940-1941). Consequently.287 in 2009. the financial markets. and after 1945 was under the USSR‟s influence.483. comparatively to other countries the Bucharest Stock Exchange was founded very early. Historically. during the war.E. and the lowest in December. After the Second World War.F. was registered in May. continuing the descending trend from the last 5 years. was called “the little Paris”). most of the population.M.C.637.

There are some features of their behaviour that might have a significant impact upon the Romanian capital market. independent of the government. the Bucharest Stock Exchange was re-opened in 1995. do not take into consideration the fundamental valuation of assets. Formally. survival being their main purpose. the black market evolved. Consequently. it is quite hard to consider a “real” Romanian financial system during the communist regime. For instance. in most cases. had no significant private sector. Based on the same principles. National Bank of Romania became the central bank. there were no private initiative and private investments and. fundamental changes were gradually made at the level of the existing financial institutions.some years of resistance. According to Ben–Ner and Montias (1994). Given these facts. Managers do not fully understand the fact that the companies‟ financial resources can be represented by the stocks bought by a number of small investors who become minority shareholders. but they want earnings as fast as possible. „unlike other East European countries. too. For instance. from the point of view of mentality and culture. Most of the Romanian companies do not pay dividends or. it can be noticed the Romanian investors‟ reluctance against the long-run gains. nowadays the capital market in Romania is organized under a system derived from the US capital market system. Consequently. there were no private funds available. Actually. Romania had no decentralized decision-making at the level of government-owned firms. In fact. consequently. Because of the centralized economy. the level of production in almost each report was overvalued. After 1989. The regulatory and monitoring authority is . the desire to become wealthy fast generates some speculative behaviour on the financial market. The response of the Romanian citizens was to adapt to the communist “values”. on the one hand. during the communist period the financial system was limited to few fully state-owned banks and the capital market totally disappeared. financial markets had specific features for the communist regime. there was no need of capital to finance them and. The existing state-owned commercial banks started to be much more market oriented. The last feature maintained over most of the transition period and it was the main reason for lack of liquidity of the BSE. and did not rely on markets to a meaningful extent‟. and so on. their size is strongly reduced. and their will to earn some money from speculative transactions. They. Nowadays. Investors have no patience in waiting for long-run gains. even if they do. Romania became much concealed towards the “values” of communism. there was no need for a complex financial system and the few existing financial institutions were suitable to the necessities of a fully state-owned economy. according to the financing needs of a market economy. the Romanian investors are influenced by the legacy inherited from the past system. Another issue is related to related to poor corporate governance principles and minority shareholders‟ protection. on the other hand.

1 – 3rd tier). 39 – 2nd tier. being disseminated in real time by the Wiener Borse. The total number of shares traded in all the three tires in April 2008 was 61 (21 – 1st tier. except for the SIFs. from the point of view of the securities traded. RAQ-I – that reveals the price movement of stocks listed on the first category of this market and RAQ-II – which reflects the price movement of stocks listed on the second category of this market. but also few local municipality bonds are traded (16 listed in April 2008) and very few corporate bonds (6 listed in April 2008).the National Securities Commission (NSC) similar to the US Securities and Exchange Commission. they remained independent.which reflects the price movement of all the companies listed on the BSE regulated market. ROTX – which reflects in real time the price movement of "blue chip" companies traded on the BSE market. . the Bucharest Stock Exchange (including RASDAQ) general trends were reflected by 7 indices: BET . The trading volume increased by almost 20 times between 2000 (April) and 2008 (April). depending on the liquidity of shares and on the other features of issuer companies. The shares listed on the BSE are divided into three tiers. and the trading value increased by almost 300 times. which is similar to the US NASDAQ. The number of licensed intermediaries expanded to 75. on the 1st and on the 2nd tiers. The main capital market is split into two parts: the Bucharest Stock Exchange (BSE) and the electronic OTC market based on negotiation between dealers (RASDAQ). In April 2008.index of the most liquid 10 companies listed on the BSE regulated market. RASDAQ Composite Index – the price index of all stocks traded on RASDAQ. BET-C . BET-FI – the index which reveals the price movements of the investment funds (SIFs) traded on the BSE regulated market. Mainly. These parts merged under the BSE authority at the end of 2005 but. the securities traded on BSE and RASDAQ are shares.

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