The role of the BSE in the exchanges' society

The BSE is currently in its ninth year of existence. Following the set-up of a well established and regulated securities marketplace in the centre of Central and Eastern Europe, it has had to face several challenges again: the general development of the capital markets and finding its correct place in the competition of the world's stock exchanges.

The Hungarian market has developed closer links with and has indeed become an integrated part of the international capital market processes in recent years. The Hungarian securities, which were offered publicly in Western European and United States (US) exchanges and over-the-counter (OTC) markets complied with the stringent requirements there and occasionally the toughest ones on earth. Globalisation in securities trading coupled with the development of fierce competition among the exchanges in the region of Central and Eastern Europe, with each market trying to convince long term foreign investors of their own attractiveness and favourable prospects.

Answers to the present challenges are: transparency, liquidity and innovation, which are also essential to provide the service at low costs. The BSE feels the movements on the capital markets all over the world; the developments of the infrastructure background, telecommunications and the changes in investment habits all strengthen the competition. Globalisation, the abolition of borders and European Monetary Union (EMU) urge the exchanges to find and stabilise their positions. The BSE realise that their results reached so far and that the improvements of the service can be maintained by increasing competitiveness. Competitiveness refers both to investments and developments and also to an effective marketing policy. The tendency for the merger of exchanges is also a fact which it is important not to lose sight of.

The BSE has already done a great deal to satisfy all these requirements and to keep the pace. In 1997 it introduced a three-section model where the membership, trading and clearing rights were separated. The tendency in the world is to run an entrepreneurial type of exchange where the membership rights do not always coincide with the traders'. By releasing the restrictions of membership, the BSE adjusts the development of universal systems. It intends to create a not-for-profit institution where the circle of owners can be broadened and can accommodate other markets as well.

The long term goal of the BSE is to widen its circle of clients. It progressively lists new companies to the BSE, constantly develops the government securities market, widens the products available so far on the derivatives market, and is permanently working to create the regulation and range of products on the standardised options market.

In order to provide a competitive marketplace, the BSE has worked out a well-cut fee structure and an outstanding infrastructure background.

Competitive trading system

As markets compete at more and more levels and as the need by exchange members to strengthen their market positions kept calling for the development of new and the enhancement of existing markets also in Budapest, which could in part be realised by the transfer of new technology, replacement was a matter of urgency as the old technology had failed to manage the high bursts of turnover at the expected level of efficiency for some time. The weeks and months with large turnover suggested what was typical in these days, namely that the exchange approached and frequently operated at the capacity limit of the trading system, the number of executable trades reached a critical quantity, hence the security of operating the system was seriously endangered.

The BSE targeted many areas of expanding services:

• expanding the scope of markets on the Exchange, which led to a decision on launching a market of options;
• procuring a trading system that offers a unified system for managing all the existing markets and those to be launched in the future on the Exchange;
• introducing trading technology in Hungary that ensures the development of all market segments in an integrated system, on a technical platform;
• selecting a trading system with a technological solution that is capable of supporting the development of the BSE and the whole of the Hungarian securities market without declared limits to growth and capacity in the years to come;
• a trading system that allows for the organisation of off-market segments around the trading system of the BSE, so as to promote higher visibility in the securities market;
• a trading system that allows for the rapid development of more efficient links of the Hungarian securities market in terms of technology and trading with international markets, which are in the process of intense globalisation under the token of the preparations in Hungary for European Union (EU) accession.

The BSE wishes to expand its trading horizon by offering new services over and above the existing and operational trading technology. With electronic trading as the prevailing and dominating mode of doing business on an exchange, a new dimension unfolds in the face of new and even younger markets. The system will lend itself to expanding the horizon of what is exchange trade proper (while Budapest remains the heart of trading) by supporting the development of the foundations for an exchange trading system that spans the whole country. At the same time, the development of the system is of strategic importance as part of the progress towards joining the unified Europe, since the technology of the trading system offers connectivity with other exchanges.

Standardised futures trading on the BSE

The young market economies of Central and Eastern Europe provide a very promising ground for capital markets. The BSE is one of the best performers in the region and, in fact, it was the forerunner in Central Europe

When the BSE launched its standardised futures trading in early 1995, it was the first stock exchange to do so in the region. Since then the market has substantially changed both in terms of volume and methods of trading.

Volumes traded

Currently, the following futures products are traded on the BSE:

• BUX index (BSE Equity Index)
• MOL MATAV and TVK equities
• USD/HUF exchange rates
• DEM/HUF exchange rates
• CHF/HUF exchange rates
• GBP/HUF exchange rates
• euro/HUF exchange rates
• one-month BUBOR (Budapest Interbank Offered Rate)
• three-month BUBOR
• three-month discount Treasury bill
• 12-month discount Treasury bill

Foreign investors have the licence to trade BUX futures on the BSE and use the same licence for equity futures.

The next high priority development: centralising all the markets into the integrated, electronic Multi-Market Trading System that will allow Hungarian and foreign investors to manage their investments in Central Europe in line with the standards and safety features commonly found at established exchanges.

Advantages of trading on the BSE markets:

• Hungary is in a favourable payment position;
• the growth of the business environment is outstanding in Eastern Europe;
• the performance of companies listed on the BSE is fairly good;
• the fundamental reasons behind the long term confidence of resident and non-resident portfolio investors are unquestionable.

Market performance in 1998

A substantial increase in turnover featured on the BSE in 1998. The value of turnover in 1998 exceeded twice the turnover in 1997.

From the cash market turnover of BSE (HUF13847.33 billion) equity market made up 50 per cent and the proportion of government bonds and Treasury bills reached 49.7 per cent. The turnover of equities (HUF6920.71 billion) and the government bonds (HUF4800.16 billion) reached nearly two and half times more than that of 1997.

Liquidity rose significantly on the BSE. In 1998 the number of daily average transactions reached 4140, which is double the number of daily transactions in 1997.

Total capitalisation of the BSE increased by nearly seven per cent from December 1997. It can be explained by a rise in capitalisation of government bonds of 48 per cent and Treasury bills of one per cent. The capitalisation of equities declined by 1.3 per cent in spite of new listings while a proportion of equities made up 55 per cent of total capitalisation at the end of 1998.

The official stock index of the BSE (BUX) fell more than 24 per cent (27.6 per cent in $). BUX reached its historical maximum level of 9016.36 points on 23 April 1998. After the effects of the Russian crisis in August and the Brazilian crisis in December, the BUX began to tumble significantly.

BUX in 1998

The derivative market developed spectacularly in 1998. Turnover reached HUF2934 billion, which is more than twice as much as that of 1997. At the end of 1998 total open interest reached 48.196 contracts, while in 1997 that number was 79.705. The decline was caused by the diminishing of DEM and US$ contracts because this year keeping an open position in basket currencies meant riskier business in consequence of several financial crises.

Trading in government papers became rounded to four decimals from 20 November 1998. Previously it was rounded to two decimals.

In 1998, seven companies were newly listed and one company was delisted from the BSE. Three electricity supplier companies were listed: the South Hungarian Electricity Supply Co. Ltd, Budapest Electricity Plc and the North Hungarian Electricity Supply Co. Ltd.

On 18 December 1998 proposals for modifying the structure of transaction fees and rights to vote were approved during the General Meeting of the BSE. It was decided that transaction fees to be paid by intermediaries would not be limited to HUF20 million and rights to vote would not be based on turnover but on accumulated transaction fees paid by the dealers.

For more information, contact the Information Centre of the Budapest Stock Exchange, Room 805, Eighth Floor, Vörösmarty tér 1, H-1051 Budapest, Hungary. Tel: (36) 1 429 6636 Fax: (36) 1 429 6654 E-mail: totha@bse.hu Web site: www.bse.hu