General aspects

The general economic overview shows that Romania has features to be considered one of the largest markets in Eastern Europe. It is a market of 23 million people and it has implemented an intensive privatisation programme, which has a goal of privatising more than 1,000 companies in 1997. Some of these companies will be privatised through the Bucharest Stock Exchange.

Current legislation provides extensive rights for major foreign investors, including full participation in the management of the investment, the right to transfer profits abroad after paying taxes, and the right to assign contractual obligations or rights to other Romanian or foreign investors. Investors are protected against confiscation or expropriation.

Portfolio investors are getting better treatment. The new law concerning foreign investments allows entire repatriation of the profits and dividends. No capital gains tax is imposed, but up to 1.5 per cent tax will be charged to the buyer on each portfolio transaction.

With Parliamentary approval of the new Securities and Stock Exchanges Act gained in 1994, the legal framework required for the establishment of a modern capital market has been laid out. The Bucharest Stock Exchange is a self-financing, non-profit organisation.

There are currenlty 98 members, of which eight were set up as securities subsidiaries of commercial banks. According to the Securities Act, banks cannot engage directly in securities business but can set up securities subsidiaries. However, the Exchange is an open institution, therefore membership is not restricted to a limited number of seats.

Membership of the Exchange is limited to securities firms which are required to have a minimum of ROL 100 million in capital.

Foreign securities companies can act in the Romanian securities market only through a subsidiary incorporated under Romanian law. Foreign banks will be subject to the same requirements, provided they have already set up a securities subsidiary.

In April 1995 the National Securities Commission approved the opening of the Bucharest Stock Exchange. The first trading session was held some months later, on 20 November. As members of the Stock Exchange, 24 brokerage houses were able to trade the shares of six companies. The BSE is a self-financing institution.

Supervision of the Stock Exchange is carried out by a General Commissioner, appointed by the National Securities Commission.

Listing

The listing process is governed by Law 52/1994 and the Exchange's rules and procedures. These regulations contain requirements for admission, maintenance and promotion of securities, mention the required documentation for the listing application and define the issuer's obligations for information disclosure. The listing system is structured into three sectors:

• Romanian company securities - divided into two tiers;
• government and municipal bonds;
• international securities.

Transparency

The BSE requires each listed company to disclose any information that can affect the share's price, such as quarterly and annual financial statements and any other price sensitive information such as:

• decisions regarding buying, selling, renting or mortgaging the assets;
• changes in management and management shareholding;
• mergers or acquisitions of the respective company;
• changes in the status of securities, as reclassification or division, or a new issue;
• granting or borrowing a loan.

Trading at BSE

Apart from the traditional departments of a stock exchange, the BSE also has the Clearing and Settlement Department which performs the settlement of trades, and the Registry Department which performs the transfer of ownership.

At the BSE, trades take place within a computerised order-driven system, assisted by a software called 'The Automatic Trading Execution System'.

Since May 1997 the BSE has traded between 9.15 am and 1.30 pm local time (GMT + 2) daily. Trading is divided into two parts:

• pre-opening - during the 15 minute period orders are entered into the trading system. At 9.30 am the system calculates the opening price for each stock in the form of a single price auction, which aims to maximise the trading volume and clear the market at the opening price.
• continuous trading - during the next four hours transactions are done in real time. The system allows multiple different quotations, matching orders on a price and time priority. As soon as two orders match, the trade is executed. Orders can be either limit, market or range. Sell orders are not accepted if the seller does not have enough securities in his account.

Other trading facilities

Transactions exceeding ROL 100 million or five per cent of the voting rights are regarded as block trades. Block trades just need to be reported to the BSE within the trading hours of the same day. The reported price has to be within price limit range and the cash will be settled off the Exchange.

Cross trades are allowed within the best bid offer prices or, if no bid-offers are in the market, they have to respect the price limit (calculated on the basis of the previous day's average price).

We have also included trading facilities in order to meet the market requirements and to stimulate the trades. Group accounts have been introduced to alleviate the traders' efforts after the end of the Mass Privatisation Programme, when a large number of retail sellers assaulted the market.

Clearing and settlement

Settlement is done through final settlement bank, the National Bank of Romania, with multilateral net clearing performed by BSE. The settlement cycle is T+3, with cash being settled first, followed by securities.

The brokerage houses must open accounts at other settlement banks, allowed by the National Bank and the BSE. There are 15 commercial banks involved in the settlement.

When placing orders with the broker, the client has to instruct its custodian before the end of the trade day. Before inputting the order, brokers check with the custodian that the investor has enough securities or funds in their account. Otherwise the custodian can reject the transaction as an unknown trade. In this case the entire responsibility for settlement goes to the brokerage house. Buy-in procedures proposed by BSE are soon likely to be adopted by the National Securities Commission.

The development of the market made us determined to make a lot of improvements to the settlement system. Custodians will have direct access to our software system regarding the settlement of stocks and money. There are three big international banks which are custodian banks, ABN AMRO, ING Bank and Societe Generale. Several Romanian banks are also involved in the settlement process as custodian banks.

Risk management

There are a number of measures to manage the risk of payment failure:

• a trading limit related to its capital adequacy is imposed on each member firm;
• in case of incapacity to pay, a credit can be granted by the settlement bank of the brokerage house, according to contractual provisions;
• in case the settlement bank cannot grant the credit or the credit does not cover the debt amount, the BSE involves the Guarantee Fund;
• as a final step, all members can be called to contribute to the payment.

Actual size of the market

1997 showed the potential of the Romanian capital market. We stared with 17 companies listed but now have 63 companies, of which 11 are listed on the first tier. The market capitalisation is expected to reach five per cent of GDP by the end of the year. The figure will substantially improve, since we have more than 100 companies applying for listing.

Prospects and objectives

During the last year of operation our Stock Exchange consolidated its technical infrastructure and our personnel gained valuable experience. Now we are ready to sustain market development and the transparency required by international standards.

At the end of 1996 we established some important objectives for this year. By now some of them are entirely or partially achieved.

We launched an official index, BET (Bucharest Exchange Trading), based on a basket of the ten most traded and liquid stocks on the first tier.

The custodian services were regulated and began to be implemented during the second half of this year.

We are constantly striving to improve our services by providing new facilities for traders and issuers - remote trading and State Ownership found public offerings through BSE. Two private banks are already listed and will start trading soon.