Eastern Europe
01 March 2011
The new markets have come along way since freeing themselves from
oppression. But many still have more to do.
Image: Shutterstock
Only 20 years ago, the vast majority of Eastern Europe was covered by the monolithic Iron Curtain of Soviet rule. It’s hard to believe that now, especially when visiting the countries - the main cities anyway - and it’s impressive to see how far they have come in terms of infrastructure and commerce. Estonia, for example, has one of the best broadband infrastructures in the world.
But, as with any country or institution that attempts huge changes in a short space of time, there are issues arising. In some regions, the liquidity of the markets remain low, while in others the regulatory infrastructure still has some way to go before it meets the standards of the developed world. And there remains the issue of understanding - those who grew up under communist rule had no need to worry about saving for their future, or investing their incomes, and that has led to the younger generation taking control.
The key challenge that remains for the securities lending market, especially in some of the smaller markets, is the limited numbers of stocks available for lending. Some of the exchanges have liquid stocks only in the dozens, leaving little room for manouvre.
But one of the key benefits of working in Eastern Europe is that because everything is so new, there are few legacy issues that affect the market. Most countries looked at models that already worked when designing their markets, so most Western investors and providers will be familiar with the technology, infrastructure and regulatory regime from markets in Germany, the UK and elsewhere.
As most of the most popular Eastern European jurisdictions are also part of the European Union, they are involved in the creation of the new pan-European legislation that will impact the financial services industry. This is expected to help the smaller states, as an increasingly harmonised regulatory regime will, they hope, encourage greater investment into their markets by firms familiar with the rules.
The Baltic states
Estonia has become one of the most technologically advanced European states and has a reputation for welcoming international firms to Tallinn. Securities lending is a small part of its market, simply because there are few local firms that hold interest to international investors, but there is certainly activity in the top 10-15 stocks.
There’s no formal securities lending regulation within the Estonian regulatory infrastructure, although short selling is not permitted. Securities lending is allowed, but it’s only offered on the OTC market. Local custodians do sometimes practice buy and sellback transactions externally but the market has some way to go before securities lending becomes a common practice. The introduction of the euro as the country’s currency at the start of the year, may provide some stimulus. The Tallinn stock exchange is now art of the OMX Group, which means Nordic investors are well-represented.
Neighbouring Latvia, while structurally sound, has a much smaller market, and securities lending is virtually non-existent. Short selling isn’t permitted, but foreign investors are welcome. Lithuania, which makes up the trio of Baltic states is in a similar position, although securities lending transactions are slightly more common. It’s still only offered on the OTC market, and custodians can provide lending transactions on a case-by-case basis for more regularly traded securities.
Bulgaria
Closer to Russia in terms of culture and attitude than some of its neighbours, Bulgaria has been slowly moving towards Western standards. In 2008, the Bulgarian Stock Exchange (BSE) - which is still almost 50 per cent state owned, switched to the Xetra trading system from RTS.
By virtue of the regulations of the local legislation securities lending can only be used to cover short selling transactions. However, though legally allowed, short selling cannot practically take place because of the stringent requirements to the issues that might be subject to short selling.
Short sales with financial instruments can be carried out within the territory of the country only on the regulated market and with instruments meeting the specific criteria set in the regulation. The financial instruments to be used when executing margin buys and short sales shall be such that are tradable on a local regulated market and with reference to the last 20 trading sessions on that market:
Have been actually traded during at least 15 of those
The average daily trading volume has been at least 5,000 lots
The average daily number of trades has been at least 30
The market capitalisation of the issue is at least BGN 20 million and its free float at least 15 per cent
The BSE is obliged to announce officially in its daily bulletin the list of securities that comply with the above criteria.
Investment intermediaries are obliged to keep securities subject to margin buys and short sales in separate safekeeping accounts within the depository institution. Short sales are offered only after signing a separate special contract between the client and the investment intermediaries. In addition, it is an obligation of the investment intermediary to make sure that it will be able to deliver the financial instruments subject to a short sale transaction, before executing it through the regulated market.
Repo transactions, however, are possible and much more popular. Repo transactions can be done with government securities, as well as with bonds and shares traded on the stock exchange.
Ukraine
As one of the largest countries in Europe, Ukraine still maintains close political ties to Russia, although its young and educated workforce looks more to the West. As with many Eastern European states, there is huge disparity between its modern, efficient and culturally exciting cities such as Kiev, and the rest of the country, where poverty, traditional farming methods and relics of Soviet times dominate.
Befitting such a large country, Ukraine has a bewildering number of exchanges, 10 at the last count, along with an OTC trading system. Investing in the market is not as simple as in some of its neighbours; foreign players have a few hoops to jump through before a firm can make investments, and currency controls remain in place.
Short selling is not available, and securities lending is not allowed - and says RBC Dexia, not likely to be introduced in the near future. Some lending does take place in the form of repurchase trades.
Romania
Romania has made real strides when it comes to attracting international investors. Its stock exchange is open to all-comers, provided they meet the same standards expected of locals, and the electronic order-driven system will be familiar to traders across the world.
Short selling is allowed only for the financial instruments for which the country’s CSD is not the main depository and registrar. The instruments should be in the account at the settlement date. For the instruments for which CSD is the Registrar, when a sale trade is introduced in the system, this checks the availability of the instruments in the account (pre-validation).
Securities lending is permitted, but it’s not yet widespread.
But, as with any country or institution that attempts huge changes in a short space of time, there are issues arising. In some regions, the liquidity of the markets remain low, while in others the regulatory infrastructure still has some way to go before it meets the standards of the developed world. And there remains the issue of understanding - those who grew up under communist rule had no need to worry about saving for their future, or investing their incomes, and that has led to the younger generation taking control.
The key challenge that remains for the securities lending market, especially in some of the smaller markets, is the limited numbers of stocks available for lending. Some of the exchanges have liquid stocks only in the dozens, leaving little room for manouvre.
But one of the key benefits of working in Eastern Europe is that because everything is so new, there are few legacy issues that affect the market. Most countries looked at models that already worked when designing their markets, so most Western investors and providers will be familiar with the technology, infrastructure and regulatory regime from markets in Germany, the UK and elsewhere.
As most of the most popular Eastern European jurisdictions are also part of the European Union, they are involved in the creation of the new pan-European legislation that will impact the financial services industry. This is expected to help the smaller states, as an increasingly harmonised regulatory regime will, they hope, encourage greater investment into their markets by firms familiar with the rules.
The Baltic states
Estonia has become one of the most technologically advanced European states and has a reputation for welcoming international firms to Tallinn. Securities lending is a small part of its market, simply because there are few local firms that hold interest to international investors, but there is certainly activity in the top 10-15 stocks.
There’s no formal securities lending regulation within the Estonian regulatory infrastructure, although short selling is not permitted. Securities lending is allowed, but it’s only offered on the OTC market. Local custodians do sometimes practice buy and sellback transactions externally but the market has some way to go before securities lending becomes a common practice. The introduction of the euro as the country’s currency at the start of the year, may provide some stimulus. The Tallinn stock exchange is now art of the OMX Group, which means Nordic investors are well-represented.
Neighbouring Latvia, while structurally sound, has a much smaller market, and securities lending is virtually non-existent. Short selling isn’t permitted, but foreign investors are welcome. Lithuania, which makes up the trio of Baltic states is in a similar position, although securities lending transactions are slightly more common. It’s still only offered on the OTC market, and custodians can provide lending transactions on a case-by-case basis for more regularly traded securities.
Bulgaria
Closer to Russia in terms of culture and attitude than some of its neighbours, Bulgaria has been slowly moving towards Western standards. In 2008, the Bulgarian Stock Exchange (BSE) - which is still almost 50 per cent state owned, switched to the Xetra trading system from RTS.
By virtue of the regulations of the local legislation securities lending can only be used to cover short selling transactions. However, though legally allowed, short selling cannot practically take place because of the stringent requirements to the issues that might be subject to short selling.
Short sales with financial instruments can be carried out within the territory of the country only on the regulated market and with instruments meeting the specific criteria set in the regulation. The financial instruments to be used when executing margin buys and short sales shall be such that are tradable on a local regulated market and with reference to the last 20 trading sessions on that market:
Have been actually traded during at least 15 of those
The average daily trading volume has been at least 5,000 lots
The average daily number of trades has been at least 30
The market capitalisation of the issue is at least BGN 20 million and its free float at least 15 per cent
The BSE is obliged to announce officially in its daily bulletin the list of securities that comply with the above criteria.
Investment intermediaries are obliged to keep securities subject to margin buys and short sales in separate safekeeping accounts within the depository institution. Short sales are offered only after signing a separate special contract between the client and the investment intermediaries. In addition, it is an obligation of the investment intermediary to make sure that it will be able to deliver the financial instruments subject to a short sale transaction, before executing it through the regulated market.
Repo transactions, however, are possible and much more popular. Repo transactions can be done with government securities, as well as with bonds and shares traded on the stock exchange.
Ukraine
As one of the largest countries in Europe, Ukraine still maintains close political ties to Russia, although its young and educated workforce looks more to the West. As with many Eastern European states, there is huge disparity between its modern, efficient and culturally exciting cities such as Kiev, and the rest of the country, where poverty, traditional farming methods and relics of Soviet times dominate.
Befitting such a large country, Ukraine has a bewildering number of exchanges, 10 at the last count, along with an OTC trading system. Investing in the market is not as simple as in some of its neighbours; foreign players have a few hoops to jump through before a firm can make investments, and currency controls remain in place.
Short selling is not available, and securities lending is not allowed - and says RBC Dexia, not likely to be introduced in the near future. Some lending does take place in the form of repurchase trades.
Romania
Romania has made real strides when it comes to attracting international investors. Its stock exchange is open to all-comers, provided they meet the same standards expected of locals, and the electronic order-driven system will be familiar to traders across the world.
Short selling is allowed only for the financial instruments for which the country’s CSD is not the main depository and registrar. The instruments should be in the account at the settlement date. For the instruments for which CSD is the Registrar, when a sale trade is introduced in the system, this checks the availability of the instruments in the account (pre-validation).
Securities lending is permitted, but it’s not yet widespread.
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