RegionalIndex Trading Implementation on Romanian Environment

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Regional-Index TradingImplementation on Romanian
Environment
University of Wisconsin - La Crosse, College of
Business Administration

• Mentor,
• Thomas Krueger, Phd
• Professor of Finance

Remus Stoica, Ec Romanian Clearing House Head of
Market Supervision
July, 2006
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Financial markets facilitate

• The raising of capital
• (in the capital
  markets)
• The transfer of risk
• (in the derivatives
  markets)
• International trade
• (in the currency
  markets)
• They serve the purpose to matching those who want
  capital to those who have it.

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The Romanian Financial Environmentis organized
by 2 exchanges consisting 3 markets

• Bucharest Stock Exchange
• the spot capital market for
  stock and bonds
• Sibius Monetary Financial Exchange
• the
  derivatives market trading
• - futures contracts on individual
  stock
• - options contracts on stock
  futures
•  
• This shows that the basic environment for capital
  market is already in place, waiting for investors
  to place their savings in the emerging economy.

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The culture of Romanian people is bank driven

• Many prefer to keep their money in bank
  savings accounts and very few take into
  consideration mutual funds, not even talking
  about hedge funds.
• This would not be a problem if these
  institutions would not block the capital into
  real estate investments or other long-term
  investments.
• The economy needs capital movement.

Source SMFE survey, 2005
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The culture of Romanian people is bank driven

• Many prefer to keep their money in bank
  savings accounts and very few take into
  consideration mutual funds, not even talking
  about hedge funds.
• This would not be a problem if these
  institutions would not block the capital into
  real estate or other long-term investments.
• The economy needs capital movement.

Source SMFE survey, 2005
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Case study on developed capital markets

• "In the beginning, there was Dow," says John
  Prestbo, markets editor for The Wall Street
  Journal.
• Charles Dow, the father of equity indexes,
  created the Dow Industrial Average (DJIA) in
  1896. The index includes only 30 of the largest
  and most important companies based in the United
  States and is weighted by price.
• ltlt It was, and is today, intended to serve as a
  "stick in the sand" from which to determine
  whether the tide of the stock market is rising or
  falling,
• Prestbo says. gtgt
• ltlt Source Indexes equal instant exposure by
  Chris MacMahon gtgt

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What is an index?

• In finance, an index is a benchmark of activity,
  performance or any evolution in general.
• Consumer price indexes (an inflation measurement)
  
• A countrys GDP index (an economic growth
  measurement)
• These benchmarks can be used,
• among other things
• to adjust salaries, bonds interest rates, tax
  thresholds.

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What is an index?
The same need for a benchmark is felt in the
capital markets all over the world. It is often
used as a tool to represent the characteristics
of its component stocks, all of which bear some
common features such as

• trading on the same stock market exchange (NYSE,
  AMEX or Nasdaq Indexes),
• belonging to the same industry (NYSE
  Transportation Index, Dow Jones 15 Utilities),
• or broad-based indexed by market capitalization
  (SP 500, AMEX Composite).

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Types of indices

• A broad-base index represents the performance of
  a whole stock market and reflects investor
  sentiment on the state of the economy (Dow Jones
  Industrial Average and SP 500 Index, the British
  FTSE 100, the French CAC 40, the German DAX and
  the Japanese Nikkei
• The concept of indices may be extended even
  beyond a single exchange (Dow Jones Wilshire 5000
  Total Stock Market Index, as its name implies,
  represents the stocks of nearly every publicly
  traded company in the United States)
• More specialized indices track the performance
  of specific sectors of the market (the Morgan
  Stanley Biotech Index). Other indices may track
  companies from a certain location.
• The focus of the research will be on the last
  category, because this specialized indexes will
  give the market the diversification
• that capital holders require.

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Romanian market insight

• Three indices managed and maintained by Bucharest
  Stock Exchange (BSE)
• BET (Bucharest Exchange Trading) - launched on
  September 22, 1997 main purpose - to reflect the
  price movements of the most liquid and actively
  traded 10 stocks principle of computation - the
  same with the majority of indices, namely
  capitalization weighted formula.
• BET-Composite Index, launched in April 17, 1998
  by Bucharest Stock Exchange reflects the price
  movement of all stocks traded on the BSE market,
  excepting investment funds calculation method is
  the same as the BET Index
• BET-FI, launched later by the same BSE in
  November 1st, 2000 is the first and the only
  sectorial index in Romania and is reflecting the
  price movements on the exchange traded
  investments funds
• The indices presented above, especially
  BET-Composite, it is considered by BSE officials
  to be able to properly track the markets
  evolution and could even be classified
• as a broad-base index. Unfortunately, the mutual
  or equity funds trading in Romania do not claim
  to construct their portfolios to match any of
  this indexes,
• therefore none of the existing market measure
  tools are traded on spot market.

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Focused Researched

• University of Wisconsin La Crosse, College of
  Business Administration
• gt specialized indexes
• As an example to follow, the best choice would be
  
• The 7 Rivers Equity Index
• ltltproject managed by Tom Krueger, Ph.D.gtgt
• tracking the performance of publicly listed
  companies
• in La Crosse, Wisconsin area.

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Specific Goals of Project Researchedltltregional
indexgtgt

• Support business owners in their business
  decisions by gathering key regional economic
  indicators and trend information
• Develop extra economic indicators for the region,
  that are not readily available to decision makers
  in the targeted area
• Develop tools to assess regional progress in
  economic growth. Prepare baseline measures that
  will allow comparison with other regions and
  measure future progress of the region
• Track the regions participation in the emerging
  economy of Romania

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Result

• Three regional indexes could divide the country
• in three major financial areas
• Transilvania Banat,
• Moldova Dobrogea
• Muntenia
• Index Identification Codes for REgional Market
  Standard
• REMS-TB, REMS-MD respectively REMS-MN.

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Criteria for inclusion

• Two criteria must be met for inclusion in the
  regional indexes
• The firm must be publicly held and traded on the
  BSEs stock market, with share price data
  available from BSE market reports, from financial
  press or different internet sources.
• The companys headquarters must be inside the
  designated area of regional measure as follows

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Calculation Method

• INITIAL VALUE 10 index points
• CALCULATION METHOD
• Regarding the principle of computation, this is
• the same with the majority of indices researched
• in United States financial environment,
• namely capitalization weighted formula.
• The regional indexes will be calculated using a
  capitalization weighted
• price based method, applied to the regional
  placed symbols
• listed on the first and second tier of the BSE.

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Calculation Method

• For the respective symbols, the prices registered
• on each trading date are compared with the prices
• corresponding to the reference (base) trading
  date.

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Implementation

• INDEX COMMITTEE
• Forming of an index managing department led by an
  Index Committee that will be responsible for all
  the issues related with the Sibius Monetary
  Financial Exchange indices components and rules.
• The Committee will take the decisions regarding
  the stock selection rules or calculation
  methodology.
• The Committee will analyze and approve all the
  index updates (based on a monthly frequency).
• It will also submit proposals to the Board of
  Directors for any commercial use of the indexes
  and will consider any possible use of the indexes
  as a base for derivative instruments.

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Implementation

• DISSEMINATION
• Any decision to change the index portfolio based
  on the companies events or other reasons are to
  be disseminated to mass media before they will be
  implemented.
• The index values and changes will be disseminated
  in real time on Sibius Monetary Financial
  Exchange web site connected with its automated
  trading system Eltrans.
• Data will also be sent to the REUTERSs database
  in accordance with an ongoing contract between
  the two companies.

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Project Implementation Calendar

• Making the projects results known and setting up
  presentations and proposals for the Board of
  Directors should not exceed two weeks after
  arrival (by October 15th). Also Setting up an
  Index Committee should be included in this time
  period (by October 15th, 2006).
• Constructing the Index Managing Department and
  gathering the logistics should take another two
  weeks after the Index Committee is established
  (by November 1st, 2006).

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Project Implementation Calendar

• Establishing a base period for starting the
  computation of the index and backdating
  calculations and also dissemination details
  reconstructing the web page www.bmfms.ro for
  hosting index information and establishing
  dissemination details with Reuters Co. (by
  December 1st, 2006).
• Final testing regarding logistics needed for
  computation would be advised. Setting up details
  about presentations, conferences and confirming
  guest presentations for the index launching (by
  December 20th, 2006).
• Index launching by 2007