On the way to a Romanian CCP

UniCredit Bank S.A.
Fri, 28/06/2019

Boosting market liquidity by installing a local Romanian CCP                                                                                                                                                                   


The Bucharest Stock Exchange (BVB) believes that a local Central Counterparty (CCP) can act as a key driver for market growth in Romania.

Back in January, an Extraordinary General Meeting of Shareholders decided to the found a joint stock company that will be authorised to act as a local CCP. In a “Business Case” presented on that occasion, BVB expressed its conviction that the potential of the Romanian capital market has not been fully exploited. This means that over the course of a decade there were no catalysts to boost market liquidity.

If no bold measures are taken, an increase in liquidity over the following years could only be marginal as the current market structure and diversity of the listed financial instruments is likely to remain unchanged. Aiming to end this limitation, BVB’s ambition is to double the turnover in 10 years by launching new products and markets.

In recent years, BVB has engaged in a significant number of initiatives focused on attracting additional liquidity that, although attracted a significant interest in the Romanian market, have not significantly improved the liquidity. In the current environment the market needs a catalyst to move the liquidity upwards. BVB needs to provide new opportunities to express more trading ideas by expanding the range of products and market mechanisms. For this reason, BVB aims to launch derivatives and further broaden its markets offering in three phases over the course of the next five years. The timing of the roll-out will be based on the feedback and the needs of the local market.

The derivatives market will be installed in 3 phases.

Phase I: Launch of single stock futures, power derivatives and currency (FX) futures

• BVB has identified that the local market is most interested in trading single stock futures, therefore it is planned to make them available first.

• A promising market for BVB is also the energy derivatives market. BVB sees a high potential for launching energy futures as participants from the energy market are numerous (around 400) and currently very active on the centralised power markets managed by OPCOM (every 1 MWh of electricity consumed in Romania is traded 1.8 times). Last year, the total value of forward market contracts was EUR 3.73 billion, representing 91.4 million MWh. OPCOM is committed to introducing centralised clearing services for forward contracts performed on the Centralised Market for Electricity Bilateral Contracts - Continuous Negotiation Mechanism (CMBC-CN), which make up 25% of the total forward market contracts (22.9 million MWh).

• FX futures will also be launched during the first phase as significant interest from the retail investors has been demonstrated.

 Phase II: Index futures and single stock options

• In the second phase, BVB will continue to add new instruments that will benefit from a market that is already familiar with derivatives. Index futures will provide the ability to take diversified exposure both long and short to the blue-chip index while single stock options can act as insurance policies.

 Phase III: Regulated lending platform and other asset classes

• BVB will continue to develop the market infrastructure though establishing a regulated lending platform and continue to diversify the products offering of BVB by launching new derivatives based on other types of asset classes (e.g. repo, interest rate, natural gas, agricultural etc.).

The introduction of the CCP will bring additional turnover for the cash markets considering that CCPs are supportive of trading platforms through broadening trading participation, providing trade anonymity and reducing the counterparty risk.

Without the employment of the CCP services, the Romanian capital market will remain limited in diversifying the range of financial products, in adopting best practices in post-trading services and in creating premises for new business opportunities.

From a timing perspective if the CCP set up is not finalised by the first half of 2020, then the strategic objective of doubling the turnover in 10 years is jeopardised.