By Henri Bergström, Senior Vice President, Corporate Development, OMX

Capital markets are relatively new to Central and Eastern Europe, having started some 15 years ago after most countries in the region regained their independence. The region’s exchanges have been trying to build a complex infrastructure and comply with new regulations practically overnight. They have made a good start, but they can do much more to promote the capital markets and take advantage of the opportunities that exist in Europe today.

Currently in many Central and Eastern European countries, awareness of the securities business is still low, and participation is limited mainly to wealthy individuals and institutions. Most exchanges offer equities and some corporate bond trading. Government securities trading is often separate. Derivatives markets exist but are mainly OTC between market participants, with some exceptions such as in Poland and Romania. Trading volume is thin, and markets are extremely volatile. And while the exchange technology is generally capable, it lacks multi-asset functionality and does not support internationally accepted standards.

At First Glance that picture may appear gloomy, but a closer look shows that Central and Eastern Europe offer tremendous opportunities for members, investors and exchanges. Mutual and pension fund activity over the past five years have raised the level of professionalism in the market and, at the same time, increased awareness among potential retail investors. In addition, countries that want to join the EU must inspire trust in their economies by fortifying their capital markets. They are required to have certain regulatory frameworks in place to be considered for entry, and they must be able to comply with the various financial directives.

For the region’s capital markets to grow over the long haul, more shares have to be made available for trading. Currently too many local blue chip companies have only around a 10 percent free float because major owners are afraid of losing control. Governments need to support capital market development by issuing treasury securities tradable in the stock exchange and by privatizing through initial public offerings. In addition, the product range needs to be expanded beyond equities to derivatives, warrants and exchange traded funds.

Exchanges Can Also Help grow their home markets by opening their doors to foreign participants. Local members may have lobbied to keep them out because they feared losing business to the large global players, their current customers. But the Nordic and Baltic market experience shows that admitting outside members can lead to increased liquidity and growth. When Copenhagen Stock Exchange joined OMX and further opened its market, for example, revenues of the domestic members increased by 55 percent, while the total market increased almost 100 percent.

Exchanges can better attract foreign investments by implementing European best practices to increase transparency and by preventing insider trading and market manipulation. And on the technology side, they can offer easy access and increase efficiency by migrating to systems that support an array of instruments as well as the standards deployed by the international market data vendors.

More important, exchanges can improve efficiency, reduce costs and expand their business through partnerships and consolidation. Romania’s RASDAQ, which was modeled on NASDAQ’s electronic OTC market, merged with the Bucharest Stock Exchange in December 2005, and the two entities integrated their markets and trading systems. Romanian market consolidation is still taking place while the Sibiu Monetary, Financial and Commodities Exchange, the main Romanian derivatives market, is looking for an international partner

In March 2007 the Zagreb Stock Exchange (ZSE) in Croatia merged with the other Croatian stock exchange, VSE, to create the largest capital market in the region. The ZSE now lists the shares of about 370 companies, and its market capitalization is the equivalent of about USD 54 billion.

Of course, the challenge for exchanges and their shareholders lies in selecting the right partners. Is this the right time to consolidate or to enter into cooperation with other exchanges? With exchange consolidation peaking and willing buyers on the market, now could be the right time, especially with industrial consolidation leading to the escape of some blue chips from the region’s stock
exhanges.



Photo: Photo Nyblin

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