The issue of the OTC market to be put up for discussion once again

The fate of Over- the-Counter trading (OTC) on the Romanian capital market may be settled at the next General Shareholder Meeting of the Central Depository, scheduled for the end of this month, said Valentin Ionescu, the General Manager of the Bucharest Stock Exchange and president of the Depository. At that General Shareholder Meeting, a Study concerning the impact of OTC trading on the capital market is set to be presented, which claims that the Central Depository, the institution which handles the settlement of trades, would earn major commissions from such trades, according to sources who did not wish to be named.

Some of the major players of the capital market, brokers and investments funds are already worked up about this topic, as they are worried over the impact that unlocking OTC trading would have on the liquidity of the BSE.

Costel Ceocea, the president of SIF "Moldova", one of the important shareholders of the BSE and of its Depository, asked for the clarification of several aspects related to OTC trading. He warned that "in the long run, the trading of stocks through the OTC market would bring a great disservice to the development of the capital market of Romania and would affect all the market players".

Mr. Ceocea said: "SIF Moldova is not against OTC trading, but we need to set some clear rules, otherwise some brokerage firms may only trade on the OTC. Also, transferring a large number of trades to the OTC, could cause the prices of the regulated market, which are used for evaluating the Assets of the Collective Investment Organisms, to no longer reflect their true value".

The president of SIF2 considers that OTC trading may reduce the liquidity of the regulated market and would place minority shareholders at a disadvantage due to the lack of clear regulations concerning the reporting requirements that the parties involved in such trades have to comply with.

"The activity for monitoring the companies listed on the Rasdaq or unlisted in the portfolio of SIF2, we are already encountering many issues related to transparency and the abuse of majority shareholders. The OTC market will only compound these problems", the head of SIF "Moldova" said.

He said that SIF2 will support OTC trading once the CNVM and the BSE will set the correct classification according to the provisions of the MiFID and the settlement and reporting rules.

• The Central Depository considering the OTC "turnaround" solution

An alternative being considered for Romanian OTC trading is that of an OTC "turnaround", where a brokerage or institutional investor buys stock on the regulated market and distributes it "over-the-counter" to its customers, or the one where the broker buys stock from its customers using the OTC and sells it on the BSE.

Costel Ceocea said: "In the meetings we had with foreign investors in London last month, some of the investment funds that we talked to complained that they find it difficult to trade in Romania, precisely because domestic brokerage firms can"t transfer shares OTC into their customers" accounts. An OTC turnaround, in other words with a leg inside on the Exchange could solve this issue, while also increasing the turnover of the regulated market".

Valentin Ionescu, the general manager of the BSE, said that a working group for finding a solution to implement OTC trading is about to be set up. Mr. Ionescu said: "The purpose of this working group is to find the solution for the implementation of OTC trading such a manner as to prevent it from affecting the integrity and the liquidity of the BSE, while at the same time decongesting the market, in the sense of allowing the delivery of blocks of shares outside the market as well.

One such OTC model could be, at the Central Depository, the < OTC turnaround >, meaning an OTC that constantly has one foot on the market of the BSE. This system is used in Greece. Thanks to its use, in Greece only 3% of the total trades are done on the OTC market. In Bulgaria, OTC trades account for 40% of the total, as they are not restricted".

Last autumn, the former Board of Directors of the Central Depository approved the settlement of OTC trades, just before the election of a new its members were replaced. The decision angered the Bucharest Stock Exchange, which is the majority shareholder of the Depository, as the management of the BSE invoking the need for a study which would assess the impact of these trades on the capital market.

Market sources which did not wish to be named stressed that the fate of OTC trading is currently uncertain on a global level, given that "Over-the-Counter" markets are being accused of not being transparent.