AFTER 20 YEARS The ASF begins the reform of the stock market

The Board of the Financial Oversight Authority (ASF) has approved the "STEAM - The plan for action intended to secure the status of Emerging Market" project, which represents a program for the reformation of the Romanian capital market, according to a press release of the institution, sent yesterday.

The initiative is praiseworthy, even if it comes 20 years after the Creation of the Romanian National Securities Commission (CNVM), the predecessor of the ASF.

After 20 years, the regulator of the capital market (the ASF/CNVM) is in its prime and seems to be showing signs of maturity.

Unlike law 297/2004 currently in effect, the law of the stock market no. 52/1994, now abolished, stipulated that the CNVM had the mission to develop the stock market.

In all the time that legal provision existed, the CNVM, the predecessor of the ASF, did nothing.

Once that stipulation was abolished, they drew a document for that purpose.

The draft is useful. We finally have something to criticize.

But any kind of criticism we were to make, would now have an undertone of admiration for the fact that they have devised a useful document. So far, the only thing we had available to criticize was the commissioners' behavior, rather than their thinking.

And Mişu Negriţoiu has provided us with some material, for example by drawing up the Dress Code for the employees.

The ASF states that the goal of the STEAM project (Set of actions Towards Establishing and Acknowledgment of the emerging Market status) is to implement strategic measures for the reclassification of the Romanian stock market as an "emerging market" (compared to its current classification as "frontier market"), within at most two years from the beginning of the program.

Mişu Negriţoiu, the president of the ASF, said: "The STEAM project is the main strategic goal for the capital market which the ASF has found and taken on. It matches the needs to open up the market, to improve the efficiency and to facilitate the investors' access to Romania and will result in an increase in the volume of investments and liquidity. We are looking to be proactive in relation to the markets and to facilitate the move of the capital market to a new strategic level. S.T.E.A.M, as suggested by the acronym, shows that the ASF has committed with energy, power, steadiness and enthusiasm to obtaining the status of emerging market for the Romanian stock market''.

What the ASF doesn't know is that the Bucharest Stock Exchange has already had a project to move up to the emerging market status for a few years now, according to the FTSE. The officials of the BSE have had meetings with the representatives of the London Stock Exchange. According to some market sources, the project is stagnating.

The representatives of the ASF have told us that the project has been configured while considering the conclusions of the Morgan Stanley Capital International (MSCI) report and the Report of the World Bank (World Bank Group Romania Capital Market Initial Diagnostic - May 2014), as well as the talks with the representatives of the market on the proposals formulated by the Coalition for Romania's Development in the document "Eight systemic barriers that prevent the development of the modern stock market in Romania" drawn up by the working group coordinated by the Bucharest Stock Exchange (BSE).

The ASF has decided to follow its own strategy, with concrete targets, even though it could have gotten behind the plan coordinated by the BSE or make additions to it, considering that it has participated in it.

The representatives of the ASF are saying that the STEAM project is one that is complementary to the "8 barriers", and it has an explicit, well-defined objective: obtaining the emerging market status for the Romanian stock market. "The STEAM project defines the strategy of the ASF to obtain the emerging market status, beyond the improvement of the general framework of the market, which the ASF is participating in through the < 8 barriers > project", the representatives of the ASF told us.

With all the appropriate polite reactions, both Ludwik Sobolewski, CEO of the BVB, and Mişu Negriţoiu show that they are concerned mostly with the perception issues, meaning that the "STEAM" project will probably steal the thunder of the "8 barriers" project.

• Sobolewski: "Even the STEAM acronym is good"

Ludwik Sobolewski, the CEO of the Bucharest Stock Exchange, considers that the involvement and the initiatives of the ASF concerning the strategic changes on the Romanian capital market are remarkable.

He told us: "We are very proud of participating in this project, at this moment which is crucial for the role that the stock market plays in Romania's economy. Even the acronym is good, because it appropriately emphasizes this historical evolution".

When asked whether the BSE was consulted about this project, its CEO replied: "Not only have we been consulted, but I dare say that we have worked together. Still, this is the project of the ASF and it depends mostly on the coordination of Messrs. Negriţoiu and Ursache (ed. note: Mircea Ursache, the vice-president in charge of the capital market), as well as of their team, which we have the pleasure of working with".

Ludwik Sobolewski says that the STEAM project and the BSE project to remove the "8 barriers" are consistent, because the list of problems classified by the ASF is even more comprehensive than what has been included in the "8 Barriers": "In that regard, I have mentioned from the very beginning, in the preamble of the document presenting the "8 barriers", that, aside from that, there is an extended list of strategic objectives that must be achieved. We praise the approach of the ASF because it addresses the causes, not the consequences. We still have ignorant people in the market and outside it, who consider the consequences or the implications as causes of the problems. It is probably a significant change that an increasingly larger number of people understand the things that need to be approached and what it means to reform the market".

According to the Authority, the set of measures proposed through STEAM includes: increasing the level of accessibility and attractiveness of the Romanian capital market; increasing the efficiency and streamlining securities lending and short selling; developing the domestic market for primary and secondary bonds (municipal and corporate); increasing liquidity and attracting new investors; increasing the visibility of Romanian companies listed on the stock market, by allowing their listing on other markets; increasing the degree of implementation of the principles of corporate governance by issuers, brokerages, market operators, depositories, etc; improving the accounting system of the regulated entities and the supervision - by aligning to the IFRS standards.

• The ASF putting foreigners first as well

The ASF plans to improve market access, and to do so it wants to ensure equal terms for all foreign investors. Even though the planned measures are not discriminatory to the domestic investors, it is annoying, to say the least, that the ASF begins its project to develop the Romanian stock market with breaks for foreigners, when it is the domestic investors that have contributed to the public offers conducted by the Romanian government lately.

The ASF plans to translate the applicable legislation in English, improving the communication between the central depositories/market operators and brokers-custodians, the separation of the trading accounts from the custody and settlement accounts, simplifying the procedures concerning the opening of an account for foreign investors, the introduction of a centralized system for the payment of dividends.

• The ASF is reviewing the elimination of the 1st Tier of the Central Depository

Together with the Central Depository, the ASF wants to make an analysis concerning the opportunity, the feasibility and the implications of eliminating the 1st tier of the accounts system of the Central Depository and the allocation of the accounts to the participants.

The 1st tier of the Depository has been at the center of several thefts of shares, because it stores millions of shares owned by citizens who received as them as part of the Mass Privatization Program.

• Tax exemptions for funds that invest in government bonds

The ASF wants tax exemptions for the local funds that invest mostly in government bonds, a measure which it will discuss with the representatives of the Ministry of Public Finance this autumn, as well as facilities for SME-type issuers in the second half of 2015.

In order to support the development of the domestic market for bonds (municipal and corporate) the ASF is considering lowering its fees, as well as making it mandatory for municipal bonds listed on the regulated market to have a rating, in order to provide more safety for potential foreign investors.

The Authority also wants to organize events with the help of various partners (market operators, the Association of Romanian businesspeople, the Council for Foreign Investors etc) in order to promote corporate bonds as an alternative form of financing".

The ASF also wants to develop the activity of market-makers, as well as create an educational program on the stock market segment.

• The creation of investment clubs and the granting of tax breaks

By the end of the year, the Authority intends to draw up a draft regulation dealing with the creation and operation of investment clubs, and to identify possibilities of granting tax breaks to the former or to their members.

• GDRs for every issuer

The ASF is also reviewing the possibility of extending the issuing of certificates of deposit to all issuers listed on the Romanian stock market by amending the ASF Regulation no. 4/2013 appropriately.

Thus, all the issuers could issue GDRs, on foreign markets, as was the case on the last two public offers of the state- Romgaz and Electrica.

• The neverending Rasdaq problem

The Rasdaq market has remained a thorn in the side of the ASF. For years, the regulator has been trying to get rid of this problem - the Rasdaq is considered an unregulated market according to the European directives, but the CNVM has granted it this status for years.

After years where some legislative projects to disband the Rasdaq made it to the Parliament, it endures unhindered, with countless scandals and complaints about shareholder abuse filed by investors.

Still, the ASF plans to create a special legal framework which would deal exclusively with the issues of companies traded on the Rasdaq market. What is more interesting is that it wants to do that by November.