English
Reporter: Lately, there's been a lot of talk about a strategy of the Bucharest Stock Exchange - more listings, more liquidity, more investors.
Dan Paul: But all of these things we've known about for 17 years.
Reporter: Even more than 17 years. We always want more, even though we always see that there is less.
Dan Paul: I think people confuse the two: the target and the strategy. The target is where you want to get, the strategy is the manner in which you want to get there.
At this moment, the Stock Exchange does not have a strategy for development within our meaning of the term.
Sure, we can talk about who should do this strategy and who should approve it.
The new management has drafted a new plan with eight growth pillars and each board member is in charge of one of them.
I am in charge of the cooperation with the authorities, with the foreign stock exchanges and with the international institutions.
On my pillar, I have led the project for cooperation with the London Stock Exchange, which includes several points, including the cooperation with FTSE.
That entails the Bucharest Stock Exchange working with the FTSE, one of the largest index makers in the world, to make an index especially for Romania, to rebrand all of the indexes of the BSE together with FTSE to sell them, to market them internationally. FTSE does this for us for free. Of course, they have an interest of their own - other products are then sold based on those indexes.
Also, the FTSE is the one that can qualify you as an emerging market. Romania is not an emerging market, at this time, it is just a frontier market.
In frontier markets, the pension funds invest approximately 2 billion dollars a year, and in emerging markets, they invest approximately 250 billion dollars. Investors split that money, and if we were to enter the "emerging markets" category and if just 1% of the money allocated were directed towards Romania, the turnover would automatically increase by approximately 2 billion. In other words, we would enter a different league in terms of money.
With money coming in from the outside, Romanians will be drawn to invest as well.
We have also begun working with the FTSE, for the promotion to the emerging market status. The BSE, as well as the CNVM must change the regulations, and to the organization of the BSE, so we can get to be an emerging market.
It is a process which can take 2-3 years. But after that, we will be in a different league in terms of money.
This is what we are working on, on one hand.
On the other hand, with the London Stock Exchange, last year, we have organized the beginning of the trading session on the London Stock Exchange, which was the first time when a Romanian minister has opened the trading session of the London Stock Exchange.
We can repeat that experience. We are trying to organize something similar with PM Victor Ponta, to organize a Romania's Day event in London, where the British will bring in investment funds which can meet the Romanian issuers. It is important that they get to know Romania.
Why Romania failed to sell 10% of Petrom is a complex discussion. Wasn't it a good time, wasn't the price good enough etc. Still, the perception remains - we failed to sell 10% of the crown jewel.
Isn't Romania saleable? Does it have a problem?
Reporter: Don't you think that the Bucharest Stock Exchange should focus on domestic investors as well?
Dan Paul: We need to open up towards foreigners as well, as well as towards the interior, to teach Romanians what it means to invest on the stock market, because they think of it as a casino.
Perhaps that's what the group which manages the Bucharest Stock Exchange which is proposing the fixed commission thinks as well.
They should not mistake the stock market with a casino. They say that they are doing that to cause the brokers to bring liquidity. But, making volume for the sale of lower commissions means market manipulation. The market has to grow naturally. If people want to buy or to sell, they should do it on their own, not because they are pushed by their brokers, and to have their portfolio churned 20 times for the sake of commissions. Sure there are speculators, who serve their purpose, just like institutional investors have their own role.
I am in favor of creating the market naturally, not by forcing brokers.
I don't agree with telling brokers "I'll lower your commissions, if you increase volumes". As long as brokers receive discounts if they get higher volumes, they will continue to force their clients to make more transactions.
Reporter: Perhaps the decision isn't wrong, just early. Perhaps it should have been accompanied by the building of the foundation for growth.
Dan Paul: The foundation is missing, the stock exchange needs to lay the foundation. Besides, by definition, liquidity is the responsibility of the market-makers. That is who facilities should be created for.
In the past, the Bucharest Stock Exchange has had troubles with this function for the few issuers that had a market maker. Some of them pulled out, they did not succeed in providing liquidity. That would have meant sitting on the "Bid" and the "Ask" alike, under certain conditions, for a specified period of time. Some of the brokers didn't like that situation, maybe because of a bad contract with the Stock Exchange, maybe because they did not have the financial strength. The moment the stock market fell, they had to stay in and maintain liquidity. At that time, they ran away, for various reasons. The Bucharest Stock Exchange has lawsuits with one of its liquidity providers because of that. So, if it's having problems with liquidity and it has the position of market maker, then these are the things it should deal with.
The Bucharest Stock Exchange needs to have a fair position for its members.
Has it reached some basic volumes?
No!
Has it reviewed the budget?
No, but it comes in and talks about commissions. It's putting the cart before the horse!
The management of the Bucharest Stock Exchange is saying that we could have a fixed revenue of 20% by "inventing" this commission. By that logic, they should put the commission at 10,000 Euros per month, so the BSE would have large guaranteed revenues. But if it did that, how many brokerages would be left?
Reporter: So I understand that you have opposed the new pricing policy on the Board of the Exchange.
Dan Paul: I am consistent. On the Board, I have opposed this item on the Agenda, because it had no economic justification. The idea that this policy will work and that it will be able to attract liquidity is just a theory. And why does the Bucharest Stock Exchange plan to increase its liquidity by just 15%? Why does it not plan to reach the volumes of 2007? Why doesn't it make its goal to reach 30 million Euros per day?
Moreover, the BSE did not analyze this commission in terms of its implications on market competition.
Reporter: What do you think are the odds of the General Shareholder Meeting of the BSE being held on March 13th-14th, considering that a quorum of 50% is needed on the second summoning?
Dan Paul: The last two Extraordinary General Shareholder Meetings of the Exchange have proven that they can't be held. Statistically speaking, this is what happened.
Now, we will see whether the General Shareholder Meeting will be held or not.
The immediate danger is the elimination of competition, and a distortion of the market costs, a forcing of the broker or of the customer to make trades just to allow the brokerage firm to pay a lower fee.
However, at this General Shareholder Meeting other things will be discussed as well, aside from the pricing policy, such as, for instance, the reduction of the quorums, for example.
If all the proposals get through the General Shareholder Meeting of March, then the General Shareholder Meetings will be easier to meet and this commission could be raised to higher figures. This would then result in a concentration of brokers, to just a few brokerages, which we could count on the fingers of one hand.
Reporter: What other threats do you see in the proposals to amend the Articles of Incorporation?
Dan Paul: The reductions of the quorum requirements, which is, indeed, in compliance with the law, but the law also allows for bigger quorum requirements. This will allow for a much easier changing of the fees.
And furthermore, the Bucharest Stock Exchange doesn't explain why up until now the tariffs would be set by the Extraordinary General Shareholder Meeting and why it wants to move the decision-making on that matter to the Ordinary General Shareholder Meeting, where the required quorum is even lower. That means they want to make it easier to change the commission structure in the future.
We have seen that over the last two years, 7-8 big brokers have left the market. We should be encouraging them to come in or to stay.
The pricing policy proposed by the BSE only benefits the top eight largest brokers; all the others are placed at a disadvantage.
Reporter: But do you think there was anything good that came out of these elections of January 9th, 2012?
Dan Paul: The cooperation with London. Besides that, the Bucharest Stock Exchange is engaged in several projects which it hasn't completed. We are talking about many things concerning the market structure which stem from the European legislation.
The Council of the Stock Exchange spends a lot of time on issues concerning regulation.
Reporter: Do you consider that the project of the Central Counterparty (CCP) will be ready on time to ensure the continuity of the derivatives market?
Dan Paul: It is a hard question. I have witnessed the discussion which took place between Bucharest and Sibiu, with the CNVM present. A "task-force" has been created, which has reviewed all of the alternatives of CCP, and then a smaller team has been created, of which the General Manager of the Stock Exchange is not a member of. I would have found it normal for him to be involved in this project and to think of what they would do with the derivatives market.
However, the project shouldn't be located at the level of the Stock Exchange, but rather at the clearing houses. They are the ones that need to adapt to the European requirements, the BSE is just a shareholder.
The CCP is a project which is coordinated by the General Manager, even though not directly. It would have been a good thing to take it on so we can see that he can lead projects. If he can, that is.
If it is wanted and if everyone reaches an agreement beneficial to the market, the CCP will be created. From an economic point of view, over the next three years, maybe even the next seven - a much more reasonable term -, this CCP does not bring much for investors. From the point of view of the investment, I don't think it's profitable. But, it is a strategic decision for the market. Do we still keep the derivatives or not? I think it's a good thing that we have the CCP.
Reporter: What are the dangers if we do not build the CCP? Does it prevent us from going up to the emerging market status?
Dan Paul: This discussion does indeed exist. We can do the CCP three years from now, start it when the project with the FTSE is done. But at any rate, we will start off the wrong foot if we don't build it. If this CCP is wanted and well coordinated, it will be built. If not, it won't.
Reporter: What do you think the consequences of the integration of the supervision of the capital market, the private pensions and the insurance sector will have?
Dan Paul: For now, all I've seen is a draft law which says that the three institutions will be merged and that the salaries and the employees will be protected. But I think that there is no need for three legal departments, or for one that cumulates the number of employees of the three institutions or by three accounting departments. If we are talking about a merger between the three institutions, this should also translate into a cost reduction.
It is a hard project for Romania.
The oversight of the market was hard to manage before, and it will be even harder from now on. There should be some super professionals in the management.
According to the latest proposals, the Authority will have a board of 17 members, who have expertise in all of the three areas. How will the decisions be made? That is a question.
I've seen some very funny nominations, like Daniel Dăianu, who could not even take care of his own money and if he is going to look after the whole market, he has a bright future at this institution.
Our Financial Oversight Authority is an original model. Other markets are either overseen by separate institutions, like we used to, or in an integrated manner with the banking supervision.
In my opinion, they should have started this restructuring differently: they should have chosen the man to lead the authority first and then he would take on the responsibility of the oversight.
Reporter: It seems like the modification isn't a Romanian policy, but rather, it serves some political interests.
Dan Paul: It would have been a Romanian policy if the selection criteria used in developed countries had been imitated. The Association of Brokers conducted a study with various European models. In Poland, Italy, France, you can tell it is a policy which belongs to the state. In various models, the National Bank has a representative within the Authority, or the president appoints the leader of the commission or the prime minister sets the wages of the president and of the vice-presidents. This shows that some institutions get involved.
It could have been done in Romania as well, the Ministry of the Economy could have had one representative, the National Bank of Romania could have had a representative, or the deputy governor of the National Bank could have been a rightful representative of the NBR on the Unified Financial Supervisory Authority. They could have designated a secretary of state as commissioner. And this would have eliminated the fighting over salaries.
Reporter: You are in a somewhat delicate position. As the president of the Association of Brokers you have some valid opinion, sometimes you may very well be empowered to express them, and you most likely probably go against the opinions of the others Board members of the BSE, when you go to their meetings.
Dan Paul: It is not a delicate position at all. This is just how I got on the Board of the Exchange, voted by those who have shares in the BSE and who wanted to have a representative. I am consistent and what I say at the Association of Brokers and what it empowers me to support, I vote as a policy on the Board of the Exchange. I say what I feel and I listen to the voice of the market, and by that I do not go against the other directors of the Stock Exchange, I just explain things from a different angle, that of the brokers.
Reporter: When will elections take place at the Association of Brokers again?
Dan Paul: In December.
Reporter: Are the members of the Association of Brokers satisfied?
Dan Paul: You should ask them, but I haven't heard any complaints. In the Association of Brokers and in the community in general, for many years now there haven't been any disagreements.
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