Investors are constantly looking for new markets from which to make a profit. Natalie Coomber explores the potential of the central and eastern European region
Each with their own very different characteristics but all
painted with the brush as being termed central and eastern
European, Poland, Romania and Ukraine, among others, are
finding their feet as a new wave of frontier markets.
This region is just on the doorstep of the mature European
futures markets of London and Frankfurt, but, despite work
taking place on a largely domestic scale, it is only in the
past few years that they have begun to step into the
Rather than being seen as the community outside the
ever-hallowed Chicago markets, this region should be
appreciated in its own right with a very bespoke and often
still influential history. That is not to say it is not without
its problems, it is just worth the challenges that investors
are often faced with when beginning to look at the region.
Over the past few weeks alone the players have begun to
shift alignments as the exchange consolidation fever begins to
hit the region. First off is Wiener Boerse, which has agreed to
buy a 25.2% stake in the Budapest Stock Exchange from UniCredit
Bank – a huge player in the region – to
become the exchange’s biggest shareholder. This
will bring its stake to 37.7%.
It did not stop there, because just a few days after, in
mid-June, Wiener Boerse announced it had bid for and won an 81%
share in the Ljubljana Stock Exchange. Many see this
two-pronged attack as an attempt to strengthen the region as a
"As the new majority shareholder, we will be working
actively to support the progress of our neighbouring stock
market and we look forward to working closely with all
employees of the Ljubljana Stock Exchange, as well as all
Slovenian market participants," says Heinrich Schaller, chief
executive of the Vienna Stock Exchange.
Schaller confirms that the exchange sees any development as
a long-term venture and that, initially, it will focus on the
areas of product development, data vending and indices.
Meanwhile, state-owned Warsaw Stock Exchange (WSE) is due to
sell of 49% of its shares later in the year, which many deduce
is the first step to taking over or merging with a neighbouring
counterpart. A source close to the exchange says that this may
be the first step before a second sell-off but that details of
this are not known and may not be for sometime.
It is not just the exchanges that are gaining a pan-region
presence. UniCredit is constantly realigning its position in
the region, often snapping up smaller operations. Also,
brokerage giant KBC Securities has had a busy few years
solidifying its status. Its expansion is managed from Brussels,
with research stemming from Poland and risk management headed
up from Prague.
The brokerage arm broke away from the main business about
five years ago and has since bought Swiss Capital in Romania,
had an acquisition in the Baltics and Romania, as well as
recently setting up activities in Bulgaria. It is also the
largest shareholder of the Prague Stock Exchange.
Kojo Asakura, director general at KBC Securities, says that
after three years of operations it has already reached the
status of the sixth largest in Poland. He admits that his
retail operation is still not what it should be because it is
"struggling with their online retail platform".
One issue that Asakura struggles with a lot is the
regulation that tends to differ vastly between countries, but
he hopes that the implementation of the Markets in Financial
Instruments Directive (Mifid) will harmonize trading across
eastern Europe. He says that in Poland at least Mifid should be
implemented in the fourth quarter and alongside it should be
the Global Securities Master Lending Agreement, which will have
a Polish annex.
Asakura is also looking ahead to the changes to the law in
short selling and securities lending, which are due to be
implemented towards the end of the year.
KBC Securities offers brokerage facilities to retail and
institutional customers from across the region but the majority
of business stems out of Poland. Asakura says that there are
still issues with omnibus accounts and that these "legal
changes are very important".
Jon Mathias, director of financial futures and options at
Merrill Lynch, has written previously about the characteristics
of emerging markets (defined as still in economic and political
development), as well as the requirements that a global broker
needs when accessing them. On the first point, he stressed the
nature that exchanges tend to be national and operate in a
legal framework, which is not often completely conducive to the
listed derivatives markets. The impact of having a highly
nationalized exchange can also lead to national technological
solutions, national exchange regulation and make the act of
even opening an account a little onerous.
These factors are seen all across the globe but in these
regions efforts are being made to improve the situation.
Mathias says that one of the most important challenges is the
need to adopt omnibus accounts. He adds that there can be a
number of problems with the three-dimensional level of the
omnibus carrier system but that when this is adopted, it tends
to be the stage "when things start to happen".
What should not be underestimated throughout the region is
the growing retail market, especially in the structured product
sector. One source says that this was so successful for the
banks because of the profit margins the sellers of the products
are able to make. Many people FOW spoke with were trying to
attract institutional clients but all agreed that education is
key to a fast-growing market.
One vital form of education is information dissemination
and, although there is not one structured approach, it is
taking place on many fronts. For example, Bulgarian Stock
Exchange, Sofia, launched X3 News in February, which has the
aim of guaranteeing "the dissemination of information in a
non-discriminative manner ensuring that the information
simultaneously reached the widest possible range of end
In Poland, New World Alternative Investments was the first
organization to set up a website dedicated to educating people
on the benefits of derivatives.
"We dedicated this website six years ago as a purely
educational and informational website," says Mateusz Walczak
chief executive of the alternative investment firm. Alongside
this, Warsaw Stock Exchange has a number of television stations
housed in its building and holds seminars on an almost daily
New World advises funds in the region, as well as selling
products to clients that it has purchased from firms such as
Goldman Sachs and Merrill Lynch. Its management reads like a
who’s who of the local and international
derivatives market, with previous bank professionals from
companies such as Blackrock heading up the firm.
As well as advising firms on their investment strategies, it
also manages a fund dedicated to Polish art and has many other
"People who created the company are also responsible for the
expansion of the derivatives market in the region. We look at
Romania and the Ukraine but our main focus is Poland –
there are 15 more mutual funds in Poland alone waiting for
approval," says Walczak.
The Polish market is gaining in stature year-on-year with
new international firms setting up home in the country.
However, there are still legislation setbacks for pension
funds, which cannot use embedded derivatives, and some
adjustments are needed in the short selling and securities
However, there is plenty of potential and it is beginning to
show. Not only is WSE the dominant domestic exchange but with
its state-of-the-art facilities and the constant interaction it
has with potential investors, it is almost becoming a gateway
to the region. Poland’s derivatives market has
been largely retail, but the institutional side is taking shape
and the structured products business is beginning to
Banks in Poland stem from two sources: those that are
offshoots of the central bank and Polish development banks,
which were set up to boost investment in the region. The latter
were the first to trade futures and options. Originally the
Polish development banks had trouble securing foreign licensing
but are now well respected in the region.
Piotr Minkina, senior specialist, treasury department at
Millennium Bank, says that the Warsaw community which deals in
derivatives is a small community with old and new timers.
"There are two waves: the first who were involved in the
conception of the markets, and then a second wave that has
joined their more experienced peers with fresh ideas and a new
WSE is increasing its international presence, signing
memorandums of understanding (MOUs) with three Taiwanese
exchanges, announcing Goldman Sachs as a remote member and
recently opening a representative office in Ukraine.
The MOUs had the aim of dual listing Taiwanese companies on
WSE, the creation of exchange indices, new investment products
and the mutual exchange of experience and information among the
markets. WSE became the first foreign exchange to open an
office in Ukraine.
"WSE offers several advantages to Ukrainian companies
seeking capital for development. We guarantee access to foreign
capital at a significantly lower cost than other European
exchanges," said Ludwik Sobolewski, WSE president, in June when
the decision was announced. "We know the potential of the
Ukrainian market and recognize that close cooperation will
benefit both sides." The exchange says that Ukraine is
perceived as one of Poland’s most important
political and economic partners, stating that it has been keen
to increase bridges of cooperation for the past two years.
Piotr Mielus, managing director financial institutions and
markets, at BPH, says that his bank is garnering good margins
from structured products aimed at retail traders where products
are bought in London and sold in Warsaw.
BPH has 200 domestic branches but because of a change of
ownership from UniCredit to GE in June, this is set to increase
in the coming months. It is busy promoting its business to
retail, institutional and corporate clients and is watching
with interest whether the stock exchange will list FX
Mielus agrees with Andrez Walkowiak from ING, who both
insist education is vital to the development of the market
especially the FX options sector, and the pair still debate
which of them made the first trade in 1996.
There are about 30 domestic pension or local investment
firms in the region, as well as another 50 insurance firms,
which are well versed on the trading of derivatives, and there
are about 15 mutual funds, which are awaiting approval. Joining
these is a fresh breed of international proprietary trading
firms making a new base in Warsaw.
Saxon Financial set up shop in Warsaw in January with Marek
Trepka, who has been with the firm for a number of years,
leading the team. Originally, Saxon had a team of five on the
ground but this has already increased to 12.
Meanwhile, OSTC, which has three offices in Greater London,
also has a large presence in the Polish capital and is
spreading its wings throughout the country.
Ian Firla heads up the Warsaw team, which primarily trades
short-term interest rates on Liffe and CME Group, as well as
some soft commodities. The operation has a number of familiar
names in its management, with Peter Green, Mark Slade and
Johnny Aucamp as principal players. OSTC clears through
Green’s trading firm Kyte Group.
Firla says that one of the reasons OSTC is in Poland is that
it sees the country as an untapped market. On May 30 the team
announced that, in cooperation with Liffe, it is opening
another two offices, one in Krakow and a second in Gdansk, both
are due to open in September, which will bring the total to
OSTC employs 100 high-frequency traders and is looking to
recruit another 50. Neither this operation nor Saxon connects
to WSE at the moment but both are considering the move.
Eurex is one exchange which is beginning to realize the
potential of this market by building incentive schemes into its
fee structure, giving an extra reason to base proprietary firms
in the country.
Trepka promotes Stellar Trading Systems connectivity as
fulfilling the demands needed by smaller, but expanding
operations, by being adaptable and scalable. Saxon is looking
to increase its size, and is looking to hire both graduates and
people with experience as the global operations move more
towards a fund management structure.
With a stock and derivatives exchange that is looking
towards product and membership expansion, as well as an
attractive environment for trading firms, Poland is set to grow
in stature. Plus, with an increasingly difficult economic
climate, regions that are not yet feeling the pinch could be
the ones to watch in the coming months.
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