Why Bulgaria should join a regional Central Counterparty

By Hannes  Takacs

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Regional CCP can be cornerstone of market infrastructure

Well developed local equity markets can offer a number of benefits to investors, businesses and the wider national economy.

The development of equity markets can provide access to long-term local currency financing to small and medium enterprises potentially at a much lower cost than traditional bank loans especially when opened to foreign investments.

Functioning cash equity markets are also a prerequisite for the development of derivatives markets which enhances the options for financial institutions and firms to manage currency, interest and credit risk.

Capital markets have expanded in many countries in the last decade. The relative size of global stock market capitalisation to GDP saw a 50 per cent increase between 1994 and 2010, from 24 per cent to 38 per cent.

However, Bulgaria’s stock market has not managed to keep up. Market capitalisation reached its all-time peak with 15 per cent of GDP in 2011 and has been decreasing steadily since to 12.4 per cent at the end of last year.

The EBRD initiated a regional Central Counterparty (CCP) project early this year which is expected to improve the overall efficiency and liquidity of local capital markets.

The idea is that one of the four EU-compliant CCPs in the region - CCP A (Austria), Athex Clear (Greece), Keler (Hungary) and KDPW (Poland) –  becomes a regional clearing service provider for central and eastern Europe.

Considering the high upfront cost and the critical mass needed to operate a local CCP, a feasibility study by Oliver Wyman, the international consultancy, and the EBRD concludes that the creation of a regional CCP is economically the most viable option for bringing central clearing services to central and eastern European capital markets.

This applies especially to markets like Bulgaria that do not use the services of a CCP yet.

Bulgaria has much to gain from participation in a regional CCP. Local businesses would enjoy improved access to capital market financing while benefitting from the reduced systemic risk in the local financial market.

The Bulgaria Stock Exchange, Central Security Depository and local brokers may also benefit from growth in their customer base and trading volumes.

The study emphasises that the regional CCP can be the cornerstone of a market infrastructure in the region that is aligned to EU standards and drives a significant expansion in investable capital, market liquidity and number of listings in the local markets, which may accelerate product innovation in the Bulgarian capital markets.

Among countries without CCPs in the CEE region, Bulgaria is the third biggest country in terms of equity transaction volume.

Early participation in the project may strengthen leverage in negotiations. The latest available World Bank figures from 2013 show that every 10 percentage points in deepening equity markets in GDP terms will yield an increase of approximately €2,500 in per capita GDP.

Bulgaria, and no other country for that matter, should not miss such an opportunity and instead join a regional CCP if and when it becomes available.

Hannes Takacs is EBRD Senior Manager, Local Currency and Capital Markets Initiative

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