**4. Conclusions**

352 Risk Management – Current Issues and Challenges

*3.4.5. Guarantee fund* 

following elements:

eliminated.

Settlement model used;

in the settlement system;

overall stock market development;

Other regulations of risk management;

The value of the transactions made on the stock market;

ultimately generates the size of the exposures to settlement;

be suspended automatically by electronic system of BSE. Basically, if a participant that has completed operations which no longer meet the inequality relationship described above, will not be allowed to the market access till increasing the trading limit. In order to increase the trading limit is however necessary that the participant expressly requests this by sending a form by fax to BSE in this respect, also assuming responsibility for carrying out the settlement. However, the participant shall submit an estimate of the value of transactions he

In time, the usefulness of trading limits and especially the formula used to calculate it attracted much discussion at the level of the stock market participants. The main criticism concerns the fact that on the right side of the relationship of inequality the sales and purchases amounts made on behalf of clients are treated similarly and influence the limit in the same way. Even if by making a sale transaction the intermediary does not assume any risk regarding the cash settlement of transactions, however the value of sales transactions made on behalf of clients diminishes daily trading limit of the participant. In fact, you can even consider that sales transactions made by a participant does not induce any risk in the entire settlement system as long as before being accepted an order of sale by the Exchange's electronic system, in the account of the seller are performed verification of the securities, subject to trading order. Considered from the perspective of market participants and given the above considerations, the current formula for calculating the limit of transaction seems unduly restrictive. Intuitively, the limit of transaction reported only net amounts paid in settlement appears to be more reasonable and would create a much closer relationship of

As required by the regulations and procedures Bucharest Stock Exchange, "The Guarantee Fund", "the Fund ", has as main objective to ensure necessary resources for proper

Sizing the Guarantee Fund and its constituent sources represent, for any settlement system, two central problems whose solutions can be found only by reference to at least the

Costs of setting up such a fund guarantee, costs supported mainly by direct participants

Financial strength of the participants in the system, which is closely related to the

The performance of the compensation system (the degree of compensation), which

Accepting that, in fact, financial risks are minimized and in very few cases are complete

intends to carry out during the day when the limit was exceeded.

emerging risks into achieving financial settlement to the Guarantee fund.

functioning of the mechanism of settlement of exchange transactions."

To increase the accuracy which describes the development of the stock exchange in our country, it is necessary to build a synthetic index. Regarding the risk on the capital market, Risk Grades values determined for BSE indices show that the domestic capital market is more risky than the North American market.

However, analyzing the Risk Grades values obtained for all indexes in the region we notice that they are very close and shows that the investors are not picking up the capital market in Romania as an excessively risky relative to other exchanges in the region. It confirms the hypothesis that the main problems of the capital market in Romania are not related to demand, but derive primarily from an inadequate supply.

The risks managed by Institutions such as market operators, clearing houses and central depositories are very important, even though there maybe be less visible to the public.

Clearing and settlement services ensure that transfers of financial instruments and financial funds between the parties of an exchange transaction to be performed safely and with low costs.

Risk Management on the Romanian Capital Market 355

Madalina Ecaterina Andreica

Octavian Stroie

**5. References** 

House

*Dept. of Economic Informatics and Cybernetics, Academy of Economic Studies, Bucharest, Romania The National Scientific Research Institute of Labour* 

*Department of Audit, National Authority for Scientific Research, Bucharest, Romania* 

[1] O'Neill Wyss, B. (2001) - Fundamentals of the Stock Market, Mc Graw Hill Printing

[2] Smith B. M. (2003) - Global Stock Market. From ancient Rome to Silicon Valley, Farrar,

[3] Bucharest Stock Exchange (2007) – Manual for the Bucharest Stock Exchange Index,

[4] Stoica, V., Ionescu, E. (2002)– Capital Markets and Stock Exchanges, Economic Printing

[7] Andreica,M., Nicolae, D., Andreica, M.E., Todor, L. (2009) – Working out forecast on the Basis of Statistical Extrapolation Principle, Economic Computation and Economic

[8] Andreica, M.I., Deac,V., Tipa, S. (2009) – Towards Providing Low-Risk and Economically Feasible Network Data Transfer Services, Proceedings of the 9th WSEAS International Conference on Multimedia, Internet and Video Technologies (MIV),

[9] Farmache, S., Andreica, M. (2010) – Improving Stock Management Assessment

[10] Farmache, S. (2011)– Ways of Stock Management Improvement, Cibernetica MC

[11] Kim J., Mina J. (2001) - RiskGradesTM Technical Document, The Risk Metrics Group

[12] Warsaw Stock Exchange (2009)– Warsaw Stock Exchange Indices, Available:

[13] McAndrews J., Stefanadis C.(2002) -The Consolidation of European Stock Exchanges, Current Issues in Economics and Finance, 8(6) June, Federal Reserve Bank of New York,

[5] Anghelache, G. (2000) – Exchange and OTC, Economic Printing House, Bucharest [6] Andreica, M., Farmache, S., Andreica, R. Andreica, C. (2007) – Controversies regarding the listing of shares issued by BSE, Vol. Pro-active Partnership in Creativity for Next

Generation*,* Polytechnique International Presses, Quebec.

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LLC, New York, Available: www.riskmetrics.com

*and Social Protection, Bucharest, Romania* 

Straus and Giroux, LLC, Chicago

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Printing House, Bucharest

In order to prevent and to reduce the risks specific to the settlement of financial instruments transactions, direct access to clearing and settlement system is limited to those participants who meet a set of capitalization criteria, operational capacity and professional experience, which means that the settlement of an exchange transaction involves a given number of financial intermediaries.

Since the highest financial risk throughout the process of finalizing exchange transactions take place in the last stage of the settlement process, an essential role is associated to the way the connection is made between the securities transfer mechanism (obligation to deliver) and the funds transfer mechanism (payment required). By using mechanisms that ensure Delivery Versus Payment (DVP), one eliminates the most important component of all financial risks during the settlement of the financial instruments transactions that is the principal risk. In order to limit the exposure to the risk of default of the intermediaries' obligations, a trading limit is set for each intermediate part.

Furthermore, the BSE requires its participants to prioritize the amounts necessary to cover their redundancy payment positions. From the market participants' perspective, the current formula for calculating the transaction limit seems unduly restrictive. Intuitively, calculating the transaction limit based only on the net amounts paid in settlement appears to be a more reasonable assumption and could lead to a much closer relationship between the risks emerging in financial settlements and the guarantee fund. Meanwhile, for the Guarantee Fund to be effective and to achieve its purpose for which it was created it is necessary that the assets within it to have a high degree of liquidity. The transition process and the recent international financial crisis have significantly affected not only the evolution of stock markets in Central and Eastern Europe, but also significantly changed the outlook for their future development.

That is why the stock market management should not only consider short-term measures in order to mitigate the crisis impact, but also to try to ensure the prerequisites for further development. The improvement of stock management in general and of stock market risks in particular, requires a medium to long-term perspective, similar to the opinions and contributions formulated by the authors in this chapter.
