*3.3.2. CPSS – IOSCO recommendations*

344 Risk Management – Current Issues and Challenges

thus raising concerns about solvency.

increased market liquidity.

instruments.

*3.3.1. G30 recommendations* 

implemented by all settlement systems:

operating problems turn into financial losses.

depends substantially on the following two main factors:

influences on a country's entire financial system [13].

the liquidity risk is inversely proportional to market liquidity: the more liquid the market is, the lower the liquidity risk costs are. Liquidity problems have a high potential to have negative influences on the entire settlement system, especially when occurring amid high volatility of shares market and any delay in completion of the settlement by a participant

**SYSTEMIC RISK** refers to cascade spreading of a situation when settlement is impossible, from one participant to the clearing - settlement system to other members in the system (or all participants in the system). Institutions that operate clearing and settlement of exchange transactions are required to provide mechanisms and procedures to prevent expansion of liquidity or solvency problems from one participant to the whole system. Investor confidence in post-transaction systems is essential for liquidity growth of the stock market and is a prerequisite to entering a virtuous circle: a more liquid market significantly reduces the impact of risks that may arise in clearing and settlement system, which is reflected in

**OPERATIONAL RISK** implies that defective processing of transactions by participants in a settlement system, failure of transactions, fraud, disruption of communications or any other

Depending on the structure of clearing - settlement systems and transaction type, there might also be other risk categories, such as bankruptcy risks of the settlement bank, legal risk or custody risk. The probability that one or other of the above risks could materialize

implementation of strict procedures to control risks in the clearing and settlement of

operation plan of the clearing and settlement system of transactions with financial

Materialization of risks in clearing and settlement operations may have significant negative

Moreover, given the internationalization of financial flows, where some of the affected participants in a clearing and settlement system operate simultaneously in multiple markets or operational links exist between two or more national clearing and settlement systems, this may cause contamination and spread of local problems internationally. Thus a set of

"G30 Recommendations" consists of a set of nine recommendations that should be

recommendations was elaborated by specialized international institutions.

securities transactions, procedures known collectively as "risk management";

**3.3. Recommendations on the clearing and settlement systems to reduce risks** 

CPSS (Committee on Payment and Settlement Systems) - IOSCO (International Organization of Securities Commissions) recommendations, completed in 2001, take and develop provisions of G30 recommendations, adapting them to the important changes occurring in the securities industry in recent years, but adding new ones.


transaction by indirect market participants (such as for institutional investors or global custodians), it must take place as soon as possible after execution of the transaction, preferably "T 0", but not later the "T +1".

Risk Management on the Romanian Capital Market 347

14. Efficiency: Without affecting operations safety, securities settlement systems should

15. Communication standards and procedures: settlement systems securities transactions must use or adopt procedures and standards to facilitate communication to facilitate efficient cross-border transactions. Providing conditions for all participants to communicate in a fast, safe and clear manner is of the outmost importance for the functioning of clearing and settlement systems. It is therefore recommended for all participants in the system to know and to use standard procedures in relation to the messages content, securities identification or other participants. In cross-border

transactions is advisable to use international standards: ISO 6166 and ISO15022. 16. Transparency: CSDs and CCPs should provide participants enough information for them to identify and evaluate risks and costs of using services provided by the central

17. Supervision: settlement systems securities transactions should be subject to transparent and effective supervision. Central banks and capital market supervisory authorities

18. Risks associated with trans-border connections between central securities depositories. The CSD that establish inter-connections with another CSD to make cross-border transactions must design and operate such connections so as to reduce specific risks of cross-border settlements. Cross-border transactions carry most of and the most complex risks that you may encounter when conducting capital market investments. Besides, the costs of performing such transactions are not reduced. To reduce risks and costs involved in carrying out cross-border transactions of financial instruments that otherwise would be borne solely by investors; institutions responsible for the successful settlement of the different countries were involved in establishing relationships to facilitate these operations. Achieving inter-connections between different systems operated by Central Depository make life easier for cross-border investors, but involves close monitoring of such risks if transferred from investors to administrators of clearing

**3.4. Risk management of settlement transactions at the Bucharest Stock Exchange** 

The services traditionally offered by stock exchanges refer to admission to the stock exchange of the issuing companies, establishing criteria for maintaining a particular security traded, disseminating for the public such stock exchange market information, especially for ensuring mechanisms to concentrate liquidity for a particular security. But continuously exchanges were directly interested in the whole building technical and institutional infrastructure to ensure safe completion and cost of transactions traded on the stock market. Therefore, some scholarships have created their own departments through which to work out the full range of post trading: clearing, settlement and registration. This was the case with the Bucharest Stock Exchange, which since the resumption of operations (in 1995) has

For settlement of stock exchange transactions, BSE chose from the beginning a variant of Model 2 settlement, which requires multilateral clearing and final settlement of funds applied

provided all operators on the stock market clearing and settlement services [14].

must work together or with other authorities with competence in the field.

ensure efficiency in terms of costs incurred by participants.

depository and central counterparty.

and settlement systems.


14. Efficiency: Without affecting operations safety, securities settlement systems should ensure efficiency in terms of costs incurred by participants.

346 Risk Management – Current Issues and Challenges

counterparty services.

should be considered.

preferably "T 0", but not later the "T +1".

achieve delivery against payment (DVP).

the use of collateral to limit exposure.

transactions with financial instruments.

data and timely completion of settlement.

participants, allowing fair and open access to the system.

of financial instruments.

transaction by indirect market participants (such as for institutional investors or global custodians), it must take place as soon as possible after execution of the transaction,

3. The settlement cycle: settlement transactions mechanisms must adopt the system by which the value date is set after a specified number of days from trade date ("rolling settlement system"). Final settlement must be made no later than "T +3". Costs and

5. Loan instruments: lending of financial instruments (REPO contracts or other equivalent transactions) should be encouraged to streamline the process of settlement of transactions.

7. Delivery versus payment (DVP): CSDs should eliminate principal risk by linking the transfer of financial instruments and transfer of equivalent financial funds so as to

8. Complete Settlement: Completion settlement must take place no later than the end date of settlement. Successful settlement on the basis of a real-time settlement mechanism

9. Risk control: CSD providing credit facilities to participants, including CSDs that operate net settlement systems, should establish control of risks, ensuring at least successful settlement if the participant with the largest payment obligation can settle the payment. The best way to control risks involves the adoption of a set of measures that combine

10. Settlement money: Assets used for last payment obligation securities transactions should carry little risk or not be at all affected by credit risk or liquidity risk. If settlement scheme does not involve any use of central bank resources, measures should be taken to protect settlement system members of potential losses and liquidity constraints that may occur due to risk cash settlement agent used to complete

11. Operational Safety: Sources of operational risk arising in the clearing and settlement should be identified and minimized by adopting an appropriate architecture for the system, through control and adoption of specific procedures. Systems must be safe and have adequate capacity. Action plans and emergency back-up should allow recovery of

12. Protect investors' portfolio: Entities that have custody of financial instruments must use specific procedures to ensure full protection of investors' portfolio. It is essential to have investors' portfolios protected from creditors' claims on the entity that retains custody

13. Access: CSDs and CCPs should have objective and transparent criteria established for

Barriers that inhibit the use of loan activities for this purpose should be eliminated. 6. Central Depository (CSD): Preserving or dematerializing of securities and their transfer

through electronic registration account must be used as widely as possible.

benefits of a shorter settlement cycle than "T +3" should be carefully evaluated. 4. Central counterparty (CCP): costs and benefits of central counterparty mechanism should be evaluated. The introduction of this mechanism should always be accompanied by control of risk assumed by the institution which provides central


#### **3.4. Risk management of settlement transactions at the Bucharest Stock Exchange**

The services traditionally offered by stock exchanges refer to admission to the stock exchange of the issuing companies, establishing criteria for maintaining a particular security traded, disseminating for the public such stock exchange market information, especially for ensuring mechanisms to concentrate liquidity for a particular security. But continuously exchanges were directly interested in the whole building technical and institutional infrastructure to ensure safe completion and cost of transactions traded on the stock market. Therefore, some scholarships have created their own departments through which to work out the full range of post trading: clearing, settlement and registration. This was the case with the Bucharest Stock Exchange, which since the resumption of operations (in 1995) has provided all operators on the stock market clearing and settlement services [14].

For settlement of stock exchange transactions, BSE chose from the beginning a variant of Model 2 settlement, which requires multilateral clearing and final settlement of funds applied to the net basis, followed by settlement of securities traded, settlement being applied to the gross. The modular structure of the electronic system of BSE that includes trading module, clearing and settlement module and registry module allowed real-time interaction between each of these components, which provided a minimum exposure of the system to operational risk. The settlement cycle used in the stock market in Romania is "T +3" and the final settlement of funds is performed in a separate section of the national payment system (ReGIS), BSE being authorized by the NBR as a inter-banking clearing house since June 9, 1997.

Risk Management on the Romanian Capital Market 349

 **National Bank of Romania**, which is the administrator of the Settlement Express Transfer (ReGIS) system within which the clearing participants hold settlement accounts and participate in the financial settlement transactions of securities concluded

Information flow and all the activities leading to successful settlement is achieved over three

1. After the trading session is closed, the Stock Exchange prepares the Compensation Report and the Settlement Report related to securities transactions executed by each intermediary. Intermediaries and custodians registered with BSE agents are required to

2. BSE will issue and send by fax with delivery receipt or secured e-mail to the clearing

3. Participants in the clearing and settlement system managed by BSE are required to check the reports taken from BSE system. If participants in the clearing and settlement system managed by BSE object to the reports, they will communicate this in writing to BSE. After complaints are settled by BSE staff and reports are amended by BSE, documents and operations resume the circuit described above and the brokers modified reports, custodians and that participants will be forwarded by the BSE in the same day. If no objections are raised regarding the data presented in the reports provided by BSE,

4. On transaction settlement date (T+3), debtor clearing participants will confirm BSE their consent to participate in the settlement, according to the amounts recorded in the Bank Settlement Report, by fax with delivery note or secured e-mail system. Also, participants

6. National Bank will confirm to Bucharest Stock Exchange that final settlement was

7. After payment confirmation is received, BSE will transfer financial instruments from the sellers' accounts to the buyers, according to the concluded transactions. This will be accompanied by sending a message confirming to all clearing participants that

Workflow described above is one in which all intermediaries and settlement system clearing participants honor their obligations that arise from the exchange transactions. Efficiency of clearing and settlement system is checked, but especially when during the settlement cycles a situation where one (or more) of the participants in the system cannot fulfil obligations. To prevent such situations and to solve them when they manifest, clearing and settlement

will set up deposits equal to the net amount to be paid, in ReGIS in favour of BSE. 5. Based on the final Settlement Balance, BSE will initiate the payment instruction to settle

concluded by sending the document "Settlement report of net positions".

system of the BSE has established a risk management mechanism.

days (T +3). Presented sequentially, the process is done through the following steps:

confirm the next day, the contents of clearing and settlement reports.

participants (settlement banks) all bank settlement reports.

these are considered to be confirmed.

settlement transaction was closed.

all net positions.

with BSE.

*3.4.2. Settlement mechanism* 

This brief presentation of the clearing and settlement of BSE is only an overview of its main features without revealing all relations established between participants on the stock market from the moment the transaction was closed on the exchange floor until settlement, meaning until the buyer settles all payment obligation according to the contract and the obligation to deliver the securities according to the contract stipulations, accrued to the buyer. To facilitate understanding of information flow that constitutes the transaction settlement system on the BSE it is useful to first review the following terms:


### *3.4.1. Participants in the clearing and settlement system*

Bucharest Stock Exchange is at the heart of the whole system of securities transactions settlement concluded on the stock market, interacting with each of the participants in the system:


 **National Bank of Romania**, which is the administrator of the Settlement Express Transfer (ReGIS) system within which the clearing participants hold settlement accounts and participate in the financial settlement transactions of securities concluded with BSE.

### *3.4.2. Settlement mechanism*

348 Risk Management – Current Issues and Challenges

called the trade date;

settlement to be applied to the net basis.

have the right to trade on the BSE; **custodian agencies registered with BSE**;

*3.4.1. Participants in the clearing and settlement system* 

transaction;

transactions;

system:

to the net basis, followed by settlement of securities traded, settlement being applied to the gross. The modular structure of the electronic system of BSE that includes trading module, clearing and settlement module and registry module allowed real-time interaction between each of these components, which provided a minimum exposure of the system to operational risk. The settlement cycle used in the stock market in Romania is "T +3" and the final settlement of funds is performed in a separate section of the national payment system (ReGIS),

This brief presentation of the clearing and settlement of BSE is only an overview of its main features without revealing all relations established between participants on the stock market from the moment the transaction was closed on the exchange floor until settlement, meaning until the buyer settles all payment obligation according to the contract and the obligation to deliver the securities according to the contract stipulations, accrued to the buyer. To facilitate understanding of information flow that constitutes the transaction settlement

 **Trading Report:** is that statement issued by BSE with terms and conditions of sale contracts of financial instruments concluded on the Exchange floor at a certain date,

 **Compensation Report:** is that document issued by BSE reflecting financial obligations and rights of company's financial instruments or custodian agent resulting from the

 **Report of Settlement:** is that document issued by the Bucharest Stock Exchange outlining duties and the pay of brokers or custodian agent, resulting from clearing

 **Settlement Banking Report:** is that document issued by the Bucharest Stock Exchange based on the settlement report that outlines the duties and financial rights of each

 **Balance for final settlement:** the document issued by the Bucharest Stock Exchange, upon which BSE is entitled to introduce in ReGIS the payment instructions for

Bucharest Stock Exchange is at the heart of the whole system of securities transactions settlement concluded on the stock market, interacting with each of the participants in the

**intermediaries**: are financial investment companies (SSIF) and credit institutions that

 **clearing participants:** banks are authorized by the National Bank as credit institutions, that have a settlement contract with BSE, ReGIS participation contract and a set up and enforce securities agreement with NBR. Intermediaries have opened settlement

accounts for exchange transactions at the level of the clearing participants.

participating bank and brokers that have an open settlement bank account;

BSE being authorized by the NBR as a inter-banking clearing house since June 9, 1997.

system on the BSE it is useful to first review the following terms:

Information flow and all the activities leading to successful settlement is achieved over three days (T +3). Presented sequentially, the process is done through the following steps:


Workflow described above is one in which all intermediaries and settlement system clearing participants honor their obligations that arise from the exchange transactions. Efficiency of clearing and settlement system is checked, but especially when during the settlement cycles a situation where one (or more) of the participants in the system cannot fulfil obligations. To prevent such situations and to solve them when they manifest, clearing and settlement system of the BSE has established a risk management mechanism.

## *3.4.3. Risk management*

Risks that can disrupt the transactions settlement flow have been identified both at the level of the brokers and custodian (first layer) and the clearing participants (second floor). Consequently, risk management measures are structured on two levels:

Risk Management on the Romanian Capital Market 351

**3 x CIFG CCFG VNC VGB VMj** / (4)

**NPV** = participant's net equity amount, included in the "Minimum net capital and

 *for purchases* - based on the amount deposited by the participant or his clients in the settlement account (or the accounts "clients") from the settlement bank or other banks, confirmed by presenting the statement of account or other bank documents (such as, for

*for sales -* depending on the amount of sales declared by the participant in writing that

**VMj** = value that has changed the total amount of loans to the participant and its customers and represents the more or less difference than the value previously reported by the

During the trading session, each time a participant concludes a transaction, the Stock

**3x CIFG CCFG VNC VGB VMj 3x CNCP VNCP VNCl CNCl** / (5)

**CNCP** = are financial instruments purchased by the participant in his own name in that

**VNCP** = are financial instruments sold by the participant in his own name in that trading

**CNCl** = are financial instruments purchased by the participant in that trading session, in his

**VNCl** = are financial instruments sold by the participant in that trading session, in his own

To determine the trading limit, participants are required to submit monthly to BSE's specialized department "Minimum net capital and indebtedness indicators statement" This statement will be sent to BSE within 10 working days from the end of the reporting month. If, during the time between two successive reports, the net capital varies more than + / - 15% compared to the last reports, the participant is required to communicate to BSE the new

If during a day, the transactions concluded by a participant affect the relationship of inequality, the participant exceeding his trading limits, the Exchange system will not allow the introduction or modification of the exchange orders on behalf of that participant, as their execution would lead to increase his exposure, and orders that are already in the market will

**CIFG** = participant's initial contribution to the Guarantee Fund; **CCFG** = participant's current contribution to the Guarantee Fund;

example, the payment order accepted by the bank);

own name and on behalf of his clients, expressed as values;

name and on behalf of his clients, expressed as values

he would perform during the trading session

trading session, expressed as values;

session, expressed as values

value immediately.

**VGB** = amount by which the trading limit may be increased as follows:

participant. BSE will modify the participant's trading limit to this value.

Exchange electronic system checks that the following formula is applied:

where:

where:

indebtedness indicators";


The main instruments to manage risk, available to BSE are the following:


BSE applies risk management measures as presented above. However, it should be noted that enforcing trading limits to each participant and using the amounts from the Guarantee Fund are the measures with the greatest impact on the entire system thus helping BSE to control risks in the settlement system

### *3.4.4. Trading limit*

The trading limit is the maximum amount limit within each of the participants on the market regulated by BSE can operate over a single trading session. This limit is calculated in real time by the electronic system of BSE, for each intermediate, being affected by each completed transaction and not by the orders entered into the system by the participant. The trading limit is determined by a calculation formula and is affected by exchange transactions concluded on their own by each participant, both on their own name and on behalf of clients.

The formula for calculating the trading limit is as follows:

$$3 \ge \left( \text{CIFG} + \text{CCFG} + \text{VNC} \right) + \text{VGB} - \text{ } / + \text{VMj} \tag{4}$$

where:

350 Risk Management – Current Issues and Challenges

a trading limit for each broker.

Risks that can disrupt the transactions settlement flow have been identified both at the level of the brokers and custodian (first layer) and the clearing participants (second floor).

1. In order to limit default exposure on brokers' obligations, BSE sets through procedures

2. To limit exposure in case of no payment, BSE ask from clearing participants and brokers to give priority to clearing and disbursement of amounts necessary to cover their debit

3. If it is found that upon settlement date, the participant to the clearing and settlement system managed by BSE has limited solvability to cover payment obligations, the clearing participant with whom the broker holds an account may proceed to grant

4. If the clearing participant grants participants in the clearing and settlement system managed by BSE a loan needed to cover the debit position, the participant in the clearing and settlement system managed by BSE was in position debtor may proceed to establish a claim pledge of financial instruments existing own account, both those settled, and of the pending settlement in favor of the credit granted. Clearing participant is required to present BSE documents stating the guarantee institution. 5. If the participant does not grant credit or the loan does not fully cover the debit of participants in clearing and settlement system, than BSE shall be able to call the

BSE applies risk management measures as presented above. However, it should be noted that enforcing trading limits to each participant and using the amounts from the Guarantee Fund are the measures with the greatest impact on the entire system thus helping BSE to

The trading limit is the maximum amount limit within each of the participants on the market regulated by BSE can operate over a single trading session. This limit is calculated in real time by the electronic system of BSE, for each intermediate, being affected by each completed transaction and not by the orders entered into the system by the participant. The trading limit is determined by a calculation formula and is affected by exchange transactions concluded on their own by each participant, both on their own name and on behalf of

Consequently, risk management measures are structured on two levels:

The main instruments to manage risk, available to BSE are the following:

 Risk management measures managed exclusively by BSE; Risk management measures managed together with NBR.

credit, under an agreement signed in advance.

The formula for calculating the trading limit is as follows:

*3.4.3. Risk management* 

positions.

Guarantee Fund.

*3.4.4. Trading limit* 

clients.

control risks in the settlement system

**CIFG** = participant's initial contribution to the Guarantee Fund;

**CCFG** = participant's current contribution to the Guarantee Fund;

**NPV** = participant's net equity amount, included in the "Minimum net capital and indebtedness indicators";

**VGB** = amount by which the trading limit may be increased as follows:


**VMj** = value that has changed the total amount of loans to the participant and its customers and represents the more or less difference than the value previously reported by the participant. BSE will modify the participant's trading limit to this value.

During the trading session, each time a participant concludes a transaction, the Stock Exchange electronic system checks that the following formula is applied:

$$\mathbf{3x} \begin{pmatrix} \mathbf{CIFG} + \mathbf{CCFG} + \mathbf{VNC} \end{pmatrix} + \mathbf{VGB} - \mathbf{\color{red}{+}} \mathbf{VM} \mathbf{\color{red}{>}} \mathbf{\color{red}{=}} \mathbf{3x} \begin{pmatrix} \mathbf{CNFP} - \mathbf{VNC} \mathbf{P} \end{pmatrix} + \mathbf{VNC} \mathbf{I} + \mathbf{CNF} \begin{pmatrix} \mathbf{5} \end{pmatrix}$$

where:

**CNCP** = are financial instruments purchased by the participant in his own name in that trading session, expressed as values;

**VNCP** = are financial instruments sold by the participant in his own name in that trading session, expressed as values

**CNCl** = are financial instruments purchased by the participant in that trading session, in his own name and on behalf of his clients, expressed as values;

**VNCl** = are financial instruments sold by the participant in that trading session, in his own name and on behalf of his clients, expressed as values

To determine the trading limit, participants are required to submit monthly to BSE's specialized department "Minimum net capital and indebtedness indicators statement" This statement will be sent to BSE within 10 working days from the end of the reporting month. If, during the time between two successive reports, the net capital varies more than + / - 15% compared to the last reports, the participant is required to communicate to BSE the new value immediately.

If during a day, the transactions concluded by a participant affect the relationship of inequality, the participant exceeding his trading limits, the Exchange system will not allow the introduction or modification of the exchange orders on behalf of that participant, as their execution would lead to increase his exposure, and orders that are already in the market will

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

Risk Management on the Romanian Capital Market 353

As explained earlier, for settling the exchange transactions, Bucharest Stock Exchange is using a variant of Model 2 Settlement (BIS classification), which requires multilateral clearing and final settlement of the funds on a net basis, followed by gross settlement of securities. For such a system, in the literature were directed two ways of determining the

1. For net settlement systems, there are six minimum requirements to be fulfilled. The fourth requirement of this report states that "*as a minimum requirement, compensation schemes and multilateral net settlement shall be able to provide for the daily settlement, when it is impossible to honour the payment obligations by the participant with the highest exposure*"; 2. Another opinion is that the minimum requirement to be greater than or equal to the number of days of the settlement cycle (for BSE, three) plus one, multiplied by the greater of the net debtor position recorded in a recent period of time, e.g. last two

As these recommendations suggest, the total amount of the Guarantee Fund has no absolute meaning, but must be interpreted in light of the whole system of risk management, value of transactions made on the stock market and especially the amount of exposure to settlement . These considerations were taken into account when establishing criteria for setting up and

Guarantee Fund of BSE was established based on initial contributions of all members of the Stock Exchange Association (later, with the transformation of BSE in a stock company, any intermediary agent, carrying out transactions at BSE became eligible to participate in the

For the Guarantee Fund to be effective and achieve the purpose for which it was created is necessary that the component assets to have a high degree of liquidity. Therefore, in managing resources in the Fund should be prioritized the safe and liquid investment criteria, the yield

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

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

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.

Guarantee Fund) as well as of all custodian agents authorized by the Stock Exchange.

functioning of guarantee fund for settlement of negotiated transactions to BSE.

obtained in the administration of the Fund represents only a secondary criteria.

optimal value of a Guarantee Fund:

weeks.

**4. Conclusions** 

more risky than the North American market.

demand, but derive primarily from an inadequate supply.

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 emerging risks into achieving financial settlement to the Guarantee fund.

#### *3.4.5. Guarantee fund*

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 functioning of the mechanism of settlement of exchange transactions."

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 following elements:


As explained earlier, for settling the exchange transactions, Bucharest Stock Exchange is using a variant of Model 2 Settlement (BIS classification), which requires multilateral clearing and final settlement of the funds on a net basis, followed by gross settlement of securities. For such a system, in the literature were directed two ways of determining the optimal value of a Guarantee Fund:


As these recommendations suggest, the total amount of the Guarantee Fund has no absolute meaning, but must be interpreted in light of the whole system of risk management, value of transactions made on the stock market and especially the amount of exposure to settlement . These considerations were taken into account when establishing criteria for setting up and functioning of guarantee fund for settlement of negotiated transactions to BSE.

Guarantee Fund of BSE was established based on initial contributions of all members of the Stock Exchange Association (later, with the transformation of BSE in a stock company, any intermediary agent, carrying out transactions at BSE became eligible to participate in the Guarantee Fund) as well as of all custodian agents authorized by the Stock Exchange.

For the Guarantee Fund to be effective and achieve the purpose for which it was created is necessary that the component assets to have a high degree of liquidity. Therefore, in managing resources in the Fund should be prioritized the safe and liquid investment criteria, the yield obtained in the administration of the Fund represents only a secondary criteria.
