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Emerging Markets A Perspective on Eastern European Exchanges The commodity exchanges in Central Eastern Europe (CEE) are relatively new and their range of products is still limited. Key challenges include the European integration and global competition. This article describes these developments, taking as an example the Romanian Commodities Exchange. It further comments on whether a regional commodity exchange could be a successful solution for the CEE countries as well as whether alliances between exchanges could reduce costs and increase revenues so that they be competitive in terms of EU standards. 46 Commodity Exchanges in Romania More than thirteen years after the start of transition to free market economy, the development of the financial and commodity markets in transition economies is still limited. As compared to developed economies, securities and commodities markets are still in the early stages of development and many further steps will have to be taken before drawing level with mature markets. The transition to free market economy, globalization and the subsequent opening of commodity markets led to the demand for risk management tools. As a result, many commodity and derivative exchanges were formed in Eastern Europe. In Romania, up to 15 exchanges were created between 1992 and 2002. The application of the Law 512/2002 governing the commodity exchange field was the starting point of a rapid consolidation process taking place during 2003. The beginning of 2004 found a strong commodity exchange operating all over Romania: The Romanian Commodities Exchange (RCE). Overview of the RCE RCE is the leader in the national market and has as prime objective: to become a regional leader. Being aware that a national exchange has no real chance of survival without international connections, RCE is one of the founders of the Association of Futures Markets (AFM). RCE is also on excellent terms with the world’s major exchanges and participates in international events. Since 2001, RCE through the AFM, became an important participant in the annual gathering of the international exchanges on Bürgenstock. The RCE was officially established on November 20, 1992, while the first trading session took place on December 10, 1992. The RCE is a joint stock company, organized in accordance with the rules and regulations of the traditional exchanges in the world. The RCE ownership structure encompasses 120 shareholders: commercial banks, investment companies, brokerage companies, as well as foreign trade companies. RCE develops cash markets for grains, oil and oil products, metals, scraps, etc. Also, since 1998, RCE develops a derivatives market for currencies and interest rate products. In 2003, the trading volume increased to approximately USD 1.3 bn, meaning a 600% increase year-on-year. The RCE has five years’ experience on the futures market, with its electronic trading system implemented three years ago. This electronic system allows the quotations display on the RCE web-site in real time. In figures, the futures and options market as at December 31, 2003 boasts 45,940 traded contracts, a total exchange capitalisation of ROL 1,050,027,785,808 and a total number of 2,463 transactions made through the electronic trading system. The most important contract on this market is the Futures contract “Dollar RCE”. Although the futures market volume doubled year-on-year, this trend is not representative for the Romanian market in general, where the main operators, such as commercial banks, lack a legal framework to operate on this market. In 2004, despite constraints in relation with the general economic environment, the RCE futures market matured and further developed its specific instruments and trading process. Notwithstanding the current legal premise, the launching of new underlying assets, such as indexes, T-Bills, and commodities, will bring a significant increase of the trading volume in 2004. As future projects, the RCE focuses its efforts on organising efficient regional cash markets for grains and petroleum products as a basis for a commodities futures market, expanding the terminals network throughout the country, trading commercial receivables, and consolidating the existing derivatives market. Future organization of CEE exchanges: how many options? What future is awaiting the commodity exchanges in the CEE countries given the fast EU integration process, which means that they will be part of a more developed European market? The global competition, the market internalization and the consolidation of trading systems in Europe could make it more difficult for the CEE exchanges to survive, especially for the small ones. Exchanges and policy makers are aware of these issues and are responding in a number of ways. The exchange of information and a closer cooperation in view of establishing different types of alliances are the main responses. Associations of emerging markets like the Association of Futures Markets (having the Secretariat in Budapest) are one example. Also, the alliances already in place among stock exchanges, such as the Warsaw Stock Exchange with Euronext, represent an alternative. We can see several options for the commodity exchanges: the integration in a regional commodity exchange, such as the RCE, individual alliances with a western exchanges, or a regional platform incorporated in a western exchange. Of course, each exchange should make a choice after assessing costs, benefits and risks associated with each of these options. Liliana Paraipan, Director Marketing & PR, Romanian Commodities Exchange, Bucharest. Tel: +40 21 2244742, Fax: +40 21 2242878, l.paraipan@brm.ro, www.brm.ro SWISS DERIVATIVES REVIEW 26 – NOVEMBER 2004
The Dark Side of Risk Management As many – if not most – practitioners in finance have heard of Behavioural Finance (BF), the notion that people are not the automatons depicted by conventional economics and efficient market hypothesis (EMH) may hardly strike as new. Nor is the topic of human error, which has been studied in several excellent publications on man-made disasters. The Dark Side of Risk Management, by Luca Celati (see also page 34), takes the challenge to a higher level by looking at the practical implications of Behavioural Finance findings. The book asks three basic questions: 1) BF studies tend to look at the impact of their findings in markets. What happens inside organizations and how do the poorly-understood human biases affect risk decisions? 2) Leaving aside the debates in academia, what should a trader, his boss and his risk manager be aware of in terms of each other’s psychological inclinations and their own? 3) As the risk management industry has evolved in variety and depth of tools, what can be done to include these biases – and not just their effects, the losses that they may originate – into the standard risk manager’s toolkit? As any reader has to find his or her own answers on his own, the book is predominantly descriptive rather than prescriptive. It is organized in three sections: 1) The Theory part shows how biases often start from the limitations in people’s information processing abilities. The overload resulting from the Information Age only compounds the problem. Thus, people use heuristics, a variety of shortcuts and rules-of-thumb that save time and simplify information. Sometimes they work and sometimes they do not. People do not have problems within themselves, they also have issues when others are involved in decision-making. A thorough review of groupthink and some hints of Game-theoretic models concludes the section. 2) The Practice part shows a series of portfolio allocation and financial decision examples to illustrate how biases work in practice and how visual framing can often play a decisive role. A review follows with the behaviour of some of the key actors in the daily risk and trading drama. Thereafter, two chapters document the disastrous effects of biases in a series of risk disasters both in finance and in the real world. Aside from well-known trading mishaps, this section shows how flawed human assumptions and frames are at the root of other dramatic instances such as the 1987 Stock Market Crash, Chernobyl, the Space Shuttle and the Titanic. 3) The Going Forward section outlines what a reader can do about the biases illustrated earlier in the book. This is where one understands the connection between standard BF and the need for introspection and meditation of which top traders and managers are aware. The Dark Side of Risk Management is hardly a book for beach readings, and indeed it is published as part of FT Professional Series. That is the price that the author pays for presenting the topic of psychological frames in risk management in such a comprehensive fashion. Accordingly, some may find the topic fairly complex in the theory part. The rest of the book, however, flows quite well and at the end the reader can feel that there is a framework in place to understand why his or her own organization and the top decision-makers follow certain patterns. The combination of humorous quotes, visual illusions, portfolio games and vivid description of risk problems make the book more engaging and enjoyable than most similar literature. As is the case with most BF-related literature, disbelievers and sceptics will have their objections and indeed the author has devoted an entire chapter to them. Rather then claiming to have found the absolute truth, the Dark Side of Risk Management is more about providing tools for self-understanding and for dismantling the many false truths that marketing has created in the risk management arena. While understandable from a marketing point of view, it is odd that most Operational Risk and empirical evidence in other fields (such as civil aviation) attribute about 70–80% of problems and losses to human error but then track mostly their effects, namely the losses that they determine. This book creates the opportunity to understand and measure the real nature of human biases in finance at their roots. That is where the book throws down the gauntlet by creating an extremely ambitious new angle in risk management. Book Review 47 SWISS DERIVATIVES REVIEW 26 – NOVEMBER 2004
Page 1 and 2: SWISS DERIVATIVES ISSUE 26 - NOVEMB
Page 3 and 4: Contents Contents SWISS FUTURES AND
Page 5 and 6: Dear Members and Friends of SFOA Ed
Page 7 and 8: Focus Treasury. Then came Ginnie Ma
Page 9 and 10: “This approach moves us in the di
Page 11 and 12: WHEN YOUR FIRST NAME IS “NEW,”
Page 13 and 14: Focus Union’s regulators in terms
Page 15 and 16: “There’s no rule saying banks c
Page 17 and 18: The rush of endless opportunity. Li
Page 19 and 20: Further your future: team up with a
Page 21 and 22: “Investor interest in gold was re
Page 23 and 24: A new standard in the derivatives i
Page 25 and 26: “The Stone Age didn’t end becau
Page 27 and 28: A blazing sponsor for Friday night
Page 29 and 30: CNBC Europe reporting live from Bü
Page 31 and 32: A fascinating presentation by ballo
Page 33 and 34: “Swiss taxation is very advantage
Page 35 and 36: “These results seriously question
Page 37 and 38: D O W J O N E S I N D E X E S THE D
Page 39 and 40: “ ‘Carry’ strategies and even
Page 41 and 42: Education Chart 2 Overbought zone (
Page 43 and 44: Bollinger Bands Let’s briefly rev
Page 48 and 49: Profile IFRI - The International Fi
Page 50 and 51: Profile 50 Official Publication of

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