Waiting for the future
The atmosphere among the half dozen traders wandering around the kiddy-pool-sized, octagon-shaped pit in the Warsaw Board of Trade last week seemed more akin to a relaxed social club than the bedlam characteristic of Western futures markets.
Over an hour passed and five futures contracts were sold. Later, the start of NATO air strikes against Serbia loomed, the Monetary Policy Council (RPP) made several key announcements and the zloty registered a zl. 0.04 loss. Still, only 66 contracts were traded during the entire day.
Clearly, when it comes to futures, the future is coming to Polish capital markets slowly.
There is a "lack of liquidity, lack of structure and understanding," when it comes to futures and other derivatives, Peter Dembinski, president of derivative consulting firm Financial Market Systems said in explaining paltry futures volumes. "We still have a lot to do in terms of education."
Futures are binding contracts that call for a standardized amount of a commodity, currency or other financial instrument to be sold at a fixed price and date in the future. The contracts can be traded before they become due and are often used to hedge currency, interest rate or commodity price risk. They are also complicated, speculative instruments that can burn even savvy investors. Perhaps the most famous derivatives disaster involved rogue trader Nick Leeson who racked up enough trading losses to torpedo investment house Barings.
The complexity and risks associated with derivatives have kept volume low at the three futures markets now trading a variety of contracts in Warsaw. Combined, the three markets average volume of just 500 contracts a day.
But players in this nascent derivatives markets argue that such investment tools, which can be crucial especially for companies with large amounts of foreign trade, have bright prospects, if only investors grow to better understand them. "We are working on it and our marketing department is trying to inform people about our presence and the kind of opportunities and advantages you can have using this tool," said Jacek Bakowski, head specialist at the Warsaw Board of Trade, which averages about 100 dollar-based future contract transactions per day.
Even the Warsaw Stock Exchange (WSE), which has offered futures contracts based on its WIG 20 index since January 1998 and dollar-based futures since last September, has only seen limited interest in its futures market. On average, the exchange has about 200-300 WIG 20 future transactions per day and "not much" dollar-based future volume, according to Leonard Furga, the WSE's director of information and marketing.
"Our traditional investors who are very much interested in equities don't quite see the benefit of using these contracts," Furga said referring to the dollar futures offered by the WSE. "The contract is too small to attract large clients and the smaller clients don't understand the benefits." However, both large and small clients will need to learn about the risks and rewards inherent in such tools if they are to be competitive in a global market, derivatives proponents said.
"If you don't hedge against interest rate risk, against currency risk, you can't be as competitive," Dembinski said. "Risk management in Poland is extremely underdeveloped and it will be extremely hard for (Polish businesses) to compete vis-a-vis Western companies" without this.
Although some companies have been burned badly in the past when exchange rates moved against them, the idea of hedging is only slowly taking hold. And those that have chosen to hedge have so far largely preferred to insulate their businesses from currency risk by using forward contracts negotiated with a bank. These are custom-made deals under which an investor agrees to buy or sell a set amount of currency at a future date.
"Banks do huge business on the hedging of export-import enterprises," said Mariola Lemonnier, counselor for the Polish Financial Exchange, which began to offer futures in February. Unlike futures, though, forwards are generally one-time deals between two parties, often a business and a bank, and since they are not traded on an exchange investors cannot exit these agreements easily. In addition, futures market players argue, the cost of a forward contract is greater than a futures contract because there is not the same market pressure keeping a lid on fees.
"On the exchange everybody has the best price," Dembinski said. "With a bank, the bank takes a lot on margins."
This cost limits returns, added the Board of Trade's Bakowski. He said that businesses using forward contracts are "losing because it's very costly and not very flexible."
There is also an issue of flexibility. Once a business forms a forward contract, it must wait until its expiration, Bakowski said. In comparison, "on the (futures) market you can sell a contract and open another," he added.
Referring to recent reports of currency losses suffered by Telekomunikacja Polska (TPSA), Bakowski said that "if they used futures they would probably have protected themselves and they could avoid losses."
But not all see the futures market as the ideal answer to protecting against risk.
Companies "like to have their solution tailor-made," said Ted Dabrowski, treasurer for Citibank (Poland). With futures, as opposed to forwards, businesses do not have a banker to advise them, cannot set the exact amount they want and are not able to control the end date of a contract.
And some businesses hedge against risk by transferring it to their clients, said the WSE's Furga. For example, travel agencies quote the price of a tour in dollars and make customers pay the equivalent price in zloty. They transfer that risk to their clients by saying the price changes as the dollar strengthens and the market accepts that, Furga said.
The loser is the customer, who is not able to hedge."That's just a result of the market not being effective," Furga said. "We haven't had that kind of hedging instrument until very recently and everyone was able to live with that. So I'm not surprised that instrument is not popular yet."
Wanted: investors
A lack of popularity among Polish businesses isn't the only problem facing the small futures markets, though. Perhaps even more threatening to their future is the lack of interest from large international investors.
"This is a very unliquid market so it's very difficult for foreign investors to operate here," said Daniel Kwiatkowski, a salesman for Raiffeisen Capital & Investment Polska.
To get these investors, the markets need to grow further. But to grow further the markets need attention from these investors.
To counter this chicken-and-egg conundrum, the futures markets are looking to boost awareness through advertising and promotional campaigns.
The WSE is preparing new advertisements dealing with derivatives that will be placed in international magazines, Furga said. The exchange also plans to participate in international derivative exhibition events.
"It's education, education, education," Furga said.
The Warsaw Board of Trade is going directly to potential customers trying to lure them into the market, said Jacek Tomaszewski, an adviser to that market's management board. He would not reveal the names of potential market makers but said the exchange was speaking with various banks.
Liquidity, or the lack of it, isn't the only issue keeping foreign players out of the market. While the zloty is nearing full convertibility, it's not quite there yet. This causes some investors to worry about their ability to transfer funds from Poland.
There is a lot of discussion over whether it is possible to transfer foreign investor money back to a home country without applying for permission, Kwiatkowski said. "This market cannot operate effectively with such things," he added.
Then there is taxation.
As of December 1998, the government clarified that for private investors, profit made from futures based on the WIG 20 are treated like other securities, and therefore are not subject to capital gains tax, Dembinski said. Institutions are taxed, though, taking some of the shine off the markets' potential. An exemption for non-equity derivatives, such as currencies, would boost volume, Tomaszewski said.
Despite these difficulties, most are optimistic and see investor interest in futures increasing over the next few years.
By the year 2000, the WIG 20 will be trading over 1,000 contracts per day, Dembinski said. "As institutions start to use the stock index futures, 1,000 could be nothing. It could very easily go up to 4,000 or 5,000 or more," he said.
"This kind of market exists in other countries so I would assume there is a place for it in Poland," Furga said. "But we're not 100% sure that's going to happen."
Over an hour passed and five futures contracts were sold. Later, the start of NATO air strikes against Serbia loomed, the Monetary Policy Council (RPP) made several key announcements and the zloty registered a zl. 0.04 loss. Still, only 66 contracts were traded during the entire day.
Clearly, when it comes to futures, the future is coming to Polish capital markets slowly.
There is a "lack of liquidity, lack of structure and understanding," when it comes to futures and other derivatives, Peter Dembinski, president of derivative consulting firm Financial Market Systems said in explaining paltry futures volumes. "We still have a lot to do in terms of education."
Futures are binding contracts that call for a standardized amount of a commodity, currency or other financial instrument to be sold at a fixed price and date in the future. The contracts can be traded before they become due and are often used to hedge currency, interest rate or commodity price risk. They are also complicated, speculative instruments that can burn even savvy investors. Perhaps the most famous derivatives disaster involved rogue trader Nick Leeson who racked up enough trading losses to torpedo investment house Barings.
The complexity and risks associated with derivatives have kept volume low at the three futures markets now trading a variety of contracts in Warsaw. Combined, the three markets average volume of just 500 contracts a day.
But players in this nascent derivatives markets argue that such investment tools, which can be crucial especially for companies with large amounts of foreign trade, have bright prospects, if only investors grow to better understand them. "We are working on it and our marketing department is trying to inform people about our presence and the kind of opportunities and advantages you can have using this tool," said Jacek Bakowski, head specialist at the Warsaw Board of Trade, which averages about 100 dollar-based future contract transactions per day.
Even the Warsaw Stock Exchange (WSE), which has offered futures contracts based on its WIG 20 index since January 1998 and dollar-based futures since last September, has only seen limited interest in its futures market. On average, the exchange has about 200-300 WIG 20 future transactions per day and "not much" dollar-based future volume, according to Leonard Furga, the WSE's director of information and marketing.
"Our traditional investors who are very much interested in equities don't quite see the benefit of using these contracts," Furga said referring to the dollar futures offered by the WSE. "The contract is too small to attract large clients and the smaller clients don't understand the benefits." However, both large and small clients will need to learn about the risks and rewards inherent in such tools if they are to be competitive in a global market, derivatives proponents said.
"If you don't hedge against interest rate risk, against currency risk, you can't be as competitive," Dembinski said. "Risk management in Poland is extremely underdeveloped and it will be extremely hard for (Polish businesses) to compete vis-a-vis Western companies" without this.
Although some companies have been burned badly in the past when exchange rates moved against them, the idea of hedging is only slowly taking hold. And those that have chosen to hedge have so far largely preferred to insulate their businesses from currency risk by using forward contracts negotiated with a bank. These are custom-made deals under which an investor agrees to buy or sell a set amount of currency at a future date.
"Banks do huge business on the hedging of export-import enterprises," said Mariola Lemonnier, counselor for the Polish Financial Exchange, which began to offer futures in February. Unlike futures, though, forwards are generally one-time deals between two parties, often a business and a bank, and since they are not traded on an exchange investors cannot exit these agreements easily. In addition, futures market players argue, the cost of a forward contract is greater than a futures contract because there is not the same market pressure keeping a lid on fees.
"On the exchange everybody has the best price," Dembinski said. "With a bank, the bank takes a lot on margins."
This cost limits returns, added the Board of Trade's Bakowski. He said that businesses using forward contracts are "losing because it's very costly and not very flexible."
There is also an issue of flexibility. Once a business forms a forward contract, it must wait until its expiration, Bakowski said. In comparison, "on the (futures) market you can sell a contract and open another," he added.
Referring to recent reports of currency losses suffered by Telekomunikacja Polska (TPSA), Bakowski said that "if they used futures they would probably have protected themselves and they could avoid losses."
But not all see the futures market as the ideal answer to protecting against risk.
Companies "like to have their solution tailor-made," said Ted Dabrowski, treasurer for Citibank (Poland). With futures, as opposed to forwards, businesses do not have a banker to advise them, cannot set the exact amount they want and are not able to control the end date of a contract.
And some businesses hedge against risk by transferring it to their clients, said the WSE's Furga. For example, travel agencies quote the price of a tour in dollars and make customers pay the equivalent price in zloty. They transfer that risk to their clients by saying the price changes as the dollar strengthens and the market accepts that, Furga said.
The loser is the customer, who is not able to hedge."That's just a result of the market not being effective," Furga said. "We haven't had that kind of hedging instrument until very recently and everyone was able to live with that. So I'm not surprised that instrument is not popular yet."
Wanted: investors
A lack of popularity among Polish businesses isn't the only problem facing the small futures markets, though. Perhaps even more threatening to their future is the lack of interest from large international investors.
"This is a very unliquid market so it's very difficult for foreign investors to operate here," said Daniel Kwiatkowski, a salesman for Raiffeisen Capital & Investment Polska.
To get these investors, the markets need to grow further. But to grow further the markets need attention from these investors.
To counter this chicken-and-egg conundrum, the futures markets are looking to boost awareness through advertising and promotional campaigns.
The WSE is preparing new advertisements dealing with derivatives that will be placed in international magazines, Furga said. The exchange also plans to participate in international derivative exhibition events.
"It's education, education, education," Furga said.
The Warsaw Board of Trade is going directly to potential customers trying to lure them into the market, said Jacek Tomaszewski, an adviser to that market's management board. He would not reveal the names of potential market makers but said the exchange was speaking with various banks.
Liquidity, or the lack of it, isn't the only issue keeping foreign players out of the market. While the zloty is nearing full convertibility, it's not quite there yet. This causes some investors to worry about their ability to transfer funds from Poland.
There is a lot of discussion over whether it is possible to transfer foreign investor money back to a home country without applying for permission, Kwiatkowski said. "This market cannot operate effectively with such things," he added.
Then there is taxation.
As of December 1998, the government clarified that for private investors, profit made from futures based on the WIG 20 are treated like other securities, and therefore are not subject to capital gains tax, Dembinski said. Institutions are taxed, though, taking some of the shine off the markets' potential. An exemption for non-equity derivatives, such as currencies, would boost volume, Tomaszewski said.
Despite these difficulties, most are optimistic and see investor interest in futures increasing over the next few years.
By the year 2000, the WIG 20 will be trading over 1,000 contracts per day, Dembinski said. "As institutions start to use the stock index futures, 1,000 could be nothing. It could very easily go up to 4,000 or 5,000 or more," he said.
"This kind of market exists in other countries so I would assume there is a place for it in Poland," Furga said. "But we're not 100% sure that's going to happen."
