Tuesday, 22 April 2008

Regulator tells exchanges to create single platform

Wall Street Journal

Jason Corcoran in Moscow

21 April 2008

Rybnikov: market users have a say on how infrastructure is set up

Merger could increase turnover sevenfold

Russia’s two largest stock exchanges are a step closer to being merged into a single trading platform following renewed efforts by the market’s main regulator to help develop Moscow as a global financial centre.

The Federal Service for Financial Markets will next month submit plans to the Government to merge the rouble-denominated Moscow Interbank Currency Exchange, Micex, and the dollar-denominated Russian Trading System Stock Exchange by 2010. The regulator believes the combined turnover of the exchanges could grow sevenfold by 2020 to 210 trillion roubles (€5.7 trillion) annually following the merger.

The regulator will propose that Micex and RTS become units of a holding company, whose shares would later be offered to the public. In an interview with Financial News, Alexei Rybnikov, the chief executive of Micex, confirmed the merger talks and said he was confident of success in spite of numerous obstacles.

He said: “We have many stakeholders involved in the affairs of the securities market infrastructure. The state is a regulator and also a shareholder both directly and indirectly in the infrastructure. In addition to the existing shareholders of the Russian exchanges, market users also have a say and their own view on how infrastructure is to be set up. The question is whether a model exists that can accommodate all these different interests and various stakeholders. I do think such a model exists.”

Analysis by Thomas Murray, a risk ratings and advisory specialist, of the vested interests of each platform’s shareholders, users, brokers, foreign and domestic investors and management in such a merger, found that while there may be diverging viewpoints on specific issues, all parties could see synergies from having a single trading platform.

Micex was set up in 1992 by Russia’s central bank, which still owns 28% of the exchange. Other shareholders include state-owned and commercial banks, which also have stakes in RTS. The significant shareholders in RTS are Troika Dialog, KIT Finance, Deutsche Securities and UniCredit Aton, each owning approximately 10% of the exchange.

Rybnikov said: “I think a model that will please all the different interests can be found and, when it is outlined, can be supported by the different stakeholders. But every stakeholder has to define what it wants from the infrastructure.”

A former head of investment banking at JP Morgan Chase in Moscow, Rybnikov has been head of the largest Russian stock exchange since its launch in November 2003. From 2002 to 2004 he was also director of the National Depository Centre, Micex’s settlement depository.

It is the creation of a central depository that lies at the heart of any merger between the two exchanges. NDC and RTS’s Depository Clearing Company have been battling for years for the title of pre-eminent central clearing company. The Government plans to set up a central depository, but the politics of choosing one depository to form the base of the single company have been a stumbling block.

Vladimir Milovidov, head of Russia’s market regulator the FSFM, told the newspaper Kommersant that the formation of a central depository was inevitable because having two institutions caused inefficiency and illiquidity and was more expensive for investors.

The FSFM has outlined a draft strategy for the development of the domestic capital markets over the next four years. Among the proposals are drastic changes to the tax rules, including cutting capital gains tax and a reduction of the tax on income from investments in securities, which the regulator hopes will encourage more companies to list their shares in Russia rather than going overseas.
The regulator has introduced several administrative controls to encourage corporates to list locally with only partial success – Russian companies that launch initial public offerings typically list both in Russia and London.

Liquidity has increased significantly, however, with average daily volumes of all Russian stocks reaching almost $6.2bn (€3.9bn), including $1.2bn of daily over-the-counter trading, according to Troika Dialog research. Roughly 45% of this trading takes place on Russian exchanges, 19% is OTC volumes in Russia and 36% is traded internationally. The inclusion of OTC liquidity adds considerably to the number of stocks that are liquid enough to merit investor interest, said Troika (see bar chart).

Rybnikov believes a deepening pool of liquidity will tempt more Russian issuers to list at home. He said: “For a global company, a foreign listing helps to create acquisition currency for potential transactions, there are also reputation and visibility-related issues that count. On top of that, the global investment banks that underwrite Russian IPOs also have most of their clients outside Russia. But as the domestic investor base grows and the competitiveness of Russian brokers grows, we will see more Russia-only listings.”

Rybnikov and other marketmakers are confident Russia can become a hub for the capital markets of the Commonwealth of Independent States and central Europe after necessary reforms.

The Russian parliament is considering legislation to allow foreign securities to list on domestic exchanges for the first time. It wants to better compete against Poland’s Warsaw Stock Exchange, which is establishing itself as a regional player having won listings from Ukraine and other former Soviet states.

Rybnikov said: “We have a lot to offer issuers from the CIS countries, not only in terms of the Russian investor base and the depth of the domestic market, but also due to the size of the foreign investor base that uses our platform.”

Such is the level of Russian corporate interest in the capital markets that Germany’s Deutsche Börse set up the first office of any foreign exchange in Moscow last year. However, the exchange group shot itself in the foot when a member of its executive board wrote to a Russia foreign policy adviser discussing a potential development with Micex to launch an equity trading and listing platform in Frankfurt.

Discussions were at an early stage and the letter to a policymaker is understood to have dismayed the Russians.

Rybnikov said: “The idea of creating a platform outside Russia in EU jurisdiction, where Russian stocks can be traded and settled more efficiently then elsewhere, is interesting. But it creates risks for our existing business. Because our goal is to get as much liquidity on Micex as possible we risk creating competition for ourselves. Hence, that idea is to be looked at with caution and will have to be studied in detail before it gets a go-ahead.”

No comments: