Monday, 10 November 2008

Russian exchanges strive to modernise

Financial News

Jason Corcoran in Moscow

10 November 2008

A merger of Micex and RTS is more likely following the exodus of €108bn in foreign capital since August

Rybnikov: suspensions must stop

Moves to merge Moscow’s two stock exchanges, modernise market architecture and improve long-term liquidity have been given impetus following Russia’s worst trading collapse since the sovereign default in 1998.

The frequent closures of Moscow’s two main trading platforms have led many investors to switch to trading Russian Global Depositary Receipts and Russian American Depositary Receipts in London and New York.

Some 23 suspensions of trading on the rouble-denominated Micex since early September have contributed to a two-thirds slide in the volume of trading and an exodus of investors.
Micex chief executive Alexei Rybnikov hopes the suspensions will become a rarity once the financial regulator, the Federal Service for Financial Markets, introduces rule changes.

He said: “I hope this situation will not continue. We have told the regulator and the Government that closures should be rare and can only be invoked for systemic reasons and not when the exchanges are only falling.”

Micex and Moscow’s biggest investment firms have asked the regulator to return to the old trading rules and allow bigger fluctuations so that a suspension becomes an extraordinary measure.

Rybnikov said the trade volume in London had doubled on the days when operations had ceased on the Micex and RTS exchanges. The trading closures, designed to curb the magnitude of fluctuations, ranged from one hour to more than a day.

BNP Paribas has estimated that $140bn (€109bn) in capital has left Russia since the beginning of August amid war with Georgia, a decline in oil prices and the rout in the country’s stock market.

Problems with the domestic repo market exacerbated the equity sell-off in early October when banks and brokers failed to meet their obligations on time. If a repo deal is not completed on schedule, the lender may dump the stocks in the market.

Repo deals made up about two thirds of the trading volume at Micex while margin trades and short selling were estimated at up to 25%. During the crisis, the regulator at various times stopped trading in repo, margin trades and short selling.

Rybnikov said a number of institutions had been fined for defaulting on bilateral repo obligations while the banning of Utrade.Ru, a subsidiary of Uniastrum Bank, should serve as a warning to others.

Difficulties in settling its repo payments, worth about 7bn roubles (€202m), forced investment bank KIT Finance to sell up to state diamond miner Alrosa and rail monopoly Russian Railways for 100 roubles. Problems at Moscow’s leading brokerage Renaissance Capital led to its sale of a 50% stake to oligarch Mikhail Prokhorov at a knockdown price of $500m.

The debate over the reshaping of Russian financial architecture has brought the issue of a merger of Micex and RTS to the fore.

Rybnikov said: “It makes sense to unify the exchanges. Only certain issues can be resolved through consolidations. The discussion started a year ago and barely anyone is against it, but we need to know what the state thinks and whether it wants to be a regulator, an owner or an activist investor.”

Russia’s Central Bank is the main shareholder in Micex, the central company in the group with a 29.8% share. Leading brokers, who are shareholders and members of both exchanges, have been campaigning steadily for a union for several years.

Vladimir Milovidov, chairman of the FFMS, admitted to delegates at last month’s UBS investor forum in Moscow that new approaches to regulation need to be found.

He said: “It is very important to combat insider trading. Laws have been submitted to the State Duma and we are hopeful they will come before parliament in the new year. We also hope to have a draft law for bond holders and to protect their rights.”

Milovidov said negotiations to expand Russia’s circle of investors to encompass Chinese funds were advanced. “We could have double listings in Shanghai and Moscow and that would provide a stabilising role.”

Deepening Russia’s investor base, pension reform and accelerating mutual fund growth are high on the agenda.

“The Russian market probably fell more than other developing markets,” explained Rybnikov. “The reason for that is the general shortage of long-term domestic investors in Russia. About a million and a half people buy and sell securities from time to time. This is roughly one per cent of the population… It is next to nothing.”

Rybnikov applauded moves to allow funds accumulated in the pension system to be invested in stocks other than governmental securities and Government-guaranteed securities.

He said: “One more significant step is the decision to allow the central bank to become a trading member on the stock exchange which would ultimately, I hope, allow the central bank to accept a wider range of collateral to provide liquidity to not only the banking system but also to the financial system, including investment companies and brokers that are not licensed banking institutions. We have seen that, as a result of the crisis, decisions which have been delayed for years have started to be taken.”

However, Rybnikov warned that differences in two competing governmental blueprints for Moscow as an international financial centre would have to be resolved first.

He said: “The Ministry for Finance and the Federal Service for Financial Markets have their own plans. There are key differences to be resolved in ideas for architecture, taxation and the investor base.”

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