Vnesheconombank

Main page

Site map

Feedback

Рус

Eng

Search:

Vnesheconombank’s Supervisory Board Regular Meeting Held

Main Page // VEB Profile // Custody // Analytical documents of Custody // Russian Securities Market

Russian Securities Market

Attractiveness of the Russian Securities Market

The Securities Market Instruments

S&P Ratings of Government and Corporate Bonds

The Procedure of Registering Rights to Securities

Legislative Framework: Practical Aspects

State Regulatory Bodies and Self-Regulating Organizations

Infrastructure Elements: Markets, Clearing Centers, Depositaries and Registrars

Securities Settlements

Foreign Participants in the Stock Market

Attractiveness of the Russian Securities Market

Presently, the Russian securities market appears to be rather attractive for investment. Investors’ interest in the Russian securities may well be attributed to the political and macroeconomic stability in the country, improved investment climate, stronger domestic currency, and decreasing inflation, as well as to ever-growing profits of the Russian companies. The domestic currency exchange rate and the Government’s ability to maintain a favourable investment climate largely depend on an increased volume of the country’s gold and foreign currency reserves, a direct consequence of rising prices for energy products, that are key items of the Russian exports. To illustrate, the Bank of Russia’s reserves, as on January 1, 2007, amounted to USD 303,7 billion, whereas on January 1, 2008, they already made USD 476,4, the year’s increase constituting over 50%.

Russian companies’ capitalization keeps growing every year, both due to rising prices for traded shares and new placements. Over the two years alone, the RTS index, calculated on the basis of the Russian issuers’ stock prices, grew more than twofold to reach 2290,5 points as on December 28, 2007, as compared to 1122,2 point, as on December 28, 2005, and 1910,3 points, as on December 28, 2006, respectively. The MICEX debt instruments index increased from 1693,5 points, as on December 30, 2006, to 1888,9 point, as on 30 December 2007, the increase thus making about 12%. The period from 2000 to 2006 witnessed an eightfold growth in the MSCI Russia index, reaching its record high for the emerging markets.

According to the major banks’ experts’ estimates, Russia belongs to a group of countries with the highest GDP growth rates and projected indicators, the so-called BRIC group, which also includes Brazil, India and China.

Undoubtedly, investment risks of the Russian securities market are to be viewed in the context of its infrastructure reliability. Underlying and underpinning the Russian market infrastructure are the best models and solutions applied abroad in the 90-s. Remarkably, within a more than ten year period of its development, the Russian market infrastructure has become fully integrated into the global market. Foreign companies’ stepped up activities on the Russian stock market, as well as substantial volumes of securities they keep in custody with the Russian infrastructure institutions only demonstrate the reliability of the record-keeping and settlement system of the Russian securities market.

The Securities Market Instruments

Among major instruments traded on the Russian stock market are corporate shares and bonds, government bonds and promissory notes of Russian banks and companies. The major types of government bonds are federal loan bonds (OFZs) denominated in Russian roubles, and foreign currency domestic bonds in US Dollars (MinFin bonds). The OFZs are traded on the stock-exchange market only, their volume exceeding RUR 1 trillion (USD 41 billion), at par. The MinFin bonds are mostly traded on the OTC market, the volume of the bonds traded approximating to USD 4,5 billion. As for corporate shares and bonds, these represent various sectors of economy. At present, among the major Russian issuers with the highest capitalization are ‘Gazprom’ Open Joint Stock Company (OJSC) (USD 336 billion), ‘Rosneft’ OJSC (USD 93 billion), ‘Lukoil’ OJSC, ‘Surgutneftegaz’ OJSC (oil and gas), GMK ‘Norilskiy Nikel’ OJSC, ‘Polyus Zoloto’ OJSC (metals and gold), United Energy Systems Russian Joint Stock Company (RJSC) (energy), ‘Rostelecom’ OJSC (telecommunications), ‘VTB Bank’ OJSC, ‘Sberbank’ OJSC (banking). Corporate shares and bonds are being traded both on the stock-exchange and OTC markets.

To illustrate, by the year-start 2008, the capitalization of the stock market reached USD 1328 billion and that of traded corporate bonds approximated to RUR 140 billion (USD 5,7 billion).

S&P Ratings of Government and Corporate Bonds

The OFZ government bonds and the MinFin bonds are assigned A- rating and BBB+ rating respectively. Remarkably, RUR denominated bonds issued by major corporations with a state participation, such as ‘Gazprom’ OJSC and ‘VTB Bank’ OJSC, possess investment-grade ratings.

The Procedure of Registering Rights to Securities

For registration of rights to the Russian issuers’ shares a two-level system is applied. At the upper level, there are issuers and/or registrars (by analogy with transfer agents in the USA) who keep a shareholders register. At the lower level, there are depositaries that maintain accounts of a nominee holder in shareholders registers and service the bulk of securities trading transactions. Under the Russian legislation, should the number of a company’s shareholders exceed 50 physical and/or legal persons, the issuer is obliged to transfer the company’s register to a specialized registrar for keeping.

Holders of the Russian issuers’ shares are free to choose an institution to keep shares with, i.e. either with a registrar company or with a depositary. Registrars keep records of blocks of shares acquired to manage companies. As a rule, these are not intended for a short-term sale to derive profit from rates differential. Those investors, who buy shares for trading on the securities market, keep them with depositaries, where the bulk of securities trading turnover is realised.

Presently, about 70 registrar companies and over 700 depositaries operate on the Russian securities market. The central trend within the past few years, due to mergers and acquisitions, has been towards a further decrease in the number of operating registrar companies and depositaries.

Generally, registration of rights to bonds at the upper level is effected by the head depositaries (most of the issues of the Russian corporate bonds are serviced by the National Depositary Center). In case of initial placements, issuers transfer global certificates for issues to a selected depositary, whereupon bonds are traded on the secondary market using the nominee holders’ and owners’ custody accounts with a particular depositary.

Legislative Framework: Practical Aspects

The Federal Law ‘On the Securities Market’ provides a legal basis for the Russian securities market. According to this law, issuing shares on the territory of the Russian Federation is allowed only in a non-documentary form, which substantially reduces the risks inherent to securities circulation and speeds up the respective turnover. The absence of documentary registered securities gives a considerable advantage to the Russian securities market over many other stock markets.

Institutions engaged in both depositary and other professional activities on the securities market are obliged to ensure a separate record-keeping of assets deposited by their clients under depositary agreements. Thus, the legislation establishes a ‘Chinese Wall’ principle to segregate the depositary’s clients’ assets from its own ones.

Under the law, should an institution engaged in depositary activities go bankrupt, its clients’ securities shall not be included into the bankrupt’s estate. This provision excludes the risk of losing securities as a result of the bankruptcy of institution undertaking depositary activities.

The law prohibits foreign depositaries from opening nominee holders’ accounts with Russian depositaries and registrars. This restriction is designed to restrain the movement of liquidity from the Russian securities market to foreign markets. At present, such a restriction appears to be indispensable since it ensures creating an environment best suited for a dynamic development of the domestic market and its infrastructure.

State Regulatory Bodies and Self-Regulating Organizations

The Federal Financial Market Service of the Russian Federation (FFMS RF) is a state body that regulates and controls the activities of the securities market participants. The key objectives of FFMS RF are to ensure a smooth operation of the Russian financial market, enhance its efficiency and investment attractiveness, as well as transparency. With these ends in view, FFMS RF exercises a strict control over the activities of financial market participants and establishes a legal framework that expressly regulates the terms and conditions for securities issuance and trading, as well as the operations of the respective professional participants.

Notably, one of the prime objectives FFMS RF seeks to accomplish is to implement a set of regulatory and technical measures intended to counteract insider information misuse and attempted price manipulation.

Moreover, on the Russian market there is a number of self-regulating organizations that unite professional market participants and work out uniform standards for their members’ activities. PARTAD is the Professional Association of Registrars, Transfer Agents and Depositaries; the National Securities Association (NFA) unites banks – professional participants of the securities market; and as for the National Association of Stock Market Participants (NAUFOR), its members also include non-banking professional participants of the securities market.

Infrastructure Elements: Markets, Clearing Centers, Depositaries and Registrars

In Russia, there is no central depositary in the form it exists, for example, in Poland, and in many other countries. However, there are two so-called settlement depositaries that provide services to the leading stock exchanges and serve as securities settlement centers.

Technically, the absence of a central depositary does not negatively impact the market participants’ interests, since the major depositaries, operating in a tough competitive environment, seek to offer their clients high quality services. The market gives an opportunity to freely select a service provider for keeping securities in custody and effecting settlements thereunder. Availability of two major securities settlements centers enables the market participants to choose a better provider depending on the range of services required, types of transactions effected or market sectors. A high enough level of the record-keeping system reliability is also ensured.

The key roles in the Russian stock market infrastructure are played by MICEX Group (Moscow Interbank Currency Exchange) and RTS Group (Russian Trading System). The MICEX Group embraces MICEX Closed Joint Stock Company (CJSC), MICEX Stock Exchange, National Commodity Exchange, MICEX Clearing House (clearing institution), National Depositary Center (NDC), a specialized clearing bank and regional exchanges. These institutions provide trading, settlement and clearing, as well as depositary services to about 1500 of the Russian banks and brokerage companies – stock market participants, both in Moscow and in major financial and industrial centers of Russia. By overall trading volume, MICEX is the largest exchange in Russia, the CIS and the Eastern Europe.

NDC was established as a central depositary to service the market of the government securities traded on the MICEX. Presently, NDC handles 100 percent of transactions effected on the GKOs-OFZs market and the Bank of Russia’s bonds, 90 percent of transactions effected on corporate and regional bonds market. Also, it services the bulk of the stock exchange transactions in shares. Leading western financial institutions recognize NDC as a reliable foreign custodian in accordance with Rule 17-f7 of the USA Investment Company Act. Currently, prime founders of NDC are MICEX and the Bank of Russia. However, in 2008, NDC, which now has a legal status of a non-commercial partnership, is to be reorganized into a joint stock company. Major Russian banks and investment companies shall contribute the bulk of the share capital to the leading Russian settlement depositary, with each shareholder having a minor interest.

The RTS, established in early nineties, ranks second in terms of trading volumes. The list of securities traded on the RTS is much more comprehensive than that of MICEX, however, its trading volume is smaller. The depositary engaged in record keeping and effecting settlements under the securities traded on the RTS is a ‘Depositary Clearing Company’ CJSC (DCC).

Being major competitors, NDC and DCC, by analogy with their western peers, namely, Euroclear Bank and Clearstream Banking, maintain mutual depositary relations, the so-called ‘bridge’, which allows two market participants to transfer securities from one settlement depositary to the other. Competition between NDC and DCC enables market participants to use the best solutions devised by these depositaries in an effort to enhance services.

Professional market participants, through the use of safekeeping accounts with custodial depositaries, effect trading in securities on the OTC market. Among major Russian custodian depositaries are Vnesheconombank, VTB, Rosbank and some other banking depositaries.

Some depositaries that seek to render international class services are assigned ratings by foreign agencies and international audit companies. To illustrate, according to Ernst & Young, Vnesheconombank’s depositary activities meet SAS-70 international standards.

Securities Settlements

As a rule, securities settlements in the Russian depositaries are effected on the basis of bilateral orders by a supplier and receiver. In this respect, Russian custodians have a certain competitive edge over their foreign peers, who traditionally make transfers acting only on the instructions of a securities supplier.

The Russian custodial depositaries are entitled to maintain clients’ cash accounts. In this regard, one of the main types of settlements under securities both on the stock market and on the OTC market is DVP (delivery versus payment). When effecting DVP transactions, a depositary credits a seller’s cash account and simultaneously writes the funds off a buyer’s account, if both parties’ cash accounts are maintained with one and the same depositary. Otherwise, settlements are effected using correspondent accounts with other depositaries.

A standard term for settlements under fixed-income instruments traded on the OTC market is T+3. As for trading on the stock exchange, the respective term of settlements is T+0.

To effect settlements, Russian depositaries widely use electronic document interchange; depositary banks also apply the SWIFT system. The past few years have witnessed a considerable effort to unify standards of electronic interaction between registrars and depositaries. Obviously, it would ensure prompt and speedy information exchange.

Usually, it takes about three days to re-register securities with registrars. And when it comes down to huge deals, re-registration fee may be considerably high, up to 0,5% of the transaction amount. Largely as a consequence, the bulk of the securities trading turnover is concentrated in depositaries charging settlement fees that are considerably lower or comparable with the average fee level in Europe.

Foreign Participants in the Stock Market

Generally, foreign participants in the Russian stock market establish subsidiaries in Russia with a 100% foreign capital, thereby becoming eligible for obtaining licenses to act on the Russian stock market as a professional participant.

Foreign issuers may use the Russian securities market as a source of capital by way of placing securities on the Russian stock exchanges, both directly and through the Russian depositary receipts (RDRs). As for the Russian market participants, their rights to foreign securities shall be registered with the Russian depositaries that maintain accounts with foreign custodians.

Obviously, the Russian market infrastructure offers foreign investors ample opportunities, including an option of turning to any infrastructure institution. As a rule, foreign investors select a depositary on a tender basis. Due regard is paid to the institution’s expertise and a positive record of operating on the national market. Among Russian depositaries it is the major ones, including Vnesheconombank, that are known to have such in-depth expertise.

Custody Serviсes