Moscow’s Long Term Reform Program
With Andrew Shemetov, Deputy CEO of the Moscow Exchange
The year 2013 has been one of change on many fronts for the Moscow Exchange. Perhaps most publicly, the Exchange held a successful IPO on its own platform, raising $500 million from a diverse set of international and domestic investors in February. The offering valued Moscow Exchange at around $4.0 bn and was a highly significant event in the life of the Exchange. It also helped put the spotlight on the progress that regulators and the Exchange have made in reforming the Russian financial market infrastructure to facilitate more international money flows. While much good work has already been done, there is a lot more still to achieve. For this reason now is a particularly exciting time in Russia’s capital markets, and for the Exchange in particular as one of the institutions spearheading this development.
Probably the product that most immediately comes to mind with any stock exchange is equities. Historically trading in some Russian equities has taken place abroad, with London and New York the chief beneficiaries. This is attributable to a number of factors, not least that Russian companies would look to other exchanges for broad and deep pools of liquidity, while a local investor base in Russia is still yet to emerge.
In this context, the transition to T+2 settlement represents a step-change that is already bringing benefits and will help to attract more foreign liquidity. T+0 trading for equities was switched off at the end of Moscow’s Long Term Reform ProgramAugust, though government bonds (OFZs) will continue to be tradeable in both modes for the time being.
The shift to T+2 has brought Moscow into line with global standards. The benefits of this and other recent changes – including the establishment of the central depository and centralised clearing, and the acceptance of US dollars and Euros as collateral – are already being seen. Citigroup, Credit Suisse, Merrill Lynch, and Morgan Stanley all started to offer their clients direct market access (DMA) to securities trading on Moscow Exchange in September, with more banks set to follow during the quarter.
Yet while equities may be the “public face” of most exchanges, one of Moscow Exchange’s distinguishing features is the diversity of its offering, with bonds, FX, money-market products and derivatives being particular strengths and key sources of growth. As well as offering more possibilities for traders, this has the additional benefit of making for a more resilient business model. Our recent results for 1H 2013 reflected the advantages of this revenue diversification, with net income up by 39% on the previous year.
One recent landmark was the signing of an agreement with Deutsche Börse to cooperate on trading of FX derivatives. Ruble/euro and ruble/dollar futures will be available through Eurex later in 2013, while traders in Moscow will gain access to futures on five German blue-chip stocks. International partnerships such as this expand the range of trading strategies and hedging opportunities available to market participants, and help to improve risk-management.
The Exchange’s recent developments and emergence as a major player on the global stage is underpinned by a longer-term programme of investment in infrastructure. Moscow Exchange is unusual in having a vertically integrated offering, from pre-trading through the trading process itself and post-trade clearing and settlement through the National Clearing Centre and Central Securities Depository, both 100%-owned subsidiaries of Moscow Exchange.
As well as making the trading process simpler and cheaper, this arrangement works to the benefit of traders by reducing the risks involved in trading in Russia and offering a higher degree of protection. All incoming trades are subject to a clearing certainty check, meaning that each incoming order is checked against the margin collateral held by the clearing house to support the trade if it happens. This gives members a lot of peace of mind regarding the stability of the central counterparty and that the trade is actually going to be cleared and delivered.
European and US markets simply cannot do something like this, because the clearing function is separated from trading at the corporate level. Individual traders have no way of knowing whether the DTCC is actually going to clear the trade, so that in some sense represents a risk for them. In markets like the US, or the UK or other European markets this is less of a problem, because the brokers are stronger and can absorb a lot of the risk involved. But in developing countries like Russia the onus of supporting the financial system lies more on the central counterparty and the clearing house, which need to make sure that they are holding sufficient margin collateral.
One target is to increase the amount of high-frequency trading on Moscow Exchange’s platforms from the current levels of about 40% of total trading – less than would be expected in a more mature market such as London or New York. To be competitive on HFT, the Exchange needs to be fast, and is currently in the process of carrying out a major redevelopment of its entire system to improve its platform, for example by bringing down latencies and increasing productivity.
This is a three-year programme that involves moving from the current risk and clearing model to a new risk-check model that will cut the time for risk-checking from the current time of about 50-70 microseconds to less than 5 microseconds. Another area of focus is the improvement of data systems to complement trading systems, because traders need to be able to see market data fast enough to avoid trading blind.
This August saw another important step in the Exchange’s infrastructure programme with the completion of the consolidation of its trading systems in a single state of the art data centre, the M1 Data Centre. Consolidation of all trading and clearing systems makes life simpler for members, as they only need support access to one data centre and can have simultaneous access to all markets.
For foreign investors, the launch of the Central Securities Depository in November 2012 removed a major barrier that had prevented them from trading in Russian local shares. Another important step on the road to attracting more investors from abroad was Euroclear and Clearstream opening foreign nominee securities accounts with the National Settlement Depository and the launch of settlement services for transactions involving Russian government bonds (OFZs). It is planned that Euroclear and Clearstream will start providing settlement services for equities from July 2014 or earlier.
Looking forward, the Exchange continues to pursue its goal of attracting a greater share of trade in Russian equities. While better trading platforms play an important role, important work also remains to be done on modernising the listing process and improving corporate governance standards in Russia – a perennial area of concern for investors and one that crops up in any discussion. As in other areas, the Moscow Exchange is a strong advocate of best practice in corporate governance, and will continue to work with the relevant authorities to bring Russia into line with international standards.