Moscow Exchange debuts cleared OTC derivatives market
Moscow Exchange has opened its new cleared OTC derivatives market, marking a major step towards Russia’s G20 commitments. But some observers still have doubts about Russia’s reputation as an investment destination.
The new service allows banks and dealers to clear OTC interest rate, FX and cross-currency swaps through Russia’s NCC central counterparty. The NCC was set up last November and was itself a landmark event for Russia, as until then many US investors in particular had been unable to invest due to SEC rule 17F7, which requires securities to be held with a central depository.
New instruments were introduced on 28 October, including interest rate swaps on Ruonia, Mosprime and Libor rates, US dollar to Russian ruble cross-currency swaps, and US dollar to ruble FX swaps with maturities from intraday to five years. The exchange plans to offer clearing of OTC FX and equity options next year.
Central clearing of OTC derivatives is a core part of the Pittsburgh agreement reached by the G20 nations in 2009. In the US, the bulk of swaps will have to be traded on centrally cleared platforms called SEFs from 2014. In Europe, EMIR contains similar requirements.
The past year has seen significant improvements in Russia’s securities trading infrastructure. Russia moved to T+2 settlement earlier this year, in a phased migration that finished in August. The move put Russia in line with Germany, which already operates T+2 settlement, and in theory reduces risk relative to other European countries, most of which operate T+3 settlement.
The Russian government drive to turn Moscow into an international financial centre is well known. The expansion of western technology firms such as TMX Atrium and the establishment of high-speed trading links have helped to ease access, from a technological point of view. However, there have also been shocks that have hurt investor sentiment, such as state-owned oil company Rosneft’s takeover of TNK-BP earlier this year, which has been characterised as a corporate governance scandal that left shareholders damaged.
“The main problem Russia has is reputational,” said Michel Danechi, partner at Armajaro Asset Management. “The reputation of Russia as a place to invest is not very good. Nobody trusts government companies in emerging markets anywhere, let alone Russia. Talking and doing nothing about reform is all very well, but we need actions not words. People have given up on words from Russian policymakers.”
Danechi added that many of Russia’s IPOs take place for “the wrong reasons” and pointed out that the obvious state collusion, corruption and politically-motivated arrests that surrounded the takeover of Yukos in 2003 still cast a long shadow over foreign perceptions of investing in Russia. Former Yukos chief executive Mikhail Khodorkovsky is still in prison in Russia, where he is classified as a prisoner of conscience by Amnesty International.
“In the US, everybody you speak to about Russia remembers Yukos,” he said. “Russia is going to have to do ten good things, to replace every one bad thing that gets into the news. Dividend payouts can help, but behaviour and the country’s reputation needs to change.”
Banks involved in the project at Moscow Exchange included Sberbank, VTB Bank, Deutsche Bank, Credi Suisse, Raiffeisen Bank, Promsvyazbank, ING, UniCredit and Metallinvestbank.