Giles Turner, news editor, talks to Tim Bevan, manager of DMA sales at Otkritie, about the difficulties of trade settlement in Russia, and how to deal with T+Zero
Same day affirmation is something of a mystical concept in many financial markets.
Not so in Russia. On MICEX Stock Exchange, the largest exchange in Russia, trading is order-driven, automatically matching trades, and settling on delivery versus payment terms with full asset pre-delivery. This turns MICEX into clearer, settler and executioner in the same day. It is also an anathema to nearly all other major markets, where T+3 takes precedence, despite the perpetual debate about what would be the best T for all markets.
T+Zero originated after the 1998 Russian financial crisis. According to Bevan: It was very difficult to get people trusting in each other again. The only way to create trust in the central market was to pre-deliver the assets. It was the right solution of the right time. Unfortunately now, it structurally creates headaches and problems, but this how the market works.
T+Zero poses problems to institutional clients looking to trade in Russia, a market increasing in popularity. $2 billion is traded a day on MICEX and $4 billion notional on FORTS. These are deep pools of liquidity that havent historically been accessible to international investors, says Bevan.
RTS, MICEXs main rival, settles on a variety of settlement dates, depending on the asset class. However, MICEX remains the largest and most liquid of exchanges, and only a domestic Russian organisation can be a member of the exchange. To allow foreign investors direct market access to the Russian market, Otkritie purchased ABC Clearing, a UK clearing company, in 2006 and launched Otkritie Securities London, a FSA regulated brokerage firm, in 2008.
Once connected, T+Zero poses operational risks. It is not just a simple case of all I need is a pipe, says Bevan. Direct market access becomes prime brokerage in one sense. You need to have access to a significant asset pool. You have to have guys acting in the domestic repo market. You have to have good access to rouble.
So what we have done with the sell-side is offer a synthetic [settlement] model. What we do is finance the business on a T+Zero basis, and then settle over-the-counter in T+2 or T+5 basis with the client, which in this case is a sell-side client, so he can match up his own client on the other side no warehousing, no financing.
To increase investor appetite in the Russian market, Otkritie spent a year working with ING in Russia developing a tri-party system. When an order comes in, MICEX goes directly to ING for the assets, rather than us. Here, the custodian settles on a T+Zero basis, explains Bevan. The motivation for setting up the ING service was not to overcome counterparty risk issues, but to eliminate financing costs and to develop a service aimed specifically at the buy-side.
ING, along with Citi, is one of the major global custodians based in Russia. Letting ING settle the trades, and Otkritie focus on direct market access, alleviates a lot of the stress involved in T+Zero settlement.
Although President Putins recent ban on grain exports will not do much for foreign investor confidence, work continues to draw investors back to a region that, before 1998, was seen as a world of investment opportunities. The Russian financial regulator (FFMS) and Deutsche Brse recently signed a Memorandum of Understanding aimed at exchanging information regarding current legislation in the capital markets. The FFMS has also adopted a law on consolidated financial reporting, introducing rules of preparation, submission and publication of the financial reporting of credit organizations and other public companies, as well as insurance companies. Russia has also added SWIFT standards to its domestic securities market.
Unsurprisingly, Bevan remains upbeat about the future. We cater to high frequency, high volume clients clients who are running algo strategies as well as the more traditional buy and sell side customers. These guys are looking for deep pools of liquidity, ideally in markets that are not already saturated, and Russia ticks the box. It is really just about core liquidity. For a lot of the algo strategies, they are intra-day trading base on algorithmic behaviour within an order book. Whether that order book is in Russia or Timbuktu, liquidity is the key requirement.