Sergey Sinkevich, Otkritie’s Head of DMA (Direct Market Access) outlines the radical changes that are opening up the Russian fixed income market and enabling international investors to trade in confidence.
The Moscow Exchange’s IPO became the symbol of changes sweeping the Russian market and epitomises Russia’s ambition to turn Moscow into a new financial powerhouse. While analysts and the media have principally focused on whether Moscow could successfully compete against other international financial centres such as London and New York for new equity issues, the impact of recent regulatory and infrastructure changes on the fixed income market have gone largely unnoticed. The fixed income market in Russia is being reshaped dramatically, making it more accessible to international investors and enabling more cost-effective execution through direct market access.
Historically, the settlement process made trading Russian securities a cumbersome enterprise. Prior to the merger of RTS and MICEX, Russia’s two exchanges, international investors had to work with two depositories – the National Settlement Depositary and the Depository Clearing Company. They also had to rely on a limited number of local brokers who would help to navigate the intricacies of local regulation, matching and post-trading services.
Russia’s local fixed income instruments always had centralised custody clauses in every prospectus, but the recent changes in regulatory environment and infrastructure finally provided additional comfort to foreign investors apart from the clauses. Last year, after nearly two decades of discussions, the Federal Law on “Central Depository” (the CSD Law) finally came into force, laying the legal foundations for a central securities depository, a fundamental institution that had long been anticipated by international investors.
On 6 November 2012, the National Settlement Depository (NSD) received the Central Securities Depositary licence from Russia’s Federal Service for Financial Markets, fully opening up the locally-issued fixed income market to foreign investors. The same CSD Law permitted Euroclear, Clearstream and other ICSDs to open direct accounts with NSD to process fixed income trades until 1 July 2014 and for cash equities thereafter. These procedures cleared the final hurdles to bringing Russia in line with the standards expected by the international investment community.
In addition to establishing a central depository, on March 25 the Moscow Exchange moved Russian sovereign bonds to T+2 settlement, improving cash management, streamlining business processes, and turning the main Russian fixed income market into a modern European market, with transparent and well-articulated rules. Europe predominantly uses T+3, with Germany and some other countries already operating T+2, and the European Union is aiming to put all 27 member states on a T+2 system, a development that should be completed by 1 January 2014. The U.S., meanwhile, uses T+3, although discussions are developing to reduce this to T+2 to harmonize with other global jurisdictions. All these developments are transforming the Moscow Exchange into a centre for liquidity and price discovery when it comes to trading and investing in Russian instruments.
Even before these ground-breaking changes, Russia’s government bonds were popular with savvy international investors, who were drawn to the country’s attractive returns. Russia’s strong growth fundamentals, low inflation, and low levels of public debt, which in 2012 was at 11% of GDP, make the country’s sovereign bonds an attractive asset for institutional investors. Liberalisation of the matching and post-trading procedures for sovereign debt trading on the Moscow Exchange is going to attract a significant share of the anticipated inflow of international capital into locally traded rouble instruments.
Last year, Russia’s fixed income placements enjoyed an unprecedented growth of nearly 30%, driven by two asset classes; municipal and sub-federal instruments and OEX issued bonds – a Russian version of commercial paper. These new issues offer investors a more diversified range of instruments.
As the Moscow Exchange adds sovereign bonds to its T+2 market, Otkritie Capital offers a more cost-effective execution through Direct Market Access (DMA). Fixed income DMA is a new concept in Russia, but we are already the leader in other markets including on the London Stock Exchange International Order Book.
Founded in 1995 and now one of the largest independent financial groups in Russia, we were among the first to recognise new opportunities offered by electronic trading through DMA. Over the past years, Otkritie and our UK subsidiary, Otkritie Securities Limited (OSL), have invested heavily in cutting-edge technology, developing ultra-low latency connectivity and proximity to LSE and the Moscow Exchange. Today, our speed of execution is one of the fastest available on the market. As an FSA-authorised broker and A1 Prime Brokerage services provider, OSL has become the partner of choice for many of the world’s leading investors.
The new ICSD settlement producers and fixed income DMA are transforming both trading and post-trading of the Russian market, bringing it to the highest international standards. Russia’s sovereign bond yields and credit fundamentals are as attractive as ever, but the days of the “Wild East” settlement practices are over, giving way to a market more familiar to international investors.
Our experienced team, cutting edge technology and unrivalled local knowledge, are ready to help international investors to capture new opportunities in one of the world’s most promising fixed income markets.©BestExecution | 2013