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WorldDecember 2 2013

Moscow Exchange reaps harmony dividends

The merger of the Micex and RTS groups to form the Moscow Exchange has proven harmonious and, so far, successful, with plenty of big names attracted to the bourse. Indeed, as Moscow looks to prove its credentials as an international finance hub, the exchange appears to be setting the standards for the rest of the city's financial institutions to follow.
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Moscow Exchange reaps harmony dividends

There is a palpable sense of excitement around the Moscow Exchange (MOEX) these days. Russia’s flagship bourse has accomplished much in the past few years, rapidly developing its exchange infrastructure, improving its regulatory environment and expanding its product range. Gone is the longstanding rivalry between the Micex and RTS exchanges, so obvious in the past, replaced by the relative harmony of a unified firm.

“We succeeded in bringing the teams together by offering them some quite interesting challenges,” says MOEX CEO Alexander Afanasiev. Those challenges included tough targets and the implementation of reform, after hiring people with international experience to ensure MOEX would be more competitive globally.

Mr Afanasiev believes one incentive for his staff to forget the past and look to the future was the MOEX initial public offering (IPO), which took place at the start of 2013. The exchange listed on itself with a market capitalisation of approximately $4.2bn – the largest exchange IPO globally since 2007, according to MOEX.

The changes mean Mr Afanasiev and his team can now approach forums such as the one they recently held in New York with a fresh confidence, able to concentrate on the exchange’s strengths instead of its shortcomings. “The main questions [in New York] focused on the potential upside after the finalisation of the reforms, improving our pipeline of product offerings and potential for further growth,” says Mr Afanasiev. One area that will be key to the growth of the exchange is the advancement of the clearing and settlement process.

Status update

Back in 2012, Russian regulators granted central securities depository (CSD) status to MOEX’s subsidiary, the National Settlement Depository (NSD). According to MOEX, this removed barriers for trading in Russian local shares for foreign investors. The National Clearing Centre (NCC) has also been established as an integrated clearing platform and central counterparty. More recently, the exchange completed a migration of its equities and bonds market to a T+2 settlement period, addressing longstanding investor demand.

Mr Afanasiev says the beginning of the new settlement period has been “surprisingly positive”, with month-on-month equities volumes for September jumping 44% and showing modest year-on-year growth. The MOEX settlement system has also been internationalised following a collaboration with Euroclear and Clearstream, allowing the two houses to settle Russian government bonds. Current plans aim to extend eligibility to corporate bonds in the first quarter of 2014, and to equities in July.

MOEX extended clearing at the NCC to over-the-counter derivatives in October, allowing banks and dealers to clear over-the-counter interest rate, foreign exchange and cross-currency swaps. The MOEX quest to broaden its range of asset classes is another important step in the development of the exchange. Also in October, it introduced Russia’s first exchange-traded fund (ETF) on physical gold, and Mr Afanasiev says the exchange is in talks with more issuers and providers.

“We see a strong interest… from the Russian customers for trading strategies, not the individual risks,” says Mr Afanasiev. “ETFs are an instrument that brings those strategies to a potential local investor.” Last month also saw the launch of trading in precious metals at MOEX for the first time in the history of exchange trading in Russia. Platinum will be included in the first half of 2014 if there is enough investor interest.

Mr Afanasiev also highlights interest rate derivatives and the repo market as important projects for the future. The attraction of high-frequency trading (HFT) has become an important facet of the MOEX strategy, although Mr Afanasiev is acutely aware of the need to balance it with more traditional methods. The share of trading volumes for HFT across equities and derivatives markets at MOEX is between 30% and 55%, and Mr Afanasiev sees up to 60% as an acceptable proportion.

Sole listings

MOEX offers co-location, a service allowing traders to place their own computers next to the exchange’s, which is often a vital tool for algorithmic traders to speed up order processing. In September, Citigroup, Credit Suisse, Bank of America Merrill Lynch and Morgan Stanley began to offer Direct Market Access (DMA) to securities trading on MOEX. More global banks are expected to start offering the service later in the year. 

But the challenge of attracting users is only one front in MOEX’s battle for success. The need to secure listings will also be central to transforming the exchange and Moscow into a serious global financial hub. Many large Russian companies have in the past taken advantage of the opportunity to list abroad on venues in London, New York and even Hong Kong. Naturally, Mr Afanasiev is keen to point out the advantages of listing domestically.

“It should be up to the issuer to decide whether they will have a dual listing or a sole listing on one of the exchanges,” he says. “A listing on MOEX has an advantage because it provides the investors with the original share…not some sort of derivative.” 

The Russian government’s privatisation programme continually promises a healthy pipeline of high-profile listings, but changes in the prevailing political and economic winds mean timelines are often tenuous. One company that did make its way onto the block was the world’s largest diamond producer, Alrosa, which listed in Moscow at the end of October. The offer price was set at Rbs35 ($1.07) per share.

Attracting the big names

A deal with Nasdaq OMX to promote listings on both exchanges was inked last month, and MOEX is hoping that large companies such as Alrosa will be joined on the exchange by some of Russia’s technology and biotech companies.

"There are a lot of interesting technology companies emerging from Russia, in combination with strong interest from global issuers and investors in becoming more involved with this community,” says Bruce Aust, executive vice-president and head of global listings at Nasdaq OMX. Support from the Russian government and the financial regulators will be crucial if MOEX is to gain every competitive advantage it can and compete effectively on the international stage. Mr Afanasiev believes a lot of the necessary legal changes have already been made, but he would still like to see more. He is keen to see government reform of Russia’s pensions funds, as well as measures to encourage private individuals to invest in the stock market.

Visitors to Moscow in 2013 will notice the city’s newly created financial district, Moscow City, dominating the skyline. The buildings are visible proof of the Russian government’s determination to turn the city into an international financial hub. And although the clusters of steel and glass are undoubtedly impressive, MOEX might yet turn out to be Russia’s most important piece of building work.

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