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Moscow Traders Scoff at Credit Suisse-Luring Rule Change

Moscow Exchange
Employees stand and smoke in an alcove near the entrance to the OAO Moscow Exchange in Moscow. Photographer: Andrey Rudakov/Bloomberg

OAO Moscow Exchange is finding it hard to appeal to both locals and foreigners.

While the bourse’s shift to a two-day settlement system spurred international banks including Morgan Stanley and Credit Suisse Group AG to start offering clients direct access to the market, local investors like Victor Bark are miffed. The move away from the same-day settlement system that Russia used since 1997 has done nothing but bog down transactions, according to Bark, the head of asset management at Alfa Capital in Moscow.

“I don’t understand who won from this,” Bark, who oversees about $2.8 billion at Alfa, said in a telephone interview. “I definitely find it inconvenient. It’s complicated settlements, accounting.”

Bark’s complaints are echoed by traders and investors all across Moscow. Sergey Lukyanchikov, who heads equity trading at Aton Capital, the brokerage founded by former Kremlin adviser Yevgeny Yuryev, said the new “Western model” is still full of problems, like making it harder for investors to buy and sell before corporate transactions such as stock repurchases. The Moscow Exchange says local traders will stop objecting to the new system once they get used to it.

The Micex Index climbed 0.6 percent to 1,479.27 by 5:49 p.m. in Moscow today. The Bloomberg Russia-US Equity Index of the most-traded Russian stocks in the U.S. rose 0.8 percent yesterday.

‘Fast Cash’

The two-day system moves Moscow’s settlement practices closer in line with those found in the U.S. and Europe. The shift complicates procedures for mutual funds looking to pull out cash or switch money between portfolios when their clients put in an immediate request, according to Stanislav Kopylov at UralSib Asset Management. While firms can turn to the bourse’s negotiated trades system to circumvent the two-day settlement system, those transactions are more expensive, he said.

“People often need their money on the same day or tomorrow,” Kopylov, who helps manage about $3 billion, said by phone from Moscow on Dec. 13. “This problem can be solved by using the negotiated trades system or loans, but costs for me are obviously higher. Fast cash used to be free. Now I need to pay for it.”

The Moscow bourse, which raised 15 billion rubles ($456 million) in a February initial public offering, has been revamping its operations. The exchange is set to make equities available through Euroclear Bank SA next year to lure trading from offshore platforms.

Citigroup, BofA

The bourse says the settlement rule change has been key to its success in wooing foreigners who had been trading Russian equities in London and New York. After trading volumes in the largest Russian companies were an average 50 percent higher in London than in Moscow over the past year, the gap disappeared this month, according to data compiled by Bloomberg.

Credit Suisse, Morgan Stanley, Citigroup Inc. and Bank of America Corp. started offering their clients direct access to trades on the Moscow bourse in September following the transition to the two-day settlement. Five more are planning to follow suit, according to Alexander Afanasiev, the exchange’s chief executive officer.

Following the introduction of the new settlement system, known as T+2, trading volume in equities, mutual fund shares and Russian depositary receipts jumped 17 percent in October to 893 billion rubles from a year earlier, the first increase since December 2011 and the highest level since September 2012, according to the bourse’s data. Volume was 731 billion rubles last month, up 3 percent from a year ago.

U.K., Ireland

“Same-day settlement was a really inconvenient system for the majority of foreign participants,” Afanasiev said in a Dec. 12 phone interview. “This is an opportunity to attract international liquidity to the Moscow Exchange.”

Bank of New York Mellon Corp. and Russia’s National Settlement Depository said today that in an attempt to lure foreign investors they will convert depositary receipts of Russian companies into shares or vice versa within one business day, compared with two to three business days now, according to a joint e-mailed statement.

As Moscow lengthens its settlement period, some developed countries are shortening theirs. The U.K. and Ireland will reduce the time it takes to settle equity trades to two days from three in October, three months before the European Union is expected to make the shorter period mandatory. The U.S. Depository Trust & Clearing Corp. commissioned a study last year on whether the American securities industry should cut the three-day time period it takes to process transactions.

“For the market player, T+0 is always better than T+2,” Oleg Popov, who manages $1 billion of securities for Allianz Investments, said by phone from Moscow. “Now, instead of one day during which the trader could buy, sell, turn a profit and exit, you need a minimum three days for that.”

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