exchangesExchange <strong>of</strong> informationOleg Safanov, president <strong>of</strong> Russia’s largest exchange <strong>RTS</strong>, tells David Walker why the country’s mainstock and <strong>derivatives</strong> exchange remains a vibrant place for investors, speculators, public companiesand hedge funds alike...The Russian Trading System (<strong>RTS</strong>)can be truly considered to be in asweet spot.In the last nine months <strong>of</strong> 2006,the Russian GDP grew at 37.7%and, notwithstanding emergingmarkets jitters in the last week <strong>of</strong>February, and in March’s first week,which saw an 11% decline in thebenchmark <strong>RTS</strong> Index, the 12-yearold Russian stock market Safonovoversees continues to see a pipeline<strong>of</strong> public <strong>of</strong>ferings satisfying investors’hunger for listings.One can see why – in the twoyears to 7 March 2007, the <strong>RTS</strong>index, calculated on the basis<strong>of</strong> shares <strong>of</strong> the 50 most liquidcompanies, appreciated by149%, according to figures fromBloomberg, in an economy displaying6.4% GDP growth in 2005.Similarly, the capitalisation <strong>of</strong> theRussian stock market has grownfrom 43.0 at the end <strong>of</strong> 2000 to 837.0by mid-October 2006.Russia’s main exchange has fivesub-sections to its structure – theClassic Market, the T+0 market,<strong>RTS</strong> Board with a system <strong>of</strong>‘indicative quotation’, <strong>RTS</strong> START(similar to London’s Aim market),and FO<strong>RTS</strong> for exchange-traded<strong>derivatives</strong>. In total, <strong>RTS</strong> has morethan 1700 securities quoted.classic record“The Classic Market is the oldeststock market in Russia. Its pricesare given in US dollars and settlementoptions include both deliveryversus payment and free <strong>of</strong> payment.We are the only Russian stockdifferent systems on <strong>of</strong>ferexchange where the trades are settledin foreign currency and Russianroubles,” Safonov explains.According to <strong>RTS</strong>’s website(www.rts.ru), the Classic Market has400 securities from 283 issuers.trading modelsThere are two trading models inthe <strong>RTS</strong> Classic Market. One isanonymous order-driven tradingwith the eight most liquid shares onthe market – namely RAO UES OfRussia, Gazprom, Norilsk Nickel,Lukoil, MTS, Rosneft, Rostelecomand Surgutneftegaz.In the order-driven trading settlementis conducted only on a DVPbasis in dollars and secured by the<strong>RTS</strong> Guarantee Fund.The second model is quote-driventrading based on the non-anonymousquotes.“The main advantage <strong>of</strong> thequote-driven trading model is theability to ‘improve the price’ bycalling the party that submitted aquote and agreeing to execute thetrade within the the spread,” the<strong>RTS</strong> notes.“Such an ability is important fortrading in less-liquid securities thatmight have large bid/ask spreads.Knowing the counterparty to thetrade is also important to managerisks associated with tradingwithout pre-funding <strong>of</strong> cash andsecurities. Plus, it helps parties tocome to an agreement involvingnon-standard settlement schemes.”flexible settlement“Settlement <strong>of</strong> trades executed onthe quote-driven market can be performedon the following conditions:“Delivery versus payment” or “prepayment<strong>of</strong> pre-delivery,” <strong>RTS</strong> sayson its website.“The parties have anability to agree on the place, price,“We can see serious interest <strong>of</strong>Western participants in theRussian economy.”sergey nazarov, renaissance investment managementdate <strong>of</strong> the delivery and the settlementcurrency although more than90% <strong>of</strong> trades are settled DVP.”With <strong>RTS</strong> Board, there is asystem <strong>of</strong> indicative quotation that,in Safonov’s words, “makes it possiblefor companies whose sharesare not admitted to be traded onthe exchange to have an indicativeprice, so they can make an analysisand know what level <strong>of</strong> prices is setbe the OTC market.“After that, they may decide totrade their shares on-exchange andget them listed.”The fastest growing segment<strong>of</strong> the Russian stock market is theTrading platform Order-driven Quote drivenInception 2005 1995Model Order-driven Quote-drivenTraded securities 8 blue chips All other stocks and bondsCurrency USD USDSettlement cycle T+4 From T+0 to T+30Clearing centre <strong>RTS</strong> Stock Exchange N/ARegistration <strong>of</strong> traded securities Depositary and Clearing Company Any depositary or registrarDelivery versus payment Mandatory OptionsSettlement firm JP Morgan Chase or <strong>RTS</strong> Settlement Chamber Any bankSettlement currency USD USD or RURsmall and mid-sized sector, a sectionthe <strong>RTS</strong> Board is very successfulat bringing into the stock market,Safonov adds.The T+0 market, Safonovexplains, “is targeted for individualinvestors and characterised by prefunding<strong>of</strong> cash and securities. Asan investment exchange, we arenow trying to promote the liquidity<strong>of</strong> the tier-two and three shares.”For hedge funds, on the equitiesside there are already 11 firms<strong>of</strong>fering prime brokerage servicesacross Russian stocks.They are Alfa Bank, Alton LLC,UBS Securities, Citibank, MDMBank, Metropol, URALSIB, ProspectInvestment, Renaissance,Troika Dialog and UFG (acquiredby Deutsche Bank).“A number <strong>of</strong> Russian companiesis already coming into the stockexchange, or planning to, and therefore,we find that with the very goodindicators <strong>of</strong> economic growth andcontinuing appearance <strong>of</strong> companiesin the stock market, we can seeserious interest <strong>of</strong> Western participantsin the Russian economy as awhole,” Safonov says.macro healthRussia enjoys political stability, hesays, government budget surplusand a rapid paying-down <strong>of</strong> foreigndebt at the same time oil at $59 abarrel builds its foreign currencyreserves.Standard & Poor’s, Moody’s andFitch all rate Russia as a country <strong>of</strong>investment grade.The attractions for both domesticand foreign investors <strong>of</strong> Russia sawtrading volume on Russian TradingSystem Group markets grow by215%, period on period, in the finalnine months <strong>of</strong> 2006.In the third quarter <strong>of</strong> 2006,<strong>RTS</strong> was also looking outwards, atopportunities for tenders in Turkeyand the possibility <strong>of</strong> creating atrading floor using IT systems inthe Ukraine. Looking further afield,<strong>RTS</strong> also signed an agreementwith Standard & Poor’s in 2006 topromote its indices globally, and toco-operate with S&P on calculationmethodology for five <strong>new</strong> sectorindices – based around oil and gas,telecoms, metals and mining, industrialsand consumer/retail.
exchangesExchange <strong>of</strong> informationthe markets on <strong>of</strong>fer at rtsMarket <strong>RTS</strong> Classic Market <strong>RTS</strong> Board T+0 market FO<strong>RTS</strong>AnonymousNon-anonymousInstruments Eight blue chips Stocks, bonds, mutual funds Stocks, bonds,mutual fundsMarket organizer <strong>RTS</strong> Stock Exchange, JSC NA <strong>RTS</strong> StockExchange, JSCGazprom sharesSaint PetersburgSEDerivatives<strong>RTS</strong> SE, JSCTrading model Order-driven Quote-driven Order-driven Order-drivenDeposits Margin 25% Not used 100% deposit <strong>of</strong> cash and securitiesbefore order submittedInitial margin3%-20%from the openpositionSettlement DVP T+4 DVP or FOP from T+3 to T+30 DVP T+3 DVP for settledcontractsPrice currency USD RUR RURSettlementcurrencyUSDClearing centre <strong>RTS</strong> SE, NP Not used <strong>RTS</strong> SE, NP <strong>RTS</strong> ClearingCentreCash settlementSettlementdepositoryJP Morgan Chase and <strong>RTS</strong>Settlement ChamberUSD orRURAny bank (for DVP: JP Morgan ChaseBank and <strong>RTS</strong> Settlement Chamber)RUR<strong>RTS</strong> Settlement ChamberRUR<strong>RTS</strong> SettlementChamberDCC Any depository or registrar DCC RDC RDC or DDCConnectivity via API Yes Planned Yes Yes
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