The merger between Russia's two largest exchanges, MICEX, the country's largest equity market, and Russian Trading System (RTS), the dominant derivatives trading venue, will lead to the Russia's most liquid stocks being traded on a T+4 settlement cycle.
Oleg Zhelezko, deputy chairman on RTS's board of directors has confirmed that the combined exchange will use T+4 rather than the T+0 model currently favoured by the ruble-denominated MICEX market, which had 84.9% market share of on-exchange Russian equity trading by volume in June 2011, according to Thomson Reuters' Equity Market Share Reporter.
The T+0 model, which requires both stocks and cash to be deposited before a trade can occur, means that the many overseas investment managers who do not have immediate access to either stocks or rubles are required to set up borrowing arrangements that are both costly and potentially risk information leakage.
The RTS Standard market has employed a T+4 model since mid-2009. It saw annual share turnover increase from €12 billion in 2009 to €61 billion in 2010.
“RTS Standard has gained a lot of volume in the last year and a half,” Zhelezko told theTRADEnews.com. “After the merger we will follow the trend and move all stocks to T+4. We might have to leave some of the less liquid stocks on T+0, but the proportion of stocks trading T+4 will be reversed.”
He said that the combined group would also push for the creation of a central securities depository (CSD). A law has been drafted to create a framework for the existence of a CSD and the two existing exchange-owned securities depositories, NSD and DCC, currently regulated as custodians, will be combined to form an operational CSD as part of the merger.
The lack of a CSD forces US investment funds to use stock registrars for the settlement process, adding to the cost and complexity of the process. Registrars are defined as the mandatory place of safekeeping and settlement, required to be used under rule 17f-7 of the US Investment Company Act of 1940. This would change after the CSD law was enacted, making trading in Russian stocks cheaper and more efficient for American buy-side firms.
“I hope the law will be brought in before the end of the year,” said Zhelezko. “The registrars will still be in place but the centralised depository will be given a priority for the listed companies.”