The Russian government's plans to transform Moscow into a financial hub have taken a step forward after the country’s main stock and derivatives exchanges MICEX and Russian Trading Systems (RTS) agreed a non-binding deal to merge.
Under the deal's terms MICEX will buy a controlling stake in its smaller rival of an undisclosed size, according to an RTS spokesperson. A binding agreement is expected to be signed in Q2.
The deal values RTS at US$1.15 billion and MICEX at $3.45 billion, with the larger trading venue to pay for 35% of the stake in cash and 65% in paper.
“The government has been pushing hard to get this done, in line with its plans to create a global financial centre in Moscow,” said Yury Plechko, deputy CEO of broker CJSC UniCredit Securities. “Increasing exchange liquidity and strengthening the trading platform was part of the plan.”
Alexander Pertsovsky, Russia CEO, for investment bank Renaissance Capital, which is a shareholder in both organisations said, “We are involved in this transaction because we believe it serves our company's economic interests as well as the purposes of developing the financial market in general.”
The merger would create a single venue for trading stock and derivatives. Currently RTS has the lion's share of Russian derivatives trading volume, while MICEX dominates the equities market.
“When we talk to our customers everyone wants to trade on RTS because of the T+4 settlement and the ability to cross margin with the derivatives section. If the merger were to use the RTS technology and post-trade operations it would be of great benefit to the international community,” says Andreas Lindblom, managing director of agency broke and custodian DMA Direct.
RTS offers 38 futures and 13 options on its FORTS trading platform. RTS Index futures are the most highly traded contract, with trading volume growing from less than US$10 billion by volume in December 2008 to US$54 billion in December 2010.
MICEX makes up around 80% of equity volume traded in central and eastern Europe according to data provider Thomson Reuters, while RTS trades less than 10%. Total equity trading on RTS reached US$122.77 billion in 2010, with turnover on its RTS Standard market doubling to US$110.35 billion. In the same period, MICEX recorded a turnover of US$1.02 trillion.
MICEX requires settlement on a T+0 basis, meaning stocks and cash must be delivered to the exchange before the transaction can occur, while RTS Standard offers settlement on a T+4 basis, which has proven popular despite only offering trading on 22 Russian blue chip stocks.
In December 2010, trading on RTS was comprised primarily of shares in Russia's largest bank, Sberbank, which saw trades totalling US$5.160 billion in value, making up 52.96% of the exchange's volume. Trading in fuel giant Gazprom's shares, worth US$1.947 billion made 19.99% of trading while Norilsky Nikel, Lukoil and Rosneft comprised 6.92%, 5.94% and 3.07% of volumes respectively.
The exchange's most active brokers in December 2010 were Troika Decalog, CentroCredit, Kit Finans, Deutsche Bank and Citigroup Global Markets.
RTS owns its post-trade processing facilities outright with 100% stakes in the RTS Clearing Centre, RTS Settlement Chamber and a 97.76% stake in the Depository Clearing Company. It also holds a 19.99% stake in the St Petersburg Exchange and 43% of the Ukrainian Stock Exchange.
Despite the potential advantages of a tie-up, Plechko adds a note of caution, “For us it is important to have competition, which will be reduced by having only one exchange. That is one of my personal concerns.”