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Rudenko P. The two-in-one exchange. Kommersant, 19 December Butrin D., Rudenko P., Mazunin A. A national security stockholder. Kommersant, 31 January Section Financial Markets and Financial Institutions According to Mr. A. Ulyukaev, First Deputy Chairman of the Central Bank, and MICEXRTS representatives, in the course of the upcoming IPO the united exchange is going to hit the level of capitalization of $6bn1.

Fig. 17 illustrates the dynamics of change in the exchanges equity capital as the deal on their merger progressed. The amount of the equity capital was very volatile, which may stir potential investors concerns. Perhaps the official statement should be appended with explanations of such sizeable changes in accounting data.

35 30 25 20 15 10 5 dec jan feb mar apr may jun jul aug sep oct nov dec 2010 MICEX-RTS (combined) CJSC MICEX JSC RTS Source: calculations by data on equity capital posted on the MICEX-RTSs homepage on the Internet.

Fig. 17. The Russian Exchanges Equity Capital The formal legal merger of the exchanges does not mean as yet establishment of an integral infrastructure of trading and settlements on the spot and futures market. Since the completion of the merger, 19 December 2011, there still have operated two parallel sections of the futures market, the two technological platforms remained different and clearing and depository and settlement operations have not been consolidated in a single center.

Integration of the IT, trading and clearing systems appears a slower process vis--vis the pace of the legal and administrative merger. The problem manifested itself in serious operational failures in 2011. More specifically, on 9 August, trading was halted for an hour and a half at the futures section of RTS. The same occurred on 17 August at SE MICEX, with no updates available over the first quarter of an hour after the failure occurred2. Subsequently, because of glitches, SE MICEX suspended operations on 1 and 8 November, with an incorrect interaction between software components of a string of nodes that ensure participants access to the trading system cited as a cause behind a two hour-long suspension of trading on 1 November and an incorrect mirroring of information of cash balances of participants in trading as a main reason for an hour-long suspension of trading on 8 November3. On 24 November 2011, JSC RTS delayed trading sessions on the futures market RTS and the RTS Standart market for a half an hour, and they kicked off at 7-30pm, instead of 7pm. The day of the legal merger of the exchanges, 19 December 2011, was darkened by an unprecedented failure in the futures market section, with unauthorized transactions starting to run after the clearing by re Rudenko P. The exchange overvalued the placement. Kommersant, 13 February 2012.

Mazunin A., Rudenko P. MICEX partly shut down America. Kommersant, 19 August 2011.

Trifonov A. The morning without an exchange. Vedomosti, 9 November 2011.

Rb mn RUSSIAN ECONOMY IN trends and outlooks sults of main session across participants in trading was over. As a result, numerous private investors suffered losses1.

Meanwhile, the exchanges executives and numerous brokers through whom the deals were concluded argued that they were not bound to compensate for such investors losses2.

The exchange staff asserted that the cause for the glitch was that after completion of settlements by the main session, inaccurate data about the participants trading and monetary positions were uploaded onto the trading system. According to Mr. D. Pankin, head of FSFM, as MICEX and RTS were busy with financial and legal aspects of the merger, they failed to ensure uninterruptable trading sessions.3.2.6. The Increase of the Role of the Government in the Area of Regulation and Oversight In 2011, the Government firmed up the regulating authorities functions on the securities market and replaced the previous head of FSFM, Mr. V. Milovidov, with Mr. D. Pankin. In compliance with Decree of the RF President of 4 March 2011 No.270 On measures on improving of state regulation in the sphere of financial market of Russian Federation, the Federal Insurance Oversight Service (Rosstrakhnadzor) was integrated in the structure of FSFM.

At the same time, the Ministry of Finance was granted powers with regard to normative and legal regulation of the financial market, thus sharing these powers with FSFM. The Decree also reads that in its capacity of a body of executive power FSFM reports directly to the RF Government.

On 31 August 2011, Prime Minister V. Putin approved reallocation of responsibilities between the Ministry of Finance and FSFM. The respective Resolution was signed on 29 August and posted on the RF Governments homepage on 31 August. The major principle underpinning the reassignment is delegation to the Ministry of Finance the power to develop the government policy and normative and legal regulation in the sphere of financial markets, including powers with regard to development of strategic avenues of advancement of the securities market. Meanwhile, FSFM will exercise normative and legal regulation aiming at improvement of oversight and control in an established form of operation. The current authority sharing by FSFM and the Ministry of Finance does not appear an optimal one, as, in our view, it means scattering the regulatory powers across various organizations and gives rise to a conflict of interest for the Ministry of Finance in its capacity of the securities market regulator and a participant therein. Once the new division of powers took effect, it decelerated the pace of adoption of new bills advocated by numerous market operators, in particular, draft amendments to the Federal Act On Investment Funds which concerns index funds. It is not accidental that in the follow-up of the meeting of the International Advisory Council on creation and development of the international financial center in Russian Federation of 28 October 2011, the RF Government was tasked to submit by 1 February 2012 proposals on extension of the FSFMs powers with respect to prevention of abuses on financial markets, protection of investors interests, in particular, in the court of law, as well as on granting it the right to design and submit to the RF Government federal bills and other drat normative and legal acts in the financial markets regulation area.

Rudenko P., Mazunin A. Stock-Majeure. Kommersant, 20 December 2011.

Rudenko P., Mazunin A. MICEX-RTSs clients were wasted. Kommersant, 21 December 2011.

Verzhbitsky . Dmitry Pankin is displeased with failures. RBC daily, 17 November 2011.

Section Financial Markets and Financial Institutions The year of 2011 witnessed adoption of three fundamental federal acts on infrastructure organizations- namely, Federal Act of 7 February 2011 No. 7-FZ On clearing and clearing operations (The Law on clearing), Federal Act of 21 November 2011 No. 325-FZ On organized trading (The Law on trading) and Federal Act of 7 December 2011 No.414-FZ On the central depository (The Law on central depository). The main positive impact of the above acts is that they establish legal grounds for operation of a centralized system for conclusion of deals, running clearing and settlement operations on the domestic market for investment assets. That said, the aforementioned federal acts have failed to dissipate concerns about the growing impact public agencies and the state-owned banks have on infrastructure organizations operation. As the operating clearing organizations and settlement depositories are at nearly 100% subsidiaries to the JSC MICEX-RTS, it is regulation of the exchange which is worth exploring in the first instance.

We believe the Law on trading substantially strengthened the public agencies leverage effect on the exchange. Whereas the Law on trading changed dramatically the concept of organizer of trading, stock exchange and items traded at the exchange, after its adoption, MICEXRTS will have to claim a new license in 2012. The Law on trading does not contain any restrictions for public structures and the Bank of Russia in their capacity of stockholders of the exchange. In compliance with p.9 Art.6 of the Law on trading, election (appointment) of the person who exercises functions of the sole executive body and other top managers of the exchange is permitted only upon a preliminary consent of the federal body of executive power in the financial markets area (FSFM of Russia). In accordance with Art.6, the principal managing body of the exchange is its Board of Directors, which at MICEX-RTS is currently dominated by public structures and companies, while decisions of the exchange Council, which is at 75% formed by participants in trading (Art. 10), are recommendatory. In accordance with Art.25, practically all the exchanges operations and entitling documents are subject to FSFMs approval. What is more, Art.25 holds that the regulatory body even sets up the index calculation procedure.

The Law on the central depository has been designed and enacted in the atmosphere of heated debate. The swords were crossed over the issue of the central depositorys exclusive right to open the nominal holders accounts with the registers and the mandatory requirement to keep the central depository as a sole structure1. In 2012, it is envisaged to accredit one of the currently operating clearing depositories most likely the National Settlement Depository (NCD) - as the central depository. The Law on the central depository does not restrict public agencies participation in its authorized capital, either. Like the exchanges tariffs, those of the central depository should be set up by the Board of Directors, while the central depository should coordinate them with FSFM. Granting the status of the central depository falls under the FSFMs purview, per the procedure established by the Ministry of Finance.

On 31 July 2011, a number of provisions of Federal Act of 27 July 2010 No. 224-FZ On countering illegal use of insider information and manipulation of the market and on introducing amendments to individual legislative acts of Russian Federation became effective. In furtherance of the Law, FSFM adopted a series of normative and legal acts. The financial market participants were to submit to the exchanges insider lists until 31 December 2011. According to the FSFM Head, in 2011 the regulator held three audits and exposed just 16 cases of ma Mazunin A., Rudenko P. Depository memorandum. Kommersant, 22 August 2011; Rudenko P. A center for securities has popped up. Kommersant, 10 October 2011.

RUSSIAN ECONOMY IN trends and outlooks nipulation. The documents were forwarded to law-enforcement agencies and a number of individuals who had committed manipulations were brought to administrative responsibility1.

These facts suggest that the oversight of compliance with the insider law has thus far been limited.

One of the challenges to advancement of the stock market is establishment of a favorable tax regime for domestic market agents and residents. The Strategy of Development of the Financial Market of Russian Federation for the period through 2020 approved by Resolution of the RF Government of 20 December 2008 No. 2043-p (Development Strategy) meant to address the problems, but unfortunately, like in the prior year, in 2011 regulatory bodies once again failed to effectively tackle problems in the taxation area. On 23 June 2011, there took effect Federal Act No. 132-FZ On introducing amendments into Art. 95, Section One, Section Two of the Tax Code of Russian Federation with regard to formation of favorable tax environment for innovation activity and Art. 5 of the Federal Act On introducing amendments to Section Two of the Tax Code of Russian Federation and individual legislative acts of Russian Federation, which abrogated the tax on foreign investors income from sales of publicly traded stock. In the past, such incomes were taxed at a rate of 20% which was withheld by the broker in his capacity of tax agent. The abrogation of the tax concerns legal relations arisen since 1 January 2011.

In December 2011, the RF Ministry of Economic Development designed a draft Resolution of the RF Government on exemption of long-term venture investors in innovation corporations equity from the corporate profit tax2. But other than that, there have been no more serious moves in the taxation area, albeit the problem of tax incentivizing of private investment is one of critical challenges facing Russias stock market. While presenting at the Government Hour at the Federation Council on 9 November 2011, Mr. D. Pankin, Head of FSFM, reckoned that his agency was on the same page with the Ministry of Finance in regard to reinstatement of tax benefits for long-term investors who have owned papers for more than three years3.

3.3. Financial Institutions in Search for New Ideas for Growth 3.3.1. Constraints to the Carry Trading Strategy and Increase of the Financial Leverage The year of 2011 saw the RF authorities search for a sustainable development pattern for the domestic banking system in the conditions of a constrained implementation of the carry trading (CT) strategy. The constraints were determined by the closure of global financial markets for borrowers from emerging economies, the capital outflow from Russia, and the effect of measures on limiting implementation of the strategy by Russian banks. The magnitude of engagement of banks in CT is exhibited by the indicators of deficit () and surplus (+) of banks foreign assets vis--vis costs of non-residents rights of claim to banks compared with the overall value of banks assets displayed in Fig. 18. The year of 2011 became the third year in a row when the cost of banks forex-denominated assets proved to be in excess of the amount of their liabilities to non-residents and accounted for 3.6% of the amount of banks assets.

Trifonov A., Voronova P. The driver of quotations. Vedomosti, 27 December 2011.

Visloguzov V. Tax benefits take a long time to come. Kommersant, 6 December Rudenko P. FSFM recommended to hold. Kommersant, 10 November 2011.

Section Financial Markets and Financial Institutions Fig. 19 displays that in H1 2011, the Bank of Russia raised its reserve requirements (RR) to liabilities before corporate non-residents in forex equivalent by 2.5% up to 5.5% of costs of the liabilities. As for liabilities before private individuals in the RF currency and other forexdenominated liabilities, RR over the period in question were raised from 2.5% up to 4.0%.

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