They centered on tightening requirements to the professional market participants, size of their own capital, countering manipulations with prices of financial assets, championing consolidation of the stock infrastructure, introducing prudential supervision provisions. The move can be characterized as a course to strengthening of the state’s role on the stock market, its direct interference with its participants’ core operations.
On 30 July 2009, FSFM approved the Executive Order “On approving changes introduced in capital adequacy ratio of participants in the securities market, as well as managing companies of investment funds, mutual investment funds and non-state pension funds approved by Executive Order of FSFM of 24.01.07 ¹ 07-50-pz-n”. In compliance with the document, the regulator raised the capital adequacy ratio for professional participants in the securities market which exercise:
- Brokerage and securities trust management – from Rb. 10 mln. up to 35 mln. from 1 July 2010 and further up to 50 mln.- from 1 July 2011;
- Dealer operations- from Rb. 5 mln. up to 35 mln. from 1 July 2010 and further up to mln.- from 1 July 2011;
- Depository operations (except for settlement depositories)- from Rb. 40 mln. up to mln. from 1 july 2010 and further up to 80 mln. from 1 July 2011;
- Operations on maintenance the registers of owners of registered securities - from Rb. mln. up to 100 mln. from 1 July 2010 and further up to 150 mln.- from 1 July 2011.
Today, FSFM has not yet abandoned the practice of mounting pressure on the financial intermediaries’ operations. In March 2011, on its web-page, the regulator posted a draft executive order on modifying license requirements to registrars. Instead of the effective requirement to a registrar to service at least 50 issuers with the number of shareholders over 500, it is proposed to have each registrar service at least 20 issuers with the number of shareholders over 500 and no less than 250,000 non-zero nominee accounts. Experts suggest that roughly a half of the 45 currently operating registrars will fail to qualify the requirement3. Following its inspections in 2010, FSFM revoked licenses from such large registrars as JSC “Aktsionerny capital” and JSC “Tsentralny Moskovsky Depositariy”. On 28 August 2010, the regulator also revoked a license for the right to exercise activities in the capacity of a specialized depository from Depositariy Irkol, one of the leaders in the sector of pooled investment.
The authors of the Report on results of the control measure “Examination of efficacy in 2008 of the effective law and normative and legal base on the financial market and the securities market for the purpose of stabilization of the financial system at the Federal Service for Financial Markets, the RF Ministry of Finance (on request)” conducted by the Accounting Chamber of RF believe that, “ the government agencies do not carry out the systemic analysis of the situation on the stock market on a permanent basis, do not track down and analyze large financial institutions’ operations on the stock market, which results in the RF Government and the country’s leadership lacking a comprehensive and actual information of the environment of, and situation at, the Russian financial market». The Bulletin of the Accounting Chamber of RF, 2010, ¹1, p.100. Posted at:
Rossiyskaya ekonomika v 2009 godu.Tendentsii i perspektivy (vypusk 31)- M., IEPP, 2010 pp. 148-151.
Smorodskaya P. Registratoram vystavily nenulevoy schet. Kommersant, 1 March 2011.
RUSSIAN ECONOMY IN trends and outlooks The FSFM’s efforts, which are aimed at a substantial tightening of requirements to professional security market participants’ own capital, are a part of the regulators community’ concerted attempt to raise requirements to banks and insurance companies’ capital. Since January 2010 banks had to boost their capital to match the mandatory mark of Rb. 90 mln. and further up to 180 mln. by 2012. The government is currently crafting amendments to the Civil Code of RF, which suggest tighter requirements to the minimal amount of economic companies’ authorized capital. The regulators’ common logic is likely to be driven by the desire to bolster the Russian corporations’ level of efficiency by raising administrative barriers to market entry and encouraging, in the up-bottom mode, processes of concentration of businesses. It is not accidental that these measures concurred with the economy and the financial market exiting the crisis and looking for new drivers of businesses’ efficiency.
The FSFM’s assessments of the impact of the tighter requirements to the capital adequacy ratio appear different from those made by the stock market participants. The regulator forecasted that the new requirements would compel some 8-10% of professional participants to quit the market1. Naufor in turn estimates the respective figure to make up over 20%2. The Federal Antimonopoly Service officially objected the FSFM’s stance, but the regulator ultimately turned victorious in the higher echelons of power.
The data on the number of licensed brokers, dealers and participants in exchanging trading at MICEX are given in Table 2. The data show that in the aftermath of the implementation of the new requirements, between 1 July 2010 and 1 March 2011 the number of brokers dwindled 8.2%, the one of dealers – 9.4%, while the number of participants in exchanging trading at MICEX even posted a 0.4% growth. That said, the figures do not quite accurately mirror the impact of the FSFM’s decisions have had on the market participants. They are to face yet tighter requirements to the capital adequacy ratio since 1 July 2011. Besides, in the course of a looming examination of the market participants’ reports on the amount of their own capital the wave of revoked licenses should be rising further on. So, it seems that NAUFOR’s projection is more adequate and, perhaps, even too conservative, and the figure is highly likely to be passed by a substantial margin.
Table The Number of Professional Participants in the Stock Market 2007 2008 2009 01.07.2010 01.03.1. The number of organizations holding a license from FSFM on the right to carry out:
1.2. Brokerage services 1445 1475 1335 1318 change to the prior period, as % 2.1 –9.5 –1.3 –8.1.3.Dealer operations 1422 1470 1337 1318 change to the prior period, as % 3.4 –9.0 –1.4 –9.2. The number of participants in the exchanging trading 460 463 477 481 at MICEX change to the prior period, as % 0.7 3.0 0.8 0.Source: by data of FSFM, NAUFOR and MICEX Too little time passed to evaluate consequences of the impact of the regulator’s move on efficiency of financial intermediaries’ operations and protection of investors’ interests. At the moment, there is an array of problems which cannot help but raise concerns.
Askar-zade. N. Za malenkogo brokera. Vedomosti, 28 July 2010.
Smorodskaya P. Brokery budut zhit po sobstvennym sredstvam. Trebovaniya FSFR obretayut silu zakona.
Kommersant, 1 October 2010.
Financial Markets and Financial Institutes Tightening requirements to the capital adequacy ratio does not go in pair with visible moves to enhance the transparency of the financial intermediaries’ operations. Their financial reporting and key performance indicators remained unavailable for the public at large. Traditional research into how greater barriers to market entry and exit tell on a greater efficiency of businesses require intermediaries to unveil such indicators as labor compensations costs, profit, the proportion of borrowed capital, among others. As most of these indicators are hard to calculate using the official reporting data and they are not published, it is impossible to run an objective evaluation of efficacy of regulator’s measures using traditional international methodologies. This allows an assumption that the regulator acts blindfold and without the much-needed analysis of respective consequences. Such a spontaneous change of rules of the game can grow into a genuine factor of instability of the business environment and hinder market investments into the sector.
Not backed by real moves in the area of the policy aimed at development of the financial market, the aforementioned measures on a sizeable growth in compulsory requirements on the businesses’ capitalization can engender consequences other than the regulators hope for. In addition to supplanting licensed small brokers, dealers and trust managers from the market, FSFM dumped efforts on a further championing of the law on investment consultants. Hence, the legal forms of delivery of investment and financial services to the population have become extinct, particularly, in the provinces. New rules limit possibilities for the rise in the national market of “niche brokers” who specialize on servicing certain segments of the market, and that poses another obstacle to innovations in the sector. Local brokers, dealers and trust managers can be replaced by black hats: unlicensed shadow brokers for private investors, Ponzi scheme operators, unlicensed forex market operators, gaming clubs, and Internet-based services1. As evidenced by the record of the national stock market back in the mid-1990s, financial pyramids flourish where legal forms of financial intermediation do not function2.
While dramatically increasing risks of the rise of illegal financial services, the government’s measures do not solve another significant problem, either, - that is, boosting the domestic financial institutions’ competitiveness and nurturing national leaders in the financial services sector. To make the financial intermediation sector competitive, one should have an extensive network of financial intermediaries, which should be in close proximity to most small investors. Large companies, national champions emerge under a ruthless competition and with the economic environment fostering innovation, thus allowing innovative companies to cash in an extra business rent. There are no such conditions on the Russian market.
Since 1 July 2011 the brokers and dealers should increase their own capital up to Rb. mln., or USD 1.7 mln. That is way tighter the requirements than those in the US and EU. In the US, it is just brokerages that keep clients’ assets, which are obligated to maintain the USD 250,000 capital in combination with prudential requirements. Requirements to capital for brokerages that operate using the sub-agent scheme with the clients’ assets deposited with a higher-level brokerage’s depository imply their own capital should be between USD 50,and 100,000, depending on whether such companies fulfill their clients’ orders on their own, or transfer them to another broker. In the EU, financial companies that deposit their clients’ According to Mr. R. Goryunov, President of RTS, “the number of unlicensed brokers will be rising, unless we foster growth in the number of decent participants”. Maltsev O. Regionlnaya fondovaya chistka. Finans. ¹10, 22-28.03.2010. p. Biyanova N., Nikolsky A. Mavrodi prinyal vyzov. Vedomosti, 12 January 2011; Yurischeva D., Nantay V., Mazunin A., Trifonov V. Sergei Mavrody splel finansovuyu set. Kommersant, 11 January 2011.
RUSSIAN ECONOMY IN trends and outlooks assets should maintain their capital at the level of Euro 125,000, while companies which are not engaged in depository operations shall have their own capital no less than Euro 50,000.
Such low requirements to financial intermediaries’ capital in the US and Europe ensure the investor community’s access to versatile investment and financial products. In the US, SEC and FINRA are tasked to oversee operations of some 5.1000 brokerages and dealer companies that run individual and corporate accounts of some 110 mln. investors. Plus, SEC has registered to date 11,000 investment consultancies that run 14 mln. clients’ assets worth a total of some USD 38 mln. Lastly, on the state level, as many as 275,000 private individuals and some 15,000 corporations were registered as investment consultants1.
Meanwhile, it is just five companies – Fidelity Investment, Charley Schwab, Ameritrade, E*Trade and Scottrade which hold some 80% of the market for retail brokerage services for private persons. An analysis of the background of such companies as Fidelity and Schwab evidences that behind their success stories and leadership in the investment retail has been a continuous strive for innovation in the area of products and services. The legislature and regulator’s mission in this regard is to focus on creation of innovation-friendly conditions and to make sure corporations can hold an innovation rent from introduction of innovations, without which there are no incentives to advancement and prowess in this field.
In Russia, 60% - plus of brokerages’ clients and active clients who strike at least one exchanging deal a month are serviced by seven largest brokerages (Fig. 16). However, when compared to the largest investment houses and brokerages in the developed countries or those in China, India or Brazil, none of them has so far qualified for the leadership in the sector.
One of the reasons for such a situation is imperfect national law and an absence of the government’s commitment and resolve to foster a business climate which would propel a prompt expansion of the most innovative companies.
Legislators are keenly aware of the uncompetitive nature of Russia’s legal environment in the financial sphere. Mr. D. Ananyev, Chairman of the Federation Council Committee for financial markets and money circulation, admits that, “…Russian financial law does not appear flexible enough, but overly imperative, and investors find it hard to build on its basis convenient forms of doing business, for property rights are not secured efficiently and informational transparency is insufficient”2.