Capital market of russia


Developments affecting financial market transactions in Russia


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3. Developments affecting financial market transactions in Russia

2019 has been an interesting year not so much from the standpoint of changes to the existing legislative framework but rather as a stress test for some of the principal features of a framework that has been put in place over the past few years. The financial sector is undergoing a dramatic shake-up. A combination of two factors – an economic slowdown and the resulting deterioration of the credit quality of banks’ loan portfolios on the one hand, and the Bank of Russia’s toughening of prudential supervision enforcement practices on the other – has resulted in a large-scale reconfiguration of the structure of the Russian banking sector. Many privately owned banks including the largest lost their licences and have been put into bankruptcy or have been taken over by the regulator acting through the Deposit Insurance Agency (DIA) or a newly created Foundation for the Consolidation of the Banking Sector. The recently adopted recovery and resolution regime is being applied on a large scale, pushing out private shareholders (through mandatory write-off of outstanding equity securities) and replacing them in most cases with government control. The banking business is thus being consolidated around state-owned banks.

On the positive side, the State Duma, which is the lower house of the Russian parliament, passed a whole host of changes to the Securities Market Act the bulk of which will come into effect in 2020 – that define new types of securities, including ever-green bonds and medium-term notes, subordinated notes that now can be offered to non-qualified investors, and preferred shares that entitle the holder to super-priority in receiving dividends in relation to other types of preferred shares and common stock. The amendments relax the requirement for prospectus registration: an exemption from registration now applies to securities offered to qualified investors and current shareholders irrespective of their number. Similarly, if a tranche of debt securities is placed within a year from the registration of a programme of issue, the placement of such tranche is exempt from the prospectus requirement; later tranches, however, can no longer rely on the shelf-registration. Amendments to the Law On mortgage-backed securities have addressed some weaknesses that, within the regime of mortgage-backed securities (MBSs) and a new type of exchange-traded and over-the-counter (OTC) MBSs that are segregated from other liabilities upon insolvency of the issuer will become available in 2020.

Changes to the Securities Market Act have also clarified certain requirements applicable to the offer of securities by foreign issuers, as well as to disclosure of information on such securities by an exchange.

New rules apply to the quality of collateral for covered bonds: loss or deterioration of collateral are treated as events of default unless disapplied pursuant to the terms and conditions of the bonds.

A new set of rules affecting class actions came into effect on 1 October 2019. It is now possible to file a class action, including an action on behalf of shareholders of a joint-stock company or other securities holders, in a court of general jurisdiction.

A more robust regime governing liability for insider trading and market manipulation came into effect on 1 May 2019 that expands the list of insiders and the scope of inside information.

The tightening of the international sanctions regime has also brought about changes to the regulatory framework. The changes to the Securities Market Act enacted in December 2018 have authorised the government to exempt issuers that have or may become subject to foreign sanctions as well as other market participants (clearing houses, central counterparties (CCPs), custodians) and insiders from certain disclosure obligations, thus shielding certain sensitive information from the public domain.



Bankruptcy

Most statutory changes in the bankruptcy regime predate 2019. Notably, there was a major overhaul of the bankruptcy legislation in 2015. The two statutes that previously governed the bankruptcy proceedings of banks and non-banking organisations have been merged into a single statute. The new law contains detailed sets of rules applicable to bankruptcy proceedings affecting various types of economic actors, including various types of regulated financial entities such as banks, brokers, dealers, asset managers, clearing houses, insurance companies, private pension funds and some others. The new regime also includes certain bail-in measures applicable to the insolvency of banking institutions that gave rise to a large number of disputes over the past three years, including in 2019.



Credit derivatives

A Bank of Russia regulation on the types of financial derivative instruments, as amended in 2015, now accommodates the use of credit default swaps in the domestic market. This development is in line with the publication earlier in 2015 of the credit derivatives definitions for use with the Russian industry-standard derivatives master agreement. The hard-wiring of the local credit derivatives market, however, is taking longer than the market would have wished. The finance industry appears to lack the requisite motivation to put in place the necessary infrastructure for servicing the needs of the local credit derivatives market in the form of a local determinations committee and an auction mechanism. The principal reason for this dampened enthusiasm is that the Bank of Russia, while giving informal preliminary indications that it would be inclined to approve credit derivatives as a means of offloading credit risk for capital adequacy purposes, has so far failed to take any specific steps to implement it. Without regulatory recognition as a balance sheet management tool, credit derivatives are unlikely to top the priorities list of the local banking community. Little progress has been made in 2019 to further this agenda.



OUTLOOK AND CONCLUSIONS

While the legislative reforms of the past few years represent a pivotal change in the regulation of the capital markets in Russia, the success or failure of such reforms can only be judged with the passage of time. The principal litmus test of whether the decisions made were the right ones will be the sustainable growth and sophistication of the capital markets. Currently, however, the accuracy of any litmus test is compromised by the challenging geopolitical situation that Russia is in, and those tensions have shown no sign of subsiding in 2019. The new regulatory paradigm that has begun to take shape with legislative and regulatory progress, the creation of a mega-regulator and the ongoing implementation of the G20 reform measures is now facing a strong headwind in the form of political tensions. The international financial sanctions against some of the leading Russian companies and their expansion in 2019 are bound to leave an imprint on how Russian capital markets will develop in the short to medium term. Reorientation towards the Asian markets, and a search for alternative funding sources unaffected by the current sanctions regime and supplanting cross-border flows with domestic growth, require time. Meanwhile, if the current breakdown in the economic and financial integration between the Russian and the global financial markets continues, the growth prospects of the cross-border and local markets are likely to remain subdued for some time to come.
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