Passage of Legislation on Derivative Financial Instruments to Help Russian Market Draw Closer to International Level
The volume of trading in derivative financial instruments in developed markets is much higher than that of trading in real assets, and this trend is getting stronger each year. The great diversity of modern markets of derivative financial instruments helps implement various tasks. Some market participants use them to insure (hedge) their financial risks; others create complex investment portfolios with preset risk parameters, a third group conducts a speculative game and finally a fourth builds new financial products.
The Russian market of derivative instruments is extremely small in terms of size in comparison with world markets and is exceptionally poor in instruments, as it only represents futures and options on shares as well as currency forwards and futures. The main reason for such a lag is the lack of a legislative base for this market’s functioning. The parties’ rights and obligations in transactions with derivatives are not clearly defined and therefore do not have sufficient legal protection. Accounting and taxation of transactions with derivatives are not entirely clear either. In order to change this situation the Federal Service for Financial Markets (FSFM) prioritizes the following activities.
On the one hand, it is necessary to eliminate obstacles that obviously hamper the development of derivatives markets. In order to provide full legal protection to derivatives market participants, it is first of all necessary to introduce amendments to the Civil Code in order to rule out the possibility of referring to such instruments as “gambling transactions” (whose requirements are not subject to legal protection in accordance with the Civil Code).
It is also necessary to pass a special law “On Derivative Financial Instruments,” which would provide a common definition of derivative instruments and definitions of such instruments’ main types, determine parties’ rights and obligations in transactions with these instruments and determine admissible basic assets. This law will regulate transactions with an obligation to transfer specified assets at a certain time in the future and (or) accounts by either or both parties, depending on changes in the value of assets determined in them (basic assets).
The law should determine requirements for derivatives market participants, including requirements regarding capitalization and other factors providing security for mediators and infrastructure institutions. Legislation should also regulate mechanisms for protecting derivatives market participants’ rights (different for different instruments). These should include requirements for the accounting system, measures to secure obligations, specifics of the formation and use of guarantee funds and requirements to risk management for market participants.
While developing the law the FSFM believes that it is necessary to take into account the practical experience of Russian derivatives markets with regard to rules of transactions, security measures and other applicable technologies.
Individual laws or other regulatory acts should regulate questions of derivatives accounting (thus, today specifics of option accounting hamper their use by banks and professional securities market participants). Moreover, the Tax Code should specify a number of issues related to taxation of transactions with derivatives.
On the other hand, it is also necessary to take measures to foster the development of certain segments of the forward market. In Russia there are practically no commodity futures, although by virtue of the Russian economic structure’s peculiarities it is possible to create broad markets of forward standard contracts for many exchange commodities (oil and petrochemicals, natural gas, power, metals, some agricultural products). Such markets will enable sellers and buyers of these products to hedge their risks, which is especially important for products whose pricing takes place in global markets. In addition to that, fair pricing on such markets will make it possible to reduce factories’ use of transfer prices.
In order to develop forward markets of real products it is also necessary to pass the law “On Warehouse Certificates and Warehouses,” which would regulate transactions with real products through deals with title securities, and the law “On Exchanges and Exchange Activities.” It is necessary to make pricing on markets of exchange commodities freer and eliminate inequality of market participants in terms of access to transportation infrastructure.
Source: Federal Financial Markets Service
