Development of Exchange Trade Regulation to Improve Quality of Russian Stock Market
Russian stock exchanges lag behind the leading Western trading floors in sales, liquidity and fair price formation. A considerable part of transactions with Russian securities (depositary receipts) is conducted in foreign markets. Russian market participants also prefer to hedge risks in Western exchanges. Concentration of liquidity on Russian stock exchanges is also impeded by active curb trading on the part of Russian brokers and dealers, which is practically uncontrolled by the regulator. The legal base is insufficient for fighting insider trading and price manipulation.
Competition between exchanges and other trading systems is currently intensifying in world markets. If, in the near future, the Russian market fails to take effective measures for strengthening stock exchanges and making them competitive, there exists the threat that the national trade infrastructure will be lost and trading activity will be completely shifted overseas, which in turn will call into question the existence of a national capital market.
The FSFM considers necessary integrated action with respect to the current situation, which can be improved materially after adoption of the special Law “On Exchanges and Exchange Activity” to be applied to stock, currency and futures mercantile exchanges. The law must specify the legal status of exchanges, set shareholder structure requirements and a corporate governance system to make exchanges transparent and attractive for investors. In view of its specific functions (not only to organize trading, but also to make it effective and clean, as well as to protect investors’ interests), a stock exchange must receive certain regulatory or pseudo-regulatory powers in relation to traders and issuers. The right of an exchange to regulate traders’ operations must prevent price manipulation and insider trading, as well as guarantee credibility of the given trader, thus protecting the interests of its clients and counteragents. The right of an exchange to regulate traders’ operations must increase the quality of traded securities, guarantee timely information disclosure by issuers, and guarantee control over adherence to corporate governance principles. The FSFM believes that the possibility of an exchange to respond immediately to violations committed by issuers or traders will strengthen the common system of stock market regulation.
The law must stipulate the requirements to the exchange trade infrastructure (clearing systems and settlement depositaries) for capitalization and a system of risk sharing. These requirements will allow increasing the infrastructure’s reliability as well as minimizing corresponding risks of investors and traders. It is necessary to increase requirements for capitalization of brokers and dealers, and also to establish prudential supervision over them. If these requirements are enforced, it will be possible to transfer from a less profitable clearing system with full preliminary depositing to a more effective system with partial preliminary depositing.
In an effort to make an exchange market liquid and price formation fair, traders and investors must always have equal access to exchange trading; professional participants must be obliged to inform an exchange about ex-pit transactions; and the taxation of exchange transactions must be improved.
Source: Federal Financial Markets Service
