This is part of the Central Bank megaregulator proposals to be presented at an Open Government session on Tuesday.

According to CB, during phase one (tentatively scheduled by 1 August 2013) FFMS will merge with the Bank of Russia as an independent agency, and following that, (by 1 January 2014) FFMS departments will merge with CB, with phase three (by 1 January 2016) dedicated to optimizing the Bank of Russia structure.

Management optimization, as stated in the draft, includes the resignation of CB First Deputy Chairman (currently there is a total of four). First Deputies will delegate their functions to three committee heads – bank oversight, financial oversight and monetary policy. These Heads will report directly to the CB Chairman.

The Head of CB will have three deputies - IT, Financial Monitoring and Currency Control, Financial Stability/Financial Infrastructure Regulation and Monitoring (central counterparty, stock exchanges, central depositary) and market instruments. The latter will report to Head of Monetary Policy instead of the CB Chairman.

The document states that as early as in stage two, a separate non-banks regulation and oversight division will become operational, reporting directly to the CB Chairman. "Financial market development function will be delegated to a separate department, outside the non-banking regulation and oversight division", says the document.The CB admits there are drawbacks in the concept, including deeper conflict of interests within the Bank of Russia (it is simultaneously a regulator, a shareholder in several market participants and a market participant).

Nevertheless, the CB does not see this issue as a dead end. “This conflict can be resolved in part by future measures (partial exit from market participants’ capital, resignation of Bank of Russia officials from Boards of Directors, delegation of functions etc)", states the draft.

The draft presents two examples of resolved conflict of interests. "The Bank of Russia has already called off regulators from Sberbank Advisory Board. The Bank of Russia has planned an exit from Sberbank. If necessary, the Bank of Russia is ready to replace other Advisory Board members with independent directors".

Today, six CB representatives are members of Sberbank Advisory Board: Chairman Sergey Ignatiev, two First Deputies Alexey Ulyukaev and Georgy Luntovsky, Deputy Chairman Sergey Shvetsov, Joint Economic Department Director Nadezhda Ivanova and Chief Auditor Valery Tkachenko.

Also, states the document, if other financial market participants regulation and oversight falls within the purview of CB officials who act as Moscow Exchange MICEX-RTS Directors, “their resignation from the Board may become necessary”. Today, Shvetsov and Ivanova are two CB reps on the Moscow Exchange Board of Directors.

The Central Bank also offers continued support for the FFMS policy of SRO development. "Further SRO development will be based on existing practice and best international SRO practice in the relevant markets. The Bank of Russia will provide the required level of transparency in regulation and oversight development", says the document.

There is more upside than potential risk to the incorporation of FFMS, says the CB. This scenario, according to the Bank of Russia, allows quicker legislation development for the International Financial Center (MIFC); solves the regulatory arbitration issue and mitigates shadow banking risks; creates effective consolidated financial market oversight; identifies and mitigates system risks by using more detailed info on financial companies’ performance; provides better macroprudential oversight, and finally, minimizes state expenditure by eliminating double management functions.

CB oversight culture is far more developed than in FFMS and the average competence level is higher, according to the Bank of Russia. CB employees are not state officials and thus the CB is a more lucrative job opportunity for qualified experts, notes the draft. The investment community trusts the CB and this applies to the regulated entities by extension, which is important for MIFC, says the document.

Deputy Chairman of the Central Bank Sergey Shvetsov commented the Bank of Russia scenario at the Open Government session on Tuesday, saying that regulatory functions consolidation is a global trend. “We should have one regulator”, said Shvetsov.

He sais that in the post-2008 crisis and stock market crash reality the need for a consolidated regulator has become apparent.

"The passive regulator we have had for 20 years has inhibited the development of the Russian financial market’s business paradigm. We can’t possibly carry on the same way we did before. We can not afford slow reforms, including regulatory", said Shvetsov.

At the same time, the CB rep considers creating the megaregulator by boosting FFMS unfeasible.

"The FFMS boost does not give us the megaregulator, it only leads to a possible lack of funds, leaving us in the same old situation, despite our best intentions. The point is, the Central Bank has a big budget which gives us room for maneuver within the year, reallocating funds to hit the problem spots, should they come out. I don’t think FFMS can afford this, since they are funded out of the state budget", commented Shvetsov.

He sees the best scenario in merging FFMS with the CB. Shevtsov admits that this change carries risks for the Central Bank itself. If the FFMS merger fails, the CB will lose points for trust, the key indicator in the transition to inflation targeting.

Continuity in FFMS service will be provided by gradual merger with the CB, says Shvetsov. He noted that during phase one the CB will create an interim entity to "completely back up the FFMS structure", and all FFMS employees will eventually be transferred to the CB. Then, during six months, the CB will set up a permanent entity which will not take on all the FFMS employees. The new unified regulator will have the following structure: "One legal department, one inspection, one office management, one accounting department, with an additional fifth CB division to the current four to handle regulation and oversight, remote oversight for market competitors". Shevtsov said that non-competitors including the Central Depositary and the Stock Exchange will be taken care of by the monetary division.

According to the CB megaregulator scenario, the Ministry of Finance retains its legislative functions, noted the Bank of Russia Deputy Chairman.

Financial markets megaregulator, Project Group №1