This follows from Finance Minister Anton Siluanov`s letter addressed to Head of FFMS Dmitry Pankin, Minister for Economic Development Andrey Belousov, Bank of Russia Chairman Sergey Ignatiev and Head of MIFC Taskforce Alexander Voloshin on 20 September. The letter contains remarks on the megaregulator from Minfin, Central Bank and FFMS.

"The Russian Ministry of Finance, in accordance with minutes of 28 August 2012 meeting with First Deputy Prime Minister Shuvalov on financial markets regulation and oversight, hereby presents a draft government report to the President of Russia, including expert opinions by FFMS (D.Pankin) and Bank of Russia (A.Ulyukaev), and requests approval within 24 hours", reads the letter signed by Siluanov.

DRAFT GOVERNMENT REPORT

The draft report states that the 2008-2009 crisis exposed serious shortcomings in global financial markets regulation and oversight. As a result, financial regulation was radically reformed. The key aim of these reforms in the USA, the European Union and other countries was improved system risks control in the financial market, regulation and oversight for new products and services, prevention, quick reaction and resolution of crisis situations.

The document notes that in 2011 Russia "implemented phase one of financial market regulation and oversight reform". Phase one of the reform refers to the distribution of functions between Minfin and FFMS, reallocating the Federal Insurance Supervision Service to FFMS and leaving the legislative powers to Minfin. Ministry and financial market sources called this a de facto loss in the power struggle for Minfin at the time: the ministry hoped to grab all of FFMS functions, effectively shutting down the service.

The draft report states that while financial companies are consolidating, FFMS and Central Bank oversight and regulation is "fragmented" and "fails to present the complete picture of the financial market and an accurate assessment of its system risks".

"Therefore, financial market regulation and oversight reform in Russia must continue. We propose delegating the FFMS legislative, financial market regulation and oversight powers to the Bank of Russia", reads the draft.

FFMS officials will be transferred and reappointed at the Central Bank. FFMS property will be transferred to the Central Bank and the federal service will be liquidated.

"We consider it important that all necessary administrative procedures be finalized by 2013, lead to no loss of human resources at FFMS, and allow expedited use of Central Bank resources to augment the technical base for the performance of the new functions, without negative effect to the current financial markets regulation".

The draft report proposes to have the presidential decree ready and passed to the Duma by 1 January 2013, with draft federal law on FFMS legislative powers delegation to the Central Bank (minus the right to introduce draft federal laws and regualtions to the government) passed to the Duma by 1 March 2013.

BACKED BY CB AND FFMS

FFMS letter, signed by Pankin says that in order to be effective, the supervisor should have the necessary technical means, qualifiled personnel and a wide network.

"It is to this end, and in view of financial limitations, maximum headcount, and federal executive authorities infrastructure that we suggest considering the transfer to the Bank of Russia of legislative functions, as well as control and oversight over financial market participants, shareholders and issuers", states the FFMS letter.

According to Pankin, the best scenario is transforming the FFMS into a separate division within the Central Bank, managed by First Deputy Chairman of the Bank of Russia.

This model would provide integration of management and IT of FFMS with respective Central Bank technology. Otherwise, says Pankin, quality of financial market regulation and oversight could be affected for at least a year since the start of reorganization.

He thinks further integration of CB and FFMS functions should be performed within three new Bank of Russia divisions: monetary policy, the national payment system and banking and financial market regulation and oversight.

The Central Bank letter signed by First Deputy Chairman Alexey Ulyukaev also supports the transfer of FFMS functions to the Bank of Russia.

The letter states that in order to avoid conflict of interest caused by CB acting as a financial market participant, functions such as insider information and/or market manipulation control, financial services customer protection, financial awareness, qualified investor identification and minority shareholder rights protection should be handled by a separate agency.

Ulyukaev proposes to transfer the remaining FFMS functions to the new CB division.

Project Group №1, Dmitry Pankin, Igor Shuvalov, Alexander Voloshin