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Corporate law and governance, financial transaction taxes

Project Group №1

Financial infrastructure and financial market regulation


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FFSM to Exchange Data with Foreign Regulators

25.10.2011 21:21 / Interfax

Federal Financial Markets Service (FFSM) Head Dmitry Pankin spoke to the press Tuesday on the Service 2011-2012 priorities and possible amendments to the agenda due to Government changes.

Alexei Kudrin’s resignation as Minister of Finance and Deputy Prime Minister raised concern among market participants with regard to possible shifts in FFSM role in financial market regulation.

“The issue is the new Government structure and functions of Ministries and Deputy Prime Ministers. This will determine how our Service will interact with the Ministry of Finance and others”, said Pankin, noting that Kudrin was Minister of Finance and Deputy Prime Minister who coordinated the financial policy.

Pankin also said that the distribution of responsibilities between FFSM and the Ministry of Finance is to be “revised in the course of a year, we will see how effective it currently is”.

“There will be new Government in place and we will go back to the issue of responsibilities”, said Pankin.

RUSSIA JOINS IOSCO

At the 10 October session of the Presidential Financial Market Committee the President decreed that certain legal amendments be made to expedite Russia joining the IOSCO memorandum of understanding.

The amendments should bring the federal financial regulator in compliance with the memorandum by 20 November 2011.

“We are very serious about joining IOSCO”, said Pankin.

He says the division lies between the memorandum signatories, countries willing to join and non-IOSCO countries such as Venezuela and North Korea. The candidates are given the year 2012 to join, however regulators have to comply with certain criteria to do so.

“We must finalize the process in 2012 and join the company of the so-called good guys”, Pankin said.

He pointed out that earlier Russia received criticism regarding a lack of insider information law. Today, this law has been passed, however two more issue remain unresolved.

Pankin says that mostly FFSM is criticized for the rights to disclose bank account info, especially for private individuals, and the ability of the Service to pass info disclosed during investigation to foreign regulators.

“Transfer of information is more or less sorted by now. The most complicated issue is amending the law to make the Service receive bank account details”, said Pankin.

To resolve this, FFSM has met Duma deputies a few times already, he says. Deputies fear that FFSM will have a non-restricted right to demand info on any bank accounts, breaching bank secrecy, besides FFSM could turn into “some form of police”.

“I guess there is some logic in this. We are looking for a compromise, wording it in a way that would please the Deputies and the international regulators”, said Pankin. He noted that the service is trying to be specific on when FFSM has the right to request info, besides there is an internal procedure for bank account info requests. “We are considering an option for challenging our requests”, he added.

Pankin says the rights of FFSM to access bank account details “have not met any substantial opposition” from the Central Bank. “Currently the main forum for these debates is the State Duma”, he added.

INSIDER INFO

According to Pankin, FFSM has deliberately postponed the enactment date of the Insider Information laws to 1 January to allow the market participants extra time to prepare. FFSM is now in discussion with participants regarding amendments to the laws.

“On the one hand, the market had time to prepare, on the other hand it would be on overstatement to say that starting from 1 January things will be perfect”, he commented.

Pankin said that the insider information law received minor comments from the market participants. “This is mostly procedural issues, such as where to call, how to report, who to include in the insider list”, he said.

“The participants are more or less ready, and in January we will see how ready”, he said.

CENTRAL DEPOSITARY SEES THE GREEN LIGHT

The Central Depositary Act may be passed by the Duma in the autumn session, and the new structure will be in place since the New Year. The CD has an exclusive right to open nominee registrar accounts for listed shares, and several market participants have voiced their fear of another monopoly.

“The concerns are clear: we endow one structure with a monopoly function, the central depositary will channel all data and monopolize the nominee account opening. These are valid and justified fears, but we have no choice. Other scenarios are the greater evil”, - Pankin said.

He stated that foreign investors see the decentralized system as having more risk and more uncertainty, while the Central Depositary with an exclusive right to open nominee registrar accounts “seems generally more secure, although the monopoly risks are there”.

“Foreign investors’ opinion was the guide for me. There is always the buy and the sell side opinion. I think we should stick with the buy side”, said FFSM Head.

Pankin noted that the CD has serious capital limits – RUB 4bn, besides it can insure its liability.

“We will look into fees control next”, he said.

The CD may lead to less revenue for the registrars. “We thought that simultaneously demanding that the open joint stock companies keep their records at registrars would offer a chance to earn extra cash to sustain the registrars”, he said.

PLANS

Pankin says that this year’s efforts will be focused on passing the CD Act by the Duma, changes to bond holders meetings law, and gaining extra powers to sign the IOSCO memorandum.

He said that the prudential control bill is slated for Duma next spring. “Too many things to clarify there”, he explained.

In the spring session Duma may also have to amend the IPO procedure laws to “harmonize the Russian IPO terms with the foreign”. The increase of commercial bonds placement term to 5-7 years and a set of no-prospect options are also planned.

Pankin said that next year FFSM will focus on disclosure of end beneficiaries by the issuers. “We came to an understanding that if a nominee is among the shareholders, and the beneficiary is not disclosed, the shares cannot vote”, he said.

FFSM Head said that minority shareholders’ rights need clarification. “Some complain that minority shareholders do not have enough rights and these rights are violated. Some complain that a shareholder buys one share and complicates things for the company. There is a problem and we will solve it, but possibly sometime next year”, he said.

FFMS ADVISORS

Dmitry Pankin said at his meeting with the Prime Minister Vladimir Putin in May that he was planning to get feedback from market participants through the FFMS expert advisory board.

According to Dmitry Pankin, by the end of October he will approve the formation of four expert advisory boards.

"Membership is more or less defined. Each board will consist of about 30 industry experts. I think, we will approve it this week", he said.

According to Dmitry Pankin, the boards will cover mutual funds, market infrastructure, insurance companies and corporate governance.

The Head of FSFM added that another, financial literacy board is in discussion.

NATIONAL PENSION FUND LOSSES

The market participants voiced concerns that pension savings may have negative returns following the results of 2011. Previously, this problem was raised in 2008, when most of the non-state pension funds had losses because of the market crash. At that time, the problem led to a collision between FFMS and the Ministry of Finance. The Ministry of Finance allowed funds to reevaluate assets not following the results of 2008, but following the results of a half-year of 2008. FFMS made an order to funds to cover losses from their proprietary funds.

According to Dmitry Pankin, FFMS and the Ministry of Finance consider solving this through regulatory acts. He explained that there is a legislative notion of pension reserve ‘security’. "In regulatory acts we can interpret the term "security", whether it should be daily or for a longer period", he informed.

According to him, if security is set as monthly or yearly, "we will kill long-term investment", as NPFs will invest only in short-term instruments.

"It is logical to make the security period longer than a year, and interpret the term "security" generally in a different way", said Dmitry Pankin, stating that a decision may be arrived at by the end of the year.

INSURERS, GET READY!

According to Dmitry Pankin, currently the number of under-capitalized insurance companies is 380 given the new increased charter capital requirements for insurance companies, which will come into force from the beginning of the next year. Considering that one part of the insurance companies will increase charter capital, another part will give up some of their licenses, more than 100 companies in total will leave the market, the FFMS Head predicts.

He underlined that the companies leaving the market are mainly small players, that is why there is no point in worrying about situation with fraud of insured parties. "We should be afraid of such situations in the compulsory third party car insurance market, but they are not connected to the charter capital amount", said Dmitry Pankin.

According to his estimates, about one third of Russian insurance companies with charter capital deficit is getting ready to enlarge it and fulfill new charter capital requirements for insurance companies.

Dmitry Pankin informed that FFMS is planning to tighten insurance companies asset regulations substantially. "No point in awaiting change at the start of the New year, first we have to solve the increased charter capital issue, but in the future FFMS will pay special attention to financial stability analysis for insurance companies, we will analyze how their assets are secured", he said.

He mentioned that the situation with the insurance companies assets and reserves is similar to the private pension funds system. Therefore the FFMS Head thinks that the approach and the requirements should be unified. However, he says that the regulations should be tightened gradually and during a longer period, in order for the market to be ready for the reforms.

According to Dmitry Pankin, at the moment FFSM is actively in cooperation with the Ministry of Finance, preparing amendments for Rules 100 and 149 which regulate assets and insurance reserves allocation.

FOREX

According to Dmitry Pankin, it is necessary to regulate FOREX companies in Russia. "We definitely need to do it. The market is a serious one, there is big money in it and lot of people trade there", he said, stating that this market should be made more transparent and the amount of fraud should be curbed.

According to him, in order to regulate FOREX in Russia, it is necessary to change legislation at the government level and to decide which authority will regulate this market.

"I would like to do this and propose the amendments. But the government will decide who is in charge of it. In my opinion, this is more of our job", he said.

Project Group №1Dmitry Pankin