Project Group №1 members

Project group 1. Financial infrastructure and financial market regulation.

‘Financial infrastructure and financial market regulation’ Project Group (PG1) was formed in November 2010. It is chaired by S.A.Vasiliev and P.A.Goncharenko. The main task of this Project Group is to simplify market access for foreign issuers and investors, regulatory unification of different financial market segments, creation of a favorable environment for foreign market players and private individuals, decreasing financial market risks. The Group is engaged in the creation of a modern and reliable financial market infrastructure, providing conditions for development of new financial instruments, decreasing system risks in the financial industry.

The Group drafts financial market regulation for submission to the State Duma, develops regulatory procedures.

On 11 November 2010, at the inaugural meeting of the Project Group 1, the Group was subdivided into six areas:

1) Financial market regulation
2) Financial market infrastructure
3) Securities market players
4) Investors
5) Issuers
6) Securities market instruments

The bulk of the Group efforts was focused on the above issues, with seminars on additional topics (long-term investments, the banking sector and insurance regulation, etc.).

The mandate of Project Group 1 is detailed below. The list was formed by Project Group members and guest experts.

1. Foreign depositaries accepted as legal nominees under Russian law.

   Foreign depositaries should be legally able to open nominee accounts in Russian depositaries on transparent terms. The right to open a foreign nominee account should be stipulated in the Federal Securities Market Act. This can be solved faster by drafting a FCSM Regulation for international (cross-border) account opening.

2. Creating a unified corporate data source.

   To improve corporate disclosure procedures, we suggest creating a unified corporate disclosure source based on data for Russian issuers that are legally subject to mandatory disclosure. Access to the data source for investors should be free of charge. The suggested base for the source is the FCSM disclosure server, equally detached from all licensed market participants. Existing private commercial information centers (agencies) are free to remain in competition, specializing on disclosure of a range of investor-relevant data that surpasses the minimum required by the law. The Russian Disclosure Center should be created with a view to its subsequent integration in an international center of the same type.

3. Creating a unified settlement system.

   Creating a unified settlement system is a vital step towards improving the Russian financial market infrastructure. Currently the suggested route is passing a law to set regulations for settlement completion, registrar operation and proof of title to securities (this procedure should comply with Rule 17-f7 (SEC), mandatory for many foreign investors in the process of risk assessment). This calls for a Centralized Depository with a regulator-approved standard electronic workflow, Straight Through Processing (STP) for nominee accounts, 1-day processing for nominee instructions.

4. Bond holders meeting.

   A law should be passed to regulate dispute settlement between bond holders and the issuers in case of the latter’s failure to perform its obligations, by convening a General Meeting of bond holders and empowering its resolution to be legally binding for all bond holders in the events stated by the law. Bond holders GM decisions are to be legally binding for all bond holders, including those who voted against or abstained from voting.

5. Financial Consultants and ratings in the trust management market.

   This should boost internal stock market investment demand by increasing the number of national retail investors. Investment consultants should be able to service private individuals’ securities transactions at a minimal cost, offer pension fund products and mutual fund shares, acting as agents for third party companies or independently. Financial consultancy should be legally introduced as an institution, with a set of requirements – for instance, with regard to proprietary funds, insurance covering professional liability, qualification standards and prevention against conflict of interest.

6. Institutional developments of private pension funds.

   Current law proclaims the principles of asset protection and private pension funds profitability, but does not provide the means to back up this principle. We propose to get rid of the declarative guarantees of private pension funds asset protection and create a compensation fund for the pension system to guarantee minimum pension for people in the event of private pension fund or employer’s bankruptcy, as well as limit the possibility of funds withdrawal by shareholders.

7. Pricing centers.

   To determine the price of low liquidity goods for the purpose of tax deduction, security valuation, capital adequacy ratio calculation etc, pricing centers are used according to Bank of Russia regulations. We suggest making pricing centers official by accrediting them via FCSM, which will ensure reliability and trustworthiness of pricing center information.

8. Indemnity fund for security market investors.

   This fund will become a key protective measure for non-qualified investors in the securities market. The fund will provide compensation for resident non-qualified investors to indemnify them from brokers’ failure to return funds and securities to clients. Creating this fund is part of the risk-oriented market regulation concept.

9. Financial derivatives.

   We suggest amendments to the Civil Code to offer remedy for trades between foreign banks or licensed foreign security market participant and Russian non-banks or companies that are not licensed security market participants. We also call for statutory acceptance of trans-border electronic trades as written contract and eliminating mandatory CFO signature on financial documents pertaining to securities market transactions. We suggest introducing a statutory procedure for financial derivatives valuation for the purposes of approval of major transactions.

10. Bond listing requirements.

    We suggest easing minimal pre-IPO trade volume requirements for bond issuers, if the issuer’s or underwriter’s shares or bonds have already been listed in the current grade or higher, of the issuer and/or underwriter has been rated on par or one grade below Russia’s sovereign rating by Fitch, Standard&Poor’s, Moody's Investor Service or a duly authorized national rating agency.

11. Metal accounts.

    We suggest amending the Civil Code to recognize Bank Deposit and Metal Account Contracts as a separate Civil Law contract. At the same time it is necessary to clarify the liability amount provisions for banks in the Bank Bankruptcy Law under such contracts, in case of revoked license. It is also necessary to empower the Deposit Insurance Agency to act as competitive manager for banks, licensed by the Central Bank of Russia to deposit precious metals for private individuals.

12. Revenue-yielding bonds.

    We suggest adding revenue-yielding bonds to the list of assets, accepted as reserve provisions and insurers’ proprietary assets, setting tax preferences for income derived from revenue-yielding bonds.

13. Placement and circulation of securities by Russian issuers in the Russian Federation.

    We suggest introducing IFRS disclosure to register Russian security issues, shorter state registration periods for security issues and IPO reports. Requirements to the IPO prospectus and the quarterly report of the issuer should be brought in line with international standards, the procedure of submission of financial reports to the regulator should be simplified.

14. Placement and circulation of securities by Russian issuers outside the Russian Federation.

    Russian law poses a number of restrictions for placement and circulation of Russian securities abroad, including ADRs and GDRs. For instance, quantitative limits have been set on placement of foreign securities in accordance with foreign regulations. These restrictions have resulted in Russian issuers almost completely foregoing the option of placement in Russia and executing IPOs abroad through offshores. We suggest considering the possibility of cancelling unfounded restrictions on placement and circulation of Russian securities outside the Russian Federation.

15. Placement and circulation of securities by foreign issuers in the Russian Federation.

    We suggest defining requirements to foreign issuers or accepting the Russian translation of a foreign IPO prospectus. We also suggest setting a special disclosure procedure for foreign issuers as well as the amount of information to be disclosed, on par with international disclosure standards, and also enable the regulator to define situations that require the Russian version and situations when a link to a webpage with disclosure information in English shall be sufficient.

16. Differentiation of professional stock market participants.

    We suggest introducing differentiating various types of stock market participants by type of operations, size of business and risks. This will lead to an increasing number of new participants, more competition, larger outreach and quality of service.

17. Simplifying procedures for trading in foreign instruments through Russian brokerages.

    We suggest clarifying the definition of ‘qualified investor’.

18. Qualification tests for foreign professionals.

    We suggest offering foreign professionals the opportunity to pass the FCSM qualification test in English.

19. Regulatory coordination for the financial market.

    We suggest a gradual separation of legislative and enforcement functions, eliminating regulatory and supervisory arbitration, introducing supervision over financial groups, creating effective communication between regulators, SROs and market participants.

20. More prominence to SROs.

    We suggest considering mandatory membership in SROs, with a leave option to create an alternative SRO with part of the regulatory functions delegated to the latter.

21. Prudential supervision.

    We suggest steps towards overcoming fragmented supervision, increasing the level of automation, introducing ‘macroeconomic supervision’, allowing effective system risk assessment for the financial system. We need to create a system that would give participants access to refinancing in case of crisis.

Project Group №1 members