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Moscow IFC: Central Depositary in Place, Now Megaregulator?

07.11.2012 19:02 / Finam.ru

The concept of unified financial markets regulation and oversight is nothing new. Attempts to create a so-called megaregulator in Russia were made in 1999 and 2006, the latter resulting in a draft bill by the State Duma Committee, its introduction postponed indefinitely. This year the initiative has been given another chance among much controversy.

The megaregulator is central to the Russian financial market development and international financial center creation, says Sergey Arseniev, Managing Director at Goldman Sachs. The key risk is, in his opinion, establishing a new bureaucracy, which could lead to loss of dialogue between the market and the regulator. Today, three possible megaregulator scenarios are considered, each with its pros and cons. One is by boosting the human resources and financial capacity of FFMS. The other two are Central Bank-based: the megaregulator is part of the Bank of Russia and FFMS becomes an affiliated agency. The 6 November Open Government session opened a debate on all the scenarios. Central Bank Deputy Chairman Sergey Shvetsov says the latter version is a legal nightmare and a corporate management problem, yet the Bank of Russia hopes to resolve the issue.

The government needs reform in either version, and does not want the process to lose speed. "We can not afford slow reform, including regulatory. The IFC plan has been postponed twice in the past two years. The Central Depositary Act was passed a year ago, and the CD became a reality only yesterday ", said Shvetsov. On November 6, Central Depositary status was granted to National Settlement Depositary. First Deputy Prime Minister Igor Shuvalov says it is quite possible to have the reform carried out within two years. With a little extra time, all things will be in place by 1 January 2016. Shuvalov thinks that the debate must be over with in three months maximum, otherwise it will become pointless, he says.

FFMS sees a CB-affiliated agency as the best scenario. Risks, according to FFMS, include the vast quality gap in functions currently performed by the FFMS and the Central Bank, in part – market manipulation and insider information monitoring. Head of FFMS Dmitry Pankin also mentions the sheer volume of FFMS oversight that could lead to a prolonged collapse of the entire process and instigate red tape, if handed over to the CB. Both the CB and FFMS call for a gradual merger of FFMS with the CB if this scenario is chosen. They also emphasize the need for thorough legislative reform that must become the basis for deeper integration with the CB.

Chairman of the Board at the National Association of Stock Market Participants Alexey Timofeev says the FFMS-based regulator scenario is the easiest, a way to avoid reform-related shock. This will also allow to retain the existing potential and experience. A CB-based regulator carries the risk of insufficient attention to new financial market segments other than banking, or even to the CB stifling these segments. There are also reputational risks, including the risk of cancelling the MIFC project. "The CB as a regulator is common in small and unambitious markets", says Timofeev. A CB-affiliated agency is a compromise, agrees NAUFOR CEO. In this case, FFMS experience will not be lost, however, this reform is the most complicated and incurs maximum shock. Strong CB influence may retain risks that arise from maximum CB authority, including possible cancellation of the MIFC project. Earlier, NAUFOR stated that the Russian financial market should have ‘twin peaks’ regulation, with two closely interacting regulators. This was the subject of a letter sent by NAUFOR to First Deputy Prime Minister Igor Shuvalov and Presidential Aide Elvira Nabiullina.

While some experts were primarily interested in the shape of the megaregulator, others had doubts as for the overall feasibility of ‘this mess’. One of them is MDM Bank CEO Oleg Vyugin. He drew the session’s attention to a conflict of interests arising from the unification of the CB and FFMS. One of his arguments : "The Central Bank is a market participant, so assuming there is some insider trading on the CB’s behalf, who will take care of it?" Another example by Vyugin: "The Central Bank trades on the exchange, and on the other hand, it regulates the exchange, so what will be the CB Chairman’s decision in case of conflict?". Sergey Aleksashenko, Director of Macroeconomic Studies at the Higher School of Economics Development Institute, supports Vyugin and proposes to leave the decision until later, following some serious debate. "I have no idea what they are getting at", he said.

The debate has only just begun, and by 24 November the Open Government is due to analyze all scenarios and draft a report to the Prime Minister. Both authorities about to be reformed agree that the CB must be the cornerstone of the megaregulator. This is likely to happen, but the exact shape of the new regulator remains unclear.

Elena Aleshina

Financial markets megaregulatorProject Group №1Elvira NabiullinaDmitry PankinIgor ShuvalovSergei ShvetsovAlexey TimofeevOleg Vyugin