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Central Bank’s First Deputy Chairman Reviews Financial Market Reform

16.12.2014 18:33 / MIFC

Central Bank’s First Deputy Chairman Sergey Shvetsov spoke at a MIFC Taskforce Financial Market Reform briefing on 16 December. The event was attended by megaregulator officials, financial market participants and leading business media.

The rough draft of Bank of Russia’s Financial Market Regulation Policy Guidelines aka ‘233 Steps’ was put together at the 17 October 2013 Strategic Session and later fine-tuned with financial market participants.

In his opening speech, the Bank of Russia’s First Deputy Chairman commented on the market situation and the Bank of Russia anti-crisis measures. He pointed out that many licensed participants are in distress due to market turmoil, and «in the nearest future, the situation will be about as bad as the darkest hour of the 2008 crisis».

On a lighter note, Sergey Shvetsov added: «I think the many previous crisis experiences that Russia’s young financial system has endured since 1991 will help us make the right decisions, persevere and continue business in all financial markets once everything has gone back to normal, I hope we can pull through all together».

From KPIs to Financial Market Development Policy

Many of the 233 steps that the Bank of Russia set as KPIs, following consultations with the market in December 2013, have already been accomplished, said Sergey Shvetsov. He proposed that MIFC Taskforce monitor the results and identify the need to take extra action.

Addressing market participants, CB First Deputy stressed: «Many of these projects were collaborations with you. Given that we have laid down the framework, I think we will bounce back and continue to reform the financial market and improve its transparence at the same steady rate next year».

The Bank of Russia is drafting a three-year strategic plan, the Financial Market Development Policy, that will, according to Sergey Shvetsov, «provide assurance to financial market participants by showing them the regulator’s plans for the next three years».

Sergey Shvetsov said he is happy with the state of partnerships between the Bank of Russia and the State Duma, the Government and the President’s Executive Office in the interests of financial market development, remarking that more focus is needed on predictability and speed of change: «The process of building the statutory and regulatory base has begun to run like clockwork, and there is potential for many processes to be expedited. The question is whether the market is ready. This is the key issue, and we have heard market participants complain at conferences that we are moving too fast, that roadmaps do not reflect accurate deadlines on what we do, therefore the market has no time to catch up with the 233 Steps reforms. I hope we can amend this by offering higher quality of disclosure — not every detail, but timeframes for entire project portfolios. We will do this to minimize the impact on the industry, especially since we realize how hard the situation is — and we share part of the blame».

New Accounting Rules: Transition

The Bank of Russia plans a transition to new accounting rules for financial market participants in three streams, said Sergey Shvetsov.

Stream One is insurance companies and non-state pension funds. Implementation of new accounting rules in these sectors will be test-launched in 2016 and will become mandatory in 2017.

«New reporting will be submitted for the first time in end-April. Delays and low quality will not be punished in 2016. New accounting rules become mandatory and the sole source of accounting information in 2017», said Sergey Shvetsov. He underscored the commitment of the Bank of Russia to making the new reporting the only one, thus eliminating the need to submit RAS and IFRS reporting separately: «We must make sure that the end result excludes double reporting».

Stream Two is licensed stock market participants — test-launch in 2017 and mandatory reporting in 2018.

Stream Three — test-launch in 2018 and mandatory reporting in 2019 — is for microfinance. Sergey Shvetsov also noted that this group is likely to include small brokerages that do not accept client risks, provide investment advising services only and act as proto-investment advisors.

Sergey Shvetsov stated that the Bank of Russia is in close liaison with vendors in this project and the transition to new accounting rules will be made as comfortable as possible for market participants: «I hope that the accountants training programme, software development and transition to the new chart of accounts will cause minimal expense for the industry».

Financial Market Digitalization

The Bank of Russia’s First Deputy Chairman said financial market digitalization is a crucial initiative, fully supported by the market participants and the Government alike. Forming an ex-territorial financial market will cut operational costs and boost competition, Sergey Shvetsov said.

Malpractice and Cybercrime

Sergey Shvetsov said that a breakthrough in cybercrime investigation is long overdue, since absence of progress in this regard carries substantial risks. Sergey Shvetsov particularly stressed the importance of smart risk-oriented oversight, allowing to ‘free the entire industry from the burden of anti-money laundering procedures’.

Mr Shvetsov denied rumours of companies recently cut off from FOREX trading: «We actually suspended several companies from stock market trading to combat misinformation pertaining to the settlement of certain futures contracts. This practice was employed for the first time, and in my opinion, if it effectively makes brokers collaborate with us, we will resort to it less. Our main point is making licensed participants collaborate with the regulator. If they are ready to do so, we see no need to suspend companies from trading».

Cost-Cutting in the Financial Market

The Bank of Russia’s outlook for the near future is marked by a drop in investment activity from both foreign and domestic investors, accompanied by growing competition.

«We think that the market will be more competitive, it will become harder to gain, therefore cost-cutting will be key. Outsourcing is just the thing for the industry to cut costs. We will push for maximum opportunities in our regulations and laws for companies to shift part of their expenses to service providers», Sergey Shvetsov said.

The briefing concluded with First Deputy Chairman of the Central Bank commenting on issues of extreme concern to financial market participants.

Ease the Oversight Burden

The Bank of Russia’s working group on bank reporting reform actively pursues its effort to digitalize bank reporting, stated Sergey Shvetsov. The set-up of a similar working group is planned for non-banks.

«Regular reporting has definitely not become more complicated. As for paperwork on occasional requests, please bear in mind that we have started a lot of investigations. We have come across makeup depositaries, vanishing brokers, we have started anti-insider trading work, and the snowballing reports effect has to do with the fact that nobody has ever dealt with these problems», Shvetsov explained. «As soon as we have launched XBRL reporting, which would make the procedure mostly automatic, requests will take minimum processing time from the licensed participant, this will be done by a link between the regulator and the database».

The Bank of Russia’s Regulatory Impact Assessment

«We get feedback on all regulations that are posted on our website, and our expert councils, due to reach full capacity next year, discuss this feedback at expert. The process is organized in a way that absolutely welcomes market participation in legislative work».

Self-regulating Organizations Bill

The Bank of Russia plans to forego the concept of SRO-based conduct oversight, if the bill fails to become Act this year. «We have lost over a year in waiting for this Act, we cannot leave the consumers without service standards forever. The trust of a financial service customer is based on service standards. Without that trust, the financial market is reduced to marginal importance», said Shvetsov.

The Bank of Russia fully supports the Financial Market SRO Act, however, the uncertainty with its adoption has called for the development of business conduct oversight standards in close cooperation with associations and market participants.

Pension System Development

The Bank of Russia sees asset management companies and pension funds as ‘intellect hubs’, generating long-term money for the economy, something that the banking system is incapable of. «I am certain that with the help of market participants we can find the right solutions, the right development pace for risk-oriented asset management practices», said Sergey Shvetsov. «We plan to invite World Bank experts on pension system development, and hope that we will soon be ready with draft proposals for the Government».

Moreover, accounting rules must match the goals of the pension system. «Today, securities cannot be held until maturity date without daily valuation. This decision was passed at a time when the investment horizon was very narrow. The arrival of a new investment horizon changes things. Now the opportunity to eliminate daily valuation will mean that pension fund investment results are less affected by the volatility of market asset value. Thus the pension fund will be able to prolong investment terms for its portfolio. In the time of financial blockade by major financial centers, pension money is likely to become the rock that we can cling to in the storm to carry on», said Sergey Shvetsov.

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