Licensed securities market participants have drafted a new Brokerage Securities Trading regulations. The document is posted on the National Securities Market Participants Association (NAUFOR) website.

Today margin loans are regulated by Federal Financial Market Service (FFMS) rules, with 1+1 leverage for mass clients, and 1+3 for professional clients.

Existing FFMS norms cover stock exchange Т+0 trades only. Moscow Exchange MICEX-RTS plans to introduce T+2 in March, cancelling Т+0 mid-Summer, which will effectively deregulate stock exchange trading.

"The draft rule approach is more up to date. It allows more flexibility and gives more leeway to companies in risk assessment", NAUFOR Chairman of the Board Alexey Timofeev told Interfax.

"We expect FFMS to pass this rule no later than Spring, and market participants will be given a time-out for compliance until Autumn", he said.

Timofeev said that depending on the new rule’s enforcement deadline, a regulatory gap of several months could occur. “This is acceptable, in our opinion”, he stated.

Maksim Poznyak, IT Deputy General Director at Otkrytie Brokerage, said that the new regulation of unsecured trades could lead to increased client leverage. "For instance, liquid top-tier company shares, could have 1+7 leverage, second-tier – 1+3, less liquid – 1+1", he thinks.

DISCOUNTED ASSETS

According to Poznyak, margin calculation today involves only two categories of instruments and cash: accepted and not accepted as collateral. "The sole criteria is organized market liquidity, despite the fact that exchange volumes are not key quality indicators of collateral for bonds, especially if compared to ordinary share volumes", he said.

The draft rule limits leverage according to more flexibly calculated quality of collateral (with shares differentiated by liquidity, and sovereign/non-sovereign bonds listed separately).

RTS Vice President Andrey Salashenko told Interfax that bonds will play a more prominent role in collateral, since the issuer’s rating will become key. Furthermore, he said, foreign securities are given a special mention in the document.

The rule does not cover foreign currency. "Currency discounts are up to the brokers, and naturally there will be no Rouble discounts", said Salashenko.

Contrary to the current rules, leverage will be based on client portfolio instrument discounts. Discounts will be set by the clearing house, while the broker will only be allowed to raise the discount.

Thus the draft authors intend to make discount calculation more flexible, partly due to the clearing house changing instrument discounts in real time, according to the financial market situation.

OTC

The draft proposes to extend unsecured trade regulation to both exchange and OTC trades.

"Trying to outlaw unsecured OTC trades is pointless, as if they carried infinite market risk. Assigning them zero market risk also makes no sense. Therefore, we need to account for all trade risks – both exchange and OTC", says Poznyak.

According to Salashenko, the document also provides a possibility of forced closing of OTC positions, at a minimum price equal to the stock exchange price of the instrument – the actual price can not fall below the exchange price 15 minutes prior to the OTC trade.

THIRD CLIENT TYPE

The draft rule introduces a third client type (with a special risk level) in addition to the existing two (‘mass clients’ with standard risk and ‘professional’ with high risk).

Upon client request, a broker can list the client under ‘category three’ in any of the following events:

- a legal entity with minimum account balance equivalent to RUB 3bn;

- a legal entity in the same category as the broker;

- a legal entity with minimum account balance of RUB 500mn and compliant with any of the following: a licensed participant, a fund of fund manager; a non-resident market participant, fund or fund manager licensed in accordance with the law of the country of incorporation, or acting in the capacity of a foreign central bank.

According to Poznyak, the third client type is introduced to protect brokers servicing high net worth and/or institutional investors and to improve business climate. Brokers will set risk management terms for these clients independently and without limitations.

"Unlike all others, third category clients get individual treatment, perform non-standard operations on non-standard terms as opposed to mass clients, or handle very huge sums, or are brokers/asset managers themselves, acting on behalf of their clients and on their clients’ terms", said Poznyak.

Also, if a broker places a securities issue for a client, he can assign the client to category three with no client request required, for the duration of the contract term.

A broker is under obligation to keep registrars of client types two and three.

FORCED POSITION CLOSING

The new rule introduces time frames for forced position closing in the event of collateral declining below minimum level. Today, there are no legally stipulated time frames for this situation.

According to the document, if collateral declines below minimum level, the broker must close the client’s long position by the end of the main trading session, in the course of which he became aware or should have become aware of the situation.

If a broker becomes aware or should have become aware of declining collateral in the course of an extra trading session or later than 3 hours prior to the end of the main trading session, he must close the client’s long positions by the end of the next main trading session.

Closing client long positions is performed in accordance with procedures stipulated in the brokerage service agreement.

According to the new rule, a broker opening long positions on client expense must declare risks, use IT means to ensure the increase of collateral, and appoint a supervisor to control risks.

Project Group №1, Alexey Timofeev