settlement for the most liquid stocks, the introduction of central security depository and central clearing counterparty, new exchange technology and co-location facilities, and a more robust market data offering.
Russia is embarking on one of the most ambitious overhauls of its capital markets system. There are three broad categories of changes: legislative, operational and technical. In each of these three categories there are a multitude of changes taking place including the liberalization of the pension system, lowering capital gains taxes for foreign investors, the migration to T+3
There are skeptics. There will be challenges. If one of the key goals to these reforms is to bring the liquidity in Russian DRs back home, one of the hurdles is changing the mindset and workflow of foreign investors. That will not be easy and will take time. First, the buy side is notorious for being slow to change. Even if all of the above changes are implemented, US and European managers are comfortable trading DRs on the London Stock Exchange. Even among the institutional investors who want to hold local Russian shares, trading through their existing brokerage arrangements. A level playing field is not enough to initiate a change in workflow, there has to be a compelling reason to switch.
Russia is well positioned within the global context, with the wind at the back of the emerging capital markets. Many emerging countries have shifted their regulatory frameworks and tax laws to encourage foreign investment and stimulate the development of their capital markets. Brazil and Russia have been upgrading their market structures and infrastructure to attract systematic and high frequency trading groups. In contrast, regulators in developed markets are pushing for financial transaction taxes and targeted policies intended to curb high frequency trading activity. Emerging markets are being opened just as developed markets are squeezed with regulation.
As the Russian equity capital markets reforms move from concept to implementation, the effectiveness of the changes will be dictated by nuanced rulemaking, fee structures and vested interests. Ultimately the Russian market will be judged on the efficiencies it delivers to market participants. TABB Group believes that the operational and technical changes are likely to occur and will have long-lasting impacts on market participants. It is harder to have full confidence in issues surrounding capital gains tax, corporate governance, and investor protection.
This isn’t specific to Russia. This has been played out in the United States and Europe for years on the equities side of the business. The US swaps market is experiencing many of the same issues that Russia will face when it begins to implement CSD, CCP, T+3 and more. It is the birth pains of a new market.
The TABB Group Vision Note Russia 3.0: Liquidity Perestroika? examines the large scale reforms being proposed for Russian equity capital markets and the long-term impact these reforms could have on how foreign investors decided to access Russian equities. The report also takes a look at how these changes will impact the mechanics of how foreign investors access Russia and what that means for local brokers and registrars.