6 June 2014

Reaping the benefits of market reform in the Russian financial market

Welcoming over 220 delegates to what has now become a yearly SWIFT Business Forum appointment in Moscow, Matthieu de Heering, Head of Russia, CIS and Mongolia ran through the agenda for the day, part of which was dedicated to the ROSSWIFT (Russian national SWIFT member and user group) AGM, and gave an overview of the growth of the Russian market on SWIFT, both in terms of users and traffic volumes.

"We have seen phenomenal growth of Russian traffic on SWIFT," he said and drawing a comparison between total traffic volume growth on SWIFT and Russian traffic growth on SWIFT since January 2004, he went on to show how, whilst the overall traffic growth stands at +142%, which is already impressive, Russian traffic has grown by a staggering +592%. This is also double the growth rate of all BRICS countries put together, which stands at +276% over the same period from January 2004 to January 2014. Another clear area of growth is that of Russian corporates on SWIT, using FileAct for their ISO20022 messages, following CGI's approval of the Russian Corporates Market Practice Group (CMPG) work in 2013.

In addition to the traffic growth, said de Heering, we have seen a number of other highlights on the business front since the Russian SWIFT community last came together at the 2013 Business Forum. Our services business in the region has grown and there have been a number of large scale consultancy engagements involving such things as SWIFT infrastructure health checks, architecture reviews, integration and standards consulting. Furthermore, he reported, a localised component can now be included in our Premium Support Services, and uptake of new products in the region has also accelerated. A significant amount of work has taken place in the last year with the Russian SWIFT users & shareholders, led by the SWIFT-ROSSWIFT task force, within which cooperation had led to some real progress being made already, and a joint, approved plan drawn up for the next round of deliverables.

A market in constant evolution

The first panel discussion of the day focused on recent developments in the Russian Financial market. To discuss the topic were Andrey Emelin, President, National Financial Markets Council, Goran Förs, Board Member, SWIFT and head of custody SEB, Alexey Maslov, SWIFT Russian User Group Chairperson and deputy head of JCB in Russia and Ilka Salonen, CEO, Uralsib Bank, who moderated the discussion. The panellists discussed the will that exists in Russia to create a fair, reasonable and competitive local system for domestic transactions, an initiative that SWIFT would surely be involved in given its core competencies, said Emelin.  Giving views "from the outside, in" Fors stated that there is still a huge amount of interest in the Nordics to invest in Russia and that the role of his bank is to offer large corporates in the Nordic region a banking relationship into the Russian market. "The market is far more open that it was," he stated, before going on to say that there are nonetheless still some improvements to be made, in particular in the area of processing timing.

It is not just about regulation but good regulation, and dialogue is a key way to achieve that.

— Göran Fors, SWIFT Board Member

Moving on to topic of the "imminent inclusion" of the Rouble in CLS, asked by Salonen what his views were, Fors responded that the Swedish Krona has been a CLS currency since 2003 and that if the Swedish experience is anything to go by, being a part of CLS gives acknowledgement and trust, not only for the currency, but also for the country. "The CLS system today is most important to our large corporate customers," he went on to say, explaining that corporates want both their bank and the currency in general to be on the system.  The next topic addressed by the panellists was that of the Bank of Russia's new role as mega-regulator. Maslov commented that discussions do arise from time to time on whether central banks are getting too much authority, but that in his view, what has been done in Russia, with the increased regulatory role of the central bank is good, and was necessary.

The panellists agreed that whilst having the right competence level within the regulator can be a challenge, a good regulator, that works with the banks and encourages collaboration and cooperation, is always beneficial for both sides. Emelin added that in his view, as competencies within the mega-regulator expand, the rate of regulation is likely to go down. "A uniform approach is what is needed," he said, "and a joint effort. It is not just about regulation but good regulation, and dialogue is a key way to achieve that." Fors stated that compliance, and KYC in particular, has become far more complicated and the complexity is now huge. Knowing all of one's banking relationships and who is behind those keeps the compliance departments in banks up at night and the levels of complexity are likely to increase rather than the opposite. As a result of this, any tool that can help is welcome, he stated, and SWIFT's KYC registry product is a great development.

To wrap up the discussion, the panellists were asked how they see the future. All were optimistic, with Fors expecting the cooperation to continue, hoping that Russia will remain an interesting market to invest in and that the exchange and capital markets will continue to grow and stabilise. "There are aspects of the legal structure that could still be improved," he offered, "but it's a continuous process and much progress has already been made." Both Maslov and Emelin felt that the Moscow International Financial Centre ambition is still very much alive and well, and that significant steps have been made in that direction. There are good, fundamental reasons to be optimistic, given everything that has been achieved just in the last 12 months, they agreed.

Building a competitive payments market

Having already addressed the topic of the Rouble becoming a CLS currency in the previous panel, the next session, entitled "Towards a Single Rouble Payments Area?" went on to take a broader look at the Russian payments market and the many changes that have been happening there. To do so, de Heering, who moderated the discussion, was joined on stage by Joerg Bongartz, Chairman of the Board, Deutsche Bank Ltd., Russia, Natalia Karachevtseva, Deputy Chairman of the Board, National Payments Council and Roman Prokhorov, Deputy Head of the National Payment Systems department, Central Bank of the Russian Federation. Prokhorov set the scene by outlining the five key areas of work that the Central Bank of Russia is focusing on, emphasising that the top priority is clearly to create a competitive market environment, relying on new technology, to offer equal access to payments services. Karachevtseva explained the role of the National Payments Council, one of the key roles of which, she stated, is to find a constructive approach and compromises to resolve the many conflicts of interest that exist in the market. The objective is to ensure that everyone's voice is heard, and that a model that works for everybody can be agreed on with the regulators, who are actively listening.

Bongaertz came to the table with a wish list, compiled in consultation with his colleagues, asking that the focus of all work done in the payments area is to improve efficiency, reduce cost and balance risks. Amongst the concerns that he expressed was that of the lack of alignment of standards between the Rouble space and the international payments space. Picking up on the point about standards, Prokhorov stated that a separate questionnaire will be issued on the subject of standards and that it is already great news that there is an appetite within the market to adopt international standards.

Touching briefly on the topic of CLS, Prokhorov gave an overview of the work that is currently underway in the final phase before implementation, following which, the project will move on to the testing and trialling phase, involving SWIFT. This, he said, means that those banks that currently only use SWIFT as a back-up communications infrastructure and will be using SWIFT for CLS, will have more work to do than others who already use it as their primary infrastructure.

Asked what advice he could give Russia on ISO 20022 implementation based on the SEPA experience in the Eurozone, Bongaertz stated that the most important lesson learned in all work groups is that dialogue should be started as soon as possible with all end users. Bringing the session to a close, Prokhorov explained that there is every intention to bring the Russian payments system in line with international standards and that there are already plans to set up a team that will work on ISO 20022 implementation in the Russian domestic payments area, in cooperation with ROSSWIFT, the Russian SWIFT Association.

A securities market with the ambition to change

The last panel of the day looked at the Russian securities market, which, like the payments market, is in a state of constant evolution. To discuss the topic were Alexei Fedotov, Director, Head of Securities and Fund Services Russia and CIS, Citi; Miguel Ferreira, Director, Head of Sales and Relationship Management UK, Ireland, Russia, Euroclear Bank; Göran Fors, Board Member, SWIFT; Elena Gusalova, Director, Head of Research and Development, NSD; Svetlana Kamasheva, Director, Head of Product Development, Custody, VTB Bank and Isabelle Olivier, Head of Clearing and Settlement EMEA, SWIFT who moderated the discussion. Gusalova gave an overview of NSD's current activities and latest achievements, highlighting the Double Taxation Treaty (DTT) agreements and the fact that custodians can now act as tax agents.  Picking up on a number of the projects listed by Gusalova, Fedotov commented that the most important thing is that the market and the CSD in particular, consistently implement what it plans to implement. He went on to list a number of things that he said still needed to be "cleaned up". Amongst these he cited capital gains taxes; rouble cash settlement, where he mentioned rouble liquidity is still sitting on a batch system that is very inefficient; the market entrance conditions that are the most difficult known, and must be reformed to make things easier for the investor; KYC requirements and, lastly, T+2 which, he said, needs to become a reality. Ultimately, the goal should be to minimise the costs for investors to enter the market and operate in it, he stated.

Other BRICS countries have not gone at the same pace as Russia in opening up to international investment and should look at Russia as an example.

— Miguel Ferreira, Euroclear

Taking over from Fedotov, Ferreira praised Russia for having achieved so much in recent years. He said that there is a lot to be proud of and commented that other BRICS countries have not gone at the same pace as Russia in opening up to international investment and should look at Russia as an example . Fors echoed Ferreira's statements, saying that changes in Russia have followed a clear way forward, building and consolidating the market infrastructure and now having a true CSD. He did say however, that some of the delivery versus payment (DVP) processes in Roubles still need attention to eliminate counterparty risk. Kamasheva added that what is in the interest of foreign investors, namely greater efficiency at lower cost, also works for domestic investors and that many good things have been done to move things in this direction, including the use of SWIFT messages for corporate actions.

Corporate actions was the next topic up for discussion, kicked off once again by Gusalova who explained that NSD is working with the community on a corporate actions framework and information centre as well as regulation to build the legal environment for corporate actions going forward. She also assured everyone that NSD is working very closely with the regulator on the implications that all of these reforms have and that there is a close dialogue between the CSD, the custodians and the regulator. The hope is that some of the results of all this work will be seen before the end of the year. Ferreira stated that corporate action changes are critical for custodians and that having a full range of corporate actions and the ability to exercise rights will make the equity market far more attractive to foreign investors. Fors supported Ferreira's view, explaining that corporate actions is where the risk is, where the main challenges are and hence where the focus needs to be going forward. "The next thing is to get issuers to actually use the market practice and what is on offer," he said. Closing the question on corporate actions, Kamasheva stated that the introduction of the cascade approach and the replacement of paper corporate actions documents with electronic documents and ISO 20022 messages is extremely important.

Closing the discussion on a very positive note, Olivier reiterated Ferreira's comment that the Russian securities market has made tremendous progress, has a lot to be proud of and is looked at by other BRICS markets as an example.

Bringing it all together

Summing up the day, Christian Kothe, Head of Central and Eastern Europe, SWIFT, commented on how much progress has been made in all areas of the Russian financial market in just a year. Reflecting on the first two panels of the day, he said that the first panel highlighted how much easier it is to do business in Russia now than it was five years ago and that cooperation will further drive harmonisation on a global level. The second panel showed how much progress has already been made in the payments market and which changes are still needed to get Russia where it wants to go. The Rouble becoming a CLS currency will be a major step and beyond that, there is clear recognition of the need for tighter integration of the domestic infrastructure and standards with international ones. Closing the forum, he reiterated SWIFT's commitment to the Russian market and thanked the delegates for their participation.

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