The political will behind the proposed merger of Russian exchanges RTS and MICEX should mean the deal results in improved access for the international investor to Moscow, and accelerated development of capital market infrastructure.
That is the opinion of market participants, who have welcomed the deal between the two venues, noting that they are more complimentary than competitive. The merger, announced 2 February, will see MICEX buy its smaller rival in a mostly paper deal. As part of the deal, the Russian Central Bank will sell its stake in MICEX.
“RTS was not originally established to be a major competitor to MICEX, so the two have developed less business overlap than many might initially perceive.” said Andy Pryer, director, execution sales at broker ING.
“Putting these two together, you have the best of both worlds, an equities, futures and options market and a very liquid local market that suddenly becomes more attractive for investors and for the listed companies,” added Vladimir Savov, head of research at Russian broker Otkritie. “Plus the exchange is being better capitalised which reduces settlement risk. In addition to one exchange there will be one repository which will also lower transaction costs, so it's hard to find a negative there.”
RTS is primarily an equity derivatives exchange, Pryer noted, with 75% of its equity flow spread over just two stocks, financial services giant Sberbank and oil and gas supplier Gazprom. MICEX, on the other hand, controls the main index for all stocks, with 70% of all executions generated domestically. Retail investors account for more than 50% of that figure.
MICEX currently accounts for 65% of all Russian instruments traded globally with RTS having a 20% market share and Russian depository receipts that are traded internationally making up the remaining 15%.
“To a large extent they are different platforms, executing in different currencies and trading cycles with a different client base,” said Pryer. “The merger should effectively allow MICEX to have the best of both worlds, offering investors, both domestic and international, the opportunity to access all stock and derivatives trading in one trading venue.”
Due to MICEX's T+0 settlement cycle overseas investors find trading a challenge as they are required to have shares or cash ready to post on the venue prior to a deal's completion. The system, which provided much needed security for investors during the Russian financial crisis in the late 1990s, is now widely seen as outmoded, especially in comparison to the RTS standard platform, which operates on T+3 settlement.
“One issue that has historically put off many foreign investors from trading on MICEX is the settlement cycle,” said Savov. “If indeed the strategic goal is to make this market a prominent regional financial hub, then it will have to offer the conditions that are in demand or it will exclude a significant proportion of counterparties. Hopefully when this is done and dusted then instead of T+0 we’ll see a longer settlement period.”
Although the two venues have not appeared overtly competitive in business lines, behind the scenes, having different groups of stakeholders has stifled progress in developing Russia's capital markets infrastructure, observes Phillippe Carré, global head of client connectivity at trading systems supplier SunGard. “There was talk of creating a central securities depository, and everyone believed it was a good idea. But there was the question of which exchange should run it. Five years later nothing has happened because of sniping between MICEX and RTS.”
The merger would make the capital markets framework more impartial by removing the diverging vested interests of the two parties said Carré, which would improve overall market confidence. “That squabbling doesn't go down well with international investors, whose access is already complicated enough with T+0 settlement and a fantastically complex registration system for owning shares,” he says.
Forcing both exchanges to sit down and agree on a merger, with the central bank selling its stake, was a political change of mindset, he notes, but the government is hoping to raise finance through the listing of non-strategic assets it had acquired during the crisis, and that needs an efficient capital market infrastructure to support it. “The government has a US$60 billion dollar IPO programme,” added Carré. “That is not going to happen unless they establish Moscow as a regional player in capital markets.”
“You may safely guess that in Russia, that if nothing has happened for a while around an issue and suddenly it receives new momentum, the government has stepped in or stepped out of the discussion,” said Savov. “The Deutsche Börse and NYSE Euronext merger should speed up things if anything. When we see such huge exchanges merging internationally across domestic borders then clearly economies of scale in this business will become even more important. The Moscow market has much bigger growth potential – and what needs to be done, needs to be done.”