Introduction to Derivatives Market of Moscow Interbank Currency Exchange (MICEX)
2 Introducing the Moscow Interbank Currency Exchange Derivatives Market What is the MICEX Group? «MICEX» stands for Moscow Interbank Currency Exchange, which was established in 1992 as the result of initiatives of the Central Bank of Russia. MICEX is a closed joint-stock company with ownership spread among major Russian commercial banks and the Central Bank of Russia. Since 1992 MICEX has developed into the MICEX Group, its entities carry out the following functions: MICEX also serves as the MICEX Group technical center; MICEX Settlement House carries out the cash settlements for all markets of the MICEX Group; National Depository Center carries out the settlements in securities; National Clearing Center the clearing organization established recently to concentrate the clearing functions for all markets of the MICEX Group; Regional exchanges the MICEX partners operating in the major financial centers of Russia as regional hubs of the MICEX trading system and providing market participants with other services. The MICEX Group mission is to be the core Russian financial marketplace, providing market participants with a full spectrum of trading, clearing and settlement services based on high-end state-of-the-art solutions. 1 To be launched in the near future.
Introducing the Moscow Interbank Currency Exchange Derivatives Market 3 The MICEX Group is the largest Russian exchange. In the 1st quarter of 2006 its market share in the organized cash markets of currencies, government and corporate bonds was equal or close to 100%, for the equities market this figure ran to 85%. The MICEX Stock Exchange at a glance in total 673 securities (stocks, bonds, ETFs) issued by 417 companies are traded on the MICEX SE; the total number of clients is 160 000; the daily transactions number averaged 120 000; Gazprom stocks trading was launched on the MICEX SE in January 2006; this segment market share grew from the first trading day's 10% to 68% in April 2006; the MICEX Index grew by 83% in 2005; by the end of April 2006 it has risen further 44%; the equity market capitalization reached 18.4 trillion rubles (USD 670 billion) in April 2006, amounting to 85% of the GDP. The MICEX liquid spot markets present a firm basis for the derivatives segment. A unique feature of MICEX is the ability to trade underlying assets (currencies, government and corporate securities) alongside with futures and options on these assets. Traders in derivatives, currency, government securities and corporate securities (equity and bonds) markets can access all markets simultaneously using the same telecommunications connection and screen. It is worth noting that the current MICEX trading system handles far more cash and futures trades than any other system currently operating in Russia. According to the Gartner Group, the reliability of the MICEX system is 99.99%. Another advantage of «the one-stop marketplace» is the possibility to transfer funds between various MICEX markets real-time within the same MICEX Settlement House. The Derivatives market current state Trading in futures and options at MICEX was opened in the MICEX Derivatives Market Section on September 12, 1996. After the August 1998 Russian financial crisis the MICEX derivatives market had been suspended for more than 6 years. In 2004 several Russian largest banks (Sberbank, Vneshtorgbank, International Moscow bank, Gazprombank, MDM and others) set up a pool of liquidity providers to resume trading in FX futures at MICEX. Today MICEX is the largest marketplace for FX derivative products in Russia and for USD/RUB futures worldwide. Nowadays three cash-settled FX futures contracts are listed on the MICEX Derivatives Market: USD/RUB, EUR/RUB, EUR/USD futures. In 2005 the trading volume in USD/RUB futures at MICEX reached USD 6.5 billion (6.5 million contracts) or 21% of the overall exchange-traded derivatives trading volume in Russia (in terms of notional value). At the end of 2005 the open interest was up to USD 2 billion. In the 1st quarter of 2006 the MICEX derivatives market shown further growth: the overall trading value totaled USD 5.7 billion. On March, 31, 2006 the record large trading volume was registered at USD 640 million. The euro-based FX futures are not liquid at the moment which is due to the relatively low EUR/RUB trading volume in the MICEX FX and OTC cash markets. The demand for the EUR/RUB futures is expected to grow in the near future, because of the steadily growing volume of the MICEX EUR/RUB cash transactions.
4 Introducing the Moscow Interbank Currency Exchange Derivatives Market Trading statistics 1 1 Based on official data from Internet sites of the exchanges.
Introducing the Moscow Interbank Currency Exchange Derivatives Market 5 FX derivatives only: All derivative instruments: Expected products The precise further development line is rather hard to predict as Russian economy shows intensive dynamics, and MICEX is to keep its eyes open to all the possibilities that the rapidly evolving markets provide. The nearest MICEX Group plans in the derivatives area include the following several projects. Stock indices and single stock derivatives In December 2005 the Federal Financial Market Service (the securities market regulator) granted the MICEX Stock Exchange the license to organize the derivatives trading. The market opening is planned for the 4th quarter of 2006. The preliminary consultations with the market participants highlighted that one of the most potentially liquid instruments is the futures on the MICEX Index, the main MICEX SE stock market indicator and one of the national equity market key indices. The MICEX Index comprises 19 most liquid stocks, including Gazprom. The
6 Introducing the Moscow Interbank Currency Exchange Derivatives Market MICEX SE trading volume for these shares makes up more than 75% of the overall exchange stock trading in Russia. As of May 2006 nine ETFs were based on the MICEX Index, that is 75% of the overall number of the index funds in Russia with total assets rounding RUB 1.7 billion, or 87.7% of overall assets of all the index funds. The opportunities for the single stock futures and options are also closely examined. Interest rate derivatives The MICEX Group plans to launch the following two types of interest rate derivatives: within MICEX in 2006 in cooperation with the National Foreign Exchange Association (NFEA) futures on the short-term interbank deposit interest rates, in particular: on the 3-month MosPrime Rate, calculated by the NFEA, which is used by EBRD for defining coupons of its two first ruble-denominated floaters; on the MosIBOR Overnight rate, calculated also by the NFEA, with the interest rate accumulation during the contract period; within the MICEX SE in 2006 2007 futures on government and/or subfederal (regional) and corporate bonds. Options In 2006 MICEX plans to launch options on USD/RUB futures which already enjoy healthy liquidity. The settlement method will be futures-style (new for the Russian market). Later with introduction of other futures the number of options is expected to grow. The derivatives clearing process Trades on the derivatives market are cleared and settled pursuant to rules and procedures that are unique to this MICEX Division. These procedures reflect general international practices. The MICEX Derivatives Division relies on two tiers of members, clearing and non-clearing («trading»). Only clearing members have access to clearinghouse services. Each trading member must establish a clearing relationship with some clearing member. The clearing system is integrated with the trading system. Clearing is performed in batch processing run immediately after the end of the trading session and the results are made available shortly thereafter. All of the day's trades and all of the open positions are marked to market to the day's settlement price. Why are settlements riskless? Daily and final settlement services are provided by the MICEX Settlement House which conducts similar activities for the other MICEX Divisions, including a real-time electronic account management interface. The MICEX Settlement House with authorized capital amounting to RUB 255 million is the largest nonbanking credit organization (NCO) in Russia. In terms of asset value, funds turnover and number of clients (more than 600 banks and financial companies) the MICEX Settlement House significantly exceeds all other NCOs. All members' deposits are held with the MICEX Settlement House on its account with the Central Bank. Since the MICEX Settlement House as the NCO may not invest MICEX members' funds it guarantees riskless settlements. Financial safeguards The Board of Directors April meeting recommended the shareholders to allocate RUB 500 million within the Reserve Fund of the MICEX Derivatives Market (the recommendation is expected to be adopted by the Shareholders Meeting in May). After the recommendation is implemented the Clearing Fund will be set up, made of the clearing members' contributions. In a clearing member default case the guarantees are used in the following order: 1. Initial margin of the defaulted member. 2. The defaulted member contribution to the Clearing Fund. 3. The MICEX's Reserve Fund and contributions of other clearing members to the Clearing Fund.
Introducing the Moscow Interbank Currency Exchange Derivatives Market 7 In November 2005 MICEX signed the SPAN License Agreement with CME. Currently a project of the SPAN implementation is under way at MICEX. The features of this project design include on-line margining and capital adequacy checks. The MICEX derivatives market access options There are several options to trade MICEX derivative instruments via the remote workstations: the Universal Derivatives Market Workstation, developed and distributed by the MICEX system integrator, CMA Small Systems AB; it is connected to the internal MICEX Trading Network and is used by the clearing and trading members of the MICEX Derivatives Market Section since its foundation in 1996; the most recent and innovative trading terminal the MICEX Trade FO, developed and distributed by MICEX; it is also connected to the internal MICEX Trading Network; typically the new clearing and trading members choose this variant; Internet-based exchange trading terminal the MICEX i-futures Client, developed by MICEX and distributed by the MICEX IT daughter company E-Stock; it is used by some clearing and trading members and also by the members' clients; security of all transactions through the MICEX i- Futures Client is guaranteed by the data encryption electronic signature. All these trading terminals present fully functional trading screens for the MICEX Derivatives Market. Since March 2005 MICEX has been providing the market participants with the possibility to request and get futures quotes from the MICEX market-makers via the Reuters Dealing 3000 terminal with the subsequent real-time trade registration in the MICEX trading system (Forward Switch Micex). How to trade futures and options at MICEX? All the derivative products on MICEX are available for trading exclusively by MICEX Derivatives Division members and their registered clients. The most direct way to gain firsthand access to the Russian markets is to become a member of MICEX. According to current regulation, MICEX membership is restricted to resident entities only, provided all the membership requirements are met. All the membership issues are regulated by the Rules of the MICEX Derivatives Division. To apply for membership in the MICEX Derivatives Division the applicant should complete an application and submit it together with recent financial statements and other papers in accordance to the membership rules for the consideration of the Board of the Derivatives Division. Once approved admission is subject to the final confirmation by the Board of Directors, comprised of the Exchange's major shareholders. The MICEX provides information services to the prospective members. Members' clients A client establishing an account with a MICEX member becomes a «registered» client. That means, that client's trades and positions bear a unique identity number and are automatically segregated from those of the member's. However, all client transactions at the exchange are handled by the member which maintains client's account in the trading system. Any client's claims, then, are on the respective brokerage member. Therefore, it is a sound decision to choose only well established members to handle your business. IT'S TIME TO SERIOUSLY CONSIDER JOINING THE RAPIDLY EVOLVING RUSSIAN MARKET OF LARGE POTENTIAL
MICEX Trade FO new trading terminal of the MICEX Derivatives Market Contacts Mikhail Temnichenko Head of Derivatives Alexander Balabushkin Deputy Head of Derivatives Our address is: Derivatives Division Moscow Interbank Currency Exchange 13, Bolshoy Kislovskiy per. Moscow, 125009, Russia phone ++7-495-705-9610 (12) fax ++7-495-202-7504 e-mail: derivatives@micex.com web-site: www.micex.com May 2006