Moscow exchange introduces a new type of security

Moscow exchange introduces a new type of security


A new securities clearing will become the certificate of participation that will act as a kind of collateral in the REPO transaction.

ASTRAKHAN, October 13, Vitaly Soldier. Moscow exchange in 2016 will introduce participants to the money market, several new instruments, including new type of security and clearing certificates (KSU), said in an interview with the Deputy Director of REPO market and Deposit-credit operations, the Moscow exchange Sergey Titov.

A classic REPO transaction (the economic meaning of such an operation — lending under the pledge of securities) from a legal point of view means that one party to the transaction sells securities to another, but at the same time enters into agreements with them and buy back after some time, usually at a higher price (the difference between the price of the second and first parts of the REPO is “REPO rate”).

The early repurchase transaction is usually impossible to separate, consequently it is impossible to repay their paper, if no special agreement with the company.

The REPO transaction with the SIC, which the exchange plans to launch in early 2016, is characterized in that a party to the transaction who wants to attract funds, delivers their paper in a special property in a pool of NCC Bank (the Bank “national clearing centre”, performing the functions of Central counterparty on the Moscow exchange’s markets), and in return receives the LCP.

It is this certificate, and not the assets themselves, will act as a kind of collateral in the REPO transaction. Thus, the subject of a REPO transaction are not assets of the participant, and the clearing certificates of participation issued to the participant in return made to the pool assets. Accordingly, the borrower will retain ownership of included in a pool of securities.

“If I want these papers or to sell these assets any corporate action (coupon payment, the payment of dividends cut-off dividends), I would like to be the owner. But until the paper is formally involved in the REPO it belongs not to me but to my counterparty in the transaction,” explains Titov.

“Pool with no such problems: the paper introduced into the pool, remain in my property, and I participate in all required corporate actions to me, as a full owner. And if you need to withdraw the paper, I contribute to that pool any other paper, and the right to withdraw. Thus, decreases the likelihood of acute shortage on the market some securities for REPO transactions. Moreover, such replacement assets in the pool do not affect already concluded REPO transactions with the constitutional court of Ukraine”, — he added.

Accordingly, included in the pool of securities it will be possible not only in case of necessity to sell, but also to obtain income. In the case of shares, the borrower will retain the right to participate in the management of the company.

At the first stage, the SIC can only be made of a REPO transaction with the Central counterparty, however, Titov has not excluded that these certificates will be included in the Lombard list and there will be the possibility of their use in REPO transactions with the Bank of Russia.

According to Titov, the SIC is a high — quality paper. It has actually cleared from market risk because the assets that will flow into the pool, are discounted using the current risk parameters set by the NCC.

“For example, You bring in a pool of assets by 100 million, you will be charged Xu with only 90 million and 10 million is a result of the use of NFP discounts to these assets. This transaction is REPO from the CCU with the Central counterparty is made without the discount. That is, the CCU is not just secured by any asset, it has already discounted assets”, — he stressed.

Extended currency REPO with the Central counterparty

REPO with the Central counterparty performs the function of the NCC Bank, are growing rapidly since launch in early 2013. If last year the average daily turnover was at the level of 100 billion per day in September 2015 — at the level of 343,3 billion rubles, follows from materials of the exchange.

This summer, the Moscow exchange launched the possibility of settlement of transactions in foreign currency (dollars and euros).

“We didn’t plan that it would be such a good growth in this segment. An interesting and unexpected trend. This is due to the fact that the participants, including banks, their currency balances instead of keep on correspondent accounts, pay for REPO with the Central counterparty overnight. Why not? The risk is assumed by the Central counterparty and the interest rate market”, — said Titov.

However, if now the REPO with the Central counterparty to settlements in rubles, you can take up to a week, with settlement in foreign currency — either overnight or two days max.

“Plan before the end of the year to extend the period currency REPO to a week. We receive feedback from participants who say they would like to see this”, — said the representative of the exchange.

The participants of the money market, he said, will be more convenient to enter into REPO transactions for a week than to sign them every day. In addition, the increase in the maximum period of the transaction will reduce certain risks of borrowers.

“When You attract funding under some operation, you need to understand for what period of time You just have money. If this operation overnight, it is unclear whether tomorrow You prolong the counterparty to the transaction or not. If this one-week REPO, if you need to be calm,” said Titov.

Repurchase agreements with floating rates

Moscow exchange plans before the end of 2016 to introduce a floating rate in the stock exchange REPO trading, said Titov.

Rates in these operations will be tied to some indicator, such as MOEXREPO rate, which is calculated daily on the basis of actually concluded deals on the Moscow stock Exchange in the REPO market with the Central counterparty.

“For example, I gave 100 million to someone at an interest rate of 11% on securities “Gazprom”. These are the standard conditions. In this case, the parties may agree that the rate, for example, will not 11%, and MOEXREPO +0,5%. It allows to manage its interest risk under a repurchase transaction,” — said Titov.

Trading system, respectively, will recalculate the interest on the REPO floating rate daily, said the representative of the exchange.

Futures on the indicator MOEXREPO

Moscow exchange plans to develop a line of derivatives, in particular, to start the futures on the indicator MOEXREPO, said Titov

Marketplace since the end of last year started to publish the index MOEXREPO indicator of the monetary market, calculated on the basis of transactions for the instrument REPO with the Central counterparty bonds (OFZ) and for the period of calculation overnight.

“Go REPO trades with the Central counterparty. We calculated weighted average rates for deals — it turns out a certain “average” rate. Today average weighted rate on REPO market, for example, 11%, tomorrow — 12%, day after tomorrow — 10%. On the basis of this indicator it is possible to create futures. This will provide market participants an additional opportunity for management of interest rate risk,” explained Titov.

The launch of futures on the indicator MOEXREPO, according to Titov, will provide participants money market new opportunities to hedge interest rate risk. The new tool is expected to appear on the exchange until the end of 2015.

Index MOEXREPO, according to Titov, “quite objectively shows the dynamics”, but the exchange also plans to expand the base of calculation, include in addition to OFZs and other bonds.