Translation. Region: Russian Federation –
Source: Central Bank of Russia –
There should be no tolerance for someone in the market having access to information before others.
The problem of insider trading and manipulation on the Russian market is not only not losing its relevance, but on the contrary, is even getting worse against the backdrop of the players becoming more active and anti-sanction relaxations in terms of information disclosure. Deputy Chairman of the Bank of Russia Filipp Gabunia spoke to Interfax about the steps the regulator has planned to counteract these and other negative practices, as well as proposals to increase the capitalization of the Russian stock market, discussions between the exchange and professional participants, and closing “loopholes” for unfriendly non-residents.
— The Russian stock market has lost a lot in recent years and has changed significantly in general. In these conditions, the task of doubling its capitalization in relation to GDP sounded quite unexpected. Is it already clear what needs to be done in the current reality to solve this problem? Is it really possible in principle?
— The task is certainly very ambitious. If we talk about what needs to be done, then, of course, there is no universal remedy. A set of actions is needed. Some measures have already been implemented, and we are waiting for their effect. For example, this is the reform of the IIS, the launch of a long-term savings program.
Now we are also suggesting that the government consider changing the incentive system for companies that receive state support when implementing various projects. Today, loans as a form of raising funds dominate our economy as a whole. This is the bridge that brings together the lender and the borrower. The state usually directs funds to subsidize interest rates, there are benefits for investment projects, but they are all tied to raising funds in the form of loans.
One measure we have proposed for discussion is subsidized equity financing, i.e. a spread-out payment to companies entering the capital market, as an alternative to subsidies under bank lending programs. In addition, tax incentives, such as income tax breaks for issuers, may also be justified if certain conditions are met.
— Won’t companies find themselves in unequal conditions? If someone’s strategy doesn’t include publicity at all…
— No, this does not mean that all support will be transferred exclusively in the form of equity capital. We expect that companies will have a choice — if a project is eligible for state support, it can be received either through preferential lending or in the form of benefits when entering the stock market. Companies themselves will make decisions based on the specifics of the project’s economy and the cost of various sources of financing. At the same time, it is important that state support is not an incentive for only one form of raising money.
By the way, the use of equity financing will help reduce the debt burden of businesses and will not lead to an additional burden on the budget. There will simply be a redistribution of expenses between forms of support. Here, of course, the position of the government, which, in fact, provides this support, is important.
— What else is on the “doubling agenda”?
— The cornerstone, of course, is trust in the stock market, including the attitude towards minority shareholders. If the interests of investors are trampled, they will not come to the market, no matter what incentives we offer. And here it is important that the interests of minority shareholders are not neglected, but on the contrary, protected. This affects, among other things, issues of maximum possible disclosure of information about issuers in the current conditions, availability of price information, increasing the transparency of dividend policy, the quality of corporate culture and much more.
— This taboo has become less unquestionable in the last couple of years. Some relaxations have already been lifted, but it is hardly possible to say that we have returned to the level that was, say, in 2021. Do you think that all the necessary conditions are now in place to raise the issue of a complete return of all rules, both in terms of disclosure and in terms of corporate governance, to the previous level?
— Currently, companies have reasons to close some information about themselves, taking into account the sanctions risks. But the fact is that many companies use external circumstances to justify their “secrecy”. Our position is that investors need information to make informed decisions. We will need to come up with some more subtle mechanisms for investors to obtain information about companies.
— And what can the expansion of trading hours on the stock market give in terms of doubling capitalization? The return of the morning session, trading on weekends?
— Weekend trading is definitely not the main recipe. But we analyze this topic comprehensively. It sounds convincing and beautiful: if stores work around the clock, why not apply this principle to the stock market? But there are still some specifics here. It is connected primarily with changes in liquidity in different time periods: very early or very late. We used to record quite significant volatility in the morning hours. And this can have serious consequences for investors, if, for example, someone had a margin position. Suddenly they will take and close, although there were no fundamental reasons for this.
Now we are trying to assess these risks and think about how to mitigate them so as not to create threats to investors. We conducted a survey among investors, asking whether they need trading on weekends. Well, the lion’s share of respondents were against it.
At the same time, the idea of expanding trading hours is not the worst: our country is large, with different time zones. Therefore, there are indeed arguments in favor of such a decision.
We have received proposals from both Moscow Exchange and St. Petersburg Exchange on how they see trading on weekends. It is important to make a balanced decision now.
— The role of the domestic investor has grown significantly now, but it is unlikely that the market can be doubled solely by relying on one’s own efforts. But if you put yourself in the shoes of a foreign investor, even from a currently friendly jurisdiction: he should probably also be concerned about the “risks of foreign infrastructure” in relation to Russia, which the Central Bank has so often spoken about in relation to foreign markets. Perhaps there are some steps that can be taken, so to speak, to accommodate foreign investors? Some restrictions can be softened, removed, to show that the risks of foreign infrastructure in Russia are no greater than the risks of a Russian investor in a foreign jurisdiction?
— It is clear that we cannot guess what concerns a foreign investor who wants to come to our market has. My opinion is that today we have no restrictions in relation to friendly jurisdictions. We have not taken a single unfriendly step, all our measures were a response to the actions of foreign institutions. Moreover, we are systematically moving towards easing regulations, for example, we have direct access for their brokers to currency trading on our exchange. In the future, we will develop depository bridges to synchronize asset accounting.
We are not closing our market and are ready for constructive cooperation.
— The head of the Bank of Russia said in May that we need to think about establishing a minimum free float level for admission to trading. Have you discussed this with the market?
— Moreover, we have a regulatory act at the output. We propose to increase the minimum share of shares in free circulation for the second level of listing — to 5%. We analyzed the volume of securities issued by issuers that are actually available for exchange transactions. In general, our estimates coincided with the exchange’s estimates. It is planned that the new requirements will come into force on April 1, 2025.
Requirements for first-tier issuers remain in place. To be included in the first quotation list, a company must direct 10% of the issue into free circulation. Then maintain a free float of 7.5%.
With regard to securities that are not included in the quotation lists (and this echelon is precisely where securities that have historically had a low free float are concentrated), measures to counter volatility are taken by the organizers of trades based on their own methods, taking into account the recommendations of the Bank of Russia.
— Recently, the topic of the risk of large companies leaving the stock exchange has been raised in the public arena. Does the regulator see such risks? Are you planning to do anything?
— For now, it seems to us that this is somewhat exaggerated. We do not see any prerequisites for delisting the largest issuers of securities. At the same time, the current regulation allows the exchange to make a decision in certain situations to lower the level of the quotation list and even delist. But in each case, it is necessary to assess the consequences of such a decision for retail and institutional investors.
— You have already outlined the problem of stock acceleration, especially low-liquidity stocks. How are things now? Are any additional steps needed?
— Indeed, it was a serious problem. In just 3 quarters of last year, the number of shares subject to destabilization reached 63. For comparison, about 12 such cases were recorded for the whole of 2022. At the same time, price fluctuations could exceed 50%. And the most interesting thing is that this was not even direct manipulation in the legal sense of the word, but you know, a kind of lottery – who will jump first. The purpose of such actions is the artificial and planned formation of a trend on the paper. And when the market is already entering the expected state or is approaching it, the manipulator exits the position, as a rule, in advance.
But the stock exchange is not gambling. Organized trading should determine adequate and transparent pricing. We, together with the Moscow Exchange, have taken measures to limit aggressive bids in the third tier. Because such swings, as I have already said, can only be arranged when the market is thin and the free float is low. New (rigid) price limits were set, the price step for the most volatile securities was increased, the possibility of submitting aggressive bids beyond a 5% deviation from the best price was limited, and the response time of the discrete auction was reduced.
In fact, this has yielded results, the number of such practices has decreased many times – to isolated cases, and this trend has remained to this day. We do not see any more bright bursts of volatility. In general, the measures have worked, so we do not see any point in making any additional decisions yet.
— Do you follow the price fluctuations of securities, including those of large issuers, at the St. Petersburg Exchange?
– Of course, right now we are discussing that they introduce the necessary levels of control to avoid volatility.
— There was an idea to increase fines for manipulation, what stage is it at now?
— We are currently discussing with law enforcement agencies the possibility of toughening the punishment. In our opinion, it should be proportional to the scale of the damage caused. Today, the minimum fine for individuals is often insignificant compared to the “earnings” received — 3,000 rubles. Articles of the Criminal Code begin to be applied when damage is caused in the amount of 3.75 million rubles. That is, the fines are small, but criminal liability occurs very quickly. We believe that it is necessary, first of all, to toughen administrative punishment.
In particular, we propose to provide for a fine that is a multiple of the amount of illegally obtained income in the process of manipulation – from 3 to 5 times. At the same time, we advocate increasing the minimum fine – up to 10 thousand for individuals, up to 100 thousand for officials and up to 1 million rubles for companies.
In addition, we believe it is necessary to increase the limitation period for bringing to administrative responsibility, as well as to introduce the concept of a lower threshold of turnover for transactions, up to which administrative punishment is not applied. Now we must bring to responsibility for any identified fact. However, according to our estimates, transactions of up to 1 million rubles are not capable of significantly affecting fair pricing on the market. And such violations do not need to be brought to “administrative” responsibility; it is quite sufficient for the broker to warn his client that this should not be done. The introduction of such a threshold will allow us to focus our attention on more serious cases that cause more significant harm to the interests of investors on the exchange.
As for criminal liability, in our opinion, it is necessary to increase the minimum threshold of damage for its occurrence. But at the same time, provide for confiscation of property as an additional measure of influence. At the same time, we believe that it is possible to exempt from criminal liability those who committed a crime for the first time and compensated for the damage.
It must be said that we want to transfer many procedures for minor violations to the broker’s side.
We have already greatly simplified the operational procedures for exchanging information with the exchange and professional participants when they inform us of any abnormal things. Traditionally, the model for combating insider trading and manipulation was, as we say, “central bank-centric”, that is, the Bank of Russia was the main link in collecting information from exchanges, issuers, and professional participants. We considered complaints and appeals from financial market participants, qualified violations, punished, and so on. Now we have managed to simplify interaction with other market participants and standardize our actions.
We assume that each participant in the system – trade organizers, brokers, issuers – can share this responsibility.
— You recently published information about a deal between an individual and a regulator. What was the agreement?
— This is the first case since such a rule has been in force in the law. For ethical reasons, we do not disclose information about the person who has agreed to an agreement with us. But how does this work in principle?
The essence of the deal is that the culprit repents of his actions and agrees to assist in the investigation of the manipulation case. In return, the charges against him are dropped, he retains his business reputation and can continue to work in the financial market.
It should be noted that this is not possible in all cases. The Bank of Russia, before entering into a deal, must take into account the severity of the committed act, its social danger.
Then we assess how the conditions that the person who has embarked on the path of correction is willing to accept in order to remove the charges against themselves are proportionate to the damage caused. This may be an agreement to undergo additional training on the topic of counteracting insider trading and manipulation, restrictions on trading with certain instruments or for a certain period of time. Providing information about other facts of manipulation may also be a condition of the deal.
The agreement is considered fulfilled if the individual has documented compliance with the terms within 6 months. Otherwise, the procedure for bringing him to administrative responsibility will continue.
— Has the insider problem gotten worse?
— Yes, this problem has become more acute than before. Firstly, because the market has become more active, more players have appeared on it, and secondly, issuers have the right not to disclose some information. And here information asymmetry appears, when a limited group of people gets access to information that will never become public. And they can use this information to make a profit on the stock market. We must not allow tolerance to develop for the fact that someone has access to information earlier than others.
We distinguish two types of insider information: trading, when an investor has learned information directly about the nature of planned trading operations on the stock exchange. And corporate, when an insider makes illegal transactions based on information from the issuer, such as the size of dividends.
Both of these need to be addressed. We have analyzed a number of cases and have come to the following conclusion. It is necessary to introduce prohibitive periods when insiders are prohibited from making transactions with securities, and it is also necessary to expand the list of insider positions and require issuers to work with them more.
Issuers need to gradually but actively form a culture: train insider employees, conduct checks on the facts of publication of insider information, including in messengers, before its official disclosure.
Everyone should understand that insider trading is not allowed and will not go unpunished. We have now begun to actively conduct checks on the largest issuers for compliance with the legislation on combating insider trading. This is, of course, a more complex story in terms of proof.
Therefore, we hope for a certain synergy due to the fact that the interests of the regulator, issuers, and professional market participants coincide here. Many companies are already turning to us for help, asking us to explain how to work with inside information.
— There were plans to launch an insider index. How is this work progressing? How much will it help?
— Yes, we worked with the Moscow Exchange on the possibility of introducing an aggregated indicator for transactions made by insiders. Obviously, without specifying the personalities and details of the transactions. The exchange is currently preparing a methodology for calculating the index. In our opinion, the introduction of such a tool will certainly provide additional transparency to the market. But unfortunately, I am not sure that this will be a panacea.
— Does everything you listed eliminate the need to think about some kind of regulation of the “Telegram” environment? If conditions are created that prevent manipulation, including from Telegram channels, let them do what they think is necessary, or is some kind of approach to them still necessary?
— Any source of information, from an insider point of view, is an object of attention for us, Telegram in this sense is just one of them. Recently, more attention has been paid to it, and we monitor this environment in the same way as other sources of information. Another issue is that Telegram channels and financial bloggers are really turning into an independent way of promoting products, in fact, they are engaged in hidden advertising. We see that bloggers often advise their subscribers to buy this or that financial product or use the services of a certain company. And people do not know whether this advice is the blogger’s personal opinion or “custom” information.
We have a letter ready for professional participants who attract bloggers (financial influencers) to promote their services, where we recommend that they disclose information about such advertising on their websites and mobile applications. Also, the performer, that is, the blogger, in turn, must mark the material – indicate who is its customer. It is important for us that the information is presented correctly and does not create false investment expectations.
— In July, NAUFOR proposed discussing the rejection of the central depository institution as a counter-sanction measure. What does the Central Bank think about this? Is there any life in this idea?
— I consider this idea to be extremely harmful. Its authors argue that abandoning the central depository will protect against sanctions. But as practice shows, it is impossible to predict where the restrictions will come from next time. From our point of view, this infrastructure solution has proven its usefulness. Centralization of accounting ensured a “single chain” of interaction between registrars and depositories and simplified the payment of dividends from public companies.
Now the issuer transfers funds to the central depository, which in turn transfers them to its clients – depositories, and thus the funds cascade to the end investor. And with decentralized accounting, the issuer is forced to interact with each nominal holder in the register.
The centralized model of the accounting system allows market participants to work in uniform formats and minimize their operational risks. The National Settlement Depository has also become the central source of information on securities and corporate actions. And it is this institution that largely helps restore the rights of Russian investors after the introduction of restrictions by unfriendly states.
In addition, it was precisely due to the centralization of securities accounting that it became possible to develop a technology that would simplify the client’s path when moving from one broker to another.
To abandon such a system, from my point of view, is in a sense to shoot yourself in the foot.
— In the spring, a discussion was launched on disintermediation, the Bank of Russia even issued a consultative report on this topic. Now the idea of a world without brokers, that is, with one super-broker in the form of the Moscow Exchange, is it closed or not yet? On the other hand, will the Central Bank think in the direction of limiting internalization, so as not to deprive the exchanges of part of their business? Where is the balance here?
— We are close to completing this discussion. We are inclined to believe that disintermediation in the form in which it may now take shape will cause quite serious damage to the market as a whole, leading to its certain fragmentation. And ultimately, the processes that connect investors and issuers, on the contrary, will be complicated, will become more expensive and less accessible. Therefore, at the moment, we are inclined to believe that we should not go this way.
At the same time, we have once again carefully assessed the practice of internalization and see that there are a number of significant negative factors here too. As a rule, the investor does not understand that he is making a deal not at an organized trade. And this affects the status of the deal itself, which may not be in favor of the broker in the event of litigation. The investor, at a minimum, should be informed that he is making an over-the-counter transaction and have the opportunity to choose where he wants to make it in order to avoid unnecessary risks.
The second is the volume of transactions. In the practices that we see, the rule of best execution is observed, the price, albeit very slightly, is better than the quotes on the exchange. But then the question arises, where is the correct price. Because if the volume of transactions taking place within the broker is several times greater than that by which the price is formed, it can be very conditionally said that the price that was formed on the exchange is really adequate. Therefore, the volume of transactions within brokers should be limited. We are currently thinking through the parameters.
— Another question for the doubling of our stock market. Now the rates are high, and the stock market, probably, is not so easy to withstand the competition for money. This year, what dynamics do you see with dividend payments that come to investors — are they reinvested for the most part or are they still withdrawn from the market and go to the banking system?
— RUB 3.2 trillion in dividends have already been paid. We have not recorded a significant flow into the banking sector. In retail, we see that this money was overwhelmingly reinvested, just not always in shares. According to the Bank of Russia, part of the funds were directed by investors into stock market instruments: as a rule, these are money market funds, which is associated with higher expected returns against the backdrop of tightening monetary policy and low market risks. In addition, according to our estimates, no more than 10% of private investors’ funds in the second quarter of 2024 “flowed” from shares to OFZs, corporate bonds and mutual funds. The sources of net purchases of bonds and mutual funds by private investors were mainly “new” money – potentially, this could be “flows” from deposits and current accounts of individuals, as well as reinvestment of funds received from the redemption of bonds and dividend payments.
— Is the launch of new instruments for retail investors being discussed — linked to cryptocurrencies, some kind of settlement futures?
— No, our attitude towards cryptocurrency has not changed from an investment point of view.
— We have not had exchange trading in dollars and euros for more than four months. For other jurisdictions, this is generally a familiar picture, but for us, it is new. Over the past time, have you seen any risks of non-market nature of exchange rate formation? Can we say that from the point of view of transparency of this process, its quality, the market has not lost anything, or does something still need to be fine-tuned?
— Just so that everyone understands how the dollar and euro rates are set after the end of exchange trading, we have published the methodology for calculating these rates on our website. That is, we have made this process transparent, and it is absolutely not arbitrary. We use an approach similar to that used when calculating rates based on exchange trading, that is, we determine the average weighted rate by volume.
In order to bring the calculation conditions closer to the stock market and exclude various anomalies, we have incorporated algorithms for cutting off atypical values into the methodology. We take the data for the calculation from bank statements.
The ability to set a rate at will that differs from the conditions prevailing on the over-the-counter market is excluded.
— This year, the threshold for mandatory sale of foreign currency earnings by exporters was lowered twice, and for a short period of time. Is it possible to move further in this direction or has the minimum required for financial stability already been reached?
— We support the decisions taken to lower the threshold and increase the terms for crediting revenue. This facilitates cross-border payments and reduces the burden on exporters. We will continue to observe. But we do not make such decisions. This is the government’s competence.
— How do you see the development of the digital financial assets market? In what prospects is the emergence of a secondary market possible, and is it needed at all?
— DFA is a young instrument. It was formed in a certain arbitration environment — in DFA it was possible to do things that were not possible in classical instruments, and vice versa, DFA has some of its own limitations. Now we are talking about how we can evaluate the results of such a spontaneous experiment in terms of arbitrations, and perhaps soften something in the classical market, perhaps tighten it in the digital asset market. For now, we are discussing the problems and looking towards eliminating the current unequal conditions.
As for the development prospects. In my understanding, it is not so much the “a la glass” treatment itself with some gigantic trading volumes that is important, but the fact that today we have each platform locked in itself, and investors have no opportunity to go beyond it. Therefore, we need to look for a solution to make these transitions possible. What it will be in the end, I cannot say yet, but by the end of the year we plan to decide on the concept.
One of the options for the development of the secondary market could be digital certificates, which will allow the organization of the circulation of digital financial assets on the stock exchange.
— Recently, a presidential decree was issued on the accounting of shares on type “C” accounts and a decision of the board of directors of the Central Bank in its development. Why was this necessary?
— We are introducing additional protection of the market from attempts to circumvent anti-sanction regulation. I am talking about practices when citizens or companies buy Russian assets from “enemies” very cheaply abroad, and then sell them here at auctions. In simple terms, they create an overhang. So, the decree makes it possible to separate this overhang from the auctions.
– But now it’s also impossible to transfer from accounts “C” without permission…
— Yes, there is a regime for separating Russian securities in the accounting chains of which there is a hostile investor. At the same time, conditions were created for bona fide purchasers so that they could exit the assets. But all our concessions were the subject of creative ideas in order to obtain a higher marginality from transactions with Russian assets. Why is this bad? Firstly, this is a certain reduction in the “C-mass”, that is, this is a weakening of the countermeasure. And secondly, this hits honest investors who came, believed in our market, invest something, try to earn.
Therefore, it was decided that now shares of Russian issuers, including international companies, can be transferred to a trading account from personal account “C” only by decision of the government commission.
— Was the scale of the problem significant enough to require a presidential decree?
— No. We responded in a timely manner (to attempts to circumvent restrictions — IF). But this game of “cat and mouse” simply shows that the demand is high, and drastic measures need to be taken to free us from constantly catching someone red-handed. And we need to protect our investors, because they are promised that everything will work out, and then it doesn’t work out, and they end up with losses. Now, from our point of view, a barrier has appeared that cannot be overcome. At least, I have not yet been able to come up with options and schemes. But I will emphasize once again that we have not recorded significant volumes that would somehow “spill” through circumventing restrictions. What we have found are isolated cases or even attempts.
— Why is this measure being introduced temporarily, only until the end of 2025?
— During this time, we want to provide additional protection mechanisms. They just require painstaking development.
— At a recent discussion of the draft of the main directions of development of the financial market, the reform of microfinance organizations was almost the hottest topic. If we listen to representatives of the industry, your proposals will put an end to it. Do you counter?
— Now the MFI market is a cauldron in which many different things are brewed, but everything that is there is considered a microfinance organization. And it is often said: “Let’s ban all this.” In fact, the market is diverse, it consists of three parts.
The first are companies that focus on financing small businesses and have nothing to do with the practices that are troubling everyone.
The second group are companies that provide installment services. Their rates are actually comparable to bank consumer loans. Also a normal product, has a right to exist.
And the third piece, which worries everyone the most, is “payday loans”. Regulation here has been tightened many times. For example, loans secured by property were banned, so that there would be no stories of people being forced into bondage, or having their apartment taken away. Maximum overpayments and interest rates were systematically reduced. But there are practices that allow one to bypass restrictions on overpayments through hidden refinancing, when a new loan is issued to a client and previously accrued interest is included in its body. A chain of loans is formed, a kind of rolling, the debt grows. There are about a third of such loans on the market.
We conducted research and found out where people spend the money they borrow “until payday.” There are categories that spend it on betting, sports games – this is a rather alarming story for us. Up to 20% of the amount of loans issued is spent on these purposes. That is, the problem is acquiring a social character.
We plan to introduce regulations that will stop such rolling. This is the restriction of “one loan per hand until repayment” for the most expensive loans. The second regulation is the introduction of a cooling-off period between repayment of one loan and receipt of another.
We have completed the discussion of the report, met with the market, State Duma deputies, received more than 100 questions and proposals. Some points are debatable, they may still move. But as far as fundamental things are concerned, we remain on our positions and intend to implement measures to protect borrowers as quickly as possible.
Please note: This information is raw content directly from the source of the information. It is exactly what the source states and does not reflect the position of MIL-OSI or its clients.
Please note; This information is raw content directly from the information source. It is accurate to what the source is stating and does not reflect the position of MIL-OSI or its clients.