NEW YORK & LONDON, April 12, 2011 - Direct access to Russian financial markets is difficult, if not impossible, for a significant portion of the trading community, limiting foreign participants to indirect access through depository receipts (DRs), swaps and exchange-traded funds (ETFs). But according to TABB Group in a new research report, the opportunity set in trading cash equities and futures in Russia is in the process of being radically reformed.
Adam Sussman, a TABB partner, director of global research and author of the report, “Trading Russia: Access and Arbitrage,” says that trading opportunities can be viewed along multiple dimensions. “The global trends of energy, privatization and Russia’s physical and political positioning between West and East, and its ties to a number of Latin American countries, make for a compelling long-term investment hypothesis. The increasing facilitation of direct access into Russia creates opportunities for shorter-term trading opportunities. The combination of a strong domestic retail market, the influx of institutional players and the rise of ETFs will generate demand for cross-border market making.”
Russia currently has the financial markets highest futures/cash market turnover of 1.2 times. Similarly, the ratio of trading in the RTS Index compared to market capitalization, at $1.5 trillion, is also the highest among the BRIC markets. “If regulators, exchange officials, brokers and other service providers continue to narrow the requirements gap of Russian capital markets,” says Sussman,“all signs point toward an increase in trading volume on the local futures and equity exchange platforms.”Based on this new research, TABB Group expects more than 20 foreign systematic proprietary trading firms to be trading directly on one of the major Russian markets by the end of 2011 and will account for up to 15% of market volume.
It is not a lack of interest or doubts on the opportunity that will handicap access into Russia, says Sussman. “TABB has identified six complications that may delay or prevent trading: regulatory, taxes, currency, exchange membership, customs and data center facilities.”
Complexity is driving many investors to use over-the-counter derivatives (OTCD) products. These are investors for whom trading and holding cash or derivatives is operationally complex, prohibited by domestic regulators, or for whom OTCD is a better fit for their overall strategy. According to TABB estimates, non-domestic investment managers and hedge funds traded $189 billion of Russian OTC equity-linked derivatives in 2010, or 23% of the exchange-traded market.
“In this era of global economic and regulatory fluctuation,” says Sussman, “developing markets have tremendous opportunities to capitalize on the challenges facing developed markets. But if handled correctly, Russia can continue to attract increased fund flows, recapture capital and flow lost to foreign-listed DRs, and ultimately act as a hub for emerging European markets and a gateway to China.”
The 20-page report with 12 exhibits is based on direct discussions withlocal brokers, exchanges, ETF issuers, swaps desks and proprietary traders in the Russian markets during the first quarter 2011. Interviews with local brokers centered on the complexities of setting up a trading account; ETF issuers on how to balance performance with tradable liquidity; exchanges on improving trading infrastructure; and investors on deciding between liquidity and cost among major access products.