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Corporate law and governance, financial transaction taxes

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Financial infrastructure and financial market regulation


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Licensed Participants Ask Regulators to Review Capital Adequacy Ratio

27.06.2012 13:41 / Interfax

National Association of Stock Market Participants (NAUFOR) and National Fund Managers League have proposed a review of the formula and limit of proprietary capital adequacy ratio for securities market participants and fund managers.

According to a NAUFOR press release, the association considers it necessary to review the formula as well as the stated limit and proposes to lower the limit for dealers, trustees and brokers acting exclusively through other brokers to perform on client instructions.

NFML has already submitted their proposals to Head of Federal Financial Markets Service (FFMS) Dmitry Pankin.

The formula and limit has been a hot topic for some time, actively debated when former Head of FFMS Vladimir Milovidow was in office and called for tighter regulations. He initiated the FFMS decree raising licensed participants capital limits twice: from 1 July 2010 and 1 July 2011. The initial raise led to Federal Anti-Monopoly Service (FAS), the Ministry of Finance and the Ministry for Economic Development demanding that these decisions be stipulated in federal law, not FFMS decree. The next raise was cancelled by new Head of FFMS Dmitry Pankin.

On 17 May 2012, FFMS posted on their website the draft decree on new proprietary funds for licensed securities market participants, fund managers, mutual investment funds, non-state pension funds, commodity exchanges and exchange brokers. The regulation introduces a tougher calculation formula for proprietary capital.

The draft sparked serious debate among market participants. The reaction prompted Pankin to blog a proposal for a workgroup to discuss the issue of proprietary capital formula on 6 June.

“I think it is better to tie in the discussions on the formula and the existing limit, in order to make the introduction of a tighter formula run parallel to differentiated approach to the limit by type of operation made by licensed participants, even lowering the demands whenever it is appropriate”, blogged Head of FFMS.

According to the NAUFOR press release, the association has conducted several work sessions with FFMS, and the dialogue will be further joined by NFML, National Stock Association (NSA) and Professional Association of Registrars, Transfer Agents and Depositaries (PARTAD).

“Proprietary funds enable the company to stay in business (pay salaries, rent, operational costs). Limits on proprietary capital cannot solve the task of covering operation risks – this is done via prudential control”, says the NAUFOR release.

A source close to the debate told Interfax that NAUFOR is in discussions with FFMS executives over possible introduction of a RUB 5mn minimal proprietary capital limit for dealers, trustees and brokers acting exclusively through other brokers to perform on client instructions. The current limit is RUB 35mn for brokers, dealers and fund managers.

PARTICIPANTS’ VIEWS

The NFML letter to FFMS states that increasing proprietary capital limits for funds managers from RUB 60mn to RUB 80mn since mid-2011 has decreased the number of active companies but has not affected the number of shell companies. “Thus we can conclude that the change is destructive for business”, states the letter.

It also says that the current proprietary capital limits and their formula is not compliant with global practice. Thus, European Union UCITS directive N85/611/ЕЕС Clause 5а stipulates for European fund managers a capital adequacy norm of EUR 125k, if assets in management do not exceed EUR 250mn. If the asset amount is higher, the capital adequacy requirement increases 0,02% off the exceeding amount, but a maximum of EUR 10mn.

The NAUFOR proposals include amendments to the FFMS formula of proprietary capital calculation.

The Association, in part, disagrees with the exclusion of software and databases from proprietary assets. Software and databases may form a substantial part of licensed participants’ asset value, especially the infrastructure ones. It should also be noted that licensed participants make large-scale investments in software development or purchase due to the newly established Central Depositary and the introduction of T+N trading on MICEX-RTS.

The association press release also states that the draft decree takes into account only 10% of accounts receivable for brokerage and trustee agreements. Consequently, the business of brokerages employing sub-brokers will be considerably restricted. In the near future the sub-broker scheme will become more widespread due to T+N trading, that separates clearing brokers and those employing clearing brokers as sub-brokerages.

The draft also excludes equities, except A and B-listed, foreign equities and mutual fund shares. As a result, a large part of traded instruments are excluded, irrespective of their issuers’ grade.

MINISTRY OF FINANCE VS FFMS

However, solving this problem could drive a wedge between FFMS and the Ministry of Finance.

According to a Ministry of Finance source, as a result of last year’s division of functions between the Ministry and FFMS, the amount of proprietary capital is within the purview of the Ministry of Finance with approval from FFMS.

The source said that NFML has also forwarded their proposal to the Ministry of Finance, as did PARTAD.

“I think that when it is all over (the new Government has been appointed), it would be more logical to raise a discussion on new capital requirements for licensed participants. They can be varied, not unified, but raising the bar for capital and its quality is essential”, said Deputy Minister of Finance Alexey Savatygin in April.

Project Group №1Vladimir MilovidovDmitry PankinAlexei Savatyugin