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FFMS Changes Listing Rules

18.06.2013 16:57 / Interfax

Federal Financial Markets Service (FFMS) has drafted and posted online Organized Trading Requirements for Securities.

“The time has come to discuss the actual draft of this rule”, said Deputy Head of FFMS Sergey Kharlamov at a Tuesday press conference.

FFMS has debated the possibility of changing the Russian listing system for several years. New listing rules were backed by Moscow Exchange MICEX-RTS as well as pension fund managers, who are only allowed to invest in top tier stock by law. These lists omit certain liquid shares such as Gazprom.

It has been reported earlier that the existing five lists would be sized down to two.

TWO LISTS

According to Kharlamov, the first draft was an attempt by FFMS to “avoid breaking up the list”. “Unfortunately, we failed to completely avoid it”, he said, adding that federal law only allows pension savings investment in top tier stock, and FFMS rules can not change that.

He says the draft rule allows merely two lists: top tier and second tier.

Kharlamov said that top tier requirements and quantitative minimum levels for securities will be set by the regulator as well as second tier parameters, while second tier minimums will be set by the exchange.

DELISTING

Kharlamov said that the draft contains provisions for conditional and mandatory delisting. Grounds for mandatory delisting include issuer’s request, bankruptcy, reorganization (liquidation or merger), as well as breach of the Securities Market Act.

Conditional delisting grounds include commencement of bankruptcy procedure by the issuer. In this case the exchange will rule whether the securities will continue to be listed.

TOP TIER REQUIREMENTS

Top tier parameters include the free float amount, issuer’s track record (three years minimum), financial and accounting disclosure, as well as corporate management requirements.

Head of Financial Market Regulation at FFMS Alexander Arefiev noted at the press conference that the free float requirements apply to shares only. If capitalization exceeds RUB 30bn, top tier free float must meet a minimum of 10%, for capitalization below RUB 30bn, the free float must be 25% or more.

He stated that free float parameters for the second tier will be set by the exchange.

Arefiev also said that top tier requirements for bonds include only two extra musts: the Board of Directors and Compliance Control.

Fund shares will be listed in the top tier if the fund’s minimum NAV is RUB 1bn. Exchange-traded funds are exempt from this requirement.

SPREAD

Head of FFMS Dmitry Pankin said that the revision of Russia’s listing rules has been the subject of heated debate.

He noted that on the one hand, issuers are interested in lower listing barriers, and the exchange needs a wider variety of traded securities. “On the other hand, we want quality securities”, he said.

According to FFMS Head, the crucial point of the debate was the need to set spread limits for top tier securities as a liquidity indicator.

“We consider spread a marker of crucial importance”, said Pankin.

Arefiev said that spread requirements will only apply to shares and fund shares. For top tier shares, the two-month average spread minimum will not exceed 5%. The exchange may keep the shares in the top tier if the minimum spread is exceeded, if the average spread did not exceed 5% in the previous three months. Fund shares minimum spread will not exceed 7%.

CORPORATE MANAGEMENT

Arefiev says that a number of corporate management requirements will be set for top tier shares.

The draft rule provides a minimum of independent directors in the Board, in proportion to the number of seats. In a board of 10 directors, two must be independent.

The issuer must also have an Audit Committee in place, chaired by an independent director, as well as a HR and Compensation Committee and an Executive Secretary.

The is required to disclose dividend policy and create internal control.

GAZPROM

In reply to a press question on the possible inclusion of Gazprom shares in the top tier according to new listing rules, FFMS expert Yuri Danilov said: “FFMS has tried its best to make Gazprom part of the top tier”.

He said that reportedly Gazprom is interested in listing its shares in the top tier. “If Gazprom wishes to do so, and the exchange has no objections, pension fund managers will be able to get their hands burned”, he said, hinting at Gazprom’s steady price drop in recent years.

Arefiev referred to the pension system regulation driving stock market infrastructure as an ‘inconvenience’.

He stressed that Gazprom’s place in the top tier was in no way the aim of FFMS efforts. “The issuer is free to be listed or delisted. FFMS is not empowered to drag everyone into the listings”, said Arefiev.

2-YEAR TIMEOUT

Аrefiev expressed hope that FFMS will be able to pass the draft rule this July, after the debates.

He said that when the Rule is enacted, the exchange will have a full year to comply with new listing requirements.

Following the adoption of new listing rules, all А1 and А2 securities will automatically become top-tier, the rest will be listed as second-tier.

Arefiev pointed out that a transition period will be introduced for the issuers of shares, fund shares and mortgage certificates. “They will have two years to become fully compliant with the new rules”, he said.

“Practically all will have to get up to speed in some way, especially in corporate management”, he said.

Danilov said that Moscow Exchange estimates put up to ten A1 and A2 shares in the top tier non-compliance risk zone. “A potential 60-70 shares may join the top tier”, he said, naming Gazprom as one of the newcomers.

Arefiev also added that the spread amount requirement will be applied to top tier shares and fund shares only four months after the end of the transition period.

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