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 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’, said that trading opportunities can be viewed along multiple dimensions. “The global trends of energy, privatisation 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 capitalisation, at US$1.5 trillion, is also the highest among the Brazil, Russia, China and India (BRIC) markets. “If regulators, exchange officials, brokers and other service providers continue to narrow the requirements gap of Russian capital markets,” said 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, said Sussman. “Tabb has identified six complications that may delay or prevent trading: regulatory, taxes, currency, exchange membership, customs and data centre facilities.”
Complexity is driving many investors to use over-the-counter (OTC) derivatives products. These are investors for whom trading and holding cash or derivatives is operationally complex, prohibited by domestic regulators, or for whom OTC derivatives is a better fit for their overall strategy. According to Tabb estimates, non-domestic investment managers and hedge funds traded US$189bn of Russian OTC equity-linked derivatives in 2010, or 23% of the exchange-traded market.
“In this era of global economic and regulatory fluctuation,” said Sussman, “developing markets have tremendous opportunities to capitalise 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.”
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