The most exciting derivatives
market in Europe at the moment is arguably
Its two domestic exchanges, Moscow
Interbank Currency Exchange and the Russian Trading System
Stock Exchange, which runs the derivatives market Forts, are
complemented by UK-based EDX London.
Generally, futures are traded
onshore. Forts, where most futures trading happens, enjoys good
liquidity, including from rich individuals and hedge funds.
The options market is largely
offshore, where EDX London pumps out between 3m and 3.5m
options a month, and has launched its own index.
"Options being traded offshore on
EDX is a recent development," comments Kevin Dougherty,
portfolio manager of Pharos Fund, which invests in Russian
equities and fixed income. "Most options were traded OTC until
the middle to end of 2009. Bringing options on Russian
securities on the stock market at EDX was a big step
Growth powered by Forts
Much of the phenomenal growth in Russia has been powered by
Forts. In June 2008, Micex and Forts together recorded 31.6m
contracts, of which 8.2m were at Micex. In June 2010, activity
had almost doubled to just under 60m contracts, but
Micex’s share had shrunk to 3.5m.
As recently as October 2008 Forts and Micex were far more
evenly matched in volume. But that November, monthly trading on
Micex collapsed, from 14.6m contracts to less than 1.5m. It has
struggled to recover.
At the same time, RTS has grown by leaps and bounds. "The main
competitive advantage of any exchange is liquidity," says
Evgeny Serdyukov, head of futures and options market business
at RTS. "Forts is the most liquid market for Russian assets.
Average daily trading volume of Forts is now at $5bn a
RTS keeps innovating
According to some market participants, RTS Index futures are
the exchange’s most successful product. "The
futures on the RTS index are very liquid on RTS, everything
else is not," says Vladimir Sotskov, head of equity derivatives
at Uralsib Capital, who divides his time between Moscow and
"The RTS Index Future is the most active and successful product
they offer and among the top 10 most liquid contracts in the
world," explains Evgeny Kuteev, managing director of
exchange-traded derivatives at Otkritie in London. "And that is
despite the fact that it’s inconvenient to trade,
as it’s dollar-denominated, while margin
requirements are settled in roubles. However, people still
trade it because they need access to the market."
And according to Michael Kart, managing partner at
hedge fund Marshall Spectrum, which trades options on EDX and
futures on Forts, "There is
still a lot of potential for growth in the RTS
Then in January 2009 RTS Stock Exchange started calculating
the RTS Standard Index, based on the 15 most liquid stocks
trading on the RTS Standard market. A cash-settled futures
contract on this followed in February 2010.
"It is denominated in roubles, which would be better to trade,
but it’s based on a different methodology," says
one market participant. "However, it’s not as
liquid as the RTS Index Future."
On the technical side, Forts and RTS Standard have migrated
their trading systems to the
protocol Plaza II, a step towards consolidating all
RTS’s trading, clearing, settlement, statistics
and reporting systems on to one platform. The data
dissemination and order management systems have moved from MS
SQL technology to Plaza II to enhance the performance of
Forts’ trading platform and speed up
Meanwhile, RTS has launched unified settlement of Forts equity
futures and stocks on RTS Standard. This allows simultaneous
execution and netting of liabilities on the two markets. It
should make arbitrage cheaper and reduce operational
In July, Forts introduced its fifth FX contract,
euro/dollar options. "These
are gaining open interest quite fast and that is a sign of the
interest coming from real hedgers and not
says a spokesperson for the bourse.
newest horse in RTS’s stable is its first
open-ended mutual investment index fund, Troika Dialog RTS
Standard. RTS believes this
is the first step to the formation of ETF analogues in
Open to all
The exchange takes pride in being open to all kinds of
investors, saying "liquidity is accumulated from different
resources, which is better for the market".
The crisis of 2008 only made this advantage more visible. "When
foreign participants were trying to understand the situation on
the global financial market, private investors became more
active and RTS’s turnover started increasing," the
Another advantage RTS is proud of is its "close to 24
Dougherty at Pharos sees significant growth potential for
options at Forts. "Some domestic institutions, such as mutual
fund managers and pension funds, want to see more options on
the domestic market at Forts, as they are not allowed to own
offshore funds," he explains.
Asked if RTS was planning any cooperation with Micex, EDX or
other exchanges, Serdyukov
replied: "While RTS is the major exchange in Russia and
developing rapidly, we are aware that for the next stage of our
international growth we will need strategic partners such as
other exchanges and trading venues.
"Of course we are in contact with the top 20 exchanges of the
world, but it is very early days in terms of concrete
cooperation. While we have talked to the Nasdaq group, we are
also talking to other international exchanges. We are very open
to international partners, but right now we are in talks with
our market participants and evaluate their needs, so we expect
another six months will pass before we move into the next stage
regarding any international cooperation."
Another market participant said: "
I doubt the RTS and EDX will cooperate any time soon. The most
likely scenario is that the RTS merges with Micex to form a
stronger trading hub in Russia."
Dougherty believes that the non-convertibility of the rouble
would for the moment prevent any meaningful cooperation between
either of the domestic exchanges and EDX. "The RTS is unlikely
to take any steps to cooperate with a foreign exchange without
the government’s direction," he adds. "I do not
see any such moves on the horizon."
Asked what changes he would like to see in the market,
Dougherty says "we would like to see full convertibility of the
rouble, which would allow integration in the
A new mood at Micex
Micex is Russia’s biggest stock exchange, claiming
to account for 90% of on-exchange share trading by value and
100% of government bond trades.
The Micex Index comprises the 30 biggest and
most attractive companies. It is calculated on a tick-by-tick
basis and there are dozens of ticks every second.
Micex trading system registers up to 850,000 deals a day and
can easily be scaled up. Its risk management system is based on
the world standard Span technology.
However, as a futures and options exchange Micex was a one
trick pony before the financial crisis. When volume in its
dollar/rouble contracts collapsed in November 2008, it had
nothing to fall back on, and this side of its business has
never recovered. T
he bourse cited "subdued FX and cash market risk appetite" for
the slump in its FX and interest rate futures.
Since 2009, however, it has begun gradually to build
alternative products – and now it appears to be making
futures on single stocks and on the Micex Index hit record
trading highs in June. The value of index trades reached
$2.7bn, Sberbank futures $250m, Gazprom futures $216m, Norilsk
Nickel futures $205m and Lukoil futures $125m. The total number
of single stock and index trades almost reached
During the last year, Micex has also made some significant
changes. In April 2010 it began using a derivatives trading and
clearing system based on a 64-digit platform. It can handle the
rapidly growing number of transactions, especially by
algorithmic trading systems.
Two months later, the bourse introduced its central
counterparty clearing house for derivatives and began a new
settlement scheme, which made it possible to deliver assets
needed for derivatives settlements from spot market
Since July, Micex has been accepting US dollars as collateral
for FX and equity derivatives, removing the need for
participants to convert currency. Asked whether Micex was
considering the same option for euros, Grigory Gankin, head of
the derivatives division, said Micex was "
ready to start with this – as soon as we see any
interest from the participants".
Waiting for liquidity
Next in the pipeline is options: on single stocks, the
Micex Index and currencies.
Micex is modernising its collateral system and
will accept securities as n
collateral. Another point of development is its Span-based
portfolio margining. The bourse plans to introduce
as well as
Will these efforts change the competitive balance between the
three exchanges? "With our new product offering," Gankin says,
"we will likely have to compete more with EDX in the field of
deliverable stock options, but less so with RTS, which is
specialised in this area on options on futures. Micex will also
launch intermarket spreads, a product that RTS
doesn’t offer yet."
All these exertions have earned the bourse respect, if not yet
liquidity. "Micex could be interesting to trade on. For some
reasons, while they have very good products, they are just not
selling. Their technology and procedures are better than Forts,
but they’ve failed to attract enough interest so
far," says Kuteev.
Often seen as more domestic than Forts, Micex is now
one of the major international derivatives exchanges about a
cooperation venture, but the would not give further
The bourse has also established a special office to
relations with foreign clients, and is planning a
Micex believes more global banks will enter its derivative
market, which, combined with new instruments such as stock
options, should attract more foreign investors.
Micex’s two year
strategic goal is to integrate its derivatives, FX, equity and
bond markets and introduce integrated clearing.
In the near term, it plans to introduce a single admission to
different segments of the derivatives markets.
The bourse admits that its main challenge is to achieve a leap
trading volumes. But it believes it has a good chance to
capitalise on its recent technological and risk management
improvements. "We are already facing increased interest from
investors and market professionals, including foreign ones,"
the bourse says.
Russia in London
Since the launch of its Russian service in December
EDX has hosted the trading of more than $130bn in notional
value, representing more than 70m, over 3m a month.
EDX offers options and futures on its own FTSE Russia IOB
Index, and options and futures on single depositary receipts
from companies such as Lukoil, Gazprom and Rosneft.
The exchange claims to account for around 90% of all Russian
stock options trading volume.
Renaissance Capital, Troika Dialog, VTB Capital, Aton,
Otkritie, Uralsib and Alfa Capital are the seven Russia-based
members out of 25 active members of the Russian
Yet EDX does not see itself as a competitor to Forts or Micex.
"International companies can only issue 25% of their share
capital as depositary receipts the rest would have to be traded
domestically – hence EDX doesn’t compete
with the Russian bourses for that 25%," explains David McTurk,
exchange broker at EDX London.
Compared to the Russian bourses, EDX has the advantage of
simpler membership regulation by UK law rather than Russian
regulation, which lags behind in creating an internationally
competitive marketplace. A key selling point for EDX is the
ease of market access it offers and the ability of Russian
clients to trade freely with international
Now, it wants "to build on the success of the Russian product
and diversify across the emerging markets
It is also "working on dividend futures products, as dividends
are a liability in Russia – so far, trade in dividend
swaps is OTC," explains Teresa McCarthy, business development
manager at EDX London.
rading in Russian index products outside Russia has struggled
to gain traction and the bulk of trading at EDX is in its
single stock options. Yet the FTSE Russia IOB, which includes
the 15 most liquid Russian companies with GDRs trading on the
London Stock Exchange’s International Order Book,
has attracted more trading activity over the past year.
n the second quarter of 2010 it reached a record of 30,000
contracts with a $1.2bn notional value.
The next stage for EDX
If challengers arise for EDX’s share of the
Russian derivatives market, they are most likely to come from
outside Russia, and growing interest in emerging markets makes
this a question more of "when" than "if", the bourse
Overall interest is still gathering pace in emerging markets,"
McCarthy says. "Liffe and Eurex have also launched Russian
derivatives products, so in terms of competition, other
international exchanges are keen to gain a stronger foothold in
How is EDX responding to this risk? "We’re
monitoring the international competition and trying to ensure
our clients are happy with the service we’re
offering," says McCarthy. "As we’re a small team
and a specialised exchange, we can be flexible and react
quickly to client feedback. Having a leaner organisational
structure to navigate means we can implement changes
While market participants say EDX is very liquid, Sotskov
argues that it acts "more like a clearing platform rather than
an exchange with an order book".
Kuteev agrees. "EDX’s main business is OTC trades,
which are then cleared through EDX," he says. "Their main users
are investment banks which have no interest in bringing trades
on the exchange. They would rather keep the trades on their
order books and keep clearing through the exchange. EDX tried
to establish DMA, but failed, and their single stock futures
have not been successful. They are still facing the challenge
of creating enough liquidity for those listed
Despite the unusual market structure of three exchanges, many
international investors feel comfortable with it.
Asked who benefits from the current set-up, Dougherty replies:
Those who can trade everywhere, such as us. Options are an
integral part of our strategy to hedge positions. If the worst
happens we are more comfortable to have our positions offshore
in case of another big sell-off, so that is part of our risk
Kart at Marshall Spectrum agrees. "For us, EDX provides the best way to
isolate counterparty risk, compared to domestic exchanges. It
is also gaining in market share and steadily
would like to see more on-exchange trading at EDX, to increase
transparency and tighten spreads.
Michael Kart’s wishlist sounds similar: "We anticipate that the greatest
challenge for the development of the market is the level of
liquidity as well as pricing transparency. We would wish the
market to be more transparent and standardised. A real
standardised platform for trading options is still lacking. At
present, options are largely still traded OTC, where market
participants trade only with selected
New sources of demand
All three exchanges are likely to benefit as more pension funds
and mutual fund managers come to the market.
"Historically, pension funds were banned from using
derivatives," explains Tamer Amara, partner at Clifford Chance
in Moscow. "Now they can invest in derivatives, but there are
still severe restrictions in place (such as the requirement for
the eligible derivative instruments to be
Mutual fund managers were limited to 10% of assets under
management, but this cap has now been removed.
"We are looking potentially at a huge new demand," believes
Sotskov at Uralsib. "Some fund managers have been using
derivatives, but usually via the management company that used
derivatives for offshore funds. Managers of Russia-based mutual
funds have been using few derivatives. If they did, they did
basic hedging with futures, but no complex transactions or
However, the industry is still in a state of transition.
"Neither buy side nor sell side really understand what to do
with the new liberties and possibilities," Sotskov says. "Both
sides have to be educated how best to use Russian derivative
Removing the limits for pension and mutual funds are just a few
recent regulatory steps that have helped the market
"In terms of listed derivatives, there have been positive
developments," explains Alexander Anichkin, counsel at Clifford
Chance. But he highlights some areas needing more work:
"Since July 1, 2010, all listed derivatives
are going through a CCP. There is no law on netting, and there
are hopes that the regulator will tackle this by the end of the
year. But so far, this is just a rough draft, so nobody knows
when it’ll actually happen."
Measures due to come out in the foreseeable future, Anichkin
says, include further improvements of laws on exchange trading,
a law on clearing that could improve the infrastructure, and
legislation that removes remaining insecurities, such as the
question of what happens to the collateral placed with RTS or
Micex in case of their insolvency.
Foreign investors still face obstacles, such as the need for a
Russian broker to handle any cross-border transaction.
"Russia still has quite a way to go in terms of legal
structures to attract more foreign investors," observes Kuteev.
"For example, there are no give-ups. The government is trying
their best, but while they are moving in the right direction,
it is still going a bit slowly."
Merger on the cards
However, while the market is growing, government intervention
might shake up the balance of exchanges.
"The government has formed a task force charged with improving
the investment climate in Russia," says Amara. "They are
looking to improve both the physical infrastructure and the
legislation side. What is encouraging is that unlike the
situation some time ago, the regulators are now more willing to
listen to market participants. In addition, there appears to be
a political will behind this initiative, as can be seen by the
fact that the head of the task force is Alexander Voloshin, who
used to run the presidential administration. You
don’t make such a high level appointment without
meaning to achieve results."
This initiative may have wide-ranging implications for both RTS
At present, Micex is owned by banks and seen as close to the
banking sector, while RTS is backed mainly by
"A merger between Micex and RTS has been on the
regulator’s agenda for quite a while," says
Anichkin. "The authorities are planning to create a regional
financial centre by 2020, which would include the merger of the
stock exchanges to create a central exchange and a central
"This merger will happen, but there is long way to go," he
affirms. "Surely, no earlier than two years from now. It would
create a financially stronger platform and the measure would
create strong synergies. Many trades include two different
counterparties with two different rulebooks, which is not very
convenient at all."
While a merger might make sense to some and be welcomed by part
of the market, the exchanges involved seem reluctant to embrace
"The potential combination of Micex and RTS is a point of
discussion that should be held at the
shareholders’ level," says Gankin.
Forts is even more reserved. Serdyukov highlights the fact that
Forts is already cooperating with domestic specialist exchanges
like the St Petersburg Exchange and the Moscow Energy Exchange,
as well as exchanges in the Ukraine and Kazakhstan.
"There are two trends at work at the moment," Serdyukov says.
"For 10 years, there has been the trend to combine exchanges,
and another trend for diversification and specialisation. We
think that a market with several competitors is actually
healthier, as this will drive competing exchanges to introduce
new products and services, which is what customers