Recent key developments – securities finance
Looking back over the past three years we can see that the securities legal framework is constantly improving in Russia. Various changes and innovations were introduced in 2009 – 2010. Having started with the adoption of "Strategy for the Development of the Russian Financial Markets until 2020" the process of change in this area has been ongoing.
Significantly changed disclosure regime
The disclosure of information rules are at the fore-front of the recent developments and closely connected with the increase in transparency of the Russian securities market.
The relevant amendments(1) came into force on 7 April 2011, but the essential regulations(2), adopted by the Federal Financial Markets Service (“FFMS”) are yet to be officially published and will come into force 10 days from official publication.
The newly-adopted regulations clarify the order of disclosure providing the issuers with certainty in avoiding non-compliance with the requirements. The issuer discloses in three ways: quarterly reports, consolidated accounts of the issuer and notifications of material facts. According to the legal definition, material facts are facts that may substantially affect the price of the securities of the issuer. The list of material facts has been extended and now includes 49 types of material facts and is not yet complete.
The regulations are aimed at simplifying procedures for issuers whose securities are not listed on any exchange. The issuer of such securities may even be exempted from their obligation to disclose, provided they comply with certain requirements and have filed the relevant application to the FFMS.
The disclosure obligation in connection with major shareholdings has also been changed and applies only if the shares are in the specific type of issuer (the issuer who is subject to an ongoing obligation to disclose information to the market). New rules require shareholders owning 5% or more of voting shares in an entity to disclose the whole chain of their beneficiaries (for this purpose the concept of a controlling person is used). The disclosure obligation also arises in connection with obtaining control over 5% or more of all voting rights attached to the shares and the holder may be subject to disclosure rules even if they do not technically hold shares. Further disclosure obligations arise when the above-mentioned percentage level exceeds or falls below 5%, 10%, 15%, 25%, 30%, 50%, 75% and 95%.
Insider trading rules become operational
The adopted Insider Trading Law(3) has not been fully operational for a long time. After the essential FFMS regulations were adopted, the FFMS postponed some insider obligations, including the obligation to adopt their own lists of inside information and disclose inside information, until the beginning of 2012.
Due to the explicit provisions of the Insider Trading Law that inside information is information which refers to one or several kinds included in the respective list of insider information, without the insider’s obligation mentioned above, in effect it was practically impossible to decide which information qualifies as inside. From the beginning of 2012 the Insider Trading Law is expected to become operational.
Developing the Russian securities market’s infrastructure
The newly adopted laws: the Clearing Law(4), the Law on Organised Trading(5) and the Law on Central Depositary(6) which all came into force on 1 January 2012 are aimed at developing the Russian securities market’s infrastructure and are expected to improve it and bring it in line with foreign standards.
The Law on Central Depositary sets forth the legal framework for the creation of the central depositary and carrying out its activities. Amongst other issues, the Law regulates the structure, formation and competence of the central depositary’s executive bodies; the order of internal and external control over its activity; matters of risk management; confidentiality issues and disclosure requirements.
Currently there is no official central depositary in Russia and its creation is expected this year. The opening of nominee accounts in the central depositary for the world’s largest clearing systems – “Euroclear” and “Clearstream” - is expected at some point in time but not earlier than 1 July 2012.
The Law on Organised Trading specifies the requirements of facilitators and participants in trading as well as provisions on the state regulation of trading activities. Facilitators should have a licence to organise trading, own a significant amount of assets as well as meet the criteria of liquidity stipulated by state authorities. All the accounting and auditing information should be disclosed on the facilitator’s website in order to ensure transparency of the facilitator’s financial and other conditions. Furthermore, the Law on Organised Trading imposes a number of obligations on facilitators, for example they must keep participants’ commercial secrets confidential and disclose any information which should be disclosed according to the legislation.
Before the Clearing Law there were no unified rules regulating clearing activities in Russia. The Clearing Law sets forth legal definitions of “clearing” and “clearing activities” and establishes that clearing activities are subject to licensing. Clearing organisations are required to disclose their clearing rules, foundation documents and annual reports and comply with other disclosure requirements. It should be noted that the Clearing Law is expected to contribute to the development of a risk management system for Russian market players. In particular, the Clearing Law provides for the concept of clearing security used to secure the obligations of the recipients of clearing services. There are two types of clearing security: individual (securing the obligations of specific clearing participants) and collective (securing the obligations of any clearing participant through the establishment of a special guarantee fund). Clearing security may include money, securities and other property (except for pledged property), listed in respective FFMS regulations yet to be adopted.
The introduction of the concept of close-out (liquidation) netting
One of the key developments introduced by the Clearing Law is the concept of close-out (liquidation) netting. Previously, as there were no such concept, Russian courts considered netting as a form of set-off (the closest existing equivalent), which was a problem in the context of insolvency. This is because Russian insolvency laws generally prohibited set-off in the course of insolvency proceedings.
The changes allow close-out netting arrangements in relation to repo transactions, derivative instruments or other transactions dealing with securities or foreign currencies (the transaction may also be carried out on a cross-border basis), provided that certain requirements stipulated by the law are met.
Whilst we can see positive progress in developing the legal framework for the securities market in Russia, the newly adopted rules are yet to be fully and practically implemented.
Another concern is the complicated and expensive procedure of state registration which is required in connection with the public offering of securities in Russia. According to Dmitry Pankin - the head of FFMS of Russia, only 20% off all offerings connected with the assets of Russian companies were performed in 2011 year in Russia. The majority of offerings were performed outside Russia by foreign companies with Russian companies and resources as assets. State authorities consider the adoption of the relevant amendments as simplifying the public offering in Russia. The first draft of amendments is expected to be prepared before the spring session of the State Duma.
Svetlana is practising Commercial & Corporate Law and also leads the Financial Services team within CIS London & Partners. Recent deals Svetlana worked on involved: advising a European insurance broker on making a private placement of its funds with one of the major Russian banks; also Corporate advice on the structure of a media fund of a well-established Russian fund manager. Svetlana can be contacted on +44 (0) 20 7242 0484 or by email at firstname.lastname@example.org.
Alexander advises on disclosure provisions, listing procedures, funds distribution by public and private placement, funds marketing and relevant contractual issues.
Alexander speaks Russian and English. Alexander can be contacted on +7 495 790 7983 or by email at email@example.com.
Victoria is a legal consultant at CIS London & Partner London office. Victoria joined London CIS London & Partners team in August 2011. Her main expertise is dispute resolution, corporate law and securities market. Victoria speaks Russian, English and German. Victoria can be contacted on +44 (0)20 3402 2078 or by email at firstname.lastname@example.org.
(1) Federal Law No. 264-FZ dated 4 October 2010;
(2) FFMS Regulations No. 11-44/pz-n and No. 11-46/pz-n dated 4 October 2011;
(3) Federal Law “On counteraction of unlawful use of inside information and of market manipulation” No. 224-FZ dated July 27 2010.
(4) Federal Law No. 7-FZ "On Clearing and Clearing Activities", dated 7 February 2011;
(5) Federal Law No. 325-FZ “On Organised Trading” dated 21 November 2011;
(6) The Federal Law No. 414-FZ “On central depositary” dated 7 December 2011.