CBR Deputy Governor Philipp Gabunia: No tolerance for anyone on market having access to info before others
Philipp Gabunia
Photo: Press-office
The problem of insider trading and manipulation on the Russian market not only remains relevant but is even getting worse amid increased activity by market players and anti-sanctions forbearance in terms of information disclosure. Central Bank of Russia Deputy Governor Philipp Gabunia told Interfax in an interview what steps the bank planned to take to counter these and other harmful practices, and about a number of proposals to increase the capitalization of the Russian stock market, intensify discussion between the stock exchange and professional parties and close loopholes for unfriendly non-residents.
Q.: The Russian stock market has lost a lot in recent years and has changed dramatically as a whole. Under these circumstances, the aim of doubling its capitalization in relation to the GDP sounded rather unexpected. Is it clear what needs to be done in the current reality in order to accomplish this task? Is it realistic in essence?
A.: The task is certainly very ambitious. If we talk about what needs to be done, then there is certainly no universal remedy. We need a set of steps. Some of the measures have already been implemented, and we are expecting an effect from them. For example, this is a reform of individual investment accounts, the launch of a long-term savings program.
Currently, we also suggest that the government consider changing the system of incentives for those companies that are being supported by the government in implementing various projects. Today, our economy is largely dominated by loans as a way of raising funds. This is a bridge bringing the lender and the borrower together. The government usually allocates funds to subsidize interest rates, there are benefits for investment projects, but all of them are tied to raising funds in the form of loans.
One of the measures we proposed for discussion is subsidizing equity financing, that is, a time-distributed payment to those companies entering the equity market, as an alternative to subsidies provided under the bank lending programs. Additionally, tax incentives may also be justified such as corporate income tax relief for issuers if certain conditions are met.
Q.: Would companies turn out to be on an unfair playing field? If someone has a strategy that does not provide for publicity at all...
A.: No, this does not mean that all support will be transferred exclusively into the form of equity capital. We are expecting companies to have a choice as to whether a project is eligible for state support and whether it will be provided through preferential lending or in the form of incentives when entering the stock market. Companies will make their own decisions based on the specifics of the project's economy and the cost of various sources of funding. At the same time, it is essential that state support should not be an incentive for only one form of raising money.
By the way, the use of equity financing will help lower the debt burden on businesses and will not result in an additional burden on the budget. There will simply be a redistribution of expenditures between various types of support. Here, of course, the stance of the government, which is essentially providing this support, is important.
Q.: What else is on the "doubling agenda"?
A.: The cornerstone is certainly trust in the stock market, including the treatment of minority shareholders. If investors' interests are trampled on, they will not come to the market, no matter what incentives we offer. And here it is crucial that the interests of minority shareholders are not disregarded, but on the contrary, they are protected. This includes, among other things, the matters of disclosure of information about issuers to the maximum extent possible under current conditions, availability of price information, improving the transparency of dividend policy, the quality of corporate culture, and much more.
Q.: This taboo has become less unbending in the last couple of years. Some relaxations have already been repealed, but we can hardly say that we have returned to the level that we had in, say, 2021. Do you think that now there are all conditions needed to raise the question of a full return of all rules in terms of disclosure and corporate governance to the previous level?
A.: Companies currently have reasons to close access to some information about themselves, taking into account the sanctions risks. But the point is that many companies use external circumstances to justify their "secrecy". Our stance is that investors need information to make balanced decisions. We will need to come up with some more subtle tools for investors to get information about companies.
Q.: And from the point of view of doubling capitalization, what can be gained by extending the trading hours on the stock market? Will it be the return of the morning session, weekend trading?
A.: Weekend trading is definitely not the main recipe. However, we are scrutinizing this subject comprehensively. It sounds convincing and nice that once stores are operating round the clock why not apply this principle to the stock market? However, there are still specifics here. It is primarily linked to changes in liquidity in different periods, either very early ones or very late ones. We used to record a rather significant volatility in the morning hours. And this may have serious consequences for investors if, for example, someone had a margin position. They could suddenly close it, even though there were no fundamental reasons for this.
We are now trying to evaluate these risks and think about how they could be mitigated so as not to endanger investors. We have conducted a survey among investors to find out whether they need trading on weekends. The lion's share of respondents were opposed to it.
At the same time, the very idea of extending trading hours is quite good, as we have a large country with different time zones. Therefore, there are indeed arguments in favor of this decision.
We have received proposals from both the Moscow Exchange and the SPB Exchange on how they view weekend trading. It is now important to make an informed decision.
Q.: The role of the domestic investor has greatly increased now, but it is hardly possible to double the market only by relying on one's own forces. But if we put ourselves in the shoes of a foreign investor, even one from a jurisdiction that is friendly at this point, he should probably also be concerned about "foreign infrastructure risks" with regard to Russia, which the Central Bank has so often mentioned with respect to foreign markets. Are there some steps that may be taken, so to speak, towards foreign investors? What restrictions could be relaxed or lifted in order to demonstrate that the risks of foreign infrastructure in Russia are no higher than the risks of a Russian investor in a foreign jurisdiction?
A.: It is clear that we cannot guess what fears a foreign investor who wishes to come to our market has. My opinion is that we have no restrictions on friendly jurisdictions today either. We have not taken a single unfriendly step, as all of our measures were a response to the actions of foreign institutions. Moreover, we are steadily moving towards easing regulations, for example, we have direct access of their brokers to forex trading at our exchange. We will develop depository bridges in the future in order to synchronize asset accounting.
We are not closing our market and we are ready for constructive cooperation.
Q.: The Central Bank of Russia governor said in May that we should think about setting a minimum free float level for admission to trading. Have you discussed this with the market?
A.: Moreover, we have a regulatory act about to be issued. We propose raising the minimum percentage of shares in free float for the second level of listing to 5%. We have scrutinized to what extent the securities issued by the issuers are actually available for exchange operations. As a whole, our estimates coincided with those of the exchange. The new requirements are expected to take effect on April 1, 2025.
The requirements for first-tier issuers will remain in place. To get into the first quotation list, a company has to transfer 10% of the issue into free float. Then it needs to maintain free float at the level of 7.5%.
With regard to securities that are not included in the quotation lists (and in this tier securities that have historically had a low free float are concentrated), measures to tackle volatility are being undertaken by trade organizers using their own methods, based on the recommendations made by the Bank of Russia.
Q.: The risk of large companies leaving the stock exchange has recently come up in the public domain. Does the regulator see such risks? Are you planning to do anything about it?
A.: At this point, it seems to us that this is somewhat exaggerated. We do not see grounds for the delisting of major securities issuers. However, current regulation allows the exchange, in certain situations, to make decisions on lowering the listing level and even delisting. But in each case it is necessary to evaluate the consequences of such a decision for retail and institutional investors.
Q.: You have already identified the problem of dispersal of shares, primarily, of low-liquidity shares. What kind of situation is it now? Do any additional steps need to be taken?
A.: Indeed, this has been a serious problem. The number of stocks prone to destabilization reached 63 in three quarters of last year alone. In comparison, there were around 12 such instances throughout 2022. At the same time, price fluctuations could exceed 50%. And the most interesting thing is that it was not even a direct manipulation in the legal sense of the word, but, you know, such a game of lottery as to who will hop off first. The purpose of such steps is artificial and planned formation of a trend on securities. And when the market has already reached the expected state or it is approaching that, the manipulator leaves the position, as a rule, in advance.
But the stock exchange is not gambling. Organized trading should determine appropriate and transparent pricing. The Moscow Exchange and we have taken measures to restrict aggressive bids in the third tier. This is because such swings, as I have already said, can only be caused when there are a thin market and a low free float. New (tight) price limits were set, the price step of the most volatile securities was increased, the possibility of aggressive bids beyond 5% deviation from the best price was curbed, and the discrete auction triggering time was cut.
In fact, this has yielded its results, the number of such practices has shrunk to single cases, and this trend has remained in place until now. We do not see any more sharp surges in volatility. Overall, the measures have proved to be efficient, therefore, we do not see the point in making any additional decisions as of yet.
Q.: Has the problem with insider trading become more serious?
A.: Yes, this problem has become more acute than before. Firstly, this is because the market has become more active and there are more entities on it, and secondly, issuers have the right not to disclose some information. Then, the information asymmetry appears, when a limited group of people has access to information that will never be made public. And they may use this information to make profit on the stock market. We should not allow tolerance to be promoted towards someone who has access to information earlier than others do.
We identify two types of insider, which are a trading insider, when an investor has learnt information directly about the nature of the planned trading operations at the exchange, and a corporate insider, when he is carrying out illegal deals while being guided by information of an issuer, for instance, by the amount of dividends.
Both need to be countered. We have analyzed a number of cases and have come to the following conclusion. It is imperative to introduce prohibition periods, when insiders are banned from conducting transactions with securities, from expanding the list of insider positions and from urging issuers to work with them more.
The issuers need to shape a culture gradually but already actively, in particular, train insider employees, conduct inspections regarding the publishing of insider information, including in messengers, until it is officially disclosed.
Everyone should have an understanding that insider trading is unacceptable and will not go unpunished. We have now actively started to conduct inspections with respect to the largest issuers in order to ensure their compliance with legislation on combating insider trading. This is certainly a more complicated story in terms of proving it.
Therefore, we are hopeful of a certain synergy because the interests of the regulator, issuers, and professional market participants are coinciding here. Many companies have already been turning to us for assistance, asking us to explain how to deal with insider trading.
Q.: There have been plans to launch an insider index. How is this work progressing? How much will it be helpful?
A.: Yes, we have been working with the Moscow Exchange on the possible introduction of an aggregated index for transactions carried out by insiders. It is clear that this would be without specifying personalities and details of transactions. The stock exchange is currently preparing a methodology for calculating the index. In our opinion, the introduction of such a tool will certainly bring additional transparency to the market. But unfortunately, I am not sure that it will be a panacea.
Q.: A discussion on disintermediation has started this spring, and the Bank of Russia even issued an advisory report on this subject. Is the idea of a world without brokers, that is, with one super-broker represented by the Moscow Exchange, closed for discussion or not yet? On the other hand, will the Central Bank be contemplating efforts to restrict internalization so as not to deprive the exchange of part of its business? Where is the balance here?
A.: We are close to concluding this discussion. We are inclined to believe that disintermediation in a way that it may take shape now will cause quite serious damage to the market as a whole and will result in its certain fragmentation. And the processes that link investors and issuers, on the contrary, will ultimately become more complicated, more expensive and less accessible. Therefore, we are inclined not to follow this path for now.
Alongside this, we have once again evaluated the practice of internalization carefully and we are seeing that there are a number of significant negative factors there, as well. As a rule, an investor does not realize that he is conducting a transaction not at a formal trading venue. And this affects the status of the transaction itself, which may not be in favor of the broker in the event of court proceedings. An investor should at least be informed that he is carrying out an over-the-counter transaction and be able to choose where he wants to carry it out in order to avoid unnecessary risks.
The second thing is the volume of transactions. In the practices that we see the best execution rule is complied with, while the price, albeit very slightly, is better than the quotes at the exchange. However, then the question arises where is the right price. Because if the volume of transactions that take place inside the broker is multiple times larger than the one on which the price is based, we can say it quite relatively that the price that is formed at the exchange is truly appropriate. Therefore, the volume of transactions inside brokers should be limited. We are currently thinking over the parameters.
Q.: Are we discussing the launch of new tools for retail investors with a link to cryptocurrencies or some kind of settlement futures?
A.: No, our attitude towards cryptocurrency has not changed in terms of investment.
Q.: We have not had exchange trading in the dollar and euro for over four months. For other jurisdictions, this is a familiar situation in general, but for us it is a new one. Have you seen any risks of any non-market nature for forming the exchange rate over the past time? Can we say that in terms of transparency of this process, its quality, the market has lost nothing, or do we still need to fine-tune something?
A.: We have published the method for calculating these rates on our website so that everyone understands how these rates are set now that trading on the exchange has stopped. In other words, we made this process transparent, and it is entirely not arbitrary. We use an approach similar to what was used in calculating rates based on exchange trading, meaning we determine the average rate weighted by volume.
In order to bring the conditions for calculation closer to the exchange market and exclude various anomalies, we factored algorithms into the method for cutting off atypical values. We take data for calculation from bank reporting.
The possibility of willfully setting a rate that differs from the conditions on the over-the-counter market is eliminated.
Q.: The threshold for mandatory sale of forex earnings by exporters has been lowered twice this year and for a short time. Is it possible to move further towards this path, or has the minimum amount, which has already been reached and which is required for financial stability?
A.: We support decisions made to reduce the threshold and increase timeframes for depositing revenues. This makes cross-border payments easier and reduces the burden on exporters.
We will be monitoring this further. But we do not make such decisions. This is the purview of the government.
Q.: The presidential decree on accounting of shares in C-type accounts and the CBR Board of Directors' decision that followed it have recently been issued. Why was it required?
A.: We are introducing additional market safeguards against attempts to circumvent anti-sanctions regulations. I mean those practices when individuals or companies buy Russian assets from no friends of ours very cheaply abroad, and then sell them at auctions in our country. In simple terms, they are making an overhang. Therefore, the decree makes it possible to separate this overhang from auctions.
Q.: But now you cannot withdraw funds from C-type accounts without authorization either...
A.: Indeed, there is a regime in place for the segregation of Russian securities, which have an unfriendly investor in their accounting chains. At the same time, conditions were created for bona fide purchasers to be able to withdraw from assets. However, all of our relaxations have been a matter of creative ideas in order to get higher margins from transactions involving Russian assets. Why is that a bad thing? Firstly, it is a slight reduction in "C-mass", so it is a weakening of the response. Secondly, it hits honest investors who came, believed in our market, are investing something and trying to make money.
That is why it was decided that the shares of Russian issuers, including international companies, could now be transferred to the trading account from the C-type personal account only upon the decision made by the government commission.
Q.: Was the scale of the problem quite significant so that a presidential decree was required?
A.: No, it wasn't. We reacted in a timely manner [to attempts to circumvent the restrictions]. But this cat-and-mouse game shows that the demand is high, and we need to undertake drastic measures to relieve us from the constant catching of someone by the hand. And we need to protect our investors, because they are promised that everything will work out, but then it doesn't, and they end up with losses. From our point of view, there is now a barrier, which cannot be overcome. I, for the time being at least, have been unable to come up with options and schemes. But I would like to emphasize once again that we have not recorded any substantial volumes that would somehow "spill over" through circumventing the restrictions. What we have uncovered are individual cases or even attempts.
Q.: Why is this measure being introduced temporarily, only until the end of 2025?
A.: We want to provide for additional protection measures during this time. They simply require meticulous elaboration.