The MICEX Group Profile

The MICEX Group is the largest exchange in Russia, the CIS countries, and Central and Eastern Europe

The MICEX Group is an integrated exchange structure that provides electronic trade organization, clearing and settlements on trades, and depository and information services. The Group includes ZAO MICEX, the ZAO MICEX Stock Exchange, the National Mercantile Exchange, the MICEX Settlement House, the National Depository Center, the National Clearing Center, regional exchange and settlement centers, and other organizations. These organizations serve over 1,700 participants in the on-exchange market, including leading Russian banks and brokerages located in Moscow and other large financial and industrial centers of Russia. The Exchange’s main function is developing market mechanisms used to determine the exchange rate of Russia’s national currency and effective turnover of investment capital in Russia’s economy using state-of-the-art exchange and information technology.

The Group’s history dates back to the early 1990s, when, during the process of market reform, the Bank of Russia and a number of Russia’s other leading banks established the Moscow Interbank Currency Exchange (MICEX) with the primary goal of organizing foreign currency trading. From the first days of the on-exchange currency market’s operation and up to the present day, the exchange rate of the US dollar determined on MICEX has been one of the main indicators of the economic reforms implemented in Russia.

A number of key segments of the financial market operate within the framework of the MICEX Group: the foreign exchange (since 1992), the government bonds market (since 1993), the derivatives market (since 1996), the equities market (since 1997), the corporate and regional bonds market (since 1999), and the money market (since 2004). With the implementation of a state-of-the-art electronic trading and depository system, the MICEX Group became a universal association of financial organizations upon which an up-to-date multifunctional system of trading, clearing, and settlements in all segments of Russia’s financial market has been built. That formed the basis for establishing the MICEX Group, whose main goals are promoting the development of market mechanisms for fixing the representative exchange rate of the Russian ruble, contributing to the financial growth of Russian companies and issuers, and attracting investments in Russia’s economy. This national financial market infrastructure that has been built over the past years is based on the most advanced exchange and information technologies.

MICEX holds a prestigious position among the world’s leading exchanges. In terms of total trading volume (107 trillion rubles or 4.2 trillion US dollars, with an average daily trade volume of 431 billion rubles or 17 billion US dollars in 2007), MICEX is the largest exchange in Russia, the CIS countries and Central and Eastern Europe. In terms of on-exchange securities turnover, the MICEX Group is one of the world’s 20 top stock exchanges (ranking 17th). The MICEX Stock Exchange has become the center of formation of liquidity for Russian assets and the main stock trading floor for international investments in leading Russian companies.

MICEX’s Main Functions

FOREX

MICEX foreign exchange trading takes place within the MICEX Electronic Trading System (SELT), in which regional currency exchanges participate in a unified trading session (UTS). Since 1992, the Russian Central Bank takes into account the results of MICEX foreign exchange trading when setting the official exchange rate of the Russian ruble. Daily trading on MICEX is held in US dollars, Euros, Ukrainian hrivnas, Kazakhstan tenges, and Belarusian rubles and trades in currency swaps are also made. In 2007, the total volume of on-exchange trades in foreign currencies amounted to 38 trillion rubles or 1.5 trillion US dollars (about 36% of the MICEX Group’s total on-exchange turnover). An effective risk management system has now been implemented in the MICEX foreign exchange, guaranteeing timely execution by all traders. One element of this system is the “payment vs. payment” rule, according to which MICEX only effects settlements with a trader once the trader has fulfilled his obligations. In 2007, clearing and settlement functions in the on-exchange currency market were transferred to the National Clearing Center (NCC), a MICEX Group affiliate established for this specific purpose, and a Unified Trading Session of inter-bank currency exchanges (UTS) was held using centralized clearing, in which the NCC acted as a counterparty to all trades made in the UTS trading and also performed centralized clearing. In this newly established system, ZAO MICEX still organized trading in the UTS and functioned as a technical center. Approximately 600 credit institutions are members of the MICEX Foreign Exchange Section. As a member of the National Foreign Exchange Association (NFEA), MICEX participates in the development and implementation of Work Standards for Internal Currency and Money Markets.

The Stock Market

The MICEX Stock Exchange, an organization operating within the framework of the MICEX Group, is Russia’s leading stock exchange, accounting for over 98% of the total volume of equities trading on all Russian stock exchanges and over 70% of the global on-exchange volume of Russian securities trading (including GDRs and ADRs). The MICEX Stock Exchange organizes daily securities trading of 760 Russian issuers, including the shares of 210 issuers such as Gazprom, RAO UES, Sberbank, Norilsk Nickel, LUKoil, Rostelecom, Surgutneftegaz, Rosneft, VTB Bank, Tatneft and other companies with a total value of about 30 trillion rubles (about 1.2 trillion dollars). 640 organizations – professional participants in the securities market – are among the traders on the MICEX SE; their clients include about 450 thousand investors, both legal entities and individuals. In 2007, the total value of trades in non-government securities on the MICEX SE (accounting for 41% of the Group’s total trade volume), including trades in shares, bonds, and repos, reached 44 trillion rubles (1.3 trillion dollars), including equities trades totaling 31 trillion rubles (1.2 trillion dollars). Trading is held electronically using a state-of-the-art electronic trading system connected to regional trading floors and remote terminals.

The MICEX Stock Exchange plays an important role in helping execute initial public offerings (IPOs) for Russian issuers. In 2007, 19 companies, including Sberbank and VTB Bank, used the MICEX SE’s services to place their shares (IPO/SPO), raising a total of 662 billion rubles (26 billion dollars) in investments. In terms of this indicator, the MICEX SE is among the world’s five largest exchanges. The MICEX Stock Exchange launched the Innovation and Growth Companies Sector (IGC Sector), established with the support of the Russian Ministry of Information Technology and Communications, in order to create conditions that enable small and medium-sized companies to attract investments in the innovative and fast-growing sectors of the economy, form an appropriate environment for these companies’ IPOs, and promote venture financing in Russia. To improve the quality and level of transparency of IGC Sector companies, the Exchange instituted listing agents, which are organizations that help high-tech companies enter the Exchange. In 2007, the debut IPOs were executed, and securities trading was launched in the IGC Sector.

The MICEX Index is Russia’s main stock market indicator, which grew by 11.5% in 2007. In that year, significant changes took place in the MICEX family of indices. The model for the MICEX composite index was introduced and it was expanded to include 30 stocks representing the main sectors of Russia’s economy, and publication of sector- and capital-based indices began. Today, the MICEX Index is used by management companies as the underlying asset for 33 Russian index unit investment funds with a total asset value of over 6.5 billion rubles. Stable growth of the market has promoted a rapid increase in the number of individual investors in the Russian stock market and the number of MICEX investors doubled over the past year, reaching 420,000. The Exchange holds trading in the units of over 200 investment funds, encouraging the development of collective investment institutions. The MICEX Stock Exchange’s introduction of “specialists,” traders maintaining bids and offers in securities, gave an additional impetus to the increasing liquidity of on-exchange trade in investment funds units.

The MICEX Stock Exchange provides unique opportunities for placing and trading corporate and regional bonds. Bonds of over 510 Russian issuers are traded, including corporate bonds (450 companies), sub-federal bonds (35), and municipal bonds (25). In 2007, 188 companies placed their corporate bonds on the MICEX SE to the total amount of 458 billion rubles (19 billion dollars) and the volume of secondary trading totaled 12.5 trillion rubles (500 billion dollars). The movement of bond quotations is reflected in the MICEX corporate bonds index (RCBI), calculated since 2003.

Government-Backed Securities and the Money Market

MICEX features a national system of government-backed securities trading (GS), comprising Russia’s eight main regional financial centers. On MICEX, traders have access to a wide range of GS market instruments, including other government bonds and Bank of Russia bonds (OBR), in addition to GKO and OFZ. Market participants also have the opportunity to perform a full set of bonds operations, from primary placement and secondary trading to the creation and execution of REPOs (both direct and reverse REPOs against the Bank of Russia and inter-dealer REPOs).

Now, over 280 authorized dealers trade on the GS market. In 2007, the total volume of trades on the GS money markets amounted to 23 trillion rubles (0.9 trillion dollars), including auctions and secondary trading in GKO/OFZ, REPOs, and Bank of Russia deposit/credit operations. The share of this segment in the total volume of on-exchange trading grew to 22%. The MICEX GS market provides the Bank of Russia with opportunities to implement its monetary policy, while at the same time providing traders with effective instruments to invest temporarily free funds and manage liquidity. MICEX publishes index values and indicators of the GS market yield and the zero-coupon yield curve for government bonds.

The Bank of Russia uses the MICEX trading system to perform deposit and credit operations with credit organizations located in various regions of Russia. In 2007, the volume of these deposit operations was approximately 720 billion rubles (29 billion dollars), and the number of banks participating in this market exceeded 140. In 2006, the range of Bank of Russia deposit operations on MICEX was extended to include “demand” deposit transactions. In addition, the performance of Bank of Russia credit operations (collateral credit) has been arranged for. MICEX has also introduced services pertaining to a new segment of the GS market, government savings bonds intended for institutional investors.

The Derivatives Market and the Commodities Market

MICEX is a leading organizer of trading in the Russian derivatives market, holding a dominant position in the market for currency futures; MICEX’s share in this segment is about 95%. The Exchange organizes trading in US dollar futures and Euro futures as well as EUR/USD futures. In 2007, the total volume of trades in the MICEX Derivatives Market Section approached 2.2 trillion rubles (87 billion dollars), with open interest reaching 5 billion dollars. MICEX also organizes trading in futures on inter-bank money market interest rates (MosIBOR and MosPrimeRate), which are calculated by the National Foreign Exchange Association (NFEA) and are acknowledged by the International Swaps and Derivatives Association (ISDA) as the reference ruble interest rate. In 2007, as part of its strategy for developing the derivatives market, the MICEX Group launched trading in futures on the MICEX Index, which became the first instrument in the stock derivatives segment. To ensure that obligations on futures trades are fulfilled, MICEX has a reliable risk management system. To cover risks, the Exchange has formed, at its own expense, a reserve fund of 250 million rubles and a guarantee fund of 250 million rubles to ensure clearing in the stock derivatives market. Market makers operating on the MICEX derivatives market support bilateral quotations, contributing to the growth of liquidity. 190 organizations are members of the Derivatives Market Section and 130 banks and financial companies trade in the derivatives market of the MICEX Stock Exchange. To further develop the derivatives market, MICEX is making efforts to widen the range of traded instruments, first of all, by launching options trading. MICEX also intends to further increase the range of derivatives on stock assets, interest rate assets, and currency assets and improve the risk management system by implementing portfolio margining technology based on SPAN (Standard Portfolio Analysis of Risk) methodology, developed by the CME and used by many leading exchanges and clearing organizations all over the world.

As an infrastructure component of the commodities market, the National Mercantile Exchange (NAMEX) organizes and holds on-exchange trading in the framework of state procurement and commodity interventions in the grain market. NAMEX’s strategic plans include developing and introducing derivative instruments on commodities, starting with delivery futures on grain.

Settlements and Clearing

In addition to organizing trading, the MICEX Group provides professional participants with a full complement of settlement and clearing services. Guaranteeing the maximum possible trade execution is one of the Exchange’s guiding principles. Settlements and clearing on trades are executed on the basis of the “delivery vs. payment” principle through specialized organizations, the MICEX Settlement House (a settlement organization for monetary funds) and MICEX’s non-profit affiliate the National Depository Center (a settlement depository). Since December of 2007, the National Clearing Center, a joint-stock commercial bank, has acted as a clearing center in the MICEX FOREX. Clearing in the stock market and the derivatives market is currently performed by MICEX.

The National Depository Center (NDC), part of the MICEX Group, is Russia’s largest depository in terms of the value of assets held in custody and, taking into account its turnover, the leading settlement depository for equities. In 2007, the NDC’s turnover totaled 60.5 trillion rubles, 26.4 trillion rubles of which consisted of equities trades. The value of securities accounted for in the NDC’s securities accounts totaled 4.3 trillion rubles (177 billion dollars), including 1.6 trillion rubles in equities (37.2% of the consolidated assets portfolio). This came as a result of successfully implementing a strategy for diversifying the NDC’s services, increased liquidity in the MICEX Group, and reduced securities custody costs. 2.5 million inventory operations are performed by the NDC, with an average of 210,000 per month. The NDC plans to improve its reliability and risk management system in order to comply with the international standards for the central record-keeping entity in Russia’s securities market. The NDC’s own capital has reached 1.34 billion rubles (by Russian accounting standards), while its limit of liability for each insured event is 50 million dollars; the А+ rating assigned to the NDC by the Thomas Murray agency has been confirmed. As Russia’s national numbering agency, the NDC assigns international ISIN and CFI codes to securities, provides assistance in qualifying foreign issuers’ financial instruments as securities, and acts as a substitute numbering agency for the CIS countries.

Settlement services in on-exchange markets are provided by the MICEX Settlement House (MICEX SH). In terms of the value of assets, the MICEX SH is among the 30 largest Russian credit organizations. The capital of the MICEX SH totals 1.1 billion rubles. In 2007, the daily average volume of payments made by traders through the MICEX SH’s correspondent account with the Bank of Russia totaled 219 billion rubles. The turnover of trading account funds in settlements of clients’ transactions on MICEX has reached 435 billion rubles a day. 400 Russian banks and about 300 financial companies maintain accounts with the MICEX SH. To bring settlement services closer to financial market participants and improve the effectiveness of settlements, branches of the MICEX SH have been opened in Rostov-on-Don and Vladivostok, and new branches are planned to open in Novosibirsk, Yekaterinburg, and Nizhny Novgorod.
The National Clearing Center (NCC) was established to implement the central counterparty model for all trades in on-exchange markets of the MICEX Group. The NCC was licensed by the Bank of Russia to carry out banking operations and became the Russia’s first organization specializing in clearing in on-exchange and OTC markets, including determining and calculating clearing participants’ obligations, organizing fulfillment of those obligations on the basis of the “delivery vs. payment” principle, and controlling the degree of risks assumed by participants.

The National Clearing Center was founded by MICEX and the NDC. The authorized capital of the NCC is 0.7 billion rubles. In 2007, the NCC launched clearing in the MICEX FOREX. Furthermore, the NCC intends to act as the central counterparty in the REPO market for government-backed securities and, subsequently, in the stock market and derivatives market.

Technology

The MICEX Group has electronic trading, clearing, settlement, and depository systems that comply with international standards for reliability, efficiency, and security. These systems comprise the MICEX Group’s real-time software and hardware complex. The complex’s telecommunication network is supported by leading network service providers and covers the entire territory of Russia. The core of MICEX‘s global trading network is formed by two computing centers (one main and one backup). The platform of the MICEX Group’s trading and depository complex is formed by approximately 100 Hewlett-Packard UNIX servers. According to the results of an audit performed by the Gartner Group, the availability ratio of the complex is 99.99. The MICEX trading complex registers up to 1 million orders and 500,000 trades a day and its capacity is continuously increasing along with the growth of the on-exchange market’s liquidity. Fiberoptic lines, satellites, and other communication channels connect the Exchange with over 1,700 remote workstations in the offices of banks, brokerages, and other financial institutions located in more than 100 Russian cities. Over 300 broker systems are connected to the MICEX trading complex, enabling brokers to provide services to investors via remote terminals using Internet technology. Trades accounting for more than half the volume of on-exchange securities trading are made via these broker systems. Applying state-of-the-art technological solutions developed with the participation of MICEX, brokerages have the opportunity to provide their clients with direct access to trading on the MICEX Stock Exchange. A number of international providers of trading solutions for brokerages and banks (GL Trade, ORC Software, ION Trading) have taken advantage of the opportunity to connect their products to the trading system, which makes access to MICEX’s markets much more convenient for foreign participants.

Regional Infrastructure

The inter-regional exchange infrastructure comprising the MICEX and regional currency exchanges emerged in the mid-1990s using a single technological platform. MICEX currently cooperates with regional currency and stock exchanges and regional settlement centers for an orderly securities market. After becoming the principal shareholder in APICEX, RCSE, NNCSE and URCEX, MICEX established the MICEX-Far East (Vladivostok), MICEX-South (Rostov-on-Don), MICEX-Volga Region (Nizhny Novgorod), and MICEX-Urals (Yekaterinburg) regional exchange centers. The main goal of these MICEX regional subsidiaries is to enable them to perform all the functions of the MICEX Group’s front office in their regions. The regional exchange centers focus on interacting with regional issuers, traders, and investors. The MICEX Group continues to cooperate with the St. Petersburg Currency Exchange (St. Petersburg), the Samara Currency Interbank Exchange (Samara), and the Siberian Interbank Currency Exchange (Novosibirsk). Regional settlement centers of an orderly securities market are located in the respective cities. Acting as the MICEX Group’s regional representatives, the regional exchange centers, regional currency and stock exchanges, and regional settlement centers for the orderly securities market interact with regional participants in financial markets, implement new technologies and systems for ensuring timely settlements with participants in on-exchange trading even though the participants are located in different time zones, and provide a wide range of information and consulting services.

International Cooperation

As a result of the ongoing process of globalization and Russia’s expected accession to the World Trade Organization, the MICEX Group is implementing a strategy for integrating into the infrastructure of the world capital market and establishing an international financial center in Moscow. The number of foreign participants in MICEX’s markets is steadily growing. The share of foreign investors’ operations in the overall volume of stock trading on the MICEX SE exceeds 30%. Within the framework of international cooperation, MICEX maintains an intensive dialogue with exchanges such as the New York Stock Exchange (NYSE), the NASDAQ, the Chicago Mercantile Exchange (CME), the London Stock Exchange (LSE), the Deutsche Borse (DB), the Wiener Borse AG (WBAG), the OMX Group, the Hong Kong Exchange (HKEx), the Tokyo Stock Exchange, the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange, and others. MICEX has singed memoranda of cooperation with many of these exchanges. MICEX is an affiliated member of the World Federation of Exchanges, which is comprised of over 100 exchanges accounting for 97% of the world stock market capital. Together with the International Association of Exchanges of the CIS Countries, the MICEX Group participates in projects aimed at developing appropriate conditions for forming an integrated stock market of the CIS countries on the technological basis of their national exchanges.

Information

Information transparency is an important principle of MICEX exchange activities. Traders and investors are able to monitor trading sessions on the MICEX web site using state-of-the-art remote mobile access technology or the services of leading Russian and international news agencies. Users receive real-time exchange quotes on tens of thousands of terminals in Russia and abroad. Today, traders use MICEX’s information services to widen their client bases, demonstrating the patterns of interaction between clients and brokers on their web sites using MICEX’s orderbook information. They also use MICEX’s game server to teach individual investors the basics of trading on the stock market. MICEX also takes part in the work being done to improve the information services market within the framework of the Non-Profit Organization Association of Financial Communications and Investor Relations. MICEX is a member of the Financial Information Services Division of the Software & Information Industry Association. MICEX disseminates press releases and informational and analytical bulletins on a regular basis and publishes a monthly Exchange Review magazine. MICEX is also included in Russia’s first museum of exchange history, where materials illustrating the development of Russian exchanges and their current work are displayed for visitors.