Challenges of the legal framework for Russian OTC derivatives - bird's view

Andrei Murygin

September 2011

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Milestones in derivatives regulation

• 2001 - Section on derivatives (allowing taxation of financial result) is added to the Tax Code

• 2007: gaming exemption recognising enforceability of trades involving 5 basic underlying assets

BUT if one of the parties is a Russian licensed professional. Trades between foreign banks and Russian corporates not covered

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Milestones (contd)

• 2009-2010 - qualified investor regulations and specific statutory provisions in the SML regulating "derivative financial instruments": list of protected underlying assets indirectly extended to 9 (including credit derivatives etc)

• 2009-2010 - favourable tax regime for derivatives is restated in line with the new SML provisions:

BUT to benefit from it a contract must be enforceable for "civil law” purposes. Not clear if foreign law governed ISDA based trades are covered.

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Milestones (contd)

• 2009 Model Derivatives Documentation approved by the industry associations NFEA, ARB, NAUFOR

• 2010 – Regulation of the FSFM defining principal types of permitted derivatives

• 2011 - new Russian netting legislation came into effect in August

BUT to become operational FSFM should adopt 3-4 implementing regulations (repository registration, list of approved sets of model documentation and procedure for registration of amendments to approved industry documentation as well as the list of foreign organisations whose model documentation will be recognised)

• 2011 – currency control exemption for foreign currency settled derivatives between residents coming into effect from January

BUT only if one party is a Russian bank or a professional participant in the securities market

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What is missing?

• specific exemption from clawback rules for close out netting: technically, a challenge of the overall netting is possible

• recognition in the Civil Code of trades with international banks and multi-laterals for gaming purposes (in line with the approach of the new netting legislation)

• against the backdrop of repos where margining is recognised in the SML, the market needs statutory recognition of outright transfer of collateral for derivatives (proposed Civil Code amendments to deal with this?)

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What is missing (continued)?

• changing Article 11 of the Currency Law to allow direct cross-border deliverable FX trades without the involvement of the Russian bank as intemediary/agent

• favourable regulatory capital treatment of back-to-back trades (e.g. N6 and N1)

• update of Russian Model Derivatives Documentation (in progress)

• to reflect new legislation and

• to extend the range of documented products (commodities, cross-currency swaps)

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Conclusion

A lot of progress has been made in the regulation and documentation of OTC derivatives

BUT

more change has to come…

…on the way to

International Financial Center

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Questions?