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FX debate

FX debate

Testing times in the search for alpha

November 2007

Russia: Rouble held back by settlement

The news that spot rouble trades have taken place electronically on EBS and LavaFX between Russian and foreign banks has been taken by some observers as proof that the currency has taken a significant step towards full convertibility. However, the deals mask the fact that Russia’s settlement system is still a real impediment to the rouble’s wider acceptance and is harming the government’s hopes that it will one day be accepted as a reserve currency.




Darryl Hooker, Icap

"Russia has ambitions to become a G8 and reserve currency. We have serious doubts about this aim unless Russia reforms its settlement system. The issue is not a technological one but a political one"
Darryl Hooker, Icap

Rouble moves mainstream
Euromoney March 2007

Market participants are keen to address the settlement problem. "At the start of the year, we met with the Russian central bank and discussed settlement. This is seen by many as the biggest issue in the market," says Darryl Hooker, emerging market manager at Icap Electronic Broking. Following this meeting, Icap hosted a forum in London in April attended by six non-Russian banks, including ABN Amro, Citi, Barclays, Société Générale and RZB.

"With the first forum, we tried to address the simple question of whether settlement really was the issue. The consensus was that it was prohibiting the rouble market’s expansion," says Hooker.

The size of this consensus was illustrated by the popularity of a second forum Icap held in Moscow on September 18 in conjunction with the Moscow Interbank Currency Exchange (Micex). "We initially invited seven local banks and five foreign banks, but we had over 50 delegates participate," says Hooker.

Daniel Aitchison, managing director, local markets trading, at Citi, agrees with Hooker that settlement problems are harming the rouble market. "The settlement system is an absolute nightmare," he says. "Settlement issues take up traders’ time and we have to allocate extra back-office resources to it. It’s really messy and we have to run parallel cash and NDF [non-deliverable forward] books. The rouble’s potentially a huge currency and we see a lot of interest from both corporates and investors," he adds.

The main problem is that Russia does not yet use a real time gross settlement system (RTGS). "The Russian settlement system has a complicated decentralized structure," say Eugenia Kuksinskaya, head of settlement centre, and Igor Souzdaltsev, head of financial institutions, at Investsberbank in Moscow.

"It consists of two settlement subsystems divided by geographic characteristics. The first subsystem is called the Internal regional electronic settlements (in Russian – VER), and the second is the Interregional electronic settlements (in Russian – MER). They work on different operational platforms. They were created in the in the 1990s at the time when the market economy just began to develop. Their task was to solve problems in settlements, to increase their speed and prevent the theft of funds by using forged settlement documents," add Kuksinskaya and Souzdaltsev.

Typically, non-Russian banks refer to the settlement system as IRS. Payments are made in five shifts across Russia’s 11 time zones. It is not unusual for FX trades to be settled in shifts four and five, which are at the end of the Moscow business day. If this happens, banks have little or no way of knowing whether they have received their roubles, making it impossible to balance their nostro accounts. Legally, clearing banks are not allowed to go overdrawn with the Central Bank of Russia and although synthetic overdraft facilities can be arranged, they come at a cost. Exacerbating the problem is the fact that all Swift payment orders have to be translated into Cyrillic and then retyped into IRS. This lack of any straight-through-processing is not only manually intensive but is prone to introduced errors. It is little wonder then that NDF trading continues to dominate the rouble market.

"We have limited overdrafts, and the current settlement system makes it almost impossible to be sure you can balance your nostro account at the end of the business day," says Aitchison. "Everyone jumped into the deliverable market when the rouble became convertible (from July 2006). It was supposedly going to make the market more efficient, but people have pulled back after receiving continual overdraft charges. Rouble trading has had to take a step back. It’s still developing, but the pace of evolution and the rate of growth are definitely being held back because of the settlement issue," he adds.

The central bank is clearly aware of the issue, and during Icap/Micex’s second forum it unveiled its new RTGS system, called Banking Electronic Speedy Payment Systems (BESP). "During the forum, the central bank showed its BESP system. After that, several recommendations were made. The most important one was that the central bank mandates local correspondent banks to be in contract (to use BESP) by the end of Q1 2008 and be active by Q3 2008," says Hooker.

In theory, BESP is already in pilot. "Russia has ambitions to become a G8 and reserve currency. We have serious doubts about this aim unless Russia reforms its settlement system. The issue is not a technological one but a political one," says Hooker.

Kuksinskaya and Souzdaltsev tread carefully around such assertions. "Because Russia has 11 time zones, banks are unable to fully control and use the funds of their branches. The branches have difficulties with liquidity too. The introduction of BESP is a new step towards development of a wire transfer system in Russia. The introduction of an online settlement system will lead to an increase in interbank market volumes and liquidity. It will also allow us to serve our clients better," they say. "It’s important to remember that BESP, unfortunately, has been created as an additional system and it has to work independently but also in parallel with the VER and MER systems. This fact is not leading to easy cooperation of some banks with the settlement units of the Central Bank of Russia. The most important thing now is that banks quickly begin to work in the new system. Otherwise, the effectiveness of this system will be small. We think, though, that BESP will begin to operate effectively in mid-2008."

If it does not, the government’s aspirations to see the rouble become accepted as a reserve currency will have to be put on hold for a little longer.







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