BNY Mellon Starts Moscow Share Conversion Deal to Lure Investors

17 December 2013
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By Lyubov Pronina

Dec. 17 (Bloomberg) — OAO Moscow Exchange is joining with Bank of New York Mellon Corp. to reduce the time it takes to convert Russian depositary receipts into shares in a bid to lure more investors to the domestic market.

Investors holding depositary receipts of Russian companies listed domestically, in London and New York can now switch DRs into shares within one business day, down from two to three now, the companies said today in a joint e-mailed statement today.
The processing time also applies to Russian equities being converted into DRs, they said.

Moscow Exchange is stepping up efforts to better accommodate investors as part of the Russian government’s plan to turn the capital city into a global financial center. The bourse moved to two-day stock settlement in September and the nation’s equities are set to become available through Euroclear Bank SA and Clearstream Banking SA next year to attract trading from offshore platforms.

“One of the main goals is to simplify the process of liquidity flow between the two segments of the market,” Eddie Astanin, chairman of the executive board of the National Settlement Depository, a Moscow Exchange unit, said in e-mailed comments. We want “to expand the liquidity pool and increase attractiveness of Russian assets.”

Brokers want faster conversion and the new model will allow depositary receipts to trade on the secondary market, settle and be used as collateral by Russian market participants in their time zone, Astanin said, while declining to estimate the potential increase in volume. Collateral pledged with Bank Rossii’s repurchase operations climbed to a record 2.9 trillion rubles ($88 billion) today, data compiled by Bloomberg show.

Market ‘Inefficiencies’

“It’s helpful and will iron out some market inefficiencies in pricing between Moscow and London and New York but until DR ceilings are lifted the large ADR premium will persist,” Julian Rimmer, a trader at CF Global Trading UK Ltd., said by e-mail from London. “So marginal benefit but not much more than that.”

Depositary receipts can only account for 25 percent of a company’s shares and 50 percent of its listed stock, a limit the Moscow Exchange has been pushing to abolish. Those rules are unlikely to change any time soon, Astanin said. The central bank, which regulates the industry, may take a decision later to cap all the legislative changes to make the Russian market more competitive, he said.

Easier Process

“If DR caps were eliminated, it is tough to say where the trading would happen more, whether in London or in Moscow, but it would certainly make life easier for all parties, clients and brokers,” John Heisel, vice president of sales and trading at Renaissance Capital, said by e-mail.

London-traded shares of OAO Magnit, the country’s biggest retailer, trade at 15.2 percent premium to domestically listed shares, down from this year’s high of 27.3 percent on June 14.

The spread between American depositary receipts of biggest mobile-phone operator OAO Mobile TeleSystems and its Moscow shares narrowed to 5.2 percent from 23.4 percent May 15.

Once the limit is eliminated, the premium will disappear and there will be a lot more fungibility between depositary receipts and shares, Graham Marshall, BNY Mellon depositary receipts regional manager for Russia and the Commonwealth of Independent States, said by phone from London. BNY Mellon acts as a depositary bank for about 70 percent of Russian depositary receipts programs.

“We do expect more DRs to be traded locally in Russia,”
Marshall said. “The fact that participants have now got another class of collateral they can use, that alone will persuade a lot of issuers that it makes sense to have their DRs quoted locally in Russia.”

Trading volumes in 10 of the biggest Russian companies are about the same in Moscow and London, while in the past year, the London volume was about 50 percent greater, data compiled by Bloomberg show.
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