Rus­sia cen­tral bank may ask banks to fore­warn it about FX deals

Gulf Times Business - - BUSINESS -

Rus­sia’s cen­tral bank is con­sid­er­ing ask­ing banks and ma­jor com­pa­nies to tell it in ad­vance about for­eign ex­change deals that could af­fect the value of the rou­ble, three fi­nan­cial mar­kets sources told Reuters.

Some banks are re­sist­ing the pro­posal on the grounds that it could af­fect their own busi­nesses and com­pro­mise client con­fi­den­tial­ity, ac­cord­ing to the sources, some of whom are in­volved in writ­ing a new code of con­duct for the forex mar­ket.

A Rus­sian fi­nance min­istry of­fi­cial de­nied the pro­posal would breach eth­i­cal stan­dards, telling Reuters that banks would not need to dis­close their clients’ names.

The of­fi­cial and other sources all asked not to be iden­ti­fied be­cause the is­sue is sen­si­tive and no fi­nal de­ci­sions have yet been made. The new FX code, which is be­ing drafted by the cen­tral bank, rep- re­sen­ta­tives of ma­jor banks and mar­ket as­so­ci­a­tions, is in­tended to com­bat fraud and im­prove mar­ket ef­fi­ciency.

The cen­tral bank, which reg­u­lates the bank­ing sec­tor and fi­nan­cial mar­kets, says a no­ti­fi­ca­tion scheme would al­low it to keep track of forth­com­ing cur­rency deals that might af­fect the rou­ble’s ex­change rate and mar­ket liq­uid­ity, the sources said.

Large cor­po­rate trans­ac­tions have caused rou­ble volatil­ity in the past.

In late 2014, the cen­tral bank in­ter­vened to prop up the cur­rency as it fell in the wake of a 625bn rou­ble ($9.43bn) bond sale by Ros­neft, even though the oil giant de­nied it was us­ing pro­ceeds to buy for­eign cur­rency.

The rou­ble had al­ready weak­ened dra­mat­i­cally in re­sponse to plung­ing oil prices and West­ern sanc­tions im­posed over Rus­sia’s an­nex­a­tion of Crimea from Ukraine. The cen­tral bank later de­scribed the Ros­neft bond sale as not trans­par­ent. Ros­neft’s ac­tiv­ity on the cur­rency mar­ket has been men­tioned dur­ing dis­cus­sions about the new FX code this year but was not a rea­son for its draft­ing, one fi­nan­cial mar­ket source said.

Ex­perts were also study­ing the case of a for­mer HSBC ex­ec­u­tive con­victed in April of fraud re­lated to a $3.5bn cur­rency trade in 2011, the source said.

The ex­ec­u­tive de­vised a scheme through which the bank ex­e­cuted a se­ries of trades in ad­vance of a client’s or­der to make a profit, a prac­tice known as “fron­trun­ning”.

“As our FX ex­perts are work­ing on the FX code, as ad­vised by the cen­tral bank, they have looked into this case from the point of view of ethics, vi­o­la­tion of this code, and dis­cussed how the Rus­sian prac­tice is tak­ing shape,” the source said.

Another source close to the talks be­tween the cen­tral bank and in­dus­try group the Na­tional Fi­nance As­so­ci­a­tion (NFA) said the idea of a “re­port­ing line” had been dis­cussed and is be­ing con­sid­ered.

But no fi­nal de­ci­sions have been made, in­clud­ing the size of trans­ac­tion needed be­fore banks would have to in­form the cen­tral bank.

“The de­ci­sion is likely to be made no ear­lier than next year,” the sec­ond source said. A third source fa­mil­iar with the talks con­firmed that the cen­tral bank and NFA have dis­cussed the prospects of set­ting up such a mech­a­nism.

Min­utes of an NFA meet­ing held on June 21 showed the HSBC case had been dis­cussed in the con­text of Rus­sia’s ex­ist­ing FX code.

Present at the meet­ing was Valery Lyakh, head of mar­ket vi­o­la­tions mon­i­tor­ing at the cen­tral bank.

“A need to set up com­mu­ni­ca­tion with the Bank of Rus­sia was noted to in­form the reg­u­la­tor in time about big client or­ders, ex­e­cu­tion of which could sub­stan­tially af­fect prices in the un­fold­ing mar­ket con­di­tions,” the min­utes said.

Asked if the cen­tral bank was propos­ing to set up such a chan­nel, Lyakh told Reuters the com­mit­tee had dis­cussed the HSBC case and noted that some coun­tries al­ready have a prac­tice of in­form­ing the reg­u­la­tor about up­com­ing big client or­ders. “That was not the pro­posal for our (Rus­sian) mar­ket,” Lyakh said.

Rus­sia’s NFA said it had no view on the is­sue but that some mar­ket par­tic­i­pants had raised the ques­tion of cre­at­ing a com­mu­ni­ca­tions stan­dard af­ter dis­cussing the HSBC case.

The first fi­nan­cial mar­ket source said the pro­posal had not come from mar­ket par­tic­i­pants, who op­posed a no­ti­fi­ca­tion clause in the FX code and had agreed to con­tinue talks on the is­sue. “The mar­ket is not crav­ing to re­port to the cen­tral bank on top of what it has to un­der cur­rent law,” the source said, adding that the FX code re­mains vol­un­tary: “No one has an obli­ga­tion to sign it.” The third source fa­mil­iar with the talks also said banks were clearly against the ini­tia­tive and were con­cerned about what kind of penal­ties they might face if they do not com­ply.

For now, the NFA com­mit­tee had de­cided to treat the FX code as a whole as a rec­om­men­da­tion and not a rule, sources said. The ini­tia­tive to re­port forth­com­ing deals to the reg­u­la­tor in Rus­sia re­sem­bles the ex­pe­ri­ence of some other emerg­ing mar­ket coun­tries and may bring Rus­sia, which has a free-float­ing rou­ble, a step closer to stricter cur­rency con­trols.

In China, cross-bor­der deals above a cer­tain size need gov­ern­ment ap­proval and com­pa­nies re­quire per­mis­sion from the forex reg­u­la­tor to ex­change yuan into for­eign cur­rency for over­seas ac­qui­si­tions.

In­dia has no such for­mal re­quire­ments but it is com­mon to in­form the Re­serve Bank of In­dia about sub­stan­tial trans­ac­tions.

The RBI deal­ing room also calls some banks on a daily ba­sis to check what kind of FX flows they are see­ing.

Asked about banks’ con­cerns, the sec­ond source close to the talks and oth­ers said the Rus­sian cen­tral bank is al­ready in a po­si­tion to ob­tain mar­ket in­for­ma­tion not avail­able to oth­ers.

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