Russian Corporate Bond MarketRussian Corporate Bond Market: : Architecture &Architecture & ChallengesChallenges

AFDC Workshop on Developing Corporate Bond Market AFDC Workshop on Developing Corporate Bond Market

Georgy OksenoytGeorgy OksenoytChief AdvisorChief AdvisorMICEX Stock ExchangeMICEX Stock Exchange

Intro

Russian corporate bond market background:started in 1999 after the 1998 Russian financial crisis

build on the same fully automatic state-of-the-art technical platform as the Russian federal bond market

backed up by the experience of creating Russian government securities market and by it’s robust clearing and settlement infrastructure

now it is an exchange-traded and the most fast growing Russian securities market and may be the World’s biggest on-exchange corporate bond market

Scope of Contents

Regulation

Instruments

Market Segmentation

Infrastructure

Market Participants

Listing & Trading

Clearing & Settlement

Market Monitoring

Information Disclosure

Future Developments

Regulation

Russian Securities Market Regulator:

Federal Financial Markets Service of the Russian Federation (FFMS)

Overall regulation under the Federal Law on the Russian Securities Market

Central Bank of Russia:

Banks participation & supervision on the Russian securities market

Under the Federal Laws on the Central Bank of Russia and on the Russian Banking System

Russian Domestic Market Segmentation

Corporate bond domestic market segmentation:

Exchange-traded marketIncluding corporate bonds traded on the government securities market

OTC market

Corporate bond market turnover breakdown (October 2006):

MICEX Stock Exchange – 87,7% (in average -70-80%)

OTC – 12,3% (in average – 20-30%)

MICEX Group: Background

MICEX was established in 1992 as a currency exchange in the form of a closed-end joint-stock companyShareholders:

Central Bank of RussiaAssociation of Russian BanksSberbank RFVneshtorgbank12 other leading commercial banks

In 2004 on the base of MICEX stock market the MICEX Stock Exchange (MICEX SE) was founded

MICEX Settlement House

MICEX

National Depositary Center

E-Stock

• Settlement Bank• Settlement Depository

• Technological support of the MICEX projects

• Currency, derivatives & federal bonds markets• Clearing & IT services

Regional currency & stock exchanges

MICEX Stock Exchange

National Mercantile Exchange

• Listing & Trading in Equities, Corporate & Regional Bonds

• Trading in commodities

• The State commodity interventions in the grain market

National Clearing Center

St.-Petersburg Yekaterinburg Samara N. Novgorod Novosibirsk Rostov-on-Don Vladivostok

MICEX Group: Organization Chart

MICEX Stock Exchange: Shareholder Structure

Banks

MICEX

Brokers

Central Bank of Russia

MICEX SE

69%

28%

69%

19%12%

MICEX Stock Market: Advanced Information Technologies

Two computer centers: main & back-up

Trading software X-stream developed by Computershare (now - OMX) with similar systems at SWX, Shanghai SE, TSX

Hard- & software complex is built on Hewlett-Packard UNIX-servers (over 80)

MICEX TE currently processes:

up to 500 000 orders per day

up to 250 000 trades per day

11 telecom providers & more than 1500 trading workplaces connected

International vendors of broker systems: GL Trade, ORC Software, ION Trading

MICEX Stock Exchange: Core Russian Financial Infrastructure

St.-Petersburg

Moscow

N. Novgorod

Novosibirsk

Rostov-on-Don Yekaterinburg Vladivostok

Samara

Instruments

Corporate bonds issuers:

Financial institutions

Private corporations

Quasi-government companies

Types of corporate bonds:

Book-entry form only

All maturities (short, medium, long term)

Coupon (fixed, index/inflation-linked), discount (zero-coupon), amortization bonds

Corporate Bond Market Size(MICEX Stock Exchange)

Number of Issuers (traded)

Number of Issues

(traded)

Outstanding Volume

(traded), bln RUR

30.12.2005 202 251 382,8

31.10.2006 277 362

656,6 (24,3 bln USD)

Duration & Yield to Maturity of Corporate Bond Market

Indicators of corporate bond market in Russia

6

7

8

9

10

11

12

13

14

01.07.03 01.07.04 01.07.05 01.07.060

100

200

300

400

500

600

700

800

Yeild weighted average, % duration, in days (secon. axis)

Corporate Bond Market Outstanding Volume Breakdown by Sector (October 2006)

21%

12%

10%

10%

9%

7%

7%

24%

Financial Sector

Telecoms

Oil & Gas

Transport

Machinery

Metallurgy

Electric Power

Others

Trading Members & Clients(MICEX Stock Exchange)

Investors(1st level)

January 1, 2005

January 1, 2006

October 1, 2006

Total 117 382 134 440 239 650

Legal Entities 20 066 19 069 23 666

Private investors 96 529 109 714 207 110

Non-residents 787 1 145 2 041

Institutional Investors 4 512 6 833

Trading members

366

459

473

500

517

538

546

575

0 100 200 300 400 500 600

January 2000

January 2001

January 2002

January 2003

January 2004

January 2005

January 2006

September 2006

Membership Requirements

Single admission to trading on all exchange-traded stock markets (equities, corporate, municipal & subfederal bonds, REPO markets)

Russian residents (might be 100% foreign owned)

Broker-Dealer License of FFMS

Special categories of market participants:

Market-makers

Specialists

MICEX Stock Exchange:Membership base

All major players of all types:banksinvestment companiesinternet brokersnonresidentsinstitutional investors

Over 80% of the total capitalization of Russian banking system & investment community

Members Participants - Global Players(MICEX Stock Exchange)

ABN AMRO Bank

BNP PARIBAS

Citibank

СOMMERZBANK

Credit Suisse First Boston Bank

Deutsche Bank

HSBC

ING BANK

Goldman Sachs

J.P. Morgan Bank International

Morgan Stanley Bank

Raiffeisenbank

UBS Securities

Others

Russian Exchange-traded Corporate Bond Market Composition

On-exchange corporate bond market:

Listed corporate bonds:List A1 - 22 issues (MICEX SE)List A2 – 24 issues (MICEX SE)List B – 63 issues (MICEX SE)List V (new)List I (innovation and growing companies)

Corporate bonds admitted to on-exchange trading without listing – 293 issues (MICEX SE)

Listing Requirements(MICEX Stock Exchange)

Requirement A1 Listing A2 Listing B Listing

One person and/or his affiliated persons can own no more than 75% of the issuer’s common registered equities (only for shares)

No more than 90%

Market value of the issueCS — 10 bln RURPS — 3 bln RUR

CS — 3 bln RURPS — 1 bln RUR

CS — 1.5 bln RUR PS — 500 mln RUR

Period of issuer’s existence not less than

3 years 1 year

Break-even years 2 our of 3 last years —

Volume of the bond issue 1 bln RUR 500 mln RUR 300 mln RUR

Net assets of mutual fundopen/interval — 10 mln RUR

closed — 50 mln RURopen/interval — 5 mln RUR closed — 10 mln RUR

Monthly trading volumefor last 3 years

for shares — 25 mln RURfor bonds — 10 mln RUR

for shares — 2.5 mln RUR for bonds — 1 mln RUR

for shares — 1.5 mln RURfor bonds — 500 thousand RUR

Monthly average volume for 6 months

for shares — 50 mln RURfor bonds — 25 mln RURfor mutual fund shares —500 thousand RUR

for shares — 5 mln RURfor bonds — 2.5 mln RUR for mutual fund shares —300 thousand RUR

for shares — 3 mln RUR for bonds — 1 mln RURfor mutual fund shares —100 thousand RUR

Issuer’s observance of the Corporate Governance norms

The formalized requests on observance of the Corporate Governance norms with confirmation documents

Financial statement Compilation and disclosure the financial statements according toaccounting standards IAS and US GAAP —

Information disclosure According to standards of FFMS

Russian Domestic Capital Market in Figures

In 2006 MICEX Stock Exchange’s share in the Russian exchange-traded stock market turnover is up to 90% (from June 2006)Volume of transactions in 2005 was 49,2% over 2004Volume of transactions in Jan-Sept 2006 reached 500,7 bln USD which is:

3,4 times more than in Jan-Sept 2005already 2,2 times more than the total 2005 turnover

Turnover of the Russian exchangesin 2003-2006, bln USD

2003 2004 2005Jan-Sep

2006

MICEX /

MICEX SE99,1 151,2 225,6 500,7

RTS Group

13,3 26,1 43,8 55,2

MICEX Stock Exchange:Average Daily Turnover

0.49

0.71 0.740.84

0.580.75 0.77 0.85

1.30 1.311.20 1.22

1.75

2.19

1.94

2.61

3.37

3.12

2.65

3.17

3.40

0

0.5

1

1.5

2

2.5

3

3.5

4

Jan

-05

Fe

b-0

5

Ma

r-0

5

Ap

r-0

5

Ma

y-0

5

Jun

-05

Jul-0

5

Au

g-0

5

Se

p-0

5

Oct

-05

No

v-0

5

De

c-0

5

Jan

-06

Fe

b-0

6

Ma

r-0

6

Ap

r-0

6

Ma

y-0

6

Jun

-06

Jul-0

6

Au

g-0

6

Se

p-0

6

bln USD

Corporate Bonds On-Exchange Trading(MICEX Stock Exchange)

Primary on-exchange market:Price auctionsCoupon rate tendersMixed (price + coupon rate) auctions

Secondary on-exchange market:Anonymous (order-driven) marketNegotiated deals mode (named orders, quote-driven market)

Fully electronic markets World-wide Internet access

MICEX Stock Exchange: Basic Market Features

Anonymous Market Negotiated Deals Market REPO Market

Insruments - Equities, Corporate, Municipal & Subfederal Bonds

Screen-Based Trading, Remote Terminals, Global Internet Access

Order-Driven Market Quote-Driven Market Negotiated Deals Mode

Locked-in-Trades

Real Time Positions Monitoring (Worst Case Scenario)

Multilateral Netting (without CCP)

Rolling Settlement, Forced Settlement (T+0)

DVP (3d Model, BIS)(Central Bank Money, intraday finality, same day funds, no zero-hour rule, without CSD)

-Mark-to-market, margin calls,

haircuts

Pre-funding of assets

before the trade

Pre-funding of assets on the settlement date

Settlements (RUR)"T+0"

Settlements (RUR) from "T+0" to "T+30"

Settlements (RUR)from "T+0" to "T+180"

Corporate Bonds Primary Placements(MICEX Stock Exchange)

Number of Issuers (placed)

Number of Issues

(placed)

Placed Volume (face

value), bln RUR

2005 year 126 145 259,5

Jan-Oct 2006 160 165 335,7

Primary Placements Parameters(MICEX Stock Exchange)

Average Issue Size, bln. RUR

Average Maturity, days

2005 year 1,79 1302

Jan-Oct 2006 2,03 1404

Corporate Bond Market Dynamics 2005-2006

Indicators of corporate bonds market at MICEX SE

0

100

200

300

400

500

01.2005 04.2005 07.2005 10.2005 01.2006 04.2006 07.2006 10.200601020304050607080

Emission, bln. RUB (secondary axis)Turnover of secondary market, bln. RUB (including REPO)

Corporate Bond Secondary Market Parameters

Turnover, bln USD

Number ofTrades

Average DailyTurnover, bln USD

AverageDeal Size,mln USD

AverageDaily

Number of

Trades

2005 year 41,7 192 931 168,0 0,22 778

Anonymous 4,8 136 294 19,3 0,04 550

NDM 25,2 37 031 101,7 0,68 149

Repo 11,6 19 606 47,0 0,59 79

Jan-Oct 2006 99,7 230 953 483,9 0,43 1221

Anonymous 7,6 146 724 37,1 0,05 712

NDM 43,8 41 437 212,6 1,06 201

Repo 48,2 42 792 234,2 1,13 208

Corporate Bond Market Liquidity Indicators (MICEX Stock Exchange)

Overall market velocity (10 month 2006) = 4,09 times including:

anonymous market velocity = 0,31 times

NDM market velocity = 1,8 times

The most liquid corporate bond issues (RZD, Gazprom, FSK EES):

average daily bid-ask (closing) spreads = 9-12 b.p. (Oct 2006)

average Intraday Volatility (max/min) = 10-20 b.p. (Oct 2006)

Market Concentration (October 2006): TOP 5 Corporate Bonds’ Market Share (turnover)

8% 7%4%

4%2%

75%

РЖД об06

ФСК ЕЭС об02

РЖД об07

УК ГидроОГК об01

РАФ об03

Прочие

Corporate Bond Secondary Market Structure by Type of Participant (October 2006)

Market concentration (top 30 = 84,4%):top 10 participants – 44,1% of the market turnovernext 10 – 18,8%next 10 – 11,5%

Dealer trades – 41,2% including:Dealer-to-Dealer trades – 17,2%Dealer-to-Customer trades – 24%

Customer operations – 58,8% including:nonresidents – 20,8%corporations – 29,5%trustees – 8,1%natural persons – 0,3%

MICEX Stock Exchange:Basic Clearing & Settlement Data

Cash Obligations Netting Rate (2005):Banks - 73,6%Non-banks - 88,6%Total – 84,53% (86,4% in 2006)

Corporate Bonds Netting Rate (2006):Gazprom Bonds A6 – 62,4%FSK EES Bonds 02 – 65,2%RZD Bonds 06 – 58%

Cash Pre-deposits/Obligations (coverage) Rate (2005):Gross – 1,09 timesNet – 5,87 times

Cash Future/Total Obligations Rate (2006): 50-60%

Russian Repo Market

MICEX:

100% of the Central Bank of Russia repo operations (CBR monetary policy operations with federal & CBR bonds, euro-, corporate & municipal bonds)

100% of the inter-dealer repo market with federal bonds (OFZ)

MICEX Stock Exchange:

> 80% of the total Russian repo market with equities, corporate & municipal bonds

MICEX Repo Market Milestones

1997 – Central Bank of Russia (CBR) started its repo operations with federal bonds (GKO-OFZ) at MICEX2002 – start of repo at MICEX’ equity, corporate & municipal bond marketSwitch to modern repo technologies (according toICMA/TMBA GMRA-2000):2003 – MICEX federal bond market (for both repo with the CBR and inter-dealer repo markets)2005 – MICEX Stock Exchange corporate & municipal bond market2006 – MICEX Stock Exchange equity market

Repo Average Daily Turnover (Jan-June 2006)

MICEX Stock Exchange (MICEX SE):equities – RUR 9,0 blncorporate & municipal bonds – RUR 7,3 bln

MICEX:federal bonds (OFZ) & CBR bonds – RUR 9,5 bln

All data refer to the 1st legs of repo only

MICEX Repo Market Main Features

Repo with federal bonds

(MICEX)

Repo with corporate & municipal bonds

(MICEX SE)

Repo with equities (MICEX SE)

International Standards GMRA-2000, classic repo, term, special collateral, cash-driven, fixed rate

GMRA-2000, classic repo, term, special collateral, both cash-and stock-driven, fixed rate

Classic repo, term, special collateral, both cash-and stock-driven, fixed rate

Trading mode On-exchange, fully electronic, negotiated deals mode (named

orders)

On-exchange, fully electronic, negotiated deals mode (named

orders)

On-exchange, fully electronic, negotiated deals mode (named

orders)

Repo maturity 0-180 days 0-180 days 0-90 days

Risk management Upon the agreement between counterparties: haircuts, fully automatic daily mark-to-market, margin calls notices and manufactured payments, other risk management tools (blocking of collateral, limits)

Upon the agreement between counterparties: haircuts, fully automatic daily mark-to-market, margin calls notices and manufactured payments, other risk management tools

Upon the agreement between counterparties: haircuts, fully automatic daily mark-to-market, margin calls notices, other risk management tools

MICEX Stock Exchange: REPO in Bonds & Equities

2,9 5,6 7,1 10,7 12,9

26,1

36,8

2,63,3

4,9

9,511,3

20,4

25,1

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

1Q

20

05

2Q

20

05

3Q

20

05

4Q

20

05

1Q

20

06

2Q

20

06

3Q

20

06

bln USD

Bonds REPO

Stocks REPO

REPO trading volume in January-September 2006 reached 132,6 bln USD which is 5 times more than in January-September 2005

MICEX SE Repo Trading Volumes(RUR bln)

0

100

200

300

2002 2003 2004 2005 2006(1st Half a Year)

Equities Bonds Total

MICEX SE Quarterly Repo Trading Volumes (RUR bln)

0

200

400

600

800

1 кв.2005

2 кв.2005

3 кв.2005

4 кв.2005

1 кв.2006

2 кв.2006

Bonds Equities

MICEX SE Repo vs Secondary Trading Volumes

0

100

200

300

2002 2003 2004 2005 2006(1st Half a Year)

Equities Bonds Total

Number & Average Size of Repo Deals

Equities

0

20

40

60

80

100

2002 2003 2004 2005 2006(полугодие)

Сдел

ки(т

ыс.

шт.

)

02 000

4 0006 0008 00010 00012 000

Сред

ний

разм

ер с

делк

и (т

ыс.

руб.

)

Количество сделок. Средний размер сделки.

Bonds

0

5

10

15

20

25

30

2002 2003 2004 2005 2006(полугодие)

Сдел

ки (т

ыс.

шт.

)05 00010 00015 00020 00025 00030 00035 00040 000

Сред

ний

разм

ер с

делк

и (т

ыс.

ру

б.)

Количество сделок. Средний размер сделки.

Maturity Structure of Repo(Jan-June 2006)

Equities

23%17%

29% 31%

Репо на 7 дней. Репо на 14 дней.Репо на 1 день. Другие даты исполнения РЕПО.

Bonds

27%18%

28% 27%

Репо на 7 дней. Репо на 14 дней.Репо на 1 день. Другие даты исполнения РЕПО.

Number of Instruments in Repo

0

100

200

300

400

500

2002 2003 2004 2005 2006

(1st Half a Year)

Equities Bonds Total

Number of Repo Participants

0

100

200

300

2002 2003 2004 2005 2006(1st Half a Year)

Equities Bonds Total

Repo Counterparties

Equities

37%

40%

17%2% 4%

Inter-dealer Legal entities

Nonresidents Private persons

Local mutual & pension funds

Bonds

61%

3%

0,03 %

1%

35%

Inter-dealer Legal entities

Nonresidents Private persons

Local mutual & pension funds

Future Repo Market Developments

Modes International Practice

(estimated market share) *

Trading Mode Anonymous repo (11-12%)

Repo participants Tri-party repo (11,3%)

Repo terms Open/Demand/Call repo

Repo-to-maturity

Roll (rollover) repo

Repo rates Floating/indexed rate (10,5% рынка)

Open rate (8,2%)

Types of collateral General collateral (GC)

(over 70%)

Collateral management Collateral management/substitution of collateral/CTD

(over 50% )

Manufactured payments Manufactured dividend

(equity repo)

Other modes Cross-currency repo, Flex repo,

build-in SWAPs, Structured products

* Market share estimations based on the 11th European Repo Market Survey by ICMA EU Repo Council (June 2006)

Russian Corporate Bond Market Prospects

International harmonization & standardization (MiFID, Prospectus Directive, Best Execution, etc.)

Full range of instruments (“Exchange-traded-only” short-term corporate bonds, RDR, ABS/MBS, SWAPs, derivatives, structured products, etc.)

Simplifying issuance procedures

Post-trade transparency (OTC trades reporting)

Corporate governance

Further infrastructure development (CSD, CCP, STP)

Investor base improvement (lack of institutional investors) etc.

MICEX: Federal Bond Market

MICEX organizes primary and secondary market for federal bonds & Bank Of Russia bonds

Volume of transactions in 2005 has reached 101 bln USD, which is 2 times more than in 2004

Volume of transactions in Jan—Oct 2006 has reached 100.5 bln USD, which is 1.7 times more than in Jan—Oct 2005

The volume of transactionsand the RGBI Index

95

100

105

110

115

120

125

1Q2003

2Q 3Q 4Q 1Q2004

2Q 3Q 4Q 1Q2005

2Q 3Q 4Q 1Q2006

2Q 3Q

points

0

10

20

30

40

50

60bln USD

MICEX: Market Value of Federal Bond Market

Market value of the federal bond market has grown 3.7 times during 2003-2005

Market value of the federal bond market in Jan—Oct 2006 has increased by 25.8% to 31.7 bln USD

Share of OFZ-AD in the market value of the federal bond market — 61.3%

Turnover velocity of the federal bond market in Jan—Oct 2006 was 64.4%

0

5

10

15

20

25

30

1H 2002

2H 1H 2003

2H 1H 2004

2H 1H 2005

2H 1H 2006

bln USD

Russian Sovereign Risk Reduction

Dynamic of government bond yields in Russia and USA

02468

101214

01.01.03 01.01.04 01.01.05 01.01.06

Yield of US Treasury 10YZero coupon yield in Russia 10Y

Source: investment company “Trust”

Short-term nature and high dispersion of yields

Source: investment company “Trust”

Two main types of bank bonds that differ by term and yield. Depends on quality

Source: investment company “Trust”

Among energy borrowers Gazprom and Lukoil are the best

MosPrime Rate: Key Russian Money Market Indicator

MosPrime Rate: Key Russian Money Market Indicator

Calculated by National Currency Association with EBRDCalculated by National Currency Association with EBRD support support fromfrom April 2005 (LIBORApril 2005 (LIBOR--type, 3 month, Tom, 12:30 Moscow time).type, 3 month, Tom, 12:30 Moscow time).

8 quoting prime banks8 quoting prime banks::ABN AmroABN AmroWestWest--East LBEast LBVneshtorgbankVneshtorgbankGazprombankGazprombankMIBMIBSaving Bank of RussiaSaving Bank of RussiaCiti BankCiti BankRaiffeizen BankRaiffeizen Bank

Firm quotes on the day of EBRD local bonds coupon calculation.Firm quotes on the day of EBRD local bonds coupon calculation.

MosPrime Rate Trend 2005-2006MosPrime Rate Trend 2005-2006

2%

3%

4%

5%

6%

7%

01.0

5.20

05

01.0

6.20

05

01.0

7.20

05

01.0

8.20

05

01.0

9.20

05

01.1

0.20

05

01.1

1.20

05

01.1

2.20

05

01.0

1.20

06

01.0

2.20

06

01.0

3.20

06

01.0

4.20

06

01.0

5.20

06

01.0

6.20

06

01.0

7.20

06

01.0

8.20

06

01.0

9.20

06

01.1

0.20

06

Outstanding volume of corporate debt linked to MosPrime Rate

Outstanding volume of corporate debt linked to MosPrime Rate

8-9) первые ипотечные кредиты в рублях с плавающей ставкой

Рост обязательств, привязанных к ставкам MosPrime Rate (публичные сделки)

0

5

10

15

20

25

30

35

40

45

апр.

05

май

.05

июн.

05

июл.

05

авг.

05

сен.

05

окт.

05

ноя.

05

дек.

05

янв.

06

фев

.06

мар

.06

апр.

06

май

.06

июн.

06

июл.

06

авг.

06

сен.

06

окт.

06

Мил

лиарды

Накопленный объемобязательств (руб.)

1

3

4

6

2

7

5

8

9

Russian Corporate Eurobonds

Eurobonds in Russia (amounts outstanding)

0

20

40

60

80

100

1.6.02 1.6.03 1.6.04 1.6.05 1.6.06

bln. USD

Government eurobonds Corporate bonds

Contacts

Address:

Bolshoy Kislovsky per. 13, Moscow, 125009, Russia

Phone:

(+7 495) 234-48-11

Fax:

(+7 495) 705-96-22

E-mail:

info@micex.com

Web:

www.micex.ru

www.micex.com