Emerging Markets: Lending in Russia - 1Q 2013
Expansion of securities lending activity in emerging markets continues to be a focal development point for J.P. Morgan, enabling Lenders to secure higher fees as the yield pick is significantly higher than the more established markets. Building upon our strong track record as a leader in emerging markets, we are now edging close to completing a loan transaction in Russia (expected to go live in the third quarter of 2013) – an exciting BRIC market with strong demand appeal.
The Russian securitises market has experienced many changes in the last 18 months, for instance, the recent creation of a single Central Securities Depository ('CSD') compliant with U.S. SEC Rule 17F-7. These changes open up new opportunities for market participants and help address key post trading infrastructure shortfalls that previously deterred international investors. The essential reform has served to significantly improve the overall appeal of Russia to non-resident investors improving both efficiency and access to the market.
Key considerations for lending in Russia
When designing a lending solution for Clients, focus on investor protection and ensuring that the end model is tailored to fit the local market is essential. In the case of Russia, extensive due diligence has been undertaken surrounding the legal safety of the loan trade, and the regulatory or tax nuances that require consideration when lending in Russia. J.P Morgan's extensive on the ground knowledge and ability to tap into our local market expertise has been crucial throughout this development. The end result is a solution that largely follows the standard securities loan structure recognized by clients today when lending in developed markets. With that said, it is important to highlight that specific nuances in relation to foreign ownership limits and corporate actions with back dated record dates do exist and should be discussed further if considering entry into Russia.
- Trading activity with borrowers will be governed under standard U.K. law securities lending counterparty agreements, with an additional market addendum that harmonizes operational practices for Russian loans with other lending markets, and seeks safeguards from borrowers in relation to foreign ownership limit regulations and back dated corporate actions
- Loans will be collateralized using non-Russian securities, in line with program standard collateral margins and schedules (cash and non-cash, including bonds and equities)
- Only equity securities held at the CSD and traded on an organized exchange will be eligible for lending
- There is no requirement for pre-trade date sale notifications, therefore, fund managers are not restricted in their ability to sell securities
Current demand and revenue spreads
As the market continues to evolve and the level of hedge fund activity begins to grow, we expect stock lending volumes to also rise accordingly.
Current demand in Russia includes both directional shorts and the Equity vs. the ADR trade, for which funds may go short the equity and long the ADR. Spreads in Russia are currently trading between 50-75bps and will increase depending on the demand of the stock. Sectors of interest include Financials, Consumer, Natural Gas and Oil and Mining. Securities that are currently in demand include Gazprom, Lukoil, SBERBANK, Rosneft and Mobile Telesystem.
Corporate actions do not tend to generate lending activity as M&A events are mainly all cash deals and companies wishing to raise capital do not tend to issue rights issues, but instead generate funds through private investors.