Brokers and dealers brace for changes in markets

New laws coming into effect from next July will see smaller and less efficient brokers and dealers in the stock exchange market leave the industry, with January tax changes providing more flexibility for investors.

The Federal Financial Markets Service (FFMS) says regional markets could see as many as three quarters of brokers and dealers affected by new minimum funding requirements coming in on July 1 next year. As of that date they will need to have minimum funding of 35 million roubles, rising to 50 million roubles a year later. There are also stricter requirements for asset management companies, depositaries, and exchanges.

The FFMS has held meetings with regional market players about the ability to comply with the new requirements and FFMS Head, Vladimir Milovidov, believes about 8-10% of market participants nationwide will be affected. But based on a survey conducted by FFMS staff during their consultations with the industry across Russia, the regional broking and dealing market will, in some areas, be heavily hit. The FFMS believes 45% of market players in the Krasnoyarsk region will be forced out, 70% in the southern region, and 75% in Eastern Siberia. Milovidov adds, however, that most of the companies affected, are providing non core services, with 80 companies not meeting existing funding requirements, being ordered to cease operations or comply.

The minimum funding laws come into affect after the introduction of a new taxation regime affecting market activity on January 1 2010. It addresses a number of issues which have arisen over the taxation of trading on the futures markets, particularly taxation of clearing houses and counteragents, VAT implementation on derivatives transactions, regulation of individual taxation and the taxation of losses, not addressed in existing tax legislation.

Key changes include an amnesty on some transactions during 2008-affected by the existing taxation regime and its treatment of losses, changes in the tax applicable to derivatives deals where goods are an underlying asset, as well as allowing for the carrying over of losses from derivatives transactions to future income for a 10 year period.

Dmitry Serebrennikov, Deputy CEO at Finam, believes the tax changes are long overdue.

“It’s really good. Authorities have long promised to make work in equity markets more comfortable and finally it happened. Both private and institutional investors will be able to balance their results, which will significantly reduce tax payments.”

Evgeny Dankevich, Director at Otkrytie FC believes the tax changes will help stimulate local markets and provide more confidence for investors looking to enter the Russian equity markets.

“I think, the most important change in Russia’s legislation that will stimulate the equity market is the new taxation regime. If before both investors’ profit and loss was taxed, which meant a person had to pay money even if he had lost everything, then from January 1, 2010 only positive results will be taxed. So, investors will be able to balance their results from operations with fund and non fund derivatives. On top of that, it will be possible to shift losses born this year, for example, to the following, which is also very convenient. I think, this is the way things should be organized, it’s more natural, more reasonable. Since the amendments come into power, an investor can be absolutely relaxed entering Russia’s equity market.”

Dankevich also sees the upside of the raising of minimum capital requirements.

“Definitely, it’ll help to get rid of inefficient small market players. It’s obvious that since companies have to show better financial standing, part of them will leave the market and the strongest will survive. And even after that about 200 players will remain in Russia’s equity market, which is more than enough for competition.”

Finam’s Serebrennikov, can see the value in the move, noting “It’ll make the market more reliable.” But he also believes the step needs to be taken as part of a considered strategy which he still isn’t seeing.

“Generally speaking, I think it’s necessary to take a complex of measures instead of introducing local amendments. Once the authorities change the legislation, they also have to change the way corresponding institutions work. I mean, they should talk about any changes as a part of a set strategy. So far they don’t have such.  The talks about making Russia a financial center have long been running, but, I think, it’s necessary to start with simple things. To create a single register service, for example.”