30 Jan 2009, Alastair Marsh, Risk magazine
Evgeny Serdyukov, head of business development at Russian Trading System (RTS) exchange’s derivatives business, Futures and Option on RTS (Forts), explained: “Currency derivatives became by far the most popular contracts by the end of December and the beginning of this year. Following the government’s decision to steadily devalue the rouble, the rouble-dollar exchange rate became unpredictable and the volatility on the exchange rate grew."
In September and October, the global financial crisis that had wreaked havoc in the US and Europe finally took hold in Russia, which had seemed relatively shielded from its impact during the first half of the year. Since September 1, Russian equity indexes have plunged – the RTSI index has lost 68.16% of its value and Russia's other major exchange, the Moscow Interbank Currency Exchange (Micex), has fallen 54.7%.
To ease the strain, the Bank of Russia has allowed the rouble to depreciate gradually. Although it held steady at around 25.70 through late September, October and November, it fell to 28.27 on December 23, and 30.53 on January 12, 2009, the second trading day of the year.
The weakening rouble has precipitated a rise in trading of currency derivatives. In the week from January 19, 596,305 rouble-dollar futures worth 21.4 billion roubles were traded on Forts, up 66.71% from the last week of December, when 198,493 contracts worth 6.16 billion roubles were traded.
On Micex, trading in futures on US dollars rose 60% from 1.47 million contracts in November to 2.35 million in December. By January, between January 19-23 and 11-16, 715,123 contracts have been booked.
Increased volumes were driven by speculators as well as hedgers, Serdyukov said. He commented that some speculators used currency futures to short the rouble, which he estimated could make possible earnings of more than 40% over annual interest rates, or more than 50% for banks.
Additionally, some Russian investors have made an arbitrage profit in buying rouble-dollar futures from Forts in Moscow and at the same time selling non-deliverable forwards (NDFs) in the OTC market in London.
NDFs are short-term foreign exchange contracts in currencies which have restricted convertibility. They are synthetic forwards that entail no exchange of currencies at maturity, where settlement is made in US dollars based on the difference between the agreed contract rate at inception and a market reference rate at maturity.
In response to the rise in volumes, Forts intends to launch more currency products, including euro futures and cross-currency euro-dollar contracts.
In the more distant future, attention may be turned towards credit derivatives. “Creating an exchange market for credit derivatives is a fashionable theme here as in the west and we are looking at the potential of these instruments – it could prove to be an interesting market,” Serdyukov noted.
Until January 2007, the law restricted derivatives trading in all asset classes, classifying them as a form of gambling. Since then, legal reforms have given protection to futures, options and swaps in currencies, equities, commodities and interest rates. However, credit derivatives are excluded from these reforms, with no credit products traded on any of Russia's exchanges.
However, Russia’s slow move towards credit derivatives may have in fact played to its advantage. “Because we didn’t have credit derivatives as developed in Russia as they are in the West, our banks of course feel better. We understand all the minuses and the possible consequences. We were lucky that this market was not well developed,” Serdyukov noted.