Limits to growth for Russian forex derivatives exchanges

From November, the Bank of Russia followed a policy of steady devaluation following the severe decline in commodity prices and the economic outlook. Between November 1 and February 19 the rouble was allowed to drop from 27.10 to 36.43 to the dollar, sparking a flurry of derivatives trading on Russia's two main exchanges, the Russian Trading System (RTS) exchange and the Moscow Interbank Currency Exchange (Micex), from banks and corporates wanting to hedge currency risks.

According to the Bank of Russia, volumes of exchange-traded dollar contracts peaked on January 15 at $13.36 billion, up from $6.75 billion on September 15.

Daily trading records for dollar futures traded on Forts, the derivatives business of RTS, were broken on four occasions in January, peaking at 15,923 trades on January 20, while Micex reported that December volumes for dollar futures were 59.8% higher than the level reported in November. Meanwhile, in the OTC market, the notional value of trades declined steadily since November, falling from $17.13 billion to $8 billion between November 5 and April 7.

Karen Kostanian, co-head of Russian research at Bank of America-Merrill Lynch in Moscow, said a cautious attitude from liquidity suppliers, especially western banks, can account for the move towards exchanges. "Micex was the main market for foreign exchange trades during the worst of the crisis and remains as such. With international firms cutting lines on locals due to increased credit risk, turnover in the OTC spot market is much smaller than it used to be," he said.

But since January, the notional value of forex contracts traded on exchanges has declined again. By April 3, the value of exchange-traded dollar contracts had fallen back to $3.70 billion.

A Moscow-based head of derivatives at a large state-owned bank explained that for Russian financials the derivatives exchanges do not present the most attractive option. While a few of the larger banks may have access to the Chicago Mercantile Exchange, most Russian firms are only able to trade on the local exchanges, which they perceive as risky, he said.

For corporates, exchanges may also be considered less attractive, an emerging markets strategist at a UK bank said. "Trading on exchanges could be less attractive because it exposes you to the glare of the regulators, who will try to exercise moral suasion on you," he said.

"The regulators would be watching you all the time. You could get a call out of the blue saying 'be careful how big your holding of foreign currency assets becomes, because in buying them you are contributing to rouble weakness, and if you buy too many, don't think I'm going to help you out in the future if you need rouble liquidity'," he said.

See also: Derivatives trades rise on falling rouble