EXPERT INTERVIEW: Legal regulation of repo market needs in further development

/IRBIS, Dinara Mukasheva, August 20, 2008/ - Repo is one the most liquidity sector of Kazakhstan Stock Exchange (KASE). Today this sector is in the process of new transformation, keystone of which becomes questions of increasing responsibility of parties during deals. Interviewed experts by IAFM IRBIS shared their opinions on repo sector regulation and said about character of events, organized by the companies for minimizing default risks on deals on repo market with the current regulation level. Baurzhan Tulepov, director of risk management and analysis department of Tengri Finance JSC thinks that today there are questions on repo market, which demand legal decision. In particular, analyst considers that client's liabilities and broker-agent's liabilities, which acts under client's instructions have no definite limits. Besides, there are no demands to the value of financial instruments on opening prices on direct repo market. Introducing of such minimal requirements, according o analyst, will allow to decrease (regulate) monetary multiplier on repo market, what favorably affected total credit risk of direct repo market. However, at that Mr. Tulepov considers that decision the problems of this market sector shouldn't have imperative mood: "Popularity of direct repo market we explain by the thing that participants sometimes use repo for downward game. We are against restriction of direct repo market by administrative and fiscal measures until alternative exchange instruments would be offered to the market". Dinara Zhangazieva, the head of investment portfolios management office of Subsidiary organization of Joint Stock Company BTA Bank BTA Securities JSC offered the following measures on regulating repo sector operations: - introduction of mandatory requirement on amount of discounts in case of reverse repo, depending on terms and listing of security, loaned in operation providing; - introduction of rating scale of all professional participants of security market, which will be renewed considering interviewed market's participants; - introduction in direct repo sector of the list of instruments, admitted as a pledge and developed, considering the range of criteria differentially on shares and bonds; - introduction of rules of prescheduled repo closing in case of market price falling to the amount of announced on pledge instrument - margin call. At that, Mrs Zhangazieva precised that mentioned offerings have already introduced in Subsidiary organization of Joint Stock Company BTA Bank BTA Securities JSC. REFERENS By the KASE Council decision of April 24, 2008 changes and additions No. 10 to "Regulations on Membership" and changes No. 7 to "Rules on Repo Transactions Execution" were approved, and made effective April 28, 2008. In accordance with the indicated amendments to the Regulations on Membership: - KASE member is liable and responsible in respect of the deal, concluded at the Exchange trades, regardless upon whose request, at whose expense and in the interests of who this deal was concluded; - at trading on somebody's behalf/at somebody's expense and/or in the interests of the third person, KASE member may act only on the basis of the corresponding agreement of the commission, concluded by this KASE member and this person; - at participation of KASE member in KASE trading, KASE and other members thereof in any circumstances consider the deals conclusion orders, submitted by this KASE member by order and/or at the expense and/or in the interests of the third person, and the deals, concluded by this KASE member by order and/or at the expense and/or in the interests of the third person, as submitted (concluded) on the basis of the corresponding agreement of the commission, concluded by this KASE member with the this person; - KASE member is automatically disqualified from participation in the trades in all financial instruments at default of the obligation on concluded on KASE and not cancelled (not considered as cancelled) deal upon expiry of ten working days from the day, on which these obligations must have been executed; new admission of such KASE member to trades in financial instruments is made on the basis of the Exchange Council decision. By the aforementioned changes to the Rules on Repo Transactions Execution set that in case of repo "nego" close deal default: - within the second working day, following the repo closing date, the affected repo transaction participant notifies KASE on his intent to cancel this closing deal or maintain the deal until final execution of the obligations on this closing deal by the guilty repo transaction participant; - in case within the second working day, following the closing date, KASE receives no indicated notification, it is considered that the affected repo transaction participant expresses his intent to cancel this closing deal; - in case the affected repo transaction participant expressed his intent to cancel this closing deal, it is considered to be cancelled, and the guilty repo transaction party is imposed an obligation to the other participant thereof a forfeit in the amount of 30 % of the sum of this closing deal (50 %, in case the securities which are the subject of repo transaction, were subjected to delisting during its term), and to pay KASE a full sum of the commission fee, accrued in regard of the repo transaction (including for the second party of the deal), and the affected repo transaction party receives the right to demand, in the order, established by the legislation of the Republic of Kazakhstan and internal KASE documents, collection of losses in the full amount in excess of the indicated forfeit from the guilty repo transaction participant; - in case the affected repo transaction participant expressed the intent to reserve this closing deal, the obligations thereon of the guilty repo transaction participant remain and he is imposed an obligation to pay to the other repo transaction participant a forfeit in the amount of 0.1 % of the sum of this closing deal for each day of default. However, on April 29, 2008 Special Inter-district Economic Court (SMES) of Almaty for purposes of securing a claim of BCC Invest JSC - Subsidiary Bank CenterCredit JSC to Kazakhstan Stock Exchange (KASE) made a decree on suspension of concordance with the Agency of the Republic of Kazakhstan on Regulation and Supervision of Financial Market and Financial Organizations (AFS) on these amendments. August 7, 2008 KASE Council abolished its decisions on mentioned amendments confirmation. Information is presented within the frames of weekly expert interview on acute questions of Kazakhstan and international stock market development, made by IAFM IRBIS. Analysts of Subsidiary organization of joint stock company BTA Bank BTA Securities JSC and Tengri Finance JSC participated in interview. IAFM IRBIS expresses its gratitude for participation in this project. For detailed information please contact us Tel.: (727) 237 53 41 [2008-08-20]