Russian Market Closure Shocking, But Hardly a Surprise

Last week's news that the Russian central bank is barring five companies, shocked the market just before the turn of the year. With everything that was said and done over the past several years, however, the move was hardly an unexpected turn of events.

The authoritarian Russian state has been on the heels of many businesses over the years, and cartels in virtually every sector of the economy are commonplace. Up until recently, the Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term brokerage industry has been the exception, rather than the rule.

As Finance Magnates extensively reported last week, the Russian central bank cracked down hard on the regulated industry and delivered on the threats made by the First Deputy Chairman of the Bank of Russia, Sergey Shvetsov.

In October of last year, Shvetsov suggested that leveraged trading could be banned altogether. To the detriment of traders and the local pioneers in the forex industry, this only happened for a predetermined number of companies.

Picking Winners and Losers

Ever since the introduction of the Russian regulatory framework the government’s approach to the market has been clear - creating a framework that only the central bank can control. As a result, the industry’s self-regulatory body CRFIN was made obsolete and the central bank encouraged the creation of the AFD (Association of Forex Dealers).

The newly created industry body welcomed select companies to its ranks and started the process of differentiation between different market participants. In the meantime, local brokerage companies have been shifting their attention offshore, something that didn’t escape the regulator’s oversight.

The flight to jurisdictions where the central bank has no oversight was cited as the primary reason for the revoking of several licenses last week.

That said, we are facing a sort of chicken-or-egg dilemma. Did the brokers move offshore anticipating harsh regulatory oversight, or did the harsh regulatory oversight and numerous threats by officials prompt the industry to move offshore?

Contrast to EU Banks Offering Turbos

The limitations on the trading industry imposed by the ESMA earlier this year have yielded a somewhat similar situation in Europe. While retail brokers have been barred from offering high Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term to their clients, banks could continue to offer “turbos” or “sprinters” - pre-leveraged investment products which were particularly popular in Belgium and Holland.

The latest changes to the regulatory framework, however, did include the banking products and put the retail brokerage industry on par with its competitors at least when it comes to leverage.

The FCA’s latest announcement, which details the changes that banks need to implement, clarified that the EU regulators are aware of the similarities between different products.

As the new permanent regulatory changes in Europe set in, the industry is facing a level playing field with the banks. In the case of Russia, the local central bank is taking charge and leaving the only regulated forex market in the hands of three big local banks.

Not only is the Bank of Russia picking losers and winners, but it is also closing the doors for clients who are interested in exercising their right to choose the brokerage with which they want to trade.

That said, according to official data cited by Bank of Russia officials, the number of clients affected by the news is circa 2,000.

Could local companies have been aware of the moves which the local regulators have been preparing? - Unlikely, but their move to welcome a number of customers to offshore subsidiaries could have accelerated the process. Once again - it’s a chicken and egg dilemma the answer to which we might never truly know.