In the spring of 2022, one of the first Western sanctions was the freezing of financial assets of brokers and a ban on cooperation with American and European companies. Clients of such brokers could not sell foreign shares held in accounts. In March, two international depositories – Euroclear and Crearstream – blocked the accounts of the National Settlement Depository (NSD). The majority of Russian brokers cooperate with the depository – they keep clients’ securities on accounts and through it go to international markets to purchase assets on behalf of clients. As a result of the blocking, securities of foreign issuers have become inaccessible to the majority of Russian investors – they do not pay dividends and cannot be sold on the stock exchange.
In response to the freezing of NSD’s foreign accounts, the Central Bank of the Russian Federation blocked trading in certain foreign shares on the St. Petersburg Exchange. Now the clients of brokers who used NSD or Best Efforts Bank (SPB Exchange) accounts to purchase foreign securities are not allowed to work with foreign assets. Let’s try to figure out how the issue is resolved at the state level and what investors should do with such securities.
Which assets are closed for trading to Russian investors
The Bank of Russia is as concerned about the blocking of foreign assets as the investors themselves. According to the statistics of the regulator, more than 5 million investors who have active accounts on the stock exchange have their securities frozen.
According to the report of the Central Bank of the Russian Federation, the total amount of customer funds kept on brokerage accounts in any form – cash, securities – is 6.7 trillion rubles. as of Q1 2022. Of this amount, the regulator points to 320 billion rubles, which were blocked in the form of shares alone.
After May 30, 2022, investors on the SPB Exchange cannot work with the following instruments:
- securities settled in EUR;
- securities from the CIS countries;
- securities that have passed the primary listing on the London Stock Exchange (LSE);
- securities with primary listing in the USA — Yandex (ISIN: NL0009805522), Mobile TeleSystems (ISIN: US6074091090), Ozon (ISIN: US69269L1044), Nexters (ISIN: VGG6529J1003), HeadHunter (ISIN: US42207L1061) and Cian (ISIN: US83418T10818T1081) .
The confidence of many private investors in the stock market is declining because most of them do not understand the causes of the lockdown. This is not the fault of brokers or management companies, together with the central depository. These are the consequences of sanctions, due to which the broker is unable to conduct transactions in foreign securities as before.
The statistics of complaints speaks about the distrust of clients in brokers: in April, clients filed almost 30 times more complaints against brokers or their actions at the Central Bank of the Russian Federation compared to February. Most of the appeals (80%) are related to the fact that the sub-sanctioned broker transferred the client to another company. But such measures were taken primarily in the interests of the clients themselves.
How is the problem solved?
Both the state and the Central Bank are interested in solving the problem of freezing the assets of private clients. Each department offers different options.
On July 14, 2022, changes came into force that relate to the operation of the securities market and the country’s central depository. Such changes were introduced by the President of the Russian Federation on the basis of the Federal Law of the Russian Federation “On Amendments to Certain Legislative Acts of the Russian Federation” No. 319-FZ dated July 14, 2022. It establishes a new procedure for the circulation of Russian shares on foreign exchanges. Among the main innovations are:
- the powers of the Central Bank have been expanded: in accordance with paragraph 6 of Art. 3 No. 319-FZ, a position was introduced – an authorized representative of the Central Bank of the Russian Federation, who has the right to control the work of the central depository and, for this purpose, request any documents to verify activities;
- the procedure for converting depository receipts (DR) of Russian issuers circulating abroad was introduced – Part 6.1 of Art. 4 No. 319-FZ.
And earlier, in April 2022, when depositary receipts (DRs) of Russian issuers fell sharply in price and foreign investors were actively selling them, a ban was introduced on new placements of DRs by Russian companies on foreign platforms. It is regulated by the Federal Law “On Amendments to the Federal Law “On Joint Stock Companies” No. 114-FZ dated April 16, 2022.
But there are also positive changes. The Clearstream international depository, through which NSD operates, announced on its website that the conversion of receipts for Russian issuers will resume from July 18, 2022. For this, the main condition must be met – the central depository of the Russian Federation will not receive profit from such operations. So the sanctions are not violated. NSD announced the abolition of fees for conversion transactions from July 1, 2022 until the end of the month.
One of the first to launch the conversion of the DR was Sberbank (SBER). On July 20, the issuer published a press release with the news about the start of the replacement of depositary receipts for shares for its clients.
Support of the Central Bank
The total number of depository receipts and foreign shares in investor portfolios, according to Central Bank statistics, is about 12% of the total structure of assets placed on IIS accounts. This is two times lower than the share of Russian shares – 25%.
Thus, the most popular assets preferred by investors are shares of mutual funds and ETFs and shares of Russian issuers. The share of such investments accounts for more than half of the assets – 51%. But ETFs, like foreign stocks, were also blocked.
The Central Bank of the Russian Federation is concerned about the current situation, because due to the freezing of foreign assets, many traders lost part of their savings in brokerage accounts due to the triggering of a margin call .
A margin call is a situation in which the broker forcibly closes the trader’s position if a minus has formed and there are not enough own funds to cover the transaction.
On July 20, the Central Bank presented the concept of improving the protection of investors’ interests. The key points are:
- an increase in the minimum portfolio size for qualified investors from RUB 6 million to RUB 30 million;
- exclusion of the requirement of higher economic education as a separate criterion for obtaining the status;
- consideration for confirmation of qualifications and knowledge only according to the standards of two specializations: “Specialist in financial consulting” and “Specialist in the securities market”;
- allowing trading with foreign financial assets only for qualified investors;
- allowing transactions with over-the-counter mutual funds and compound bonds with structured income only for qualified investors;
- reducing the maximum amount of leverage for unqualified investors and introducing mandatory notification of the client before opening such positions about the use of credit funds.
Also, the Central Bank of the Russian Federation plans to tighten the testing procedure that the broker requests before the client plans to purchase an instrument that falls into the list with mandatory testing of unqualified investors. If earlier the number of attempts was not limited, as well as the time to complete the survey, now these rules can be changed. The regulator proposes to limit the number of attempts and the time to pass the test.
Additionally, the Bank of Russia is working on the possibility of introducing the replacement of Eurobonds with the Russian equivalent. That is, holders of Eurobonds will be able to exchange them for classic debt securities issued by the same issuer, but in rubles.
Is it possible to sell assets on the OTC market?
If the investor is not ready to wait until the work with foreign shares will be available in the previous mode, he can sell such assets. To do this, use the over-the-counter market, or OTC (from the English over the counter – “over-the-counter”). Examples of such sites are the St. Petersburg Currency Exchange or MOEX Board . The number of transactions on such sites is four to ten times less than on the Moscow Exchange or the St. Petersburg Exchange. Therefore, prices may differ from quotes on the main site. For example, the number of positions on the main market for Sberbank shares at the end of the trading session on July 21, 2022 was 113,144, while only 15,566 were recorded on the over-the-counter market, which is almost eight times fewer transactions.
On such platforms, participants work directly with each other. The list of tools available for work is also limited here.
You can offer frozen assets to your broker, but there is no guarantee that he will be interested in such a deal. And if he agrees, then the question is at what price and whether it will be profitable for the investor.
Since the key idea for 2020-2021 was to attract private investors to the stock market for its development, the state and the Central Bank will continue to develop programs to protect them. After February 2022, there was an outflow of foreign investors, so they need to attract new clients to replace them.
The Central Bank of the Russian Federation in its review of securities market participants for the first quarter of 2022 shows the following statistics: the shares of residents in the portfolio of brokers account for 24%, and the share of participation of non-residents is 15%.
The problems of blocking foreign shares faced by domestic investors are partly due to the fact that the Russian securities market does not offer such a wide variety as foreign exchanges. The choice among Russian issuers is much more modest, and we also need to work in this direction – to expand the list of instruments available to a private investor.
As NAUFOR President Aleksey Timofeev notes, “in order to choose financial instruments, form long-term strategies and diversify portfolios, you need access to a thousand shares and a thousand bonds from different industries and in different currencies. The set of domestic financial instruments, especially stocks, is much more modest. Russian retail investors invested in domestic securities due to access to foreign and the ability to diversify portfolios. Today we are talking about preserving the diversity of financial instruments as a condition for the efficient operation of the financial market, which means unblocking foreign securities in NSD, as well as access to securities from other regions of the world.”
The return to the previous trading model, when foreign shares were available to Russian investors, is considered one of the priority areas for the work of the Central Bank.
What should investors do in this situation?
The asset freeze has a negative impact on both sides: both domestic investors and foreign investors who cannot sell Russian shares have suffered. But if you want, you can find a way out of any situation. This is illustrated by the example of Clearstream, which went along and allowed the conversion of depositary receipts of Russian companies, subject to NSD’s compliance with the terms of the transaction.
The Central Bank of the Russian Federation is also interested in an increase in the number of private investors, thanks to which financial markets develop. But one of the main tasks at the same time, the regulator considers increasing financial literacy and protecting the interests of inexperienced investors.
While securities of foreign issuers are not available to most brokers who do not have direct access to foreign exchanges, clients of such companies can consider alternative investment options. Although the Russian market offers much fewer securities for trading, it is possible to work with other assets to diversify the portfolio and hedge transactions. For example, with futures, among which contracts for new goods regularly appear , or with precious metals .