CBR inclined to reject proposed disintermediation on financial market, but concerned about fragmentation of liquidity - report
MOSCOW. June 26 (Interfax) - Providing direct access to exchange trading for a large number of clients is difficult and the Russian market does not currently have the necessary technological foundation for this, while the benefits are unclear, the Central Bank of Russia said in an advisory report called "Universalization or Specialization? Participants' Roles on the Stock Market" published on Tuesday.
Trends have emerged on the Russian market that are blurring the lines between infrastructure and broker activities, the CBR said. On one hand, brokers independently match clients' orders to sell and buy securities without entering organized trading, but on the other hand the issue of possibly granting certain groups of clients direct access to the exchange is being raised.
Market participants began to discuss the idea of disintermediation and internalization at a National Association of Stock Market Participants (NAUFOR) conference in May.
"We need to work out and decide what we're doing together with market participants - delineating the roles of these players more clearly or deeming that interpenetration has pluses and this could be beneficial, convenient for clients. And we as the regulator will look at this in terms of the client, foremost," Central Bank chief Elvira Nabiullina said at the time.
The Moscow Exchange is concerned about the actions of a small group of large brokers who are conducting transactions internally, which has a negative impact on liquidity, the chairman of the exchange's supervisory board, Sergei Shvetsov said.
NAUFOR president Alexei Timofeyev, in turn, came out against the idea of giving investors direct access to the exchange. "I think that this is an extremely untimely and unneeded concept, in our view. Naturally, the objective roles that are played by various financial institutions - the exchange, which brings together all brokers, and brokers, which attract clients - are disrupted. The disruption is in the fact that the exchange becomes the competitor of brokers, starts competing for clients. As a result, brokers will avoid the exchange and internalization, which, it seems, triggered the debate about disintermediation, will become even more obvious and inevitable," Timofeyev said.
The CBR said in the report that transactions that brokers make outside of organized trading on the internalization or cross-agency model amount to about 6% of exchange trading volume in 2024, but they can total as much as a third of trading volume for certain securities.
The CBR said direct access to exchange trading for retail investors without the involvement of brokers does not exist in international practice. "Its closest analogs are narrowly specialized and targeted at certain categories of investors, and also require special attention in terms of risks," the report said.
Maintaining specialization is the more preferable direction for the development of the Russian stock market's architecture, including amid conditions of external uncertainty, the CBR said.
Current regulation already includes restrictions for brokers regarding internalization, the CBR said. For example, it stipulates that in order to execute a client order by making a transaction with them, a broker must make a matching transaction on the exchange.
Concentration of market liquidity should not limit brokers' ability to provide clients with over-the-counter trading services, particularly with large stakes, at reasonable prices and with limited impact on market stability, the CBR said.
However, if the risks of liquidity dilution increase for a number of financial instruments and transactions, regulatory measures will be needed to reduce the risk of liquidity fragmentation, such as caps on the scale of over-the-counter transactions made by brokers on an internal or cross-agency basis, the CBR said.
