The Ukrainian Exchange launches the quote-driven and repo market

"Ekonomicheskie izvestiya", № 135(1133)
August 5, 2009
Written by Olga Galitskaya

After the new version of Trading rules, approved by the Securities and Stock Market State Commission, came into force, market participants received an opportunity to make repo trades and work on the quote-driven market.

As mentioned at the Ukrainian Exchange, the first repo trade will be concluded at the end of this week.

The notion "repo" (from English term "repurchase agreement") means a type of sale and purchase transaction, where a securities holder sells assets to the counteragent and commits to repurchasing the asset at a specified price on a given date i.e. repo transaction consists of two purchase and sale transactions.

As explained by the market participants, repo transactions are today the simplest way of crediting cash funds against securities and crediting securities against cash funds. "Technically, repo is not a credit instrument, but economically it performs functions of borrowing securities or cash funds, - they say. Development of this market has been held back by the absence of a fully-fledged exchange market with a smoothly running settlement and clearing system that would allow concluding and settling trades in real-time mode.

In May the Ukrainian Exchange gave traders an opportunity to set repo quotes. "Funding instruments are critical for the development of a market that requires 100% advance depositing of securities and cash", says Aleksey Sukhorukov, first deputy CEO of the Ukrainian Exchange. "There are  a number of situations when investors need to borrow securities or cash for trading or settlement purposes for a length of time. The repo mechanism provides lending or borrowing securities/cash with minimized risks, since the exchange guarantees DVP settlement of both parts on a repo trade".

Vladimir Grishchenko, head of Securities Trading of Troika Dialog Ukraine sees this opportunity as a positive development of the Ukrainian stock market.

"Introducing repo trades on the Ukrainian stock market will significantly extend the traders’ set of asset management tools, thus increasing their efficiency. They will be able to lend and borrow cash and securities for a given time, the repo term ranging from several days to weeks", says Vladimir Grishchenko. "The limited liquidity (very small free-float) repo trades will encourage significant growth of the stock market turnover, as the repo trades will be executed on the exchange. Supervision of repo trades settlement carried out by the Ukrainian Exchange will help in reducing the risks and increasing the credibility among the participants".

The Repo market is OTC in most countries – trades are negotiated by phone. Obligations can be fulfilled both with the use of OTC settlement systems and within the exchange system on DVP terms with 100% depositing of assets. The latter is especially convenient if the attracted cash or securities are needed for exchange trading.

The second equally important amendment defines the Quote-Driven Market. It is a perfect market for less liquid securities because the quotes are non-anonymous and do not require advance depositing of assets. This is a necessity for securities trading with wide spreads where there is an obligation to trade at a price, within volume or specific settlement dates.

"Given our experience only 30-40 stocks can effectively trade on the Order-Driven Market", says Aleksey Sukhorukov. "Low liquid stocks are less fit for the anonymous market, because their spreads often make it impossible to execute a trade without further negotiation of the terms".

"Currently there are over 70 stocks on the list of the Ukrainian Exchange, however only around half of them are trading actively. The exchange is interested in extending the range of securities for which it is a reference point in terms of pricing, and the Quote-Driven Market will allow us to further this goal", says Mr. Sukhorukov.

The third amendment to the Trading Rules enables the Ukrainian Exchange to interact with the Central Counterparty.

"The Central Counterparty resolves three major issues at the same time: guarantees the anonymity of settlement, provides a legal opportunity to match orders submitted by one and the same trader based on the commission agreement and makes it possible to optimize the costs of trading participants associated with meeting the financial monitoring requirement", says Aleksey Sukhorukov. "CCP is a global practice implemented on all developed markets, and the reviewed Trading Rules allow CCP trading in the Ukraine".