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. Last Updated: 07/27/2016

Veksel Trade Rules Set to Lure Investors

From successfully launching Sputnik to putting the first man in space, Russia has taken pride in defeating the odds to achieve what was thought impossible.

That pioneering spirit raised its head once again this week when a group of banks and brokerages announced that they are set to conquer another frontier: Russia's opaque, multibillion-dollar market for veksels, or promissory notes.

If the Association of Members of the Veksel Market, known by its Russian acronym AUVER, fulfills its plan to create the world's first system of regulated trade in IOUs, investors can finally close the book on a decade fraught with risk and nontransparency in Russia's dynamic veksel market.

One might ask why even bother to harness the 600 billion ruble ($ 21.5 billion) market that took off in the early 1990s when cash-strapped companies began to commonly offer veksels in lieu of payment.

AUVER and other market players say the answer is simple. On its own the market has blossomed into a powerhouse whose daily turnover is estimated by insiders to dwarf that of the stock market by 10-to-1. But the risks are tremendous since about half of the debt being traded is overdue.

AUVER, whose 130 members include heavyweights like the Investment Banking Corp., Gazprombank, MICEX and the Tyumen Oil Co., says the market needs an environment that will woo more investment from the West and ultimately provide a financial boost to Russian companies.

"From the first steps of this institution [AUVER] its main aim was to make the market transparent," said Dmitry Budakov, deputy head of the Moscow Interbank Currency Exchange board. "The market was very criminal from the very beginning, and the association decided to ... reduce the risk of market participants," he said

AUVER's system, which it endorsed late last week and expects to be put into action within a month, will fulfill those needs by putting the trade of veksels on par with the trade of corporate bills and equities.

Furthermore, within months dealers will be swapping veksels with a standard paper on a central trading floor, according to the market players who devised the plan. The market, described in full on AUVER's web site, will be backed with a settlement depository and regulated with a standardized set of rules.

Backers of the regulated market hope the system will draw fresh interest from foreign investors since it will drastically reduce investment risk by providing access to issuers' credit histories and guarantees on the paper. Only AUVER-approved veksels would be traded.

AUVER is holding negotiations with the Russian Trading System and the Moscow Interbank Currency Exchange over which exchange will offer the main trading floor. The MICEX board expects to approve rules for veksel trade next month.

While a pact with a main clearing house may not be signed for several more months, AUVER officials expect that the first over-the-counter deals under the new framework will be carried out within a month. Trading at a main exchange will be in full swing within two years, they predict.

Initially, though, banks are expected to dominate regulated trade and will begin dealing under the new system within weeks. AUVER expects that a large portion of the new paper to initially hit the market will be millions of dollars in mortgages from banks. To date, the Russian market offers no securities in which to trade mortgage debt. That debt is rapidly growing after a group of Moscow banks kicked off wildly successful mortgage programs last year in conjunction with the Washington-backed U.S. Russia Investment Fund last year.

Market players this week welcomed the plan to bring order to veksel trade.

"An investor would realize he is not buying valueless paper," Sergei Putnik, fix-income analyst at Troika Dialog, said.

But some insiders questioned whether the wild horse that has a daily turnover in nominal value of $400 million to $1 billion can be tamed.

It can and it will be, AUVER assures.

"If some market participants can show it is a positive experience, others will join as well," said Mikhail Kuznetsov, deputy board chairman of Investment Banking Corp., which is participating in talks with MICEX and RTS.