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. Last Updated: 07/27/2016

Trading Probe of Moody's Upgrade Heads West

bloombergFSC Chairman Igor Kostikov
LONDON -- The Federal Securities Commission plans to extend a probe into bond-price gains that occurred about half an hour before Moody's Investors Service raised the country's credit ratings last month.

Russia's market regulator will ask the U.S. Securities and Exchange Commission in Washington and the Financial Services Authority in London to widen the investigation to the United States and Britain, FSC Chairman Igor Kostikov said last week. It will first complete its inquiry into trades in Russia, he said.

Russia's benchmark Eurobond due 2030 started rising Oct. 8 before Moody's raised the country's bond ratings by two levels to investment grade. More than half of the 3.4 cents on the dollar gain in the benchmark bond occurred in the 35 minutes before the announcement at 11:24 a.m. London time that day, according to J. P. Morgan Chase & Co. statistics. Most of the trades probably occurred outside Russia, Kostikov said.

"It took place in the West, not Russia," Kostikov said in a televised interview with Bloomberg News. "We will talk with our colleagues in the U.K. and the U.S. We're working with them."

The Moody's upgrade was the first time Russia received an investment-grade rating, opening the securities to some investors whose fund rules prevent them from buying speculative-grade, or "junk," bonds.

Moody's and Standard & Poor's have a policy of telling bond issuers before a rating action is taken. Alexei Sizov, head of fixed-income at Renaissance Capital, Russia's second-biggest brokerage, said traders knew of the move about half an hour before Moody's announcement to the market.

"It is typical for us to inform issuers some time before the release; that's always been our policy," said David Levey, managing director of sovereign risk at Moody's in New York. "We will be very interested in the results of this inquiry but so far we don't see any reason to change."

The Russian regulator will contact the SEC and FSA as early as this year, Kostikov said after the televised interview. Deputy Finance Minister Alexei Ulyukayev has said the commission should investigate the trades.

The Emerging Market Traders Association, the New York-based industry body, called on ratings companies to review their policy after the bond rally, while welcoming the commission's response.

"Mr. Kostikov is taking his duties quite seriously and that has to be a good thing for the market," said Michael Chamberlin, EMTA's executive director in New York. "It's a normal path for an investigation to take" to work with international regulators.

The Federal Securities Commission is restricted to imposing maximum fines of about $2,000 on anyone found to have traded on insider information under current Russian laws, Kostikov said. There is no law preventing government officials passing on information that may affect securities prices, he said.

The commission is pushing lawmakers to introduce criminal sanctions against insider trading in the first half of 2004, Kostikov said.

"Two thousand dollars seems like a slap on the wrist if you've made $2 million on a trade, but the publicity from it may be more damaging," EMTA's Chamberlin said. "If this leads to better regulation of the Russian market then that in itself is much more important than what individual penalties may be involved."

David Eacott, spokesman for Britain's FSA, declined to comment on any specific discussions with the Russian regulator.

"We are more than willing to help" with Russia's inquiry, he said.

SEC Spokesman John Heine declined to comment.

In London on Friday, Kostikov also told foreign investors not to take fright over the arrest of Mikhail Khodorkovsky and the freezing of his shares in Yukos, urging them to keep faith in the country.

He said the drama unfolding at Yukos was a matter for the courts and should not discourage foreign firms from investing.

"There cannot be democracy and a liberal economy without law and order. Law and order and the legal system should apply to everyone -- small and big companies," he said in an interview.

Kostikov preached calm abroad and noted that within Russia there was widespread support for the prosecutors' tough line.

"There is a feeling that not everything has been fair [in the past], and now everyone has to play by the same rules."

(Bloomberg, Reuters, MT)

Source: Trust investment bank

A graph depicting the surge in trading volumes for Russia's benchmark Eurobond before Moody's officially announced its upgrade.