Financial market in new realities: challenges and solutions

Posted on

Since the beginning of 2020, domestic companies from various fields have experienced several shocks at once: the waves of the coronavirus pandemic, a large-scale lockdown, disruption of supply chains, and much more. One of the biggest blows came to the financial market. He managed to recover and adapt to the existing realities, but not for long. Alexander Zozulya, Director of the Global Markets Department at Sberbank, spoke about the challenges the financial market faces in 2022 and how it counters them, including using the bank’s solutions.

The events of 2022 have become a “perfect storm” for the Russian financial market. Those sectors that have been significantly integrated into the international financial landscape have been particularly hard hit. For sanctions reasons, foreign counterparties left, thousands of transactions were terminated ahead of schedule, some markets lost liquidity, and some products lost their relevance. For example, there were restrictions on operations with foreign exchange instruments. Benchmarks have changed, a significant layer of investors have left the Russian market, access to financial information and infrastructure has been limited.

At first, we expected that all the changes that had taken place would significantly correct the situation on the market, some segments would suffer greatly or cease to exist altogether. Somewhere our forecasts were justified, somewhere they weren’t. But life did not stop, the Russian financial market did not “die” under the pressure of sanctions.

The importance of a number of areas for the economy has increased, for example, the precious metals market, conversion operations with friendly countries, securities trading, and the ruble interest rate market. If we talk about the latter, then with the departure of foreign banks and funds, the liquidity of almost the entire range of derivative financial instruments (DFIs) has suffered significantly.

Sber has been actively involved in the development of the local market for interest-bearing derivatives since 2014. Since 2017, the market volume has grown more than 10 times; at the end of 2021, the bank’s share in the local ruble interest rate derivatives market was about 50%*. All this time, Sber has been helping clients manage interest rate risk by offering floating-rate lending in conjunction with derivatives. This spring, when the Central Bank of the Russian Federation temporarily raised the key rate to a historically high level of 20% per annum, our tools worked: more than 80% of companies that hedged their risk received protection from the rate increase.

Non-residents were one of the main market counterparties for interest rate derivatives. With their departure, this direction has suffered greatly, but I am sure that together with other market participants we are able to restore liquidity. The base of assets and liabilities at a floating rate has been preserved, which means that the need for hedging will also remain. For many local banks, the derivatives business was not previously a priority, and in recent months the focus has shifted more towards basic needs: capital protection, liquidity management, trading and banking books. But already now we are seeing that banks are increasing their activity, and we are counting on the growth of the interest-bearing derivatives market with the participation of domestic players. In particular, we expect greater involvement of insurance companies and non-state pension funds.

Another problem faced by the Russian market is the withdrawal of Western investors. They provided about half of the turnover on the free float market. A large number of securities “stuck” in foreign depositories appeared, it was not clear how to service certain debt instruments. As a result, liquidity in the surviving part of the local stock market suffered greatly. However, no one canceled the needs of business, as a result, many began to make over-the-counter transactions. Now Sber is actively developing projects that will help restore the securities market. They are primarily related to the provision of infrastructure, the implementation of algorithmic solutions and other services.

One of such projects is a platform for financial institutions to perform OTC transactions with SberTrade securities . Initially, this platform was created not only for Russian investors, but in the spring we quickly rebuilt its focus on a local audience. As a result, the platform has become a response to the challenges faced by the financial market in conditions of high volatility, liquidity tightening and shrinking federal bond market. Now SberTrade users can participate in the aggregation of liquidity from Sber, and this allows our clients to quickly conduct large transactions. Today, through the platform, you can buy Russian bonds, plans to provide access to shares and other instruments.

The Russian financial market as a whole shows much more resilience and flexibility than many thought, it is able to grow and develop. We see this in other areas as well. After the withdrawal of global banking groups from the Russian market, we are seeing a multiple increase in interest in structured products on the part of professional participants in the securities market. And if until February of this year foreign players dominated the structured products market, now the positions of departed international counterparties are actively occupied by Russian issuers. In particular, Sberbank is successfully developing its own programs for issuing structured bonds in Russian law. Over 9 months, we conducted 74 new placements of structured products for a total amount of more than 32 billion rubles, including for leading independent players in the investment and insurance markets.

Another challenge was the departure of Bloomberg and Refinitiv, which were heavily integrated into the Russian infrastructure. This event resulted in the loss of access for representatives of the local market to financial information: quotes, exchange rates, pricing, up-to-date analytics, which in turn affected the processing of transactions and other aspects. Now local players are working to implement their own solutions and services. For example, this is done by the Moscow Exchange.

Sber, for its part, is also actively developing this area. Initially in our SberCIB Terminal system, a platform on which financial institutions and legal entities can enter into transactions in financial markets online, the focus was on foreign exchange transactions and currency risk management. But now we are supplementing the platform with other tools and services and are working to turn SberCIB Terminal into an information and communication platform with access to real-time quotes and the ability to trade, currency and commodity market news, analytics, and comments from our traders. In the system, it will be possible to negotiate deals, enter them into electronic form, and make settlements through a central counterparty. We expect that our solution will be in demand in the new conditions and will be useful to the bank’s customers.

Today, there are real difficulties in many segments of the Russian financial market, but we see potential: liquidity and asset value will be restored, processes will improve, and new infrastructure solutions will appear. Life in the capital markets is changing and rebuilding. There is a need for the market both among investors and among borrowers. Therefore, the main task is to build a new model of interaction on which we can all rely. The active involvement of local market participants will increase its resistance to external factors and increase liquidity. In a number of areas, the market volume can potentially return to the positions of the beginning of 2022, and in some areas, there may also be a rapid growth.

Leave a Reply

Your email address will not be published. Required fields are marked *