A. Introduction

2. This IOSCO assessment was conducted as part of a financial sector assessment led by the IMF under Dimitri Demekas. The on-site portion was conducted between March 27 and April 13, 2011. Andrea M. Corcoran, an external consultant, with many years of regulatory experience acted as assessor. The assessment is based on information available as of June 2011.

B. Institutional and Market Structure—Overview

7. FSFM is the sole regulator of: solo securities market professionals (brokers, dealers, portfolio managers, and other intermediaries); issuers; collective investments (CIS), CIS management companies and special custodians; exchanges and market infrastructure, such as clearing and settlement arrangements, depositories, and registrars, for securities corporate bonds, and other products, including futures. However, the entity within the MICEX Group market complex, which trades foreign currency, is overseen by the Central Bank of Russia (CBR) as is the government bond market. FSFM has certain company law responsibilities, in particular with respect to tender offers, mergers and other combinations. FSFM oversees the public issuance of securities and registers all corporate bonds and equity offers, except for certain short term debt, described as commercial paper. Many securities transactions, however, are conducted within banking structures as opposed to through separate securities broker subsidiaries. FSFM is the regulator for certain of the securities functions performed within banks, such as special custodial functions, brokerage, or asset management. However, FSFM is not the regulator of pooled investment funds offered by banks to their customers (bank managed mutual funds or BMMFs), though it may authorize the management companies. The assets under management in BMMFs are declining and overall, such bank funds are relatively small, about US$230,000,000 in 2011. The FSFM regulates the contents of disclosures by public companies and nonbank financial institutions engaged in capital markets transactions (professional market participants). The Ministry of Finance (MoF) is responsible for establishing accounting and auditing standards. As of March 4, 2011, FSFM assumed the functions related to insurance supervision. The alignment of responsibilities, leadership of the combined agency, and initial proposals for the distribution of powers and authorities were announced in April. These announcements would give additional authority to the Ministry of Finance with respect to the issuance of regulations related to prudential matters, such as capital, but preserved the assignment of supervisory and operational functions in that area to the FSFM.

8. FSFM has full licensing authority with respect to the professional market participants subject to its jurisdiction, and can grant, condition, suspend, revoke, or deny licenses, without approval by any other authority within the government. FSFM has administrative powers, including the power to issue secondary legislation or normative decrees, as specifically spelled out in primary legislation, the power to provide interpretations and guidance, and the power to impose monetary sanctions and to compel information from any person. FSFM has substantial authority under all of the laws referenced above and other laws that have been adopted and/or are pending such as the draft law, known as “On Amendments to the Securities Law and to Certain Legislative Acts of the Russian Federation (Prudential Supervision Law).

9. The securities market has grown and become more sophisticated over the years. As did other markets, there was a decline in volume and value in 2008, with recovery in 2009.¹

RTS INDEX DYNAMICS, 1995–2009

Citation: IMF Staff Country Reports 2012, 053; 10.5089/9781475502213.002.A001

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RTS INDEX DYNAMICS, 1995–2009

Citation: IMF Staff Country Reports 2012, 053; 10.5089/9781475502213.002.A001

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RTS INDEX DYNAMICS, 1995–2009

Citation: IMF Staff Country Reports 2012, 053; 10.5089/9781475502213.002.A001

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10. Although the numbers are volatile, Russia’s equity markets are about mid-size among world markets. As of 2009, OECD reports indicate that Russia’s market capitalization as a percentage of GDP was at an approximate par with several developed countries, such as France, the Netherlands, and Japan, and above that of Germany. The numbers, however, appear to change radically, year on year, and market uncertainty, from global events, elections or other matters, can lead to dramatic changes. There is also some significant cross border foreign direct investment; for example, Pepsi Cola recently bought Wimm-Bill-Dann, Russia’s largest dairy and beverages company, and Lebedyansky, Russia’s largest juice maker.

11. The number of market participants continues to grow. Nonetheless, fewer than 1 percent of the economically active population have individual brokerage accounts and less than 2 percent of GDP is invested in pension and other long term investment vehicles. Private pension funds (non-state funds), which are regulated by FSFM declined in number from 290 in 2005 to 150 in 2010 (although the figures on assets under management in such funds are not available.) The collective investment industry is predominantly made up of unit investment trusts. Reports for 2010 disclose about US$41 billion AUM in 1461 funds distributed among three categories—open end, closed end and interval. The largest number of funds, constituting more than 33 percent of the dollar amount invested, are real estate funds; these are mostly captive closed end funds used to finance commercial property development, that are disappearing due to the recent withdrawal of a tax benefit. Although there has been an attempt to develop a longer term bond market, most activity is in the shorter range (one to two year durations) and during the height of the crisis some issuers experienced debt servicing issues. In 2010, in respect of the corporate bond market, there were 364 issuers and 663 issues, with a total value in circulation of US$88.6 billion, approximately US$81 billion was in circulation in government debt. There are 1800 authorized professional market participants (that is, brokers, dealers, asset managers, special custodians and depositories) distributed within the Russian Federation.

12. The Russian securities markets in particular have been volatile in the last five years, reflecting the inflow and outflow of money and the crisis. Foreign investment banks, for example, report that US$20 billion of foreign investment exited the markets in the first quarter of 2011. This volatility is continuing, and is reflected in the changes in market capitalization in relation to GDP. A large percentage of the securities traded by volume and value are carried out by banks for their own account, as they use equities for collateral, owing to a lack of other alternatives such as long term bonds. The top ten market participants account for almost 50 percent of trading and, in consequence, what impacts banks as large participants directly affects the securities markets and vice versa. RTS, in contrast, noted during interviews that much of its volume, which includes direct access trading, is now retail-oriented.

13. While overall the markets are growing some have expressed concern that capital formation is moving offshore citing recent planned listings in Hong Kong and London. For example, Valars Group, one of Russia’s largest grain trading companies, was planning an IPO on the Warsaw Stock Exchange in May. Consolidation is also occurring, some of it prompted by purchase of private by government-controlled entities; for example Sberbank, owned 60.25 percent by the CBR, recently purchased 80 percent of Troika Dialog, the oldest and largest private investment bank in Russia. Alfa Bank, a non-government owned commercial bank wanted to acquire AKB Bank of Moscow, however VTB Bank, a government-owned bank ultimately prevailed. At the same time, on November 27, 2010, the Russian Government issued Resolution No. 2101-re-endorsing the Projected Plan/Program for Privatization of Federal Property and Guidelines for Privatization of Federal Property for 2011–2013 (the “Privatization Program”), under which multiple privatizations, including that of a portion of Sberbank are expected to occur. These “reprivatization” actions, coupled with other structural changes and modernizations of the regulatory system, potentially may provide renewed support to the securities markets if they provide fair pricing, and proper disclosure and shareholder protections.

14. MICEX Group and RTS, the two main Russian exchanges executed a binding merger agreement on June 29, 2011, following an expression of intent in March. The two entities expect to conclude their combination by year end. The total value of the combined deal is about US$5 billion, with the majority ownership of 75 percent to be in the shareholders of MICEX. The new exchange will be 50 percent owned by state-controlled institutions, including CBR, Sberbank, VTB and Gazprom, though CBR indicated that it might reduce its stake prior to the deal’s conclusion. The total market capitalization for all equities traded on both MICEX and RTS was about US$1 trillion as of January 2011. MICEX is listed as among the top 20 exchanges per the World Federation of Exchanges. RTS’s largest market is FORTS, or Futures and Options RTS, which settles through a central counterparty (CCP). The total number of futures and options contracts traded on FORTS in 2010² were 623,992,623 as reported to the Futures Industry Association.

15. There are a large number of registered public companies, but only a tiny (less than one) percent are listed on the exchanges. Of these the 10 largest issues account for 56.8 percent of market value and over 80 percent of market activity; the 30 largest account for 81.4 percent of market capitalization. Exchanges can admit companies to trading without listing, and also without authorization of the issuer. In 2010, according to FSFM statistics, there were 499 issuers admitted to trading on organized markets.

C. Preconditions for Effective Securities Regulation

16. Securities exchanges and capital markets are contractual and rules-driven ventures. Although some of the rules are embedded in exchange trading platforms, the integrity and equity of the application of the rules and of the conduct of public offerings are critical to maintaining market confidence. Similarly, in that securities are a legally created negotiable form of property interest, the integrity of how those interests are created, held and transferred is critical to their intrinsic value as is the governance structure of the issuers. Russia has invested huge efforts, over a lengthy period, to try to improve the legal and operational framework within which its markets operate. Nonetheless, there remains significant uncertainty about the integrity of the legal system that supports contracts and market rules and as to the expertise of the courts in financial matters. Currently a number of initiatives are underway that would help address these “rule of law”-related issues, including: improved accounting standards, provisions for finality of settlement, better rules of administration, initiatives that move toward the creation of a central depository, enhanced ownership and control reporting, provisions for an investor compensation fund, more intensive monitoring of market abuses and improved laws to address these, better means to enforce the proper conduct of business with retail market participants, and exploration of ways to enhance the availability and fairness of alternative dispute resolution regimes. Such improvements should be aggressively pursued.

D. Main Findings

17. Overall as many improvements are brand new and many changes remain pending, these findings reflect that many beneficial changes, which overtime may improve the performance of the regulator, are as of the date of this assessment, largely untested in practice.

(i) Principles 1–5, Principles relating to the Regulator: Improvements have been made in certain of the powers and authorities assigned to the regulator and certain regulatory as opposed to supervisory powers and authorities have been reassigned. At the present time, FSFM has the capacity to issue regulations in its remaining areas of competence, subject only to the condition of proper legal structure under the Federal Constitution, in consultation with other governmental entities as appropriate. Prior to the recent changes the FSFM operated substantially on a day-to-day basis, without political interference. Nonetheless, during the transitional period of uncertainty, there was a lack of transparency about ongoing legal initiatives that raised some concerns about whether the impending changes could adversely affect this existing level of regulatory independence. For example, the new alignment, as projected, will explicitly require MoF approval for certain matters. Although such consultation should not be a factor in day-to-day operations and supervision, the actual operational procedures have yet to be clarified.

(ii) Principles 6–7, Principles relating to self-regulation: Although the Russian SROs have the ability to make and enforce binding rules on their members, membership is voluntary and only a third of professional market participants belong. If the FSFM obtains the authority sought under the Prudential Supervision Law, currently in its second reading before the Duma, professional market participants that deal with the retail public will be required to belong to an SRO subject to FSFM oversight. FSFM will be able to use that SRO to improve the development and enforcement of conduct of business and customer fairness requirements and to institute more expeditious dispute resolution and mediation processes. Exchanges and other market operators are required to enforce their rules but are not regarded as self-regulatory organizations under Russian law.

(iii) Principles 8–10, Principles relating to enforcement of securities regulation. New rules to define the offenses of market abuse and insider trading, to require the maintenance of insider lists and to improve the ability to investigate violations against third parties as well as licensees are achievements as is the institution of new real-time trade monitoring capability within the FSFM. However, the sufficiency of these changes to detect and deter misconduct should be tested as they are implemented and cases are brought where warranted. Further, the ability to obtain general bank records for natural persons to conduct securities regulation and to investigate any securities law violation remains an issue. To the extent legal changes are needed to remedy this, they should be aggressively pursued.

(iv) Principles 11–13, Principles for cooperation in regulation: The powers to obtain information and to share it have been augmented since the prior report. Further improvements are pending in consolidated supervision/banking legislation which will remove certain remaining limitations, facilitating intergovernmental communication for financial market oversight. The FSFM should aggressively pursue becoming a full signatory to the IOSCO Multi-lateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU). It should also seek to document its cooperative and investigative information sharing arrangements with the CBR and other relevant authorities and to keep relevant performance statistics. (See also Principles 24 and 29.)

(v) Principles 14–16, Principles for Issuers: New disclosure rules requiring material event reporting and ownership and control reporting, which attempt to improve information on indirect and connected ownership and to guide continuous disclosure have been adopted, as has the requirement for preparers and management to be liable for the accuracy of disclosure. Pending legislation would treat Directors as fiduciaries and a new Presidential Decree requires Ministers to step down from the supervisory boards of government-sponsored enterprises. These are sound improvements, which need some testing in practice. Regulatory vigilance in enforcing these requirements should determine whether the requirements are increasing sufficiently the transparency of ownership and related transactions.

(vi) Principles 17–20, Principles for collective investment schemes: The FSFM has legislation that recognizes that CIS are vehicles for retail investment. In this regard it provides a framework of substantial protections. It is now in the course of adding some modernizations, which include more flexibility for sophisticated investors and broader use of derivatives under EU-like requirements for diversification and leverage. FSFM should take steps to ensure that surveillance programs keep abreast of the growth of products and structures in this market. All marketing of mutual funds should be covered by securities requirements.

(vii) Principles 21–24, Principles for market intermediaries; new capital requirements are being phased in albeit planned increases for brokers due in July were cancelled. FSFM is also adding new measures to determine the operational capacity of intermediaries as part of the licensing qualification process and considering an early warning process. These initiatives should be pursued. The legislative ability to appoint an authorized representative from FSFM to operate a professional market participant for which the license has been suspended or withdrawn, or to operate a provisional administration, to manage and/or wind down a distressed firm and to require enhanced risk management and other prudential measures are pending. The FSFM should take into consideration its experience with intermediaries in using these new supervisory powers and should move to update its existing periodic inspections regime/algorithm by adding some risk-based analyses and random checks for records, capital and other compliance requirements. The operation of the new alignment of functions should be kept under review. Prompt steps also should be taken to put into place the authority to create an investor compensation fund and to develop appropriate contingency plans.

(viii) Principles 25–30, Principles for the Secondary Market. New technical capacity to undertake real time surveillance of trading was obtained last year. Experience with the alerts generated through this surveillance facility, and the reporting by exchanges of defined nonstandard transactions (potential market abuses), should enable the FSFM to better detect and deter market misconduct and to investigate/and or report suspicious transactions. Ongoing processes to revisit the listing, admission to trading and market structure should be continued to improve price reporting. As measures are adopted to provide the legal underpinning for a central counterparty and rationalization of the securities settlement system, the FSFM should ensure that its own regulatory methods and programs are adjusted so as to supervise the new operations in an effective, comprehensive way including back-testing of the extent to which margin/default coverage is achieved. Contingency and cooperative information sharing arrangements (or a crisis management plan, which addresses various types of crises) should be in place to address market disruption or failure of an intermediary.

Table 1.

Summary Implementation of the IOSCO Principles—ROSCs

If material changes result from the realignment of powers and authorities to accommodate the transfer of insurance functions and the change in leadership of the FSFM, or otherwise, the rating contained herein may require further assessment.

Table 1.

Summary Implementation of the IOSCO Principles—ROSCs

If material changes result from the realignment of powers and authorities to accommodate the transfer of insurance functions and the change in leadership of the FSFM, or otherwise, the rating contained herein may require further assessment.

Principle	Grading	Findings
Principle 1. The responsibilities of the regulator should be clearly and objectively stated	PI	• The FSFM’s powers and authorities, in so far as they pertain to securities functions and professionals, are set out comprehensively in the law, including relevant Presidential decrees and Resolutions of the Government of the Russian Federation. In combination, these laws grant the FSFM a number of normative authorities within its competence, including as to the securities functions conducted by banks. Not all marketing of bank-managed collective investments is under the direct oversight of the FSFM, however. • The accessibility of the applicable laws would be improved by attempting to provide a consolidated text and by reinstating a publicly available English translation. • There is an informal working arrangement with the CBR for the oversight of commonly supervised entities. This arrangement has not been documented to address the sharing of information to combat securities law violations. • All supervisory functions over insurance were transferred to the FSFM on March 4, 2011 as were such functions with respect to certain other non-banking financial institutions as of June. The alignment of functions between the FSFM and the MoF has not yet been finally agreed.
Principle 2. The regulator should be operationally independent and accountable in the exercise of its functions and powers	PI	• FSFM currently has the authority to grant, condition, suspend and revoke licenses without interference. FSFM also has been granted broad inspection and sanctioning powers with respect to capital markets professionals and participants. These powers appear to be unaffected by the recent changes in the overall structure, functions and accountability of the FSFM. • Under the new structure, the FSFM will retain powers to issue secondary legislation (regulation or norms) in its areas of remaining competence, subject in certain matters of importance to approval by the MoF. With respect to capital requirements and the diversification requirements for mutual funds, the MoF will have normative powers in coordination with the FSFM. • It is premature to evaluate how this rearrangement of functions and authorities will operate in practice. The process for making these changes was not transparent. • The head of the agency is not appointed for a fixed term, there are no criteria for removal, and the agency itself does not have legal protection from liability for the performance of its mandates in good faith, all matters of concern to IOSCO and other financial standards setters.
Principle 3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers	PI	• The FSFM has made a substantial effort since 2008 to obtain all the powers and authorities necessary to be IOSCO-compliant. In this respect, FSFM has undertaken an enormous project to obtain expanded information sharing powers and to make clear its administrative authority with respect to third parties. • More authority is currently projected to be provided with respect to access to (i) information regarding the general bank accounts of natural persons and (ii) information necessary for overall prudential supervision of groups, as the residual limitations on interagency sharing of bank records for regulatory and supervisory purposes are currently expected to be removed in pending legislation. • FSFM’s ability to obtain bank records apparently does not now extend to natural persons or to enforcement of securities laws generally. • FSFM will need sufficient resources to implement the beneficial new powers it has obtained and to enable it to attract sufficiently expert personnel to oversee the evolving markets appropriately, a matter of concern to the investing public. FSFM’s existing budget may not be sufficient to accommodate adequate training to assure that the expertise of FSFM staff matches its expanded mandate.
Principle 4. The regulator should adopt clear and consistent regulatory processes	BI	• The FSFM commits its general and specific actions to writing; all of its actions are subject to appeal in the courts; and procedures affecting the FSFM are documented both in a Federal Law, the Administrative Code, and also in an internal general regulation. While there is a means to be heard at least on the papers in individual proceedings in practice, this process could be made more explicit. • FSFM has oversight over the exchanges and organized markets, but disciplinary actions of SROs and exchanges are appealable only to the courts. • New proposals are published on FSFM’s website and there is an opportunity for comment. The industry indicates that the opportunity for increased dialogue is welcome. Feedback statements on the handling of comments are not currently part of the consultation process. Interpretations must be given in writing and within a specified time frame. • FSFM removed its English language website and it was not operational during this assessment. A website that is accessible not only in Russian, but also in a language more broadly understood in the financial community, as previously was the case, is a factor in attracting offshore business. • The FSFM supports the use of alternative dispute resolution mechanisms, but does not mandate that financial market professionals w submit to this type of process on request of customers. • Complaints may lead to investigations; more statistics or performance metrics would make clearer how such matters are handled and disposed of.
Principle 5. The staff of the regulator should observe the highest professional standards	BI	• FSFM staff is subject to general and specific law on professional conduct and confidentiality. They are not permitted to engage in personal trading. They are also subject to the Insider Law, which makes violations sanctionable. • FSFM has not consolidated the applicable requirements in a Code of Conduct or as a part of the Internal Code that could be made publicly available. It should also introduce monitoring processes. (See also Principle 2).
Principle 6 The regulatory regime should make appropriate use of self-regulatory organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence and to the extent appropriate to the size and complexity of the markets	Not Assessed	• The Securities Law contemplates the use of SROs that are like industry professional/trade associations. These have the ability to comment on agency action, can make binding rules of conduct for their members and offer dispute resolution services, pursuant to relevant law. • As membership in any such SRO is voluntary, their usefulness in expanding the scope of the regulator’s capacity to oversee the market and to enforce protections to retail customers is limited. SROs do provide a mechanism for informed consultation on agency actions. • The Prudential Supervision Law that is pending a second reading in the Duma will make participation in an SRO mandatory for financial intermediaries that deal with retail customers and will create a securities compensation fund through such SRO for retail investors. • Planned initiatives to strengthen retail protections would be welcome by market participants. Over time the scope of these arrangements might be further evaluated, and extended to other types of clients, such as institutional clients representing the interests of retail clients like CIS.
Principle 7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities	BI	• The FSFM has a program both to oversee SROs—it conducted four reviews in 2010—and to cooperate with them on inspections and in deterring and detecting market abuses and other misconduct. SROs, however, are not subject to a legal obligation of confidentiality as is the FSFM. Membership in SROs also is now voluntary (See Principle 6 above). • Securities exchanges, although they must enforce their rules as a matter of contract and to satisfy FSFM requirements, and are obligated to report specific types of non-standard transactions by their members or subscribers to the FSFM, are not designated as SROs by the law (See Principle 25). • All SRO rules must be approved, and can be deemed effective in 30 days if there is no objection from FSFM. • The FSFM indicates that it intends to provide additional oversight to any SRO designed for protection of retail investors.
Principle 8. The regulator should have comprehensive inspection, investigation and surveillance powers	PI	• The FSFM has comprehensive inspection powers, including the capacity to inspect brokers’ files and to trace transactions to a broker’s bank accounts. • There are plans either to further clarify or to amend relevant banking law to remove limitations on access to general bank accounts of natural persons for all regulatory purposes. Such accounts can currently be reached with respect to entities for manipulation and insider trading actions under the relevant securities laws, but as to natural persons the banking law has not been amended.
Principle 9. The regulator should have comprehensive enforcement powers	BI	• FSFM has investigative and enforcement powers to bring administrative actions against third parties as well as licensees. • FSFM also has received brand new authority to combat market abuses, such as insider trading and manipulation that define the offenses with particularity. In fact, FSFM has already brought a case. • The new provisional administrator powers create the possibility to freeze assets and for FSFM personnel to act as an authorized representative to operate/or oversee the operations of a professional market participant that is revoked or suspended or otherwise put under administration. • The FSFM is continuing to pursue enhancement of its enforcement and sanctioning authorities.
Principle 10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.	PI	• The FSFM conducts an active inspection and investigation program. It has withdrawn and revoked licenses, and undertaken an energetic program of initiatives together with the Government, to get the powers to become IOSCO-compliant in the enforcement area. • The FSFM has also recently obtained new surveillance tools and dedicated staff to identify suspicious transactions that can be modeled to implement its new authority to combat various market abuses. • FSFM also makes all of its sanctions public on its website. • Some period of observation of the use of these new enforcement powers and tools is necessary to determine how effectively they work in practice. • FSFM would benefit from improved performance indicators for its enforcement program.
Principle 11 The regulator should have the authority to share both public and nonpublic information with domestic and foreign counterparts	BI	• FSFM has the ability to share public and non-public information in its files or available to it through inspection of licensees with domestic and foreign authorities, including information with respect to the bank accounts of legal entities (and maintained for business) to the full extent of its ability to obtain such information • There are plans to amend the Banking Law and or otherwise to clarify that FSFM has access to the general bank accounts of natural persons for regulatory purposes. In the interim, the FSFM has full authority to assist with respect to those bank records by going through a court process
Principle 12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts	I	• The FSFM cooperates with both domestic and international authorities. • Although FSFM is still negotiating a protocol with the CBR, it has understandings with other domestic regulators and it has specific MoUs with 15 foreign authorities and a side letter with a 16th. Additionally it sits on several domestic and international committees where important contacts and informal networks are formed and where information is shared verbally as well as an internal task force of all financial authorities. • FSFM should continue to pursue information sharing arrangements with all jurisdictions that trade Russian equities or deposit receipts.
Principle 13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers	PI	• The FSFM has full power and authority to share information with foreign authorities without dual criminality or an independent interest in the action to the full extent of its powers to obtain and use information itself, which powers have been expanded recently. FSFM may need to commence an investigation or inspection to do so, but has that power. • FSFM should commence a reasoned process to become a signatory to Annex A of the IOSCO MMoU within the deadline. In this regard, FSFM has received substantial additional powers since 2008, can seek to clarify those ambiguities within its power to clarify, and can confirm through IOSCO’s process what further legal clarifications, such as, on bank records of natural persons, are expected. • Appropriate clarifications would raise the level of FSFM compliance.
Principle 14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions	PI	• FSFM requires prospectus, financial and non-financial disclosure and reporting. It defines what information must be submitted, conducts prospectus reviews, and the review of periodic and ad hoc statements and filings. • The prospectus and material event disclosure requirements for public companies, defined as companies with more than 500 participants are contained in the Securities Law. The Company Law also has disclosure requirements for public issuers. In addition to specific requirements, the Securities Law has a general provision for those issues it covers that requires that all information material to price be disclosed. • FSFM conducts reviews of issuers and public companies, both in the regions and at headquarters, mostly via review of filed disclosure documents, and periodic financial reports, but in some cases via on-site inspections. Preparers of statements are liable for the accuracy of disclosures, and the FSFM has in fact suspended and required the correction of filings. • FSFM has received important new authorities to look at indirect control of entities, and has added additional material event reporting to its disclosure requirements. Some experience with the application of these enhancements to determine their effectiveness is necessary before FSFM could be found to be fully compliant. FSFM and the industry report that the effects of these changes and other actions have been to increase the overall transparency of public companies (See also Principle 15). • Efforts also are being made to improve accounting standards. The efficacy of disclosure ultimately depends on the application of accounting and auditing, and ownership information reporting. While these matters are actively being improved, more experience is needed with their implementation for FSFM to move to a higher level of compliance. (See also Principle 16)
Principle 15. Holders of securities in a company should be treated in a fair and equitable manner	PI	• A Code of Conduct for corporate governance was adopted in 2002. The RTS and the MICEX require compliance with this Code for their top tier companies. • The FSFM also oversees company law, including pricing, relative to take over transactions. The law provides for the protection of minority rights. • More experience with the application of new ownership and control reporting procedures is required, but such reporting, if enforceable and enforced, should materially improve the ability to provide the requisite protections. • Directors and officers are not required to disclose any interest in shares, only interests that cross a 5 percent or greater threshold. • Required annual “comply or explain” disclosure for public companies as to Code of good governance would improve the information provided to shareholders.
Principle 16. Accounting and auditing standards should be of a high and internationally acceptable quality	PI	• IFRS for consolidated financial reports of issuers and financial markets participants is required after 2015. • While financial reports must still be filed in accordance with Russian Accounting standards, IFRS-compliant statements also must be disclosed now if IFRS is used for foreign offers or even for internal reporting. The top tier of listed companies also uses IFRS pursuant to exchange rules. • Accounting and auditing oversight procedures should continue to be strengthened. Additionally, as the requirement for IFRS is phased in, adequate oversight and training of accountants and the regulators will be important and will need to be intensified.
Principle 17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme	PI	• The FSFM has initial and ongoing licensing standards that involve fit and proper criteria, including competence, lack of disqualifying conduct, adoption of appropriate structures and controls and review. • FSFM also has rules to prevent or require disclosure of related party transactions, subject to certain exceptions comparable t those in other jurisdictions. • Firms that market funds must be licensed, except that banks can place bank customers in bank-managed funds, without a brokerage license. • There are some gaps among the customer protections, such as those related to best execution, although additional customer protection rules could be provided by the relevant SRO for the management company or possibly, otherwise, through the expected ability to mandate the use of an SRO for intermediaries doing retail related business.
Principle 18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets	BI	• FSFM has structural requirements for collective investment schemes (CIS), whether joint stock companies (of which there are only eight), or unit investment trusts, which treat their participants’ interests as securities. • The law and related rules require the assets of the CIS to be maintained at a non-affiliated “specialized” custodian. The custodian is to maintain a register of unit holders, account for the transfer and investment of subscriptions, and monitor investments and activities of the management company relative thereto for compliance generally with the law. • The Investment Fund law recognizes that the portfolio assets of the CIS are not part of the investment management company’s estate, nor are they amenable to the claims of debtors of individual fund participants or of the special custodian. Similarly in the case of fund companies, portfolio and other assets held for investors are available only to satisfy such investors’ claims. • A special administration procedure also is provided by that law in the event of the need to wind down a fund or otherwise. • There is a process whereby auditors confirm that fund money and property are properly maintained, that custodial procedures are observed, and that portfolio structures and net asset value computations are correct. • Acquisition of funds by other funds should be monitored to prevent abuses.
Principle 19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme	I	• Investment by laws and agreements, information on fund composition, price reporting and financial reports for managers and custodians, as well as specific and general qualitative disclosure is required for investment funds. Among other things these relate to the fund governance and management and their qualifications, investment policies, fees and costs, and to the fact that performance gains cannot be guaranteed. A particularly important disclosure is with respect to the volatility of markets where liquidity is not assured. • Risk warnings to retail investors should help to ensure they understand the difference between investment funds and bank accounts and/or bank offered funds to the extent that the protections are not identical. • The Investment Fund law provides specific requirements for SROs to which management companies are now voluntary members. These require such SROs to handle complaints, monitor for compliance with applicable rules, cooperate with the FSFM, and bring disciplinary procedures. • See Principle 4, 6, 7 and 23 with respect to efforts to require mandatory use of an SRO to provide more oversight of retail offerings and education of customers.
Principle 20. Regulation should ensure that there is a proper and disclosed basis for assets valuation and the pricing and the redemption of units in a collective investment scheme	BI	• FSFM has specific requirements for the valuation of assets. There are special provisions that apply to illiquid assets to promote the use of fair/accurate valuations. Attentive oversight of the pricing of illiquid assets, and of any related evaluators, is necessary. Clear provisions for errors are needed, for example. • NAV for open-ended funds has to be published daily on the Internet site of the CIS management company and if funds are listed on a stock exchange, the price must also be published through on-line data feeds of authorized vendors. • Closed end funds and interval funds must report on redemption dates (which must be at least once yearly) and in the case of movable assets not less frequently than quarterly. (See Principle 18 for the role of auditors)
Principle 21. Regulation should provide for minimum entry standards for market intermediaries	BI	• FSFM has fit and proper licensing requirements that include statutory disqualifications and capital and educational qualifications and professional competence requirements that apply to all intermediaries, including (except for capital) banks undertaking securities functions. • While currently licenses are issued on the documents, coupled with a review of a certification as to no criminal record from the Ministry of Interior, there is a pending project to add a due diligence review of operational capacity to conduct the business for which a professional market participant is licensed. • See Principle 22. As capital requirements become more complex, it will be important to have appropriately expert staff to conduct these reviews.
Principle 22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake	PI	• Minimum financial requirements for brokers were materially increased to Rub 35 million (US$1.25 million) in 2010, and were to have been further increased in July, 2011. Special custodians and non-settlement related depositories’ capital will be increased to Rub 80 million. as previously planned in July. • More specific risk-based measures and ratios related to credit and other risks are proposed to be added by the Prudential Supervision Law, which is in its second reading. • The development of specific requirements has now been reassigned to the MoF and planned increases due for brokers in July were postponed in May pending the projected adoption of the Prudential Supervision Law. • Existing requirements will be augmented by the ability to undertake appropriate due diligence, a new consolidated financial reports filing requirement when it is applied, by the Consolidated Supervision Banking Law, if and when adopted, and by the full implementation of IFRS by 2015. • FSFM has no early warning requirements or procedures. • These changes will require adequate expertise to supervise and implement, including new inspection regimes and procedures, which might reasonably focus on identifying and prioritizing risks as well as random inspections to ensure that books and records are current and that the capital rules are being followed properly.
Principle 23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters	PI	• The Securities Law and FSFM regulations contain broad duties of good faith, loyalty and fairness to customers. Recent regulations adopted in 2010 permit through new monitoring procedures the ability to better oversee customer first and other customer protection requirements in real time and the new Insider Law makes market operator personnel and professional market participants insiders with respect to information received from their clients. • The adoption, application and enforcement of business conduct standards and other customer protections could be improved with the use of a mandated SRO for intermediaries handling retail business. • Currently the order handling requirements are not very specific, so enforcement and oversight may be complicated---a general issue with using principles, as opposed to rules, of supervision. These issues could be ameliorated through use of an SRO that establishes best practices providing more content to the principles.
Principle 24. There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk	PI	• There are new powers to deal with firm financial distress, including appointment of a temporary/provisional administrator, and, there are additional new rules pending final legislative approval. • FSFM and the exchanges and the other relevant authorities need contingency arrangements to deal with market and firm disruption, making full use of their administration and information sharing powers, which address several potential scenarios. See Principles 1 and 29. Such arrangements would need to evolve with the market and be kept under continuous review. • New authority to create an investor compensation scheme is expected to come on line with pending legislation.
Principle 25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight	BI	• The FSFM has a licensing procedure for regulated exchanges and organized markets, which includes fitness and financial requirements. • A new law known as the Law on Exchanges and Organized Trading is in the process of being adopted which may contain additional improvements. • Disclosure relative to the differential requirements as to each of the specific tiers of trading is important to customer protection and fairness.
Principle 26. There should be ongoing regulatory supervision of exchanges and trading systems, which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants	BI	• The FSFM conducts oversight reviews of exchanges. In this regard it visited the RTS in 2010. Inspections result in a report, an exit conference, and follow up. • FSFM also works with the exchange personnel on emerging issues. • The FSFM now has additional authority to do its own monitoring of suspicious transactions and potential violations and new technology to apply these. Additionally regulations adopted in 2010 require all organized markets and exchanges to submit various types of information about non-standard and potentially abusive transactions to the FSFM in a specified format. • The FSFM would benefit from more metrics for evaluating performance by exchanges of their compliance functions.
Principle 27. Regulation should promote transparency of trading	PI	• Price and volume is reported by the market to the FSFM. The data feeds are licensed in real time to commercial providers and they are also available with a 15 minute time lag to the general public on line. • Reporting of OTC transactions has been improved, consistently with changes in the process being made globally, which are currently being refined after the crisis. Almost all OTC reports are made through RTS. • How to address the prices of the same product listed or admitted to trading at two exchanges in the same time zone continues to be subject to regulatory scrutiny. • The exchanges and the FSFM would benefit from staying abreast of developments more generally about market structure, transparency and related protections.
Principle 28. Regulation should be designed to detect and deter manipulation and other unfair trading practices	PI	• Adoption of the law on market abuses, such as insider trading and manipulation is a step forward and includes the sanction of disgorgement of wrongful profits. • The systems to deter and detect such misconduct are in the process of being developed and tested as the law is being phased in. The FFSM has a new real time surveillance tool, and the exchanges are required also to enforce their rules against misconduct. Specific exception reports on non-standard transactions are required by the exchanges to the FSFM to be made in a common format. (See also Principles 7 and 26). • Some experience is necessary to see how these improved requirements work in practice and whether the penalties are dissuasive and proportionate.
Principle 29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption	PI	• The exchanges have some rules with respect to these risks built into their systems. The procedures for defaults are public. • The FSFM has power to demand additional information from direct market participants on clients within omnibus accounts. • This power is untested. • The FSFM should develop approaches that enable it to determine where risks are originating in the market, and to follow up with other regulators in conducting appropriate surveillance. • Contingency procedures are not currently documented nor are related cooperative arrangements with other regulators. There should be documented contingency plans to address both general market and firm disruptions (see also Principle 24 Key Q1).
Principle 30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk	Not Assessed	• Adoption of the Clearing Law that provides a legal underpinning for final settlement in a central counterparty system and for close out netting and related risk management parameters is an important step forward. • It is important to assure that as implemented the risk management and oversight of the CCP system is sufficient to meet international requirements. • Such a system should bring more transparency to exposures, and further facilitate anonymous trading. As it concentrates risk at the CCP, however, the financial resources and margining and variation systems are critical and appropriate and ongoing back testing of the sufficiency of the risk management systems is important. • The system still permits the use of multiple registrars or transfer agents though issues relative to liability for custodianship obligations have been clarified and the number of such agents is declining. Use of a Central Security Depository which complies with the CPSS/IOSCO standards for securities settlement systems, and US law for US mutual funds investing offshore would send an important signal to the market as to the integrity of the system for transfer of securities.
Aggregate: Fully implemented (FI) 2 broadly implemented (BI)10, partly implemented (PI) 16, not implemented (NI) 0, not assessed (N/A) 2.

View Table

Table 1.

Summary Implementation of the IOSCO Principles—ROSCs

If material changes result from the realignment of powers and authorities to accommodate the transfer of insurance functions and the change in leadership of the FSFM, or otherwise, the rating contained herein may require further assessment.

Principle	Grading	Findings
Principle 1. The responsibilities of the regulator should be clearly and objectively stated	PI	• The FSFM’s powers and authorities, in so far as they pertain to securities functions and professionals, are set out comprehensively in the law, including relevant Presidential decrees and Resolutions of the Government of the Russian Federation. In combination, these laws grant the FSFM a number of normative authorities within its competence, including as to the securities functions conducted by banks. Not all marketing of bank-managed collective investments is under the direct oversight of the FSFM, however. • The accessibility of the applicable laws would be improved by attempting to provide a consolidated text and by reinstating a publicly available English translation. • There is an informal working arrangement with the CBR for the oversight of commonly supervised entities. This arrangement has not been documented to address the sharing of information to combat securities law violations. • All supervisory functions over insurance were transferred to the FSFM on March 4, 2011 as were such functions with respect to certain other non-banking financial institutions as of June. The alignment of functions between the FSFM and the MoF has not yet been finally agreed.
Principle 2. The regulator should be operationally independent and accountable in the exercise of its functions and powers	PI	• FSFM currently has the authority to grant, condition, suspend and revoke licenses without interference. FSFM also has been granted broad inspection and sanctioning powers with respect to capital markets professionals and participants. These powers appear to be unaffected by the recent changes in the overall structure, functions and accountability of the FSFM. • Under the new structure, the FSFM will retain powers to issue secondary legislation (regulation or norms) in its areas of remaining competence, subject in certain matters of importance to approval by the MoF. With respect to capital requirements and the diversification requirements for mutual funds, the MoF will have normative powers in coordination with the FSFM. • It is premature to evaluate how this rearrangement of functions and authorities will operate in practice. The process for making these changes was not transparent. • The head of the agency is not appointed for a fixed term, there are no criteria for removal, and the agency itself does not have legal protection from liability for the performance of its mandates in good faith, all matters of concern to IOSCO and other financial standards setters.
Principle 3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers	PI	• The FSFM has made a substantial effort since 2008 to obtain all the powers and authorities necessary to be IOSCO-compliant. In this respect, FSFM has undertaken an enormous project to obtain expanded information sharing powers and to make clear its administrative authority with respect to third parties. • More authority is currently projected to be provided with respect to access to (i) information regarding the general bank accounts of natural persons and (ii) information necessary for overall prudential supervision of groups, as the residual limitations on interagency sharing of bank records for regulatory and supervisory purposes are currently expected to be removed in pending legislation. • FSFM’s ability to obtain bank records apparently does not now extend to natural persons or to enforcement of securities laws generally. • FSFM will need sufficient resources to implement the beneficial new powers it has obtained and to enable it to attract sufficiently expert personnel to oversee the evolving markets appropriately, a matter of concern to the investing public. FSFM’s existing budget may not be sufficient to accommodate adequate training to assure that the expertise of FSFM staff matches its expanded mandate.
Principle 4. The regulator should adopt clear and consistent regulatory processes	BI	• The FSFM commits its general and specific actions to writing; all of its actions are subject to appeal in the courts; and procedures affecting the FSFM are documented both in a Federal Law, the Administrative Code, and also in an internal general regulation. While there is a means to be heard at least on the papers in individual proceedings in practice, this process could be made more explicit. • FSFM has oversight over the exchanges and organized markets, but disciplinary actions of SROs and exchanges are appealable only to the courts. • New proposals are published on FSFM’s website and there is an opportunity for comment. The industry indicates that the opportunity for increased dialogue is welcome. Feedback statements on the handling of comments are not currently part of the consultation process. Interpretations must be given in writing and within a specified time frame. • FSFM removed its English language website and it was not operational during this assessment. A website that is accessible not only in Russian, but also in a language more broadly understood in the financial community, as previously was the case, is a factor in attracting offshore business. • The FSFM supports the use of alternative dispute resolution mechanisms, but does not mandate that financial market professionals w submit to this type of process on request of customers. • Complaints may lead to investigations; more statistics or performance metrics would make clearer how such matters are handled and disposed of.
Principle 5. The staff of the regulator should observe the highest professional standards	BI	• FSFM staff is subject to general and specific law on professional conduct and confidentiality. They are not permitted to engage in personal trading. They are also subject to the Insider Law, which makes violations sanctionable. • FSFM has not consolidated the applicable requirements in a Code of Conduct or as a part of the Internal Code that could be made publicly available. It should also introduce monitoring processes. (See also Principle 2).
Principle 6 The regulatory regime should make appropriate use of self-regulatory organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence and to the extent appropriate to the size and complexity of the markets	Not Assessed	• The Securities Law contemplates the use of SROs that are like industry professional/trade associations. These have the ability to comment on agency action, can make binding rules of conduct for their members and offer dispute resolution services, pursuant to relevant law. • As membership in any such SRO is voluntary, their usefulness in expanding the scope of the regulator’s capacity to oversee the market and to enforce protections to retail customers is limited. SROs do provide a mechanism for informed consultation on agency actions. • The Prudential Supervision Law that is pending a second reading in the Duma will make participation in an SRO mandatory for financial intermediaries that deal with retail customers and will create a securities compensation fund through such SRO for retail investors. • Planned initiatives to strengthen retail protections would be welcome by market participants. Over time the scope of these arrangements might be further evaluated, and extended to other types of clients, such as institutional clients representing the interests of retail clients like CIS.
Principle 7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities	BI	• The FSFM has a program both to oversee SROs—it conducted four reviews in 2010—and to cooperate with them on inspections and in deterring and detecting market abuses and other misconduct. SROs, however, are not subject to a legal obligation of confidentiality as is the FSFM. Membership in SROs also is now voluntary (See Principle 6 above). • Securities exchanges, although they must enforce their rules as a matter of contract and to satisfy FSFM requirements, and are obligated to report specific types of non-standard transactions by their members or subscribers to the FSFM, are not designated as SROs by the law (See Principle 25). • All SRO rules must be approved, and can be deemed effective in 30 days if there is no objection from FSFM. • The FSFM indicates that it intends to provide additional oversight to any SRO designed for protection of retail investors.
Principle 8. The regulator should have comprehensive inspection, investigation and surveillance powers	PI	• The FSFM has comprehensive inspection powers, including the capacity to inspect brokers’ files and to trace transactions to a broker’s bank accounts. • There are plans either to further clarify or to amend relevant banking law to remove limitations on access to general bank accounts of natural persons for all regulatory purposes. Such accounts can currently be reached with respect to entities for manipulation and insider trading actions under the relevant securities laws, but as to natural persons the banking law has not been amended.
Principle 9. The regulator should have comprehensive enforcement powers	BI	• FSFM has investigative and enforcement powers to bring administrative actions against third parties as well as licensees. • FSFM also has received brand new authority to combat market abuses, such as insider trading and manipulation that define the offenses with particularity. In fact, FSFM has already brought a case. • The new provisional administrator powers create the possibility to freeze assets and for FSFM personnel to act as an authorized representative to operate/or oversee the operations of a professional market participant that is revoked or suspended or otherwise put under administration. • The FSFM is continuing to pursue enhancement of its enforcement and sanctioning authorities.
Principle 10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.	PI	• The FSFM conducts an active inspection and investigation program. It has withdrawn and revoked licenses, and undertaken an energetic program of initiatives together with the Government, to get the powers to become IOSCO-compliant in the enforcement area. • The FSFM has also recently obtained new surveillance tools and dedicated staff to identify suspicious transactions that can be modeled to implement its new authority to combat various market abuses. • FSFM also makes all of its sanctions public on its website. • Some period of observation of the use of these new enforcement powers and tools is necessary to determine how effectively they work in practice. • FSFM would benefit from improved performance indicators for its enforcement program.
Principle 11 The regulator should have the authority to share both public and nonpublic information with domestic and foreign counterparts	BI	• FSFM has the ability to share public and non-public information in its files or available to it through inspection of licensees with domestic and foreign authorities, including information with respect to the bank accounts of legal entities (and maintained for business) to the full extent of its ability to obtain such information • There are plans to amend the Banking Law and or otherwise to clarify that FSFM has access to the general bank accounts of natural persons for regulatory purposes. In the interim, the FSFM has full authority to assist with respect to those bank records by going through a court process
Principle 12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts	I	• The FSFM cooperates with both domestic and international authorities. • Although FSFM is still negotiating a protocol with the CBR, it has understandings with other domestic regulators and it has specific MoUs with 15 foreign authorities and a side letter with a 16th. Additionally it sits on several domestic and international committees where important contacts and informal networks are formed and where information is shared verbally as well as an internal task force of all financial authorities. • FSFM should continue to pursue information sharing arrangements with all jurisdictions that trade Russian equities or deposit receipts.
Principle 13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers	PI	• The FSFM has full power and authority to share information with foreign authorities without dual criminality or an independent interest in the action to the full extent of its powers to obtain and use information itself, which powers have been expanded recently. FSFM may need to commence an investigation or inspection to do so, but has that power. • FSFM should commence a reasoned process to become a signatory to Annex A of the IOSCO MMoU within the deadline. In this regard, FSFM has received substantial additional powers since 2008, can seek to clarify those ambiguities within its power to clarify, and can confirm through IOSCO’s process what further legal clarifications, such as, on bank records of natural persons, are expected. • Appropriate clarifications would raise the level of FSFM compliance.
Principle 14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions	PI	• FSFM requires prospectus, financial and non-financial disclosure and reporting. It defines what information must be submitted, conducts prospectus reviews, and the review of periodic and ad hoc statements and filings. • The prospectus and material event disclosure requirements for public companies, defined as companies with more than 500 participants are contained in the Securities Law. The Company Law also has disclosure requirements for public issuers. In addition to specific requirements, the Securities Law has a general provision for those issues it covers that requires that all information material to price be disclosed. • FSFM conducts reviews of issuers and public companies, both in the regions and at headquarters, mostly via review of filed disclosure documents, and periodic financial reports, but in some cases via on-site inspections. Preparers of statements are liable for the accuracy of disclosures, and the FSFM has in fact suspended and required the correction of filings. • FSFM has received important new authorities to look at indirect control of entities, and has added additional material event reporting to its disclosure requirements. Some experience with the application of these enhancements to determine their effectiveness is necessary before FSFM could be found to be fully compliant. FSFM and the industry report that the effects of these changes and other actions have been to increase the overall transparency of public companies (See also Principle 15). • Efforts also are being made to improve accounting standards. The efficacy of disclosure ultimately depends on the application of accounting and auditing, and ownership information reporting. While these matters are actively being improved, more experience is needed with their implementation for FSFM to move to a higher level of compliance. (See also Principle 16)
Principle 15. Holders of securities in a company should be treated in a fair and equitable manner	PI	• A Code of Conduct for corporate governance was adopted in 2002. The RTS and the MICEX require compliance with this Code for their top tier companies. • The FSFM also oversees company law, including pricing, relative to take over transactions. The law provides for the protection of minority rights. • More experience with the application of new ownership and control reporting procedures is required, but such reporting, if enforceable and enforced, should materially improve the ability to provide the requisite protections. • Directors and officers are not required to disclose any interest in shares, only interests that cross a 5 percent or greater threshold. • Required annual “comply or explain” disclosure for public companies as to Code of good governance would improve the information provided to shareholders.
Principle 16. Accounting and auditing standards should be of a high and internationally acceptable quality	PI	• IFRS for consolidated financial reports of issuers and financial markets participants is required after 2015. • While financial reports must still be filed in accordance with Russian Accounting standards, IFRS-compliant statements also must be disclosed now if IFRS is used for foreign offers or even for internal reporting. The top tier of listed companies also uses IFRS pursuant to exchange rules. • Accounting and auditing oversight procedures should continue to be strengthened. Additionally, as the requirement for IFRS is phased in, adequate oversight and training of accountants and the regulators will be important and will need to be intensified.
Principle 17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme	PI	• The FSFM has initial and ongoing licensing standards that involve fit and proper criteria, including competence, lack of disqualifying conduct, adoption of appropriate structures and controls and review. • FSFM also has rules to prevent or require disclosure of related party transactions, subject to certain exceptions comparable t those in other jurisdictions. • Firms that market funds must be licensed, except that banks can place bank customers in bank-managed funds, without a brokerage license. • There are some gaps among the customer protections, such as those related to best execution, although additional customer protection rules could be provided by the relevant SRO for the management company or possibly, otherwise, through the expected ability to mandate the use of an SRO for intermediaries doing retail related business.
Principle 18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets	BI	• FSFM has structural requirements for collective investment schemes (CIS), whether joint stock companies (of which there are only eight), or unit investment trusts, which treat their participants’ interests as securities. • The law and related rules require the assets of the CIS to be maintained at a non-affiliated “specialized” custodian. The custodian is to maintain a register of unit holders, account for the transfer and investment of subscriptions, and monitor investments and activities of the management company relative thereto for compliance generally with the law. • The Investment Fund law recognizes that the portfolio assets of the CIS are not part of the investment management company’s estate, nor are they amenable to the claims of debtors of individual fund participants or of the special custodian. Similarly in the case of fund companies, portfolio and other assets held for investors are available only to satisfy such investors’ claims. • A special administration procedure also is provided by that law in the event of the need to wind down a fund or otherwise. • There is a process whereby auditors confirm that fund money and property are properly maintained, that custodial procedures are observed, and that portfolio structures and net asset value computations are correct. • Acquisition of funds by other funds should be monitored to prevent abuses.
Principle 19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme	I	• Investment by laws and agreements, information on fund composition, price reporting and financial reports for managers and custodians, as well as specific and general qualitative disclosure is required for investment funds. Among other things these relate to the fund governance and management and their qualifications, investment policies, fees and costs, and to the fact that performance gains cannot be guaranteed. A particularly important disclosure is with respect to the volatility of markets where liquidity is not assured. • Risk warnings to retail investors should help to ensure they understand the difference between investment funds and bank accounts and/or bank offered funds to the extent that the protections are not identical. • The Investment Fund law provides specific requirements for SROs to which management companies are now voluntary members. These require such SROs to handle complaints, monitor for compliance with applicable rules, cooperate with the FSFM, and bring disciplinary procedures. • See Principle 4, 6, 7 and 23 with respect to efforts to require mandatory use of an SRO to provide more oversight of retail offerings and education of customers.
Principle 20. Regulation should ensure that there is a proper and disclosed basis for assets valuation and the pricing and the redemption of units in a collective investment scheme	BI	• FSFM has specific requirements for the valuation of assets. There are special provisions that apply to illiquid assets to promote the use of fair/accurate valuations. Attentive oversight of the pricing of illiquid assets, and of any related evaluators, is necessary. Clear provisions for errors are needed, for example. • NAV for open-ended funds has to be published daily on the Internet site of the CIS management company and if funds are listed on a stock exchange, the price must also be published through on-line data feeds of authorized vendors. • Closed end funds and interval funds must report on redemption dates (which must be at least once yearly) and in the case of movable assets not less frequently than quarterly. (See Principle 18 for the role of auditors)
Principle 21. Regulation should provide for minimum entry standards for market intermediaries	BI	• FSFM has fit and proper licensing requirements that include statutory disqualifications and capital and educational qualifications and professional competence requirements that apply to all intermediaries, including (except for capital) banks undertaking securities functions. • While currently licenses are issued on the documents, coupled with a review of a certification as to no criminal record from the Ministry of Interior, there is a pending project to add a due diligence review of operational capacity to conduct the business for which a professional market participant is licensed. • See Principle 22. As capital requirements become more complex, it will be important to have appropriately expert staff to conduct these reviews.
Principle 22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake	PI	• Minimum financial requirements for brokers were materially increased to Rub 35 million (US$1.25 million) in 2010, and were to have been further increased in July, 2011. Special custodians and non-settlement related depositories’ capital will be increased to Rub 80 million. as previously planned in July. • More specific risk-based measures and ratios related to credit and other risks are proposed to be added by the Prudential Supervision Law, which is in its second reading. • The development of specific requirements has now been reassigned to the MoF and planned increases due for brokers in July were postponed in May pending the projected adoption of the Prudential Supervision Law. • Existing requirements will be augmented by the ability to undertake appropriate due diligence, a new consolidated financial reports filing requirement when it is applied, by the Consolidated Supervision Banking Law, if and when adopted, and by the full implementation of IFRS by 2015. • FSFM has no early warning requirements or procedures. • These changes will require adequate expertise to supervise and implement, including new inspection regimes and procedures, which might reasonably focus on identifying and prioritizing risks as well as random inspections to ensure that books and records are current and that the capital rules are being followed properly.
Principle 23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters	PI	• The Securities Law and FSFM regulations contain broad duties of good faith, loyalty and fairness to customers. Recent regulations adopted in 2010 permit through new monitoring procedures the ability to better oversee customer first and other customer protection requirements in real time and the new Insider Law makes market operator personnel and professional market participants insiders with respect to information received from their clients. • The adoption, application and enforcement of business conduct standards and other customer protections could be improved with the use of a mandated SRO for intermediaries handling retail business. • Currently the order handling requirements are not very specific, so enforcement and oversight may be complicated---a general issue with using principles, as opposed to rules, of supervision. These issues could be ameliorated through use of an SRO that establishes best practices providing more content to the principles.
Principle 24. There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk	PI	• There are new powers to deal with firm financial distress, including appointment of a temporary/provisional administrator, and, there are additional new rules pending final legislative approval. • FSFM and the exchanges and the other relevant authorities need contingency arrangements to deal with market and firm disruption, making full use of their administration and information sharing powers, which address several potential scenarios. See Principles 1 and 29. Such arrangements would need to evolve with the market and be kept under continuous review. • New authority to create an investor compensation scheme is expected to come on line with pending legislation.
Principle 25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight	BI	• The FSFM has a licensing procedure for regulated exchanges and organized markets, which includes fitness and financial requirements. • A new law known as the Law on Exchanges and Organized Trading is in the process of being adopted which may contain additional improvements. • Disclosure relative to the differential requirements as to each of the specific tiers of trading is important to customer protection and fairness.
Principle 26. There should be ongoing regulatory supervision of exchanges and trading systems, which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants	BI	• The FSFM conducts oversight reviews of exchanges. In this regard it visited the RTS in 2010. Inspections result in a report, an exit conference, and follow up. • FSFM also works with the exchange personnel on emerging issues. • The FSFM now has additional authority to do its own monitoring of suspicious transactions and potential violations and new technology to apply these. Additionally regulations adopted in 2010 require all organized markets and exchanges to submit various types of information about non-standard and potentially abusive transactions to the FSFM in a specified format. • The FSFM would benefit from more metrics for evaluating performance by exchanges of their compliance functions.
Principle 27. Regulation should promote transparency of trading	PI	• Price and volume is reported by the market to the FSFM. The data feeds are licensed in real time to commercial providers and they are also available with a 15 minute time lag to the general public on line. • Reporting of OTC transactions has been improved, consistently with changes in the process being made globally, which are currently being refined after the crisis. Almost all OTC reports are made through RTS. • How to address the prices of the same product listed or admitted to trading at two exchanges in the same time zone continues to be subject to regulatory scrutiny. • The exchanges and the FSFM would benefit from staying abreast of developments more generally about market structure, transparency and related protections.
Principle 28. Regulation should be designed to detect and deter manipulation and other unfair trading practices	PI	• Adoption of the law on market abuses, such as insider trading and manipulation is a step forward and includes the sanction of disgorgement of wrongful profits. • The systems to deter and detect such misconduct are in the process of being developed and tested as the law is being phased in. The FFSM has a new real time surveillance tool, and the exchanges are required also to enforce their rules against misconduct. Specific exception reports on non-standard transactions are required by the exchanges to the FSFM to be made in a common format. (See also Principles 7 and 26). • Some experience is necessary to see how these improved requirements work in practice and whether the penalties are dissuasive and proportionate.
Principle 29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption	PI	• The exchanges have some rules with respect to these risks built into their systems. The procedures for defaults are public. • The FSFM has power to demand additional information from direct market participants on clients within omnibus accounts. • This power is untested. • The FSFM should develop approaches that enable it to determine where risks are originating in the market, and to follow up with other regulators in conducting appropriate surveillance. • Contingency procedures are not currently documented nor are related cooperative arrangements with other regulators. There should be documented contingency plans to address both general market and firm disruptions (see also Principle 24 Key Q1).
Principle 30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk	Not Assessed	• Adoption of the Clearing Law that provides a legal underpinning for final settlement in a central counterparty system and for close out netting and related risk management parameters is an important step forward. • It is important to assure that as implemented the risk management and oversight of the CCP system is sufficient to meet international requirements. • Such a system should bring more transparency to exposures, and further facilitate anonymous trading. As it concentrates risk at the CCP, however, the financial resources and margining and variation systems are critical and appropriate and ongoing back testing of the sufficiency of the risk management systems is important. • The system still permits the use of multiple registrars or transfer agents though issues relative to liability for custodianship obligations have been clarified and the number of such agents is declining. Use of a Central Security Depository which complies with the CPSS/IOSCO standards for securities settlement systems, and US law for US mutual funds investing offshore would send an important signal to the market as to the integrity of the system for transfer of securities.
Aggregate: Fully implemented (FI) 2 broadly implemented (BI)10, partly implemented (PI) 16, not implemented (NI) 0, not assessed (N/A) 2.

Recommended action plan

Table 2.

Recommended Action Plan to Improve Implementation of the IOSCO Principles

While legislative powers and authorities are now in place and more are pending, more experience is needed with how these new powers work in practice before IOSCO expectations can be said to be fully implemented.

Table 2.

Recommended Action Plan to Improve Implementation of the IOSCO Principles

While legislative powers and authorities are now in place and more are pending, more experience is needed with how these new powers work in practice before IOSCO expectations can be said to be fully implemented.

Reference Principle	Recommended Action
1. The responsibilities of the regulator should be clear and objectively states.	• The CBR and the FSFM should document a protocol for cooperation with respect to the oversight of entities or groups in which they have a common interest. • A consolidated version of law and regulations with linkages should be on the website, ideally in English as the language of finance, as well as in Russian. • The distribution of powers in the new authority should be promptly clarified and made readily accessible together with an explanation of how the arrangements are expected to operate in practice.
2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.	• The new structure of the FSFM should be kept under observation to ensure that the new alignment of functions does not lead to day-to-day operational interference by the MoF • Even if it is accepted protocol to resign upon a change of political administration, under existing standards, the executive director of a regulatory agency should be appointed for a fixed term and the criteria for removal should be specified. • Legal protection for good faith performance of the regulatory mandate by FSFM should continue to be pursued.
3. The regulator should have adequate powers and resources.	• The skills, technical competences, IT facilities and human and monetary resources of FSFM should keep pace with the complexity and scope of its regulatory mission. • The FSFM should determine if it needs additional types of resources and a different skill mix than it has currently for its resources to be equal to market demands; it should do a needs assessment, prepare an action plan, and use it in constructing the next rolling budget or amending this one. In particular FSFM should retain the ability to hire external experts and should be exempt from the government-wide headcount reduction. • FSFM resources must be sufficeint to enable it to attract sufficiently expert personnel to oversee the evolving markets appropriately, a matter of concern to the investing public. The budget should also accommodate training to assure that the expertise of FSFM staff is sufficient to implement more complex and nuanced requirements, to conduct due diligence, and to implement new powers and authorities. • FSFMs ability to obtain bank records should extend to enforcement of securities laws generally and proper oversight of regulated entities. The law should be amended if necessary to provide FSFM sufficient powers to meet the requirements for joining the IOSCO MMoU as a full signatory (see also Principles 8 and 13)
4. The regulator should adopt clear and consistent regulatory processes.	• FSFM should maintain logs of complaint dispositions, inspections, investigations and cases, and use them to determine whether penalties are proportionate, consistent and dissuasive. • The practice and procedure for an opportunity to be heard in administrative proceedings should be documented giving content to the Investor Protection Law. • The regulator should continue to assure that to the extent possible its processes are transparent, restore its English website, consider the publication of feedback statements after consultation, and support measures to provide expanded access to mediation and alternate dispute forums.
5. The staff of the regulator should make appropriate use of SROs that exercise some director oversight responsibility for their respective areas of competence and to the extent appropriate to their size.	• FSFM should consider having a Code of Conduct for employees specific to the agency and establishing monitoring processes to ensure compliance. -Publication of professional procedures and the internal regulation at the FSFM can help promote confidence in the regulatory process (see also Principle 2 on liability).
6. The regulatory regime should make appropriate use of SROs that exercise some direct oversight responsibility for their respective areas of competence and to the extent appropriate to their size.	• The FSFM should continue to actively use what Russian law deems as SROs to provide some oversight of professional qualifications and business conduct standards and serve as a type of conduit or trade association for obtaining comment from more than one perspective on the costs and benefits of rule proposals and other matters. • The FSFM should explore how best to use of its pending authority with respect to a mandatory SRO for market professionals serving retail customers (i) to provide additional resources for customer protection, (ii) to ensure a high level of consistency in the rules relative to retail customer protection, and (iii) to develop a sufficient capital base for a risk-adjusted compensation fund. • FSFM should promptly implement any such authority once obtained.
7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.	• SROs have access to sensitive information as the result of their inspection activities. It may be that the information is protected in their hands from improper use by internal rules or membership agreements. • FSFM should adopt an explicit requirement that an SRO must treat non-public information in accordance with professional standards of confidentiality equivalent to those required of FSFM, or of any other authority whose information the SRO may be using if higher.
8. The regulator should have comprehensive inspection, investigation and enforcement powers.	• The FSFM should seek a declaration or legislative amendment confirming its ability to directly access general bank records for all regulatory purposes. • FSFM might consider exploring whether at headquarters, using a methodology that identifies key risks, coupled with random reviews of the currency of records would increase the efficiency and effectiveness of the inspection process (see also Principle 22).
9. The regulator should have comprehensive enforcement powers.	• The FSFM should evaluate the operation of its new enforcement powers relating to insider trading and manipulation during the phase-in period to determine whether they are achieving enhanced deterrence of misconduct. • In this respect FSFM should develop appropriate performance metrics relative to whether the remedies and procedures are dissuasive and proportionate.
10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.	• FSFM should determine how best to measure and present performance objectives and statistics for enforcement and related monitoring activities. • See also the comments under Principles 4, 6, 7, 8, and 9.
11. The regulator should have the authority to share both public and non-public information with domestic and foreign counterparts.	• Information sharing among domestic authorities may be improved with the adoption of the Banking Law amendments related to consolidated supervision and completion of a formal protocol with the CBR (See Principle 1). • The regulator can share non-public information (subject to the clarification above and referred to in Principle 8) in its files under a Memorandum of Understanding with appropriate confidentiality protections to the same extent as such information is obtainable by FSFM. • FSFM should take steps promptly to meet requirements to sign the IOSCO MMoU.
12. Regulators should establish information mechanisms that set out when and how they will share both public and non-public information with domestic and foreign counterparts.	• FSFM should consider whether the cross listing of securities, through ADRs and GDRs, or as the basis of indexes, such as the MSCI, favors the execution of additional specialist, bilateral MoUs. • See Principle 8, 9, 11, and 13.
13, The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and powers.	• The FSFM should document its assistance activities. (See also Principle 4) FSFM should support prompt adoption of changes and/or clarifications that will expand its access to bank records and move forward to become a fully signatory of the IOSCO MMoU. • (See also Principles 8 and 11)
14 There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.	• FSFM should report on the extent to which ownership and control reporting is in practice improving transparency and protection of investors through disclosure. • Also, FSFM should evaluate the level of continuing disclosure compliance and consider automating more of the process.
15 Holders of securities in a company should be treated in a fair and equitable way.	• Useful amendments have been made to seek better ownership and control reporting (See Principle 14). The effect of these amendments should be kept under review. • FSFM now has power to review tender offer prices, and should document how the pricing review methodology works in practice. • Management and Board members of issuers should be required to disclose shareholdings even if they do not cross the 5 percent threshold. • FSFM should consider what qualifications and oversight is needed for independent evaluators, who currently are not required to be licensed. • Required “comply or explain” disclosure for public companies as to the voluntary Code of good corporate governance would improve the information provided to shareholders.
16. Accounting and auditing standards should be of a high and internationally acceptable quality.	• FSFM should work with the Ministry of Finance and other relevant authorities to determine the best way to (i) oversee accountants and auditors, (ii) encourage prompt movement of financial market participants and issuers to prepare for the institution of IFRS, (iii) assure appropriate capacity/training among the profession and within the regulator to implement the accounting changes, and to (iv) move concomitantly to prepare a plan to improve audit standards.
17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.	• See Principle 21 below.
18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of customer assets.	• FSFM should keep under review the sufficiency of available information to determine whether the custodian of customer funds is in fact unrelated to the management company and otherwise to check on the proper custodianship and protection of customer funds and the proper pricing of units of interest. • FSFM should develop, as necessary, means to review on an ongoing basis whether new models of CIS, such as ETFs, require additional structural protections.
19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.	• If the Prudential Supervision Law, now in its second reading, is adopted, FSFM should commit some responsibilities for providing a complaints forum and overseeing conduct of business affecting retail holders of CIS as well as individual retail investors to the mandatory SRO for market professionals engaging in retail business. • FSFM and the Russian Federation should promptly effectuate the authority to establish an appropriate investor compensation fund. (See also Principle 24 and 29).
20. Regulation should ensure that there is a proper and disclosed basis for assets valuation and the pricing and the redemption of units in a collective investment scheme.	• FSFM should assess how well the pricing methodology for illiquid securities functions in practice. (See also Principle 16).
21. Regulation should provide for minimum entry standards for market intermediaries.	• FSFM should promptly implement its plans for doing a limited initial operational capacity due diligence on applicants above a certain size. • Once adopted, the Prudential Supervision Law will enhance initial entry criteria, including for capital and internal controls, and ongoing compliance capability. FSFM should assure that it has the appropriate expertise and staffing to apply these new powers and authorities (see Principle 3).
22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake..	• FSFM should institute specific early warning reporting to relevant FSFM personnel by the exchanges and professional market participants to permit prompt corrective actions to be taken as necessary. • FSFM should analyze whether current capital requirements are sufficient to address the various risks set forth in IOSCO standards, including credit, market, and operational risks, in preparation for applying new authorities to be granted by the Prudential Supervision Law. For example, FSFM should develop a means to test the outcomes of market moves above a specified size on capital. • Pending changes to capital requirements will require adequate expertise to supervise and implement, including new inspection regimes and procedures, which might reasonably focus on identifying and prioritizing risks as well as random inspections to ensure that books and records are current and that the capital rules are being followed properly.
23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interest of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.	• The FSFM requires professional market participants authorized by it to have compliance personnel. • More capacity to oversee intermediary risk management will be provided by introduction of the Prudential Supervision Law. FSFM should assure that it has sufficient expertise in place to conduct such assessments. (See also Principles 3 and 22) • Also, FSFM should exercise the power it receives from the Prudential Supervision Law, when adopted, to cause the mandatory SRO for professional market participants dealing with the retail public to develop more guidance on the implementation of conduct of business principles, such as best execution and marketing consistent with customer investment objectives.
24. There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.	• The appointment of an authorized representative in connection with suspension or revocation of a license or as part of a temporary administration proceeding will facilitate the management of a firm in distress. • The adoption of the Prudential Supervision Law should be progressed and implementation guidance for such representation should be considered once the law is finally effective. • The FSFM and the exchanges and other relevant financial authorities should have contingency arrangements to deal with market and firm disruption, making full use of their administrative and information sharing powers. The FSFM should attempt to determine in advance the steps of a wind-down plan. The plan should contain (i) means to communicate with other regulators, (ii) trigger points, such as changes in financial condition outside a specific tolerance and reductions in capital, that are early warnings and lead to initiation of prompt corrective action, and (iii) an analysis of the available measures and tools to minimize customer, counterparty and systemic risk. • Any plan also should include the procedures for non-routine communication with other regulatory authorities, including both domestic and relevant foreign authorities—and for determining whether market misconduct is related to financial issues in that such misconduct sometimes obscures financial distress. • Authority to establish an investor compensation fund should be promptly implemented.
25. The establishment of trading systems, including securities exchanges, should be subject to regulatory authorization and oversight.	• The FSFM in authorizing new trading systems, or in determining how to conduct ongoing oversight of merged markets, should update and refine its audit and surveillance programs. • Additionally it should use its new surveillance capability to assess on an ongoing basis the appropriate parameters based on experience with STRs or non-standard transactions (that may indicate insider trading, market manipulation or other abuses) for its own surveillance and for reporting by the exchanges or organized markets. • The different tiers of market structure should be transparent to customers; customers should be informed that the protections or risks relative to different tiers of trading are different. • See Principles 17, 21, and 26.
26. There should be ongoing regulatory supervision of exchanges and trading systems, which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demand s of different market participants.	• The FSFM should develop a metrics for evaluating exchange performance of its compliance role and maintain performance statistics. • See Principle 25.
27. Regulation should promote transparency of trading	• The FSFM should keep under continuous review how price reporting is conducted and whether there is a need to consolidate pricing information on the market where the same product is listed or admitted to trading in the same time zone. In this regard it should take account of, or ask the exchanges to provide an account of, the completeness and timeliness of information being reported from OTC markets to the exchanges. • The FSFM should also ask the new SRO for retail investors, should the authority be granted, to study whether the number of markets interferes with price formation and informs or confuses investors as to risk and how best to address any such confusion. • The exchanges and FSFM should keep abreast of developments more generally about market structure and protections and make needed adjustments in the related oversight programs.
28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.	• The FSFM should develop programs to surveill or otherwise to detect insider trading, manipulation and other market abuses using its new real time information feed and other information such as media reports. • In this regard FSFM should determine whether the definitions used and penalties assigned are achieving their detection and deterrence objectives. • To assist this process, FSFM should develop metrics for measuring the performance of market operators and FSFM surveillance systems in detection and deterrence (see also Principle 25).
29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.	• The FSFM should develop approaches that enable it (i) to determine where risks are originating in the market, (ii) to back test risk reduction measures and sufficiency of existing risk management at exchanges and financial market professionals, and (iii) to follow up with other regulators in conducting appropriate surveillance. • There should be contingency plans to address both market and firm disruption. • As stated in Principles 1 and 24, the FSFM should refine and document its existing arrangements for cooperation with the CBR with a view to further articulating the actions that can be taken to address the default or failure of a professional market participant or a market disruption through temporary administration, instructions to market operators, or exercise of any other oversight authority and to document how to address market abuse. • Risk management and appropriate cooperation with the exchanges on surveillance also should include understanding the roles of each party in the event of a market disruption or firm failure before the fact. For example, FSFM should determine in advance how to use any and all additional authorities granted in pending legislation and conclude exemplary contingency arrangements for various scenarios.
30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk	• FSFM should request an assessment of its clearing infrastructure once contemplated changes are implemented. • Prior thereto, FSFM should design a program for appropriate oversight of any CCP, including back testing, that takes advantage of the new Clearing Law to assure that the risk management regimes in place operate properly and that netting, margining and related collateral and other risk mitigation arrangements provide the level of default coverage required by international standards (see also Principle 29). • FSFM should also take steps to cause any CSD to meet the requirements of the IOSCO/ Committee on Payment and Settlement standards for securities settlement, payment systems, and CCPs, and best practices of G-20 countries for central securities depositories that apply to CIS investing offshore.

View Table

Table 2.

Recommended Action Plan to Improve Implementation of the IOSCO Principles

While legislative powers and authorities are now in place and more are pending, more experience is needed with how these new powers work in practice before IOSCO expectations can be said to be fully implemented.

Reference Principle	Recommended Action
1. The responsibilities of the regulator should be clear and objectively states.	• The CBR and the FSFM should document a protocol for cooperation with respect to the oversight of entities or groups in which they have a common interest. • A consolidated version of law and regulations with linkages should be on the website, ideally in English as the language of finance, as well as in Russian. • The distribution of powers in the new authority should be promptly clarified and made readily accessible together with an explanation of how the arrangements are expected to operate in practice.
2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.	• The new structure of the FSFM should be kept under observation to ensure that the new alignment of functions does not lead to day-to-day operational interference by the MoF • Even if it is accepted protocol to resign upon a change of political administration, under existing standards, the executive director of a regulatory agency should be appointed for a fixed term and the criteria for removal should be specified. • Legal protection for good faith performance of the regulatory mandate by FSFM should continue to be pursued.
3. The regulator should have adequate powers and resources.	• The skills, technical competences, IT facilities and human and monetary resources of FSFM should keep pace with the complexity and scope of its regulatory mission. • The FSFM should determine if it needs additional types of resources and a different skill mix than it has currently for its resources to be equal to market demands; it should do a needs assessment, prepare an action plan, and use it in constructing the next rolling budget or amending this one. In particular FSFM should retain the ability to hire external experts and should be exempt from the government-wide headcount reduction. • FSFM resources must be sufficeint to enable it to attract sufficiently expert personnel to oversee the evolving markets appropriately, a matter of concern to the investing public. The budget should also accommodate training to assure that the expertise of FSFM staff is sufficient to implement more complex and nuanced requirements, to conduct due diligence, and to implement new powers and authorities. • FSFMs ability to obtain bank records should extend to enforcement of securities laws generally and proper oversight of regulated entities. The law should be amended if necessary to provide FSFM sufficient powers to meet the requirements for joining the IOSCO MMoU as a full signatory (see also Principles 8 and 13)
4. The regulator should adopt clear and consistent regulatory processes.	• FSFM should maintain logs of complaint dispositions, inspections, investigations and cases, and use them to determine whether penalties are proportionate, consistent and dissuasive. • The practice and procedure for an opportunity to be heard in administrative proceedings should be documented giving content to the Investor Protection Law. • The regulator should continue to assure that to the extent possible its processes are transparent, restore its English website, consider the publication of feedback statements after consultation, and support measures to provide expanded access to mediation and alternate dispute forums.
5. The staff of the regulator should make appropriate use of SROs that exercise some director oversight responsibility for their respective areas of competence and to the extent appropriate to their size.	• FSFM should consider having a Code of Conduct for employees specific to the agency and establishing monitoring processes to ensure compliance. -Publication of professional procedures and the internal regulation at the FSFM can help promote confidence in the regulatory process (see also Principle 2 on liability).
6. The regulatory regime should make appropriate use of SROs that exercise some direct oversight responsibility for their respective areas of competence and to the extent appropriate to their size.	• The FSFM should continue to actively use what Russian law deems as SROs to provide some oversight of professional qualifications and business conduct standards and serve as a type of conduit or trade association for obtaining comment from more than one perspective on the costs and benefits of rule proposals and other matters. • The FSFM should explore how best to use of its pending authority with respect to a mandatory SRO for market professionals serving retail customers (i) to provide additional resources for customer protection, (ii) to ensure a high level of consistency in the rules relative to retail customer protection, and (iii) to develop a sufficient capital base for a risk-adjusted compensation fund. • FSFM should promptly implement any such authority once obtained.
7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.	• SROs have access to sensitive information as the result of their inspection activities. It may be that the information is protected in their hands from improper use by internal rules or membership agreements. • FSFM should adopt an explicit requirement that an SRO must treat non-public information in accordance with professional standards of confidentiality equivalent to those required of FSFM, or of any other authority whose information the SRO may be using if higher.
8. The regulator should have comprehensive inspection, investigation and enforcement powers.	• The FSFM should seek a declaration or legislative amendment confirming its ability to directly access general bank records for all regulatory purposes. • FSFM might consider exploring whether at headquarters, using a methodology that identifies key risks, coupled with random reviews of the currency of records would increase the efficiency and effectiveness of the inspection process (see also Principle 22).
9. The regulator should have comprehensive enforcement powers.	• The FSFM should evaluate the operation of its new enforcement powers relating to insider trading and manipulation during the phase-in period to determine whether they are achieving enhanced deterrence of misconduct. • In this respect FSFM should develop appropriate performance metrics relative to whether the remedies and procedures are dissuasive and proportionate.
10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.	• FSFM should determine how best to measure and present performance objectives and statistics for enforcement and related monitoring activities. • See also the comments under Principles 4, 6, 7, 8, and 9.
11. The regulator should have the authority to share both public and non-public information with domestic and foreign counterparts.	• Information sharing among domestic authorities may be improved with the adoption of the Banking Law amendments related to consolidated supervision and completion of a formal protocol with the CBR (See Principle 1). • The regulator can share non-public information (subject to the clarification above and referred to in Principle 8) in its files under a Memorandum of Understanding with appropriate confidentiality protections to the same extent as such information is obtainable by FSFM. • FSFM should take steps promptly to meet requirements to sign the IOSCO MMoU.
12. Regulators should establish information mechanisms that set out when and how they will share both public and non-public information with domestic and foreign counterparts.	• FSFM should consider whether the cross listing of securities, through ADRs and GDRs, or as the basis of indexes, such as the MSCI, favors the execution of additional specialist, bilateral MoUs. • See Principle 8, 9, 11, and 13.
13, The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and powers.	• The FSFM should document its assistance activities. (See also Principle 4) FSFM should support prompt adoption of changes and/or clarifications that will expand its access to bank records and move forward to become a fully signatory of the IOSCO MMoU. • (See also Principles 8 and 11)
14 There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.	• FSFM should report on the extent to which ownership and control reporting is in practice improving transparency and protection of investors through disclosure. • Also, FSFM should evaluate the level of continuing disclosure compliance and consider automating more of the process.
15 Holders of securities in a company should be treated in a fair and equitable way.	• Useful amendments have been made to seek better ownership and control reporting (See Principle 14). The effect of these amendments should be kept under review. • FSFM now has power to review tender offer prices, and should document how the pricing review methodology works in practice. • Management and Board members of issuers should be required to disclose shareholdings even if they do not cross the 5 percent threshold. • FSFM should consider what qualifications and oversight is needed for independent evaluators, who currently are not required to be licensed. • Required “comply or explain” disclosure for public companies as to the voluntary Code of good corporate governance would improve the information provided to shareholders.
16. Accounting and auditing standards should be of a high and internationally acceptable quality.	• FSFM should work with the Ministry of Finance and other relevant authorities to determine the best way to (i) oversee accountants and auditors, (ii) encourage prompt movement of financial market participants and issuers to prepare for the institution of IFRS, (iii) assure appropriate capacity/training among the profession and within the regulator to implement the accounting changes, and to (iv) move concomitantly to prepare a plan to improve audit standards.
17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.	• See Principle 21 below.
18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of customer assets.	• FSFM should keep under review the sufficiency of available information to determine whether the custodian of customer funds is in fact unrelated to the management company and otherwise to check on the proper custodianship and protection of customer funds and the proper pricing of units of interest. • FSFM should develop, as necessary, means to review on an ongoing basis whether new models of CIS, such as ETFs, require additional structural protections.
19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.	• If the Prudential Supervision Law, now in its second reading, is adopted, FSFM should commit some responsibilities for providing a complaints forum and overseeing conduct of business affecting retail holders of CIS as well as individual retail investors to the mandatory SRO for market professionals engaging in retail business. • FSFM and the Russian Federation should promptly effectuate the authority to establish an appropriate investor compensation fund. (See also Principle 24 and 29).
20. Regulation should ensure that there is a proper and disclosed basis for assets valuation and the pricing and the redemption of units in a collective investment scheme.	• FSFM should assess how well the pricing methodology for illiquid securities functions in practice. (See also Principle 16).
21. Regulation should provide for minimum entry standards for market intermediaries.	• FSFM should promptly implement its plans for doing a limited initial operational capacity due diligence on applicants above a certain size. • Once adopted, the Prudential Supervision Law will enhance initial entry criteria, including for capital and internal controls, and ongoing compliance capability. FSFM should assure that it has the appropriate expertise and staffing to apply these new powers and authorities (see Principle 3).
22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake..	• FSFM should institute specific early warning reporting to relevant FSFM personnel by the exchanges and professional market participants to permit prompt corrective actions to be taken as necessary. • FSFM should analyze whether current capital requirements are sufficient to address the various risks set forth in IOSCO standards, including credit, market, and operational risks, in preparation for applying new authorities to be granted by the Prudential Supervision Law. For example, FSFM should develop a means to test the outcomes of market moves above a specified size on capital. • Pending changes to capital requirements will require adequate expertise to supervise and implement, including new inspection regimes and procedures, which might reasonably focus on identifying and prioritizing risks as well as random inspections to ensure that books and records are current and that the capital rules are being followed properly.
23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interest of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.	• The FSFM requires professional market participants authorized by it to have compliance personnel. • More capacity to oversee intermediary risk management will be provided by introduction of the Prudential Supervision Law. FSFM should assure that it has sufficient expertise in place to conduct such assessments. (See also Principles 3 and 22) • Also, FSFM should exercise the power it receives from the Prudential Supervision Law, when adopted, to cause the mandatory SRO for professional market participants dealing with the retail public to develop more guidance on the implementation of conduct of business principles, such as best execution and marketing consistent with customer investment objectives.
24. There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.	• The appointment of an authorized representative in connection with suspension or revocation of a license or as part of a temporary administration proceeding will facilitate the management of a firm in distress. • The adoption of the Prudential Supervision Law should be progressed and implementation guidance for such representation should be considered once the law is finally effective. • The FSFM and the exchanges and other relevant financial authorities should have contingency arrangements to deal with market and firm disruption, making full use of their administrative and information sharing powers. The FSFM should attempt to determine in advance the steps of a wind-down plan. The plan should contain (i) means to communicate with other regulators, (ii) trigger points, such as changes in financial condition outside a specific tolerance and reductions in capital, that are early warnings and lead to initiation of prompt corrective action, and (iii) an analysis of the available measures and tools to minimize customer, counterparty and systemic risk. • Any plan also should include the procedures for non-routine communication with other regulatory authorities, including both domestic and relevant foreign authorities—and for determining whether market misconduct is related to financial issues in that such misconduct sometimes obscures financial distress. • Authority to establish an investor compensation fund should be promptly implemented.
25. The establishment of trading systems, including securities exchanges, should be subject to regulatory authorization and oversight.	• The FSFM in authorizing new trading systems, or in determining how to conduct ongoing oversight of merged markets, should update and refine its audit and surveillance programs. • Additionally it should use its new surveillance capability to assess on an ongoing basis the appropriate parameters based on experience with STRs or non-standard transactions (that may indicate insider trading, market manipulation or other abuses) for its own surveillance and for reporting by the exchanges or organized markets. • The different tiers of market structure should be transparent to customers; customers should be informed that the protections or risks relative to different tiers of trading are different. • See Principles 17, 21, and 26.
26. There should be ongoing regulatory supervision of exchanges and trading systems, which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demand s of different market participants.	• The FSFM should develop a metrics for evaluating exchange performance of its compliance role and maintain performance statistics. • See Principle 25.
27. Regulation should promote transparency of trading	• The FSFM should keep under continuous review how price reporting is conducted and whether there is a need to consolidate pricing information on the market where the same product is listed or admitted to trading in the same time zone. In this regard it should take account of, or ask the exchanges to provide an account of, the completeness and timeliness of information being reported from OTC markets to the exchanges. • The FSFM should also ask the new SRO for retail investors, should the authority be granted, to study whether the number of markets interferes with price formation and informs or confuses investors as to risk and how best to address any such confusion. • The exchanges and FSFM should keep abreast of developments more generally about market structure and protections and make needed adjustments in the related oversight programs.
28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.	• The FSFM should develop programs to surveill or otherwise to detect insider trading, manipulation and other market abuses using its new real time information feed and other information such as media reports. • In this regard FSFM should determine whether the definitions used and penalties assigned are achieving their detection and deterrence objectives. • To assist this process, FSFM should develop metrics for measuring the performance of market operators and FSFM surveillance systems in detection and deterrence (see also Principle 25).
29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.	• The FSFM should develop approaches that enable it (i) to determine where risks are originating in the market, (ii) to back test risk reduction measures and sufficiency of existing risk management at exchanges and financial market professionals, and (iii) to follow up with other regulators in conducting appropriate surveillance. • There should be contingency plans to address both market and firm disruption. • As stated in Principles 1 and 24, the FSFM should refine and document its existing arrangements for cooperation with the CBR with a view to further articulating the actions that can be taken to address the default or failure of a professional market participant or a market disruption through temporary administration, instructions to market operators, or exercise of any other oversight authority and to document how to address market abuse. • Risk management and appropriate cooperation with the exchanges on surveillance also should include understanding the roles of each party in the event of a market disruption or firm failure before the fact. For example, FSFM should determine in advance how to use any and all additional authorities granted in pending legislation and conclude exemplary contingency arrangements for various scenarios.
30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk	• FSFM should request an assessment of its clearing infrastructure once contemplated changes are implemented. • Prior thereto, FSFM should design a program for appropriate oversight of any CCP, including back testing, that takes advantage of the new Clearing Law to assure that the risk management regimes in place operate properly and that netting, margining and related collateral and other risk mitigation arrangements provide the level of default coverage required by international standards (see also Principle 29). • FSFM should also take steps to cause any CSD to meet the requirements of the IOSCO/ Committee on Payment and Settlement standards for securities settlement, payment systems, and CCPs, and best practices of G-20 countries for central securities depositories that apply to CIS investing offshore.

Authorities’ response to the assessment

18. The authorities found the detailed report comprehensive and useful and welcomed advice on how to move forward on improvements, both pending and planned. Most of the FSFM’s suggested enhancements and corrections are now incorporated in the text. In particular, the assessor has attempted to suggest how oversight of intermediaries might be strengthened in ways currently already in the planning process by FSFM. These include the enhancement of licensing procedures by adding on-site inspections and interviews to conduct due diligence on operational capacity and the development of contingency planning including appropriate cooperative protocols or memoranda of understandings with other financial authorities to address both financial and firm distress.

19. To address FSFM concerns as to what should be next steps with respect to clearing improvements; the assessor further recommended a more detailed assessment of the new clearing and CCP authorities obtained in 2011 after some period of experience with the development by FSFM of an oversight plan and early clarification of the realignment of all new authorities. FSFM has taken this under advisement.

20. FSFM indicated its belief that the accessibility of the law, rules and legislation affecting capital markets was sufficient and objected to the discussion of independence. The assessor did not concur, and concluded that an evaluation of the level of independence of the newly combined regulator’s capital market oversight operation would require a period of experience with the new alignment of powers and accountability arrangements.