ANNUAL REPORT Moscow Interbank Currency Exchange closed end company

ANNUAL REPORT 2004 Moscow Interbank Currency Exchange (closed end company) MOSCOW INTERBANK CURRENCY EXCHANGE 2004 ANNUAL REPORT Moscow 2005 K. Korishchenko Chairman of the MICEX Exchange Council A. Potemkin Chief Executive Officer of the MICEX 2 MICEX Annual report 2004 Chairman's and Chief Executive's statement to stockholders and market participants Dear ladies and gentlemen, We are pleased to note that last year was another successful stage in the development of the Moscow Interbank Currency Exchange (MICEX). The impressive performance of the MICEX as a universal exchange and considerable growth of all of its main finan cial indicators are fully reflected in the present annual report. In 2004, the MICEX was operating in the context of positive changes in the Russian economy, which helped the MICEX to pro duce a set of successful results. Last year, the volume of trading on the MICEX increased twofold over 2003 and reached almost 548 bln dollars. This is a record figure in the history of trading on the MICEX. The daily average turnover also increased almost twofold: to 2.2 bln dollars. These achievements place the MICEX among the world leading exchanges. The MICEX reached these significant results by developing all sectors of the exchange market and implementing a number of large scale projects. In 2004, we emphasized the formation of a powerful stock market segment. The MICEX was a co founder of ZAO MICEX Stock Exchange (MICEX SE). On January 11, 2005 the MICEX SE, acting on the basis of an appropriate license, began to carry out operations in corporate securities, which had been traded in the MICEX Stock Market Section before. At present, the MICEX SE organizes the trading, listing and client service, while the MICEX provides clearing service and technological support. This improves the quality of services offered to issuers and investors and raises the efficiency of the risk management system. One of the most important results of the Exchange's work in 2004 was a significant increase of turnover in the MICEX market of corporate and regional securities (1.4 times) and in the market of corporate bonds. The latter has become an important source of investments for the manufacturing sector of Russia's economy. In 2004, the total volume of corporate bonds placement grew 1.8 times and reached almost 5 bln dollars. The number of companies whose securities are traded on the Exchange continued to grow. At the end of 2004, 413 securities of 267 issuers were traded in the MICEX Stock Market Section. Last year was marked by better cooperation between market regulators, the Exchange and dealers, which resulted in the launch of the MICEX money market: deposit transactions of the Bank of Russia with credit institutions with the use of the exchange infra structure. Turnover grew 1.2 times in the government securities market, the total volume of transactions amounting to 46.8 bln dollars. This resulted primarily from the increase of the number of REPO operations in government securities, which proved to be a highly effective instrument of refinancing of banks, helping to alleviate unfavorable changes of the market situation. Last year was marked by the resumption of trading in the bonds of the Bank of Russia (BBR), which began issuing these securities after a three year sus pension period. The liberalization of the currency control and the cancellation of the compulsory sale of hard currency export proceeds on the Exchange made the existence of the Unified Trading Session (UTS) and the System of Electronic Lot Trades (SELT) somewhat artificial. This is why the most important project, implemented in May 2004, was the unification of trading in the morning UTS and the afternoon SELT session. The modified Unified Trading Session enabled to concentrate market liquidity and improve the reliability of the trading system. The MICEX continued to upgrade the trading and settlement infrastructure of the currency market, trying to meet participants' needs. We made it possible to carry out SWAP transactions in the exchange currency market. These operations helped Russia's commercial banks to maintain the liquidity level during the summer "confidence crisis" period. In 2004, the volume of SWAP transactions increased 4 times. The synergy effect of the implementation of new projects manifested itself in the accelerated growth of turnover in the exchange currency market as compared with the total volume of interbank FX operations. Last year, the volume of trade in the MICEX cur MICEX Annual report 2004 3 rency market grew 2.4 times and reached 350 bln dollars, its share of "dollar/ruble" operations in the total turnover in the Russian currency market increased from 5% in 2003 to 9% in 2004. The volatility of the exchange rate of the US dollar stimulated the interest of our clients in hedging currency risks and helped to increase turnovers in the US dollar futures. In 2004, the total turnover in the Derivatives Market Section grew 3.7 times. In 2004, the MICEX derived higher profit from its information and commercial activities thanks to its consistent and prudent information and marketing policy. At the regional level, the Exchange's activities were aimed at providing favorable conditions for the implementation of the MICEX Group's regional policy. The MICEX intends to promote integration with regional currency and stock exchanges by joining their shareholding structures and managerial bodies. Among the Exchange's priorities is charity work in the areas of health care (support of specialized children's health care institu tions), culture and arts. An important area of the MICEX work in 2004 was cooperation with different financial institutions and leading foreign exchanges with the aim of developing orderly capital markets. The development of the world financial infrastructure leads to the consolidation of services by types of business. This trend is observed on all levels of the work of the MICEX Group. Our medium and long term plans envisage: ■ ■ ■ forming, in the framework of the MICEX Group, the Russian stock market's central floor; reinforcing the MICEX's role of the leading provider of settlement and depositary services to the exchange and the over the counter markets; creating a central settlement depositary; creating a clearing organization in the framework of the MICEX Group (first, in the currency market). Another major task in 2005 will be the development of the euro/ruble and euro/dollar currency market as well as the development of the market of derivative financial instruments (options, interest rate and equity derivatives). We thank all of our stockholders, partners and clients for their trust. We thank the MICEX employees for their effective and fruit ful work, their responsible attitude and professionalism. We hope to see our successful cooperation continue. We also hope that you will find our plans attractive and that our annual report will confirm that you made a correct choice when you selected the MICEX as your financial partner. Chairman of the MICEX Exchange Council K. Korishchenko Chief Executive Officer of the MICEX A. Potemkin 4 MICEX Annual report 2004 Contents Chairman's and Chief Executive's statement to stockholders and market participants The MICEX and the Russian financial market Main results in 2004 Participants in financial markets The MICEX markets The currency market The government securities market and the money market The market of non government securities (NGSM) The derivatives market The commodities market Information technologies and the MICEX soft and hardware complex Information products Information and analytical work Public relations Regional policy: scope and goals Charity Main events in 2004 Financial results 3 6 7 9 11 11 17 21 31 33 36 40 42 43 44 46 47 50 MICEX Annual report 2004 5 The MICEX and the Russian financial market Russia's economy is developing rapidly. In 1999 2004, Russia's GDP increased by almost 48%, while the average growth rate amounted to 6.7% (in 2004: 7.1%). Thus, the rate of Russia's economic growth continues to outpace that of leading industrial nations (which, according to the OECD, amounted to about 3.6% in 2004). Russia's rapid economic growth is the result of the synergy effect of several economic factors, including a favorable price situation in world commodity markets. In 2004, the value of Russian exports was higher by a third than in 2003. At the end of the year, the country had a high budget surplus, a positive balance of payment and a stable currency mar ket. Its gold and currency reserve and stabilization fund increased considerably. Russia's strong financial position enabled Fitch rating agency to upgrade, in November 2004, Russia's credit rating to investment grade level. In January 2005, Standard&Poоr's, too, upgraded Russia's rating to investment grade level. At the same time, the situation in the Russian financial system was developing unevenly. Problems, which arose in the banking system in the summer of 2004, had a negative impact on the dynamics of bank assets. As a result, for the first time in 5 years, the banking system decreased the size of its assets relative to the GDP (from 42.2% to 41.7%). Nevertheless, in 2004, the banking system became more credit oriented, and the proportion of credits in banks' assets grew from 48% to 55%. The capitalization of the Russian stock market continued to growth: during the year it grew from 174 to 234 bln dol lars. The ratio of the nominal value of outstanding corporate bonds to the volume of the GDP grew from 1.2% to 1.5%. In the context of deteriorating investment climate, the MICEX Index growth of 7.3% and was lower than in many developed countries. In these conditions the Moscow Interbank Currency Exchange (MICEX) reached the record high turnover of 16 tril lion rubles. At present, the MICEX accounts for about 90% of the turnover of the whole Russia's exchange market. This result was reached thanks to both external and internal factors. Among the external factors one should note the growth of the volume of export proceeds coming to the internal market, the increase of investments and value of gov ernment, regional, municipal and corporate securities placed and traded on the MICEX. An important factor was the improvement of the Russian legislation. The internal factors included further development and diversification of business, the creation of favorable working envi ronment on the Exchange for the financial market participants and the offering of new services and financial products. At present, the MICEX Group is an infrastructure organization, which provides a whole range of trading, clearing, settlement and depositary services on the basis of a top level IT platform. Mission. The MICEX Group works to advance Russian financial market by developing its' infrastructure and offer ing the full range of modern services to the market participants. Being a centerpiece of the Russian financial market infrastructure the group offers trading, clearing, settlement and depositary services on the basis of a high class inte grated technological platform. MICEX Group Objectives: ■ ■ ■ ■ To meet the needs of issuers, investors and market participants by rendering the full range of services which secure operations in financial and other assets To provide state of art trading, depositary, settlement and clearing services to Russian financial market par ticipants through development of an infrastructure holding To optimize operating costs for market participants To secure the profit and raise the capitalization of the Group by offering integrated services for the Russian financial market. 6 MICEX Annual report 2004 The MICEX Group consists of The MICEX Settlement House (MICEX SH), not for profit partnership The National Depositary Center (NDC), closed end joint stock company The MICEX Stock Exchange (MICEX SE), closed end joint stock company The National Mercantile Exchange (NAMEX), IT Company E Stock and a num ber of regional currency and stock exchanges. The MICEX serves as a basis for the national system of trading in the currency, stock and derivative segments of the financial market in Moscow and in Russia's largest financial and industrial centers. The MICEX's integrated technological platform is an automated hard and software system of the top international level. It is used by the MICEX Group to organize trading and to provide clearing, settlement and depositary services to market participants. The platform is both universal and flexible, which enables the MICEX to satisfy the changing needs of the market, develop clearing and settlement services and organize trading in almost any asset suitable to be an exchange product. The high effectiveness and scalability of the platform enables to ensure the stable growth of the number of operations. The core of the MICEX global trading network is two computing centers: the main one and the reserve one. About 100 thousand clients are connected to the trading system via the system of web based trading. The MICEX soft and hardware complex handles up to 220 thousand orders a day and registers up to 110 thousand trades a day. Eleven net work providers and 274 broker systems are connected to the MICEX soft and hardware complex. Since 1992, the RF Central Bank has set the official exchange rate of the Russian ruble taking into account the results of currency trading on the MICEX. As a result of the Exchange's work in 2004, the share of the exchange turnover in dollar/ruble operations in the total turnover of Russia's currency market grew from 5% to 9%. A broad range of operations in government, regional and corporate bonds is performed within the MICEX system: from primary placement and secondary trading to the redemption of issues and payment of coupon yields on bonds as well as REPO operations. The MICEX is Russia's leading stock floor, where, as of year end 2004, trades were held in stocks and bonds of 262 Russian issuers, including such blue chips as RAO UES, LUKoil, Rostelecom, Mosenergo, Sberbank, Surgutneftegaz and others, whose total capitalization amounts to about 150 billion dollars. It should be noted that the bank crisis, which happened in the summer of 2004, proved once again the importance of exchange trading which the MICEX organizes in all financial markets. During such difficult situations it is especially important to have instruments which support the bank liquidity. During the crisis, the Exchange acted as a guarantor of classical refinancing operations. The MICEX ensured the performance of such transactions as the sale and purchase of different liquid assets (stocks, bonds, currency) with settlements based on the "delivery versus payment" principle, as well as FX swaps, direct and reverse REPOs against the Bank of Russia and inter dealer REPO operations. Transparency is an important principle of the MICEX's work. Participants in trading and investors can get the mar ket data during sessions on the MICEX web site (www.micex.com). Every day, the MICEX releases 14 issues of news, statistics and commentaries. Information on trading is published by leading Russian and international news agencies. Main results in 2004 In 2004, the development of the MICEX financial management was linked with creating a unified system of man agement of financial resources, flows and risks of the MICEX Group and forming an effective financial and manage ment structure. In 2004, the MICEX developed financial, operational and tariff models of interaction between the MICEX and the MICEX Annual report 2004 7 MICEX SE. This enabled to streamline the business processes of the MICEX stock market and preserve the eco nomic, technological and tariff unity of the MICEX Group. This also helped to ensure further reinforcement of the MICEX's competitive edges by improving the quality of its services. Spheres which still need to be improved are: marketing and organizational work at the MICEX SE; settlements and clearings services as well as information technologies at the MICEX; the optimization of participants' costs (in the first stage, reduction by 2 7%). To raise the transparency of the MICEX Group's finances, the MICEX developed, in 2004, the "Rules of Organizing the Budget Process of the MICEX Group", addressed to stockholders and market participants, and unified standard forms of the consolidated budget, based on the International Accounting Standards, for the MICEX Group and organizations comprising it. In the framework of transition to the unified methodology of budgeting in accordance with the International Accounting Standards, the MICEX prepared, for the first time, the consolidated budget of the MICEX Group based on international standards. Considering the stable growth of the MICEX Group's assets and capitalization and the growing complexity of its organizational structure, the MICEX management focused its efforts on improving control over funds flows. Transition to the unified standards of risk management for all organizations of the MICEX Group and the imple mentation of a centralized system of management of financial resources enabled to reduce credit and market risks as well as liquidity risks for operations involving financial reserves. The year of 2004 was a year of record growth of the MICEX turnovers. The total volume of trade on the MICEX amounted to about 16 trillion rubles (548 bln US dollars, which exceeds 1.9 times the level of 2003). In terms of US dollars, the turnover increased twofold. These impressive results were achieved due to the rapid development of all sectors of the exchange market and the implementation of a number of projects, which included: ■ ■ ■ the unification of the Unified Trading Session and the System of Electronic Lot Trades in currency, which completed the creation of a unified national currency market in Russia; the establishment of the MICEX SE, where on January 11, 2005 trading began in corporate securities which had been traded in the MICEX Stock Market Section before; the launch of the MICEX money market: deposit transactions of the Bank of Russia with credit institutions with the use of the exchange infrastructure. Table 1. The MICEX trade volume, bln rubles. 2003 The currency market The government securities market The stock market The derivatives market The deposit market TOTAL * Trading in the deposit market has been held since 2004 2004 10 051,9 1 352,1 4 351,2 13,07 199,2 15 967,4 2004 over 2003, times 2,3 1,2 1,4 3,7 —* 1,9 4 441,6 1 113,9 3 025,7 3,51 — 8 584,7 In 2004, considerable growth took place in the currency trading sector of the MICEX financial markets. The total vol ume of transactions in foreign currency amounted to about 10.052 trillion rubles (350.0 bln dollars), which exceeds 2.3 times the level of 2003. This achievement was the result of May 2004 unification of the UTS and the SELT, which enabled to concentrate market liquidity, reduce operating costs and integrate the principles of individual and collec tive responsibility in a new system of risk management. All this helped to provide better trading environment for mar ket participants. As a result of these innovations, the proportion of this segment in the total turnover of interbank con version operations in the dollar/ruble instrument grew from 5% to 9%. In 2004, in the sector of corporate and regional securities the trading volume increased 1.4 times and amounted to 4.351 trillion rubles (151.2 bln dollars). The volume of stock trading increased 1.3 times to 2.779 trillion rubles (97.0 8 MICEX Annual report 2004 bln dollars). The MICEX Index increased by 7.3% and reached 552.22 points. The number of securities admitted to trading continued to growth. At the end of December 2004, 413 securities of 267 issuers were traded in the MICEX Stock Market Section, while at the end of 2003 these numbers were 381 and 235 respectively. The growing role of the stock and bond segment of the Exchange's markets was reflected in its organizational struc ture. The MICEX Stock Exchange was established in 2004 with the participation of the MICEX. It obtained the license of the RF Federal Service for Financial Markets and on January 11, 2005 launched trading in corporate secu rities, regional securities (issued by entities within the Russian Federation) and municipal securities. At present, the MICEX Stock Exchange organizes the trading process, listing and client service, while the MICEX provides clearing services and technological support. This division of functions improves the flexibility of serving issuers and investors and the management of system risks. In 2004, noticeable growth of turnovers took place in the corporate bonds market, which became an important source of investments for the manufacturing sector. The total volume of issue of corporate bonds increased 1.8 times and reached 140.4 bln rubles (4.92 bln dollars). The total volume of transactions in these instruments amounted to 574.3 bln rubles (20.0 bln dollars). Let us also note the rapid growth of the volumes of operations in regional and municipal bonds. The volume of exchange transactions in these securities increased 2.7 and 3.3 times correspondingly and amounted to 493.3 bln rubles (17.13 bln dollars) and 14.9 bln rubles (0.5 bln dollars). The total turnover of the government securities market in 2004 increased and amounted to 1.352 trillion rubles (46.8 bln dollars), which exceeds 1.2 times the level of 2003. This success was achieved, to a considerable degree, as a result of repo market development, which volume amounted to 620.4 bln rubles (21.4 bln dollars). REPO operations proved to be a highly effective instrument of refinancing of banks, helping to mitigate unfavorable changes of the market situation. In 2004, MICEX and Central bank of Russia implemented a new project: Central bank deposits through the MICEX trading and settlement system. The volume of deposit operations amounted to about 200 bln rubles (7 bln dollars), while the number of participants grew to 112. Market participants continue to display interest in the sector of currency futures, which was revived on the MICEX. The growing volatility of the exchange rate of the US dollar to ruble stimulated interest in hedging currency risks and helped to increase turnovers in the US dollar futures to 13.1 bln rubles (0.46 bln dollars). As of year end 2004 the open interest reached 139 million dollars in nominal value, having increased 17 times over the year. Another important area of the MICEX's activities in 2004 was the development of cooperation with foreign exchanges and financial institutions. An important stage in the development of orderly capital markets of the CIS countries was the establishment, in December 2004, of the Association of Central Depositaries of Eurasia. The NDC, the settle ment depositary of the MICEX, took an active part in establishing this organization. In 2004, the MICEX signed agreements of cooperation with the London Stock Exchange and the Shanghai Stock Exchange. Agreements with these top level international exchanges confirm the fact that the MICEX is recognized as Russia's leading exchange meeting high international standards. The implementation of these agreements will help to make the Russian securi ties market more transparent for international investors. Participants in financial markets In 2004, the MICEX continued to attract professional participants in financial markets and their clients. 97 organi zation became members of different sections of the Exchange (27 of them already were members of other sections of the Exchange). At the end of the year the MICEX client base was comprised of 846 organizations. 831of them have Member of Section status. MICEX Annual report 2004 9 Table 2. The number of participants in the MICEX markets The Currency Market Section (CMS) The Stock Market Section (SMS) The Derivatives (Standard Contracts) Market Section (D(SC)MS) The number of members of sections (net) The Government Securities Market (since April 2004: the Government Securities Section) Participants in the UTS – nonmembers of the Currency Market Section The total number of market participants (gross) 01.01.00 01.01.01 01.01.02 01.01.03 01.01.04 01.01.05 363 374 445 495 506 534 372 459 470 500 517 555 214 212 194 196 197 156 606 673 710 773 798 831 260 277 280 298 303 286 38 57 93 64 54 — 1247 1379 1482 1553 1577 1644* * Induding participants in the money market, which was aunded in 2004 The most rapid growth of membership took place in the largest and most dynamic sections: the Stock Market Section and the Currency Market Section. The increase of the total number of market participants resulted, besides other things, from the launch of the money market. More than 50% of participants trade on several markets of the Exchange at the same time. Members of the MICEX Sections are professional participants in financial markets who hold special licenses and sat isfy certain requirements established by the Exchange. Most financial intermediaries members of sections are credit institutions (72%). Their legal status allows them to work in all segments of the exchange market. 88 commercial banks are members of all sections of the Exchange. Figure 1. Membership in the MICEX sections by types of activities Banks Companies 900 800 700 600 500 400 300 200 100 31 0 1992 1996 2000 2005 2000 2005 CMS SMS 233 210 534 129 363 212 243 14 86 1996 2000 DMS 182 598 424 345 90 48 124 108 2005 31 1992 1996 NET 14 231 2000 2005 10 MICEX Annual report 2004 One third of market participants (34.3%) are regional organizations, which have the use of remote access to trading provided by the MICEX. Russia's leading financial organizations trade on the MICEX. Ninety eight out of one hundred largest (by the amount of capital) Russian banks trade on the Exchange. Among market participants are 43 out of 45 financial companies comprising the group of highly reliable brokers in the Russian stock market (rating of the National Association of Stock Exchange dealers, 2004). The MICEX enables a wide circle of financial intermediaries to participate in trading. The Exchange continues to lib eralize the regulatory and technological conditions of admission to trading and requirements to participants' financial state. The MICEX continues to improve its risk management system. At the same time, in the composition of partici pants in trading we can see the accelerated growth of the proportion of large cap organizations: banks members of sec tions and financial companies. For example, 70% of banks reporting to the Exchange own the capital exceeding 300 million rubles. Over the year, the proportion of companies with this amount of capital grew from 7% to 9%. In 2004, the total capital of members of sections reporting to the Exchange grew by 16%, while their profit grew by 36.2%. The MICEX markets The currency market In 2004, the state of the Russian currency market was affected by favorable conditions of foreign trade and a stable economic situation inside the country. The growth of Russia's GDP exceeded 7%, the trade export surplus increased by 45%, the ruble appreciated by 5.8%, while the inflation level amounted to 11.7%. Growing prices for main Russian exports and massive sale of hard currency export receipts had a positive effect on the activity of market participants. Record turnovers In 2004, the total volume of trade in the exchange currency market amounted to 350 bln dollars, 2.4 times more than in 2003. In December, the MICEX set a historical daily volume record of 6.095 bln dollars. It is noteworthy that this figure was achieved in the conditions of ongoing liberalization of the currency market, which implies the reduction of the compulsory sale of hard currency export receipts and the right to choose the place of sale. Factors, which contributed to the growth of the exchange market turnovers, included favorable organizational and technological environment provided to participants, in particular, the unification of two trading session, guaranteed execution of transactions, the reliable system of settlements, well developed information technologies and competi tive exchange commission. MICEX Annual report 2004 11 Figure 2. Trade volumes, bln US dollars 350 300 250 200 150 100 50 0 30,6 1998 1999 2000 2001 68,3 124,0 71,2 63,2 2002 2003 2004 142,9 350,0 The unification of two trading sessions The liberalization of the currency regulation is requiring the modernization of the financial infrastructure. This is why the most important project implemented in 2004 was the unification of trading in the Unified Trading Session (UTS) and the afternoon session SELT. The aim of the unification was to combine the main advantages of the two sessions. The unification enabled to concentrate the liquidity of the exchange market and improve the reliability of the trading system by combining the advantages of the two risk management systems: individual and collective responsibility. The introduction of a new scale of commission rates enabled to ensure an optimal combination of the reliability of the exchange currency market and the cost of operations for participants. The improvement of the competitiveness of the exchange market as a result of the unification of the two trading ses sions stimulated demand for the services of the MICEX trading system, which caused the growth of the proportion of transactions carried out within the trading system from 79% in 2003 to 83% in 2004. Figure 3. The proportion of system transactions in the total volume of the exchange currency market 2003 79% 2004 83% 21% System transactions 17% Out of the system transactions 12 MICEX Annual report 2004 The introduction of the new scale of commission rates in the UTS caused the growth of daily volumes of operations of most participants and the increase of the proportion of large players (to 84%). This confirmed the attractiveness of the exchange segment of the market for leading operators and the competitiveness of the commission in the current state of the currency market. In June – December 2004 (after the unification of the two sessions), the daily average volume of trade in the MICEX currency market increased by 63% as compared with January – May 2004. In December the volume of trade in the MICEX currency market reached 2.8 bln dollars a day. Figure 4. The currency market trade volumes in 2003 2004, bln US dollars 2003 60 58,2 2004 50 50,7 40 35,9 30 26,3 27,5 28,2 20 21,1 23,1 20,3 20,9 16,1 21,7 17,3 12,5 12,9 10,1 13,5 11,7 19,8 10 9,1 6,7 8,6 11,8 11,4 0 January February March April May June July August September October November December Structural changes The year of 2004 was marked by the growth of the volumes of operations in all main instruments of the currency mar ket. The main currencies traded in 2004 were the US dollar and the Euro. Dollar ruble instruments are the most liq uid, accounting for 99.3% of the total trade volume. The volume of FX swaps showed the biggest growth: over the year it increased 4 times to 106 bln dollars. In 2004 the proportion of these operations in the currency market exceeded 30%. Such impressive growth was the result of banks' intensive use of FX swaps for refinancing purposes. Table 3. The volume of operations by instruments, bln US dollars 2003 USD/RUB_TOM USD/RUB_TOD SWAP_USD/RUB EUR/RUB_TOD 52,8 61,1 26,8 1,6 2004 134,3 105,9 106,0 2,2 Change +154% +73,4% +296% +33,5% MICEX Annual report 2004 13 In 2004 the proportion of the dollar ruble instrument with today settlements dropped from 45% to 31%. The per centage of dollar transactions with tomorrow settlements remained at the level of 38%. The structure of the currency market in terms of types of instruments became more balanced and stable. Figure 5. The structure of the exchange currency market by instruments, % 2003 45% 30% 2004 31% 16% 1% 38% 1% 38% USD/RUB_TOM SWAP_USD/RUB_TOD_TOM USD/RUB_TOD EUR/RUB_TOD In 2004 the volume of trades in Euro in the exchange currency market amounted to 2.07 bln Euros. In the total vol ume of trade on the MICEX the proportion of Euro remained unchanged over 2003 and amounted to about 1%. In 2004 the MICEX took steps to promote trading in Euro for rubles in the Russian currency market. The MICEX developed the strategy of development of the Euro market for 2005, which envisages changing the system of risk man agement in this segment of the market. In the framework of this strategy, on the 20th of December 2004, the MICEX trebled time of the trading session in Euro. Figure 6. Total volumes of operations in instrument EUR/RUB_TOD in 2003 2004, mln Еuros 300 250 200 213,8 150 100 50 0 January February March April May June July August September October November December 180,3 177,7 280,9 276,5 253,9 231,6 203,0 168,0 162,7 144,7 206,7 202,3 190,9 161,6 169,7 125,1 151,6 168,9 130,2 155,7 164,2 190,6 2003 2004 147,3 The proportion of transactions in other currencies did not exceed one thousandth of a per cent of the turnover. In 2004, besides the US and EU currencies, participants carried out one time transactions in Ukrainian hryvnas (in the amount of 324 thousand hryvnas) and Swiss francs (3.076 million Swiss francs). 14 MICEX Annual report 2004 Regional currency exchanges The existing national system of exchange trading covers Russia's main financial regions and ensures the simultaneous participation of commercial banks located in different regions and time zones of the country. Trading in the UTS is held within the time interval which is unified for all regional currency exchanges. Regional currency exchanges continue to play a significant role in the currency market. As a result of 2004, the pro portion of RCEX in the total turnover of the UTS amounted to 4.38% (4% in trading in the US dollar and 48% in operations in the Euro). As compared with 2003, the total turnover of regional exchanges increased by 78%. Table 4. Turnovers of regional currency exchanges and the number of participants in trading in the UTS Regional currency exchanges Turnover, bln rubles 2003 405,55 2004 720,43 Change +78% Table 5. Participation of regional currency exchanges in trading in the US dollar and the Euro in the UTS in 2004 SPCEX UTS in the US dollar, mln dollars UTS in the euro, mln euros 8 685,0 1 328,1 SICEX 6 273,9 114,0 URCEX 4 787,1 45,4 APICEX 956,7 16,5 NNCSEX 1 337,4 135,6 SCIEX 192,0 17,4 RCSEX 633,5 37,3 In 2004 regional currency exchanges, acting as representatives of the MICEX, provided market participants a con venient and reliable access to trading in the MICEX currency market. They also provided information and consult ing services to regional banks. Improving the quality of services offered to market participants In 2004 the MICEX continued to upgrade the trading infrastructure of the currency market in order to better satisfy the needs of its participants. The MICEX improved the system of the web based access to trading in foreign curren cy and electronic document turnover. The number of participants using the web based access increased by 30% and reached 52. 159 participants used electronic document turnover (34% more than in 2003). The improvement of the quality of services and the growth of market liquidity resulted in the growth of the number of participants in the MICEX currency market. On January 1, 2005, the total number of members of the MICEX Currency Market Section amounted to 534 credit institutions, that is, over 63% of all Russian banks licensed to deal with foreign currency. MICEX Annual report 2004 15 Figure 7. The number of currency market Section's members 600 500 495 400 506 534 445 363 322 210 374 300 200 179 100 207 200 137 77 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 The synergy effect from the implementation of new projects was observed in the accelerated growth of the turnover of the exchange currency market in comparison with the total volume of interbank conversion operations. Over the year the proportion of the exchange segment grew from 5% to 9%. Figure 8. The proportion of the exchange market in the total turnover of interbank cash conversion operations in the dollars/ruble instrument 2003 95% 2004 91% 5% 9% Out of the system transactions System transactions Strategy for the MICEX currency market One of the most important areas of development of the MICEX currency market is the modernization of the risk management system on the basis of a specialized clearing organization, which is being created in the framework of the MICEX Group. 16 MICEX Annual report 2004 The main functions of the clearing organization in the currency market will include: calculation of net obligations of participants in foreign currency trading, setting of trading limits for participants, registration of marginal payments, controlling the observance of the "payment versus payment" principle and ensuring conditions of guaranteed settle ments with all participants. Considering the growing role of the European Union in Russia's foreign trade, the MICEX is preparing steps to stim ulate trading in European currency in the exchange currency market. The MICEX intends to change some principles of risk management system in this segment of the market. The 100% advance depositing of funds will be replaced with partial depositing. Participants will be enabled to use the euro/ruble instrument with tomorrow settlements and carry out "currency swap" transactions. Besides time of the trading session in European currency will be extended. Other projects to be implemented in 2005 include: ■ ■ improvement of the mechanisms of settlements in the currency market and launch of two settlement sessions, which will enable regional participants in trading to receive cash sooner than before; transition to the "unique limit" principle, which enables participants in trading to transfer funds in any cur rency in advance in order to carry out their operations in the currency market independently from the instrument used. The performance of these tasks, combined with flexible and balanced tariff policy, will help to reduce transaction costs for all market participants, improve the conditions of trading and settlements and raise the attractiveness of exchange trading. The government securities market and the money market In 2004 MICEX focused its efforts on increasing the liquidity of the government securities market (GSM), develop ing the money market, introducing new instruments and improving the transparency of these markets. In particular, MICEX admitted to trading OFZ AD bonds with variable coupon rate, RF Eurobonds, bonds of the Central bank of Russia and City of Moscow municipal (domestic) bonds. MICEX provided access for credit institutions to Central bank deposits. Moreover, MICEX improved its trading and settlement technologies, launched government bond indices and created Government Securities Section. The volume and structure of the GKO OFZ market In 2004, the RF Ministry of Finance continued to increase the volume of government bond issue. As a result, the nominal volume of outstanding securities increased to 557.56 bln rubles, which exceeds the results of 2003 by more than 75%. The total volume of GKO OFZ primary placement in 2004 was 134.64 bln rubles (in 2003: 111.07 bln rubles). The structure of the GKO OFZ market in 2004 underwent some changes. At the end of the year the largest share of the nominal volume was covered by OFZ AD (67.8%), while at the beginning of 2004 the largest share was taken by OFZ FD (52.1%). The share of OFZ PD remained the same, while GKO were no longer present in the market structure as of the end of 2004. MICEX Annual report 2004 17 Figure 9. Structure of the nominal volume of the GKO OFZ market (31. 12. 2004) 2004 7,8% 67,8% 24,4% OFZ AD OFZ PD OFZ FD A new type of OFZ AD was introduced in the GKO OFZ market. It has a variable rate of coupon yield, which is based on the official inflation rate. In November, 2004, the first issue of these bonds (issue #48001) was admitted to trading in the GKO OFZ market. In addition to the growth of the market volume, participants' activity on the secondary market also rose. The total GKO OFZ turnover on MICEX exceeded 1 230 bln rubles, which exceeds the level of 2003 by more than 10%. Figure 10. Turnover on the GKO/OFZ market in 2003 – 2004, bln rubles 600 500 400 300 200 100 0 Placement austions Secondary trading Central bank repo Central bank reverse repo 111,1 134,6 248,7 138,4 0,1 27,5 339,0 2003 2004 592,5 423,7 331,0 Inter dealer repo The increase of turnover was encouraged by Central bank repo operations used as an instrument of monetary policy. Central bank has conducted repo auctions with terms of 1, 7 and 90 days. The Central bank repo turnover with GKO OFZ in 2004 amounted to 590.6 bln rubles (in 2003 – 331.0 bln rubles). 18 MICEX Annual report 2004 Regional currency exchanges In the framework of the existing national system of exchange trading, regional currency and stock exchanges act as representatives of MICEX in the GSM and the money market. In 2004 the share of regional exchanges in the total turnover in the GSM and the money market amounted to 7.29%. As compared with 2003, the share increased 2.8 times, while the turnover of regional exchanges increased 3.7 times. Table 6. Turnover on regional exchanges and the number of participants in the GSM and the money market Regional currency exchanges Turnover, bln rubles Share in the total turnover 2003 66,06 2,56% 2004 247,28 7,29% Change 274% 185% New instruments in the government securities market One of the most important results in 2004 was the organization of trades in RF Eurobonds, state currency loan bonds issued in 1999 (OGVZ 1999), bonds of the Central bank of Russia (OBR) and City of Moscow municipal (domestic) bonds (City of Moscow bonds). This enabled the Central bank of Russia to use these bonds for implementation of its monetary policy (repo and reverse repo, secured crediting). Clearing and settlement for these bonds are effected with the use of unified cash positions according to the procedures existing in the GKO/OFZ market. As of the end of 2004, 7 issues of RF eurobonds, 1 issue of OGVZ 1999, 1 issue of OBR and 19 issues of the City of Moscow bonds were admitted to trading in the government securities market. The total turnover in these instruments amounted to 121.8 bln rubles, including the primary placement of OBR in the amount of 34.5 bln rubles. Central bank deposits: a new instrument in the money market In March, 2004, MICEX provided access for credit institutions to Central bank deposits. The advantages of using the MICEX System of electronic trading for Central bank deposits transactions are: ■ ■ ■ ■ high tech access to Central bank deposits (automated mode of trading, preparing and submitting reports; elec tronic document circulation); wider access to deposit operations in regions; the high efficiency of using funds, kept on accounts with the Clearing Houses of the Organised Securities Market, for operations in the other markets of MICEX; transparency of operations. During the year Central bank of Russia carried out regular deposit operations with credit institutions, using the MICEX System of electronic trading, at auctions and on fixed terms. Terms of deposits, placed on fixed terms, were 1 day ("tom/next" and "spot/next" instruments) and 1 week ("1 week" and "spot/1 week" instruments). Terms of deposits, placed at auctions, were 4 weeks and 3 months. In 2004 the total volume of Central bank deposits, concluded with the use of the MICEX System of electronic trading, amounted to about 200 bln rubles. Improvement of trading and settlement technologies In October 2004, to further develop the technologies of trading and settlement in the government securities market, MICEX implemented the operations in the MICEX trading system with the use of funds held in a participant's trust management. MICEX ensures separate accounting of funds and securities, held in trust management, by opening separate trust management cash positions and depo positions. Following the adoption of the Bank of Russia's Directive of 07. 06. 2004 #115 I "On special discretionary accounts for non residents' funds recording" and other legal acts, MICEX introduced special discretionary S accounts and spe cial divisions of depo S control accounts for non residents' funds and government securities. They replaced the "old" S accounts and depo S accounts, which were terminated on 1 August 2004. MICEX Annual report 2004 19 The MICEX GSM Section In 2004 MICEX formed the Government Securities Section, whose members are dealers of the GKO/OFZ market. The new Section's aim is the formation of an effective and liquid market of government securities. In 2004 the Section Council, comprised of representatives of leading market participants, took part in the develop ment of rules of performing certain operations in the MICEX government securities market and provided assistance to government bodies with developing the market infrastructure and improving its liquidity and transparency. GSM indexes as a way to improve market transparency In the framework of development of the government bonds market, in November 2004 MICEX began to publish the Russian Government Bonds Index (RGBI), which was added to the family of main indicators of the stock market including the MICEX Index (stocks) and the MICEX Corporate Bonds Index (RCBI). Figure 11. Values of the Russian Government Bonds Index in 2004, points 119 118 117 116 115 114 113 112 December January February 2004 2003 March April May June July August September October November December 113,78 116,27 116,36 116,73 118,62 115,10 114,46 114,28 113,88 113,87 114,18 114,35 113,90 The Russian Government Bonds Index (RGBI) is the index of "net prices". Besides the RGBI, 2 more indices are cal culated as indicators of price movements on the GKO/OFZ market: the Russian Government Bonds Index – gross (RGBI g) and the Russian Government Bonds Index – total return (RGBI tr). These indices are calculated under the methodology of indices of "gross prices" and "total return" correspondingly. The advantages of the MICEX Russian Government Bonds indices are: ■ ■ ■ ■ calculation in a real time mode; correspondence of the calculation methodology to the international practice; broad sampling of securities; mitigation of the effects of non market factors. 20 MICEX Annual report 2004 In addition to the Russian Government Bonds indices, MICEX calculates the Russian Government Bonds Effective Yield to maturity (RGBEY) and the Russian Government Bonds Gross Yield to maturity (RGBY), which are gov ernment bonds' yields to maturity weighted by market value. The above indices and yield indicators help to satisfy the need of Russian and international investors in representative indicators of the government bonds market, which enable to evaluate the effectiveness of investing into these instru ments and forecast the medium and long term changes in the market. Reduction of the MICEX commission fees To raise the attractiveness of the government securities market and reduce participants' costs, in September 2004 MICEX reduced its commission fees for main operations in this market. For short term instruments (with maturity up to 200 days) the fees were reduced by more than 30%, while for other instruments – by more than 40%. To create favorable conditions for increasing market liquidity, MICEX will continue to monitor the effect of the exchange commission fees on participants' activity. Development strategy for the government securities market and the money market In 2005 MICEX intends to further develop the government securities market and the money market. The main projects include: ■ developing the market of repo operations with the instruments of the government securities market (addressed and anonymous repos). The market of anonymous repos with guaranteed settlement of transactions is to be created at MICEX in addi tion to the existing market of "addressed" repos. It will enable government securities market participants to carry out repo transactions without and above mutual limits. This will give participants more possibilities to manage their liquidity and will help to increase the volumes of the repo market. ■ developing deposit and credit operations of the Bank of Russia using the MICEX trading system. This will be achieved by expanding the range of instruments (credit institutions will be enabled to perform oper ations with the Bank of Russia's on demand deposits) and ensuring the possibility of the Bank of Russia's oper ations of secured crediting (in the form of secured loan auctions and in the form of secured loans at fixed inter est rates) using the MICEX system of electronic trading. ■ organizing the market of interbank loans (IBL) using the MICEX trading system. The introduction of IBL operations is an addition to the Bank of Russia's deposit operations and other instru ments of the MICEX money market. According to this project, MICEX will act as an "electronic broker" pro viding market participants with the MICEX system of electronic trading for performing IBL transactions and granting them such services as preparing and submitting reports on transactions, ensuring settlement of trans actions and providing information on the market. ■ creating a high tech market of government savings bonds. MICEX, which organizes trading on the market of government savings bonds, and Sberbank, which acts as the issuer's agent and a depositary, intend to create a high tech market of government savings bonds. First issues of government savings bonds are scheduled to be placed in 2005. ■ expanding the range of market instruments by admitting new types and issues of bonds to trading. As the Bank of Russia expands list of securities, which may be taken as collateral for its loans, MICEX will admit new types and issues of bonds to trading on the government securities market. The market of non government securities (NGSM) In 2004, the MICEX focused its efforts on restructuring the stock market component of its business in compliance with the law. The MICEX transferred trading and listing of all securities from the MICEX Stock Market Section to MICEX Annual report 2004 21 the MICEX Stock Exchange, which obtained an appropriate license. The functions pertaining to the organization of trading in corporate securities and regional and municipal securities were distributed between the MICEX and the MICEX SE in the following way: ■ the MICEX SE organizes listing, trading (establishes the order of executing transactions; ensures fair market prices and guaranteed execution of transactions), works with market participants and advances the exchange technologies; the MICEX providеs clearing and technological support of trading on the MICEX Stock Exchange, including the provision of technological access to trading (trading in securities on the MICEX Stock Exchange were launched on 11 January 2005). ■ Volume and structure of the market In 2004, the MICEX stock market continued to develop rapidly. Total turnovers in the NGSM market grew by 44% over 2003. Trade volumes of the secondary bonds market increased more than two times. The turnover of eurobonds doubled, while the turnover REPO transactions grew by almost 60%. Table 7. Trade volumes in 2003 2004 Instruments Total volume Stocks Secondary trading Bonds Secondary trading Placement REPO Shares of mutual funds Eurobonds Trade volume, bln rubles 2003 2004 3 025,67 2 454,86 2 144,65 569,62 372,18 122,32 385,26 0,10 1,10 4 351,18 3125,14 2 778,85 1223,7 761,21 195,38 612,66 0,14 2,20 Change +43,81% +27,3% +29,57% +114,83% +104,53% +59,73% +59,02% +40,00% +100,00% Table 8. Leading issuers of the stock market Issuer RAO UES LUKoil Surgutneftegaz YUKOS Norilsk Nickel Other Total Volume of secondary trading, bln rubles 1360,6 396,9 214,8 209,8 191,9 404,8 2778,9 Table 9. Leading issuers of the market of corporate and regional bonds Issuer Government of Moscow Gazprom Administration of Moscow Region Bank for Foreign Trade CentrTelecom Other Total Volume of secondary trading, bln rubles 241,0 66,9 33,7 25,6 21,8 372,3 761,2 22 MICEX Annual report 2004 The secondary stock market remains the main segment of the NGSM market on the MICEX. In 2004, the total turnover of this segment amounted to 2778.85 bln rubles, which exceeds by almost 30% the same figure for 2003. The main indicator of the secondary stock market is the MICEX Index, which has increased 5.5 times since 1999. As of year end 2004, the proportion of the MICEX in the total turnover of the leading floors of the Russian stock market amounted to 84%. Figure 12. Volume of trade in stocks and the MICEX stock index bln RUR 6000 Trade volume MICEX Index 600 514,71 5000 548,15 500 4000 4120,4 318,91 400 3000 300 237,63 2000 2903,3 200 151,87 85,05 4,3 1997 144,39 1317,6 100 1000 45,34 15,5 1998 0 77,3 1999 477,8 2000 747,5 0 2001 2002 2003 2004 In 2004, two Russian issuers made their IPOs in the MICEX primary placement sector: IRKUT Corporation and Kalina Concern. Thus, four IPOs worth of more than 6 bln rubles have been made in this sector since the time of its creation in 2002 (in 2002 and 2003 IPOs were made by RBK Information Systems Company and Apteka 36,6 chain of pharmacies). The possibility of making an IPO in the internal market using the high tech MICEX trading system enables issuers to use the advantages of equity financing: ■ ■ ■ ■ obtaining long term financing; improving capitalization; enhancing the company image; listing on an exchange. In 2004, the most dynamic segment of the MICEX NGSM market was the bonds market. The total growth of trade volumes in this segment amounted to 114.8% over 2003. The turnover of the secondary bonds market grew more than 2 times (104.5% growth over 2003) and reached 761.21 bln rubles. On the bonds market the most rapid growth was shown by the segment of regional bonds, where the total trade vol MICEX Annual report 2004 23 ume increased by 170% to 508.25 bln rubles. The total volume of transactions in the secondary market grew by 180.5% to 338 bln rubles. In 2004, 20 entities in the Russian Federation and Russian municipalities placed their bonds on the MICEX, including the Government of Moscow; the Government of Moscow Region; the Administration of Novosibirsk Region; the Chief Financial Office of the Administration of Krasnoyarsk Territory; The Administration of Irkutsk Region; and the Department for Finances, Budget and Control of Krasnodar Territory. The total volume of raised funds exceeded 55 bln rubles. The segment of corporate bonds continued to develop rapidly. In 2004, the total trade volume increased by 87.6% to 715.45 bln rubles. 83 bond issues worth of more than 140 bln rubles were placed in the primary market. Altogether, in 1999 2004, more than 350 issues of corporate bonds worth of more than 330 bln rubles were placed in the MICEX NGSM market. Figure 13. Volume of placement of corporate bonds bln RUR 250 Placement volume Number of placed issues 100 200 89 84 80 150 69 60 140 60 100 45 79 11 9 30 2000 40 50 20 0 1999 25 2001 48 0 2002 2003 2004 In 2004, the MICEX tested the project of holding trades to determine bonds coupon rates with simultaneous buy back of these securities from all those who whish. The use of new trading modes "Buy back: auction" and "Buy back: address orders" enabled to buy back securities during a special time period with the possibility of showing data sepa rately in the information on the results of trading. In 2004, turnovers of the market of the RF eurobonds, organized by the MICEX, grew 2 times over 2003 and reached 2.2 bln rubles. The main advantages of the secondary market of eurobonds for investors were: ■ ■ ■ ■ the possibility of diversifying assets by using currency instruments with the minimum default risk; the possibility of carrying out transactions with a small number of eurobonds (from 1 thousand US dollars); considerable decrease of risks as a result of using the "delivery versus payment" tool with settlements on the day of transaction; high effectiveness of transactions combined with their low cost. 24 MICEX Annual report 2004 In 2004, the market of REPO operations in non government securities was developing rapidly. The procedure of con cluding REPO transactions, implemented in 2002, raised the potential and the attractiveness of the orderly exchange securities market in the management of financial assets for both credit and non credit institutions as well as for indi vidual investors. In 2004, the proportion of REPO operations amounted to 14% of the total trade volume. As com pared with 2003, it increased by 2.7%. The volume of trade in REPO transactions grew by 59% over 2003 and amounted to 612.7 bln rubles. Figure 14. The volume of REPO operations in 2004, bln rubles 80 67,9 60 54,5 45,0 55,6 48,3 55,6 60,7 50,3 60,8 49,1 40 36,6 28,3 20 0 January February March April May June July August September October November December The REPO market is an important mechanism to manage liquidity. It gives participants in the stock market additional possibilities of crediting with securities and cash. In 2004, 206 market participants carried out their operations in the REPO market (in 2003: 176). The list of financial instruments, in which one can carry out REPO transactions, includes stocks, corporate, regional and municipal bonds, the RF eurobonds and also shares of mutual funds. In 2004, REPO transactions were carried out in 216 bond issues and 60 issues of stocks. Shares of mutual funds are another instrument traded on the MICEX. This type of financial instruments was admitted to trading in February 2003. As of year end 2004, shares of 32 mutual funds under the management of 15 management companies were admitted to trading. The volume of trade in this segment amounted to 0.14 bln rubles. To make the NGSM market more effective, the MICEX developed new formulas to calculate the yield of bonds with debt amortization. In December, 2004, the MICEX divided the trading system on which the markets of non government and government securities were based. As a result, the MICEX now uses two independent software packages, each of which ensures the independent operation of each market. This helped to reduce operating risks and improve the effectiveness of the MICEX soft and hardware resources. MICEX Annual report 2004 25 Listing on the MICEX Since the time of the creation of the MICEX stock market, the number of traded instruments has been steadily growing. Figure 15. Number of securities traded on the MICEX, units 500 Unlisted Listed 132 400 146 300 80 19 38 167 186 97 235 181 298 200 18 13 148 194 100 112 0 1997 1998 1999 2000 2001 2002 2003 2004 On 31 December 2004, the total number of listed instruments and instruments admitted to trading as unlisted secu rities amounted to 430 securities (including shares of mutual funds) of 278 issuers and mutual funds. Of them, 132 securities of 73 issuers were listed. In 2004, 146 securities were admitted to trading in the MICEX stock market: 111 bonds, 17 stocks and 18 shares of mutual funds. In 2004, one of the most important projects was the adoption of new Rules of Listing, Admission to Placement and Circulation of Securities on the MICEX Stock Exchange, which were needed to restructure the stock market com ponent of the MICEX business. Basing on the new rules, the MICEX worked out the system of control over the obser vation of the norms of corporate management by issuers. The system is aimed at improving the transparency of the market and protecting investors' interests. The system is applied to issuers whose securities are listed on the MICEX. In 2004, to provide assistance to issuers, the MICEX: ■ ■ ■ ■ organized seminars and conferences aimed at explaining to issuers the mechanisms and possibilities of the stock market; provided consulting services when admitting to placement and/or trading on the MICEX; posted information on the MICEX web site containing material facts (events) of issuers' financial and eco nomic activities; performed expert examination of documents submitted by issuers as part of the listing procedure or the proce dure of admission to trading and/or placement; 26 MICEX Annual report 2004 ■ controlled issuers' observance of listing requirements, monitored their information disclosure and checked the observance of the norms and principles of corporate conduct. Members of the Stock Market Section A wide range of traded instruments and the high level of the NGSM market's technological base attract the growing number of participants. Figure 16. Members of the MICEX Stock Market Section 600 500 555 470 500 517 400 459 366 300 286 200 236 100 25 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 In 2004, 52 organizations – professional participants in the securities market were admitted to the MICEX Stock Market Section: ■ ■ credit institutions – 29; non credit institutions – 23. As at 31 December, 2004, 555 organizations – professional participants in the securities market were members of the MICEX Stock Market Section: ■ ■ credit institutions – 345; non credit institutions – 210. In 2004, the NGSM market was developing rapidly on regional currency exchanges, which act as regional represen tatives of the MICEX. The proportion of regional currency exchanges in the total turnover in the NGSM market amounted to 22.17%. As compared with 2003, the turnover of regional exchanges increased by 40%. MICEX Annual report 2004 27 Table 10. Turnovers on regional currency exchanges and the number of participants in trading in the NGSM market Regional currency exchanges Turnover, bln rubles 2003 1 383,53 2004 1 941,04 Change 40% Clearing and settlements The clearing and settlement system of the non government securities market is based on the following principles: ■ ■ obligations for transactions in securities are determined on the basis of multilateral clearing with the use of netting; clearing is performed for transactions with full coverage (transactions with settlement code Т0 and first parts of REPO transactions) or without full coverage (transactions with settlement codes B0 B30 and second parts of REPO transactions); settlements for participants' funds and securities are effected on the terms of "delivery versus payment". ■ In 2004, following the adoption of new legal acts on currency control, the MICEX adopted a new version of the Rules of Clearing and Settlements in the MICEX Stock Market Section. These Rules regulate the opening and the use of special "A" and "O" brokers trading accounts by participants in clearing (which are not authorized banks) when the latter carry out operations in the interests of their clients – nonresidents. Participants in clearing can use new special "A", "O" and "P2" trading divisions of depo accounts, which their clients open with the National Depositary Center. Special "A" and "O" trading divisions can be used when carrying out transactions in internal securities in the interests and at the expense of nonresident clients, while а special "P2" trading divisions can be used when carrying out trans actions in external securities (the RF Eurobonds) in the interests and at the expense of resident clients. In 2004, the MICEX implemented a new scheme of clearing and settlements for funds (project "Clearing Banks"). The new scheme enables market participants to use funds reserved in clearing banks' trading accounts with the MICEX Settlement House for the performance of their obligations for transactions. In March, 2004, the MICEX, with the assistance of the NDC, launched, in the NGSM market, a new system of information exchange between the MICEX and the NDC, which considerably improved the effectiveness of transfer of securities in the course of trading and enabled to change the depo positions of participants in clearing in the real time mode. An important innovation was the scheme of buying securities back to issue depo accounts. Web based trading One of important areas of the MICEX's work is the development of the system of access to trading via the Internet, which enables members of the Stock Market Section to install third level remote workplaces for their clients using of the hard and software interface ("gateway"). The use of remote client workplaces provides flexible interaction between a client and his broker, including the transmission of exchange information and the communication of orders to brokers in the real time mode. 28 MICEX Annual report 2004 Figure 17. Gross turnover of trade via the gateway in 2004 bln RUR 600 Amount of transactions (purchase+sale) 500 488,5 400 428,0 321,4 341,6 326,7 459,9 406,5 339,7 285,9 407,3 371,9 371,5 300 200 100 0 January February March April May June July August September October November December In 2002 2004 web based trading accounted for 50 60% of the total trade turnover in the MICEX Stock Market Section. Monitoring of trading To ensure fair and open price formation, the Exchange provides proper conditions for honest competition between participants in the stock market. The MICEX Rules provide equal terms for all participants in trading. The MICEX does everything to prevent unfair trading, price manipulation and the use of insider information. All unusual and sus picious situations, emerging in the course of trading, are revealed by the MICEX monitoring system and scrutinized. In cases stipulated in the legal acts, regulating the Exchange's activities, information on participants' actions showing signs of price manipulation or unfair trading is sent to the RF Federal Service for Financial Markets. To monitor trading, the Exchange uses and develops automated systems SMARTS (Securities Markets Automated Research Training and Surveillance) and SAFRAN (the Financial Markets Analysis System of the RF Academy of Sciences), which supplement each other. SMARTS enables to control automatically in the real time mode the given parameters of the course of trading. It also enables to analyze unusual situations and the reveal orders and transactions whose parameters exceed the established limits. This way of analyzing the market is convenient, given the intensity of trading. The system of control signals, based on the formalization of events taking place in the trading system and used in SMARTS, enables to reveal participants' actions which deserve more in depth analysis. Besides generating signals, SMARTS continuously calculates different indicators of the state of the market, including the current settlement prices, and the technological index, which is used to make decisions about the suspension of trading. SAFRAN is used to analyze the behavior of participants in trading and their influence on price formation. SAFRAN's data base contains information on trading in securities since 1997. It also contains information on non standard sit MICEX Annual report 2004 29 uations revealed in the course of trading. Jointly with the RF Academy of Sciences the MICEX explores the possibil ities of upgrading SAFRAN by applying new methods of revealing actions which show signs of price manipulation. Stock Market Indexes The MICEX calculates a family of indexes comprised of: ■ ■ ■ ■ the MICEX Index; the MICEX 10 Index; the RCBI Index; the RCBI c Index. The MICEX Index is a classical stock index calculated continuously in the course of trading on the basis of current average weighted prices of stocks weighted by market capitalization. The Index has been calculated since 22 September 1997. The MICEX 10 Index (calculated since 30 December 1997) is a simple price index calculated in the real time mode as the arithmetic mean of price changes of 10 most liquid stocks, the composition of which is revised quarterly. RCBI Index (Russian Corporate Bond Index) is the Russian index of corporate bonds, calculated continuously in the course of trading. It is a market capitalization weighted price index (Laspeires index). The Index reflects current prices and helps to take decisions in the corporate bonds market. The Index has been calculated since 1 January 2003. RCBI с Index (Russian Corporate Bond Index coupon) is the Russian (coupon) index of corporate bonds. It is a standard full income index, which is calculated on the basis of price changes and the increment of the accumulated coupon yield and the amount of coupon payments. RCBI с Index is calculated once a day at the close of the trading session. It helps to evaluate the efficiency of investments in corporate bonds. The methodology of calculation of indexes RCBI and RCBI с is in line with the recommendations on the calcula tion of bond indexes of the European Bond Commission of the European Federation of financial analysts' societies. Strategy for the stock market In 2003, the MICEX Stock Exchange was established, where trading was launched on 11 January 2005. The strategy for the MICEX stock market business emphasizes the following areas: ■ ■ ■ completing the transfer of trading to the MICEX Stock Exchange and ensuring the effective operation of the stock market after the re organization; developing the IPO segment; creating a primary placement market for Russian companies' stocks; widening the range of liquid instruments in the context of decreasing free float; improving listing procedures; creating a system of control over the observance of corporate management norms by issuers whose securities are listed on the MICEX SE; developing the procedure of admission of exchange (commercial) bonds to trading; attracting most interesting financial instruments to listing; developing REPO operations; providing the possibility of concluding REPO transactions with the deferred DVP date for the first part and prolonging REPO transactions and the possibility of executing obligations for a REPO transaction on the day of transaction (settlement code R0); organizing REPO auctions to place funds; creating an anonymous REPO market and a new system of managing default risks; improving the family of indexes by implementing the system of adjusting the free float of securities comprising indexes; developing the system of index management and forming the Index Committee; improving customer service on the basis of a unified system of client support; improving the communication mechanism, which will enable the Exchange to establish business relations with large organizations clients and enhance its image; carrying out marketing studies and promoting new products and services; improving the MICEX web site; establishing the MICEX as a key price forming floor in the Russian financial market. ■ ■ ■ ■ 30 MICEX Annual report 2004 The derivatives market In 2004, the MICEX derivatives market was affected by two factors. The first (positive) factor was the strengthening of the ruble against the US dollar, which, along with the increased volatility of the USD/RUR exchange rate in the SPOT market, had a positive impact on the MICEX market of currency futures. The negative factor was the enact ment of the RF Federal Securities Commission's Decree #03 54/ps of 26. 12. 2003, which allowed, as of January 1, 2005, trading in derivatives on stocks, bonds, and related indexes only on stock exchanges. Instruments traded in the MICEX derivatives market In 2004, FX futures were traded in the MICEX Derivatives (Standard Contracts) Market Section. We have already mentioned that the strengthening of the ruble against the US dollar and the growing volatility in the SPOT market stimulated the demand of financial institutions and their clients for instruments enabling to hedge currency risks. On the other hand, during the whole of 2004, a pool of banks (Sberbank, Vneshtorgbank, MDM Bank, PSB and Metallinvestbank) maintained bids and offers with narrow spreads for all contract months of the USD/RUR futures. This resulted in the increase of trading volume and the open interest, especially in the fourth quarter of 2004. Figure 18. Trading volume and open interest in the USD/RUR futures in 2004 bln rubles Trade volumes 8 7 6 5 4 3 2 1 0 January February 7,1 1,0 0,9 0,3 March 0,4 April 0,1 May 0,2 June 0,2 July 1,0 1,4 0,2 0,5 August September October November December The growth of the trading volumes in currency futures and options on Russia's derivatives floors in 2004 was as follows: ■ ■ ■ the MICEX: 10.1 times; the St.Petersburg Currency Exchange: 4.1 times; the FORTS: 3.5 times. Table 11 shows the parameters of currency futures traded in the MICEX Derivatives Market Section in 2004. MICEX Annual report 2004 31 Table 11. Short specifications of MICEX currency futures USD/RUR futures Contract size Contract months Delivery method Final settlement price 1 000 US dollars Next 6 months + 2 months in March, June, September and December quarterly cycle Cash settled The average weighted exchange rate of the US dollar in the UTS on the final settlement day The official exchange rate of the euro, set by the RF CB on the final settlement day Euro/RUR futures 1 000 euros Next 6 months Participants in the derivatives market In 2004, the bulk of the trading volume in the market of the USD/RUR futures was accounted for by credit institu tions from the pool of banks operating in the currency derivatives market, in particular, Sberbank, Vneshtorgbank, MDM Bank, PSB StPB, EvrofinanceMosnarbank, Metallinvestbank, NOMOS, MAB, Konversbank and others. Such Internet brokers as Otkrytie Brokerage House, Brokercreditservice and Alor Invest Investment Company operated in the MICEX derivatives market. As of December 31, 2004, the number of Members of the MICEX Derivatives (Standard Contracts) Market Section amounted to 156 organizations. Two organizations joined the Section in 2004: EURASBANK (Individual Clearing Member) and Gazprombank (General Clearing Member). On December 28, 2004 the Council of the Derivatives Market Section decided to affiliate ROSPROMBANK as a General Clearing Member and RUSICH CENTER BANK as an Associated Clearing Member of the MICEX Derivatives (Standard Contracts) Market Section. The decision was approved by the Exchange Council in January 2005. During the year, the Derivatives Division of MICEX focused on potential new market participants, in particular: ■ sent out materials on membership, participation in trading, technological access, launching new instruments and services, accounting for credit and non credit institutions; provided weekly statistical information and analytical materials on the results of trading in the MICEX derivatives market; defined a circle of banking institutions, which can be attracted to the market, and met with their heads to dis cuss the issues of their entering the market and the use of derivatives to manage financial risks; held a seminar for chief financial officers of large and rapidly developing organizations. Participants in the sem inar simulated hedging the exchange rate risk by carrying out transactions in USD/RUR futures in the MICEX trading system. ■ ■ Improving the technology of the derivatives market In 2004, the following technological innovations were made in the MICEX Derivatives Market Section: ■ to meet the growing demand of market participants and their clients contracts months were added for USD/RUR futures enabling to hedge currency risk up to 1 year ahead (before that, USD/RUR futures had been traded up to 6 months); a new type of position accounts was introduced – "special position accounts". The use of special position accounts by market participants considerably reduces costs of maintaining positions without decreasing the safety of the guarantee system; the theoretical part was completed and the practical phase was started of the project to organize trading in options. Under the project, trading in options on futures is to be launched in 2005. ■ ■ 32 MICEX Annual report 2004 Strategy for the derivatives market Strategy for the market of derivative instruments provides for the implementation of the following projects: ■ ■ ■ organizing in 2005 the market of options on currency futures. launching the futures on the exchange rate of the euro to the US dollar with settlements in Russian rubles to hedge risks in the euro/USD pair. improving the existing system of risk management, which includes: ❏ creating, in the framework of the MICEX Group, a specialized clearing organization to perform clearing for derivatives; ❏ introducing elements of portfolio margining for futures and options contracts; ❏ removing (or increasing) the price limits for orders while saving on line orders credit checking procedure and the retaining limits for the settlement price, which reduces the possibility of forced closing out of positions; ❏ establishing a guarantee fund as an additional element of the risk management system. ■ developing a new concept of the risk management system, including: ❏ developing the methodology of evaluating the amount of possible losses for portfolios of derivatives and calculating the requirement to initial margin on the basis of probabilistic models; ❏ including into the constituent and other regulative documents of the newly established MICEX Clearing House clauses which will allow performing clearing functions in the derivatives market; ❏ developing draft internal regulative documents of the MICEX Clearing House concerning the deriva tives market, submitting them to appropriate regulatory agencies for approval and obtaining the neces sary licenses. ■ developing and launching the market of derivative instruments on stock indexes and interest rates, organizing trading in: ❏ futures and options on one of the indicative rates of the market of interbank credits (on the MICEX); ❏ futures and options on the basis of government, regional and corporate bonds (on the MICEX Stock Exchange); ❏ futures and options on stock indexes (on the MICEX Stock Exchange). Commodity market The MICEX develops and implements projects in the commodity market jointly with the National Mercantile Exchange (NAMEX). The NAMEX (together with the Central Russian Universal Exchange – CRUEX) was selected by the Federal Agency for the Regulation of the Food Market under the RF Ministry of Agriculture to organize trading for government commodity selling interventions in the grain market in 2004. The NAMEX performed functions of the administrator of the trading system during government interven tions in the grain market in 2004, using the technological services of the MICEX. Trading was efected in the unified electronic system of grain trading, developed by the MICEX. Access of regional participants was provided by the St.Petersburg Currency Exchange (SPCEX), the Rostov Currency and Stock Exchange (RCSE), the Nizhni Novgorod Currency and Stock Exchange (NCSE), the Samara Currency Interbank Exchange (SCIEX), the Urals Regional Currency Exchange (URCEX) and the Siberian Interbank Currency Exchange (SICEX). MICEX Annual report 2004 33 Figure 19. Organization of exchange trading in grain MICEX Technological Center NAMEX Administrator of trading CRUEX SPCEX RCSEX NNCSEX SCIEX URCEX SICEX Regional floors acting as representatives of NMEX in 2004 government procurement interventions in the grain market Trading floor in Moscow In the course of 2004 government commodity interventions, the NAMEX and the Federal Agency for the Regulation of the Food Market used the MICEX system of electronic document and information exchange. From 18 February till 26 July 2004, 307 milling enterprises from different regions of Russia participated in exchange grain trading. The total volume of grain sold through the exchange trading system amounted to over 1.5 million tons for the sum of about 6 bln rubles. In June, 2004, the MICEX and the Russian Grain Association held a round table talk, devoted to the problems of the grain market, and a series of meetings involving US experts (ACDI/VOCA Company), representatives of the Federal Agency for Agriculture as well as Russian and foreign participants of the grain market. All those events were devoted to the issues of organizing permanent exchange grain trading on the national scale and in particular grain futures trading with delivery FOB the Black Sea region. Besides, the MICEX representatives gave talks on organizing the exchange grain market at the 5th grain round "The Grain Market: Situation in Russia and in the World" (June, 2004) and the Second International Conference "The Grain Industry in the 21st Century" (November, 2004), attended by the RF Agriculture Minister A.Gordeyev, repre sentatives of the RF Agriculture Ministry, the RF Ministry for Economic Development, the Russian Grain Association, international experts and participants of the grain market from different regions of Russia. Strategy for commodity markets (the grain market) The MICEX intends to continue its cooperation with the NAMEX in developing commodity markets. In the open contest, organized by the Federal Agency for Agriculture in November 2004, the NAMEX was selected to organize trading for government purchase interventions aimed at regulating the market of farm products, raw mate rials and food. 34 MICEX Annual report 2004 In future, exchange trading in the framework of purchase interventions will be held in the unified electronic system of grain trading, developed by the MICEX. The MICEX technological infrastructure allows market participants to trade in the real time mode simultaneously in Moscow, St.Petersburg, Rostov on Don, Nizhni Novgorod, Samara, Yekaterinburg, Novosibirsk and other cities which have centers of remote access, organized by the Nizhni Novgorod Currency and Stock Exchange and the Siberian Interbank Currency Exchange. Figure 20. Geography of grain trading St. Petersburg Nizhni Novgorod Kazan Ufa SPCEX MOSCOW MICEX NCSE Yekaterinburg URCEX RCSE SCIEX SICEX Kurgan Saratov Saransk Rostov on Don Orenburg Samara Novosibirsk Krasnoyarsk The parties involved in government purchase interventions will perform the following functions: ■ ■ ■ the NAMEX: organizer of trading and settlements, administrator of the exchange trading system, trading floor in Moscow; the MICEX: technological center providing its soft and hardware complex for exchange trading and for the access of participants to the trading system; regional floors – representatives of the NAMEX in exchange trading: provide their soft and hardware com plexes for the access of participants to the trading system. The strategy for commodity markets also includes: ■ ■ organizing regional exchange grain trading. The plan of development of the exchange grain market in Samara Region was approved by the Ministry of Agriculture and Food of Samara Region. organizing the market of derivative instruments on grain in 2006. MICEX Annual report 2004 35 Information technologies and the MICEX soft and hardware complex In 2004, the main goals of the MICEX technological policy were: ■ ■ the provision of a technological base for the operation of the MICEX markets under normal conditions and in emergency situations; the protection of markets against technological risks; the promotion of business by providing IT support; protection against the risk of technological backwardness. The information and technological infrastructure of the MICEX is an up to date, highly liable and well protected soft and hardware complex (HSC), which ensures the work of national markets of different financial instruments and provides participants with trading, depositary and settlement services. The MICEX HSC is based on two separate computing centers (the main one and the reserve one), equipped with state of the art computing facilities. The two computing centers have about 100 UNIX servers and a corporate system of centralized data storage, based on XP256 and XP128 devices installed in the computing centers. The computing centers operate in the framework of a unified telecommunication infrastructure. The MICEX network infrastructure, being a part of the MICEX data transmission network, is formed of 130 intellectual devices, ensuring the inter network exchange of data at the speed of 1Gigabit/sec. The regional infrastructure of the complex covers the whole territory of Russia and is based on seven regional centers of technological access. Each Federal District has at least one such center. The distributed telecom munication infrastructure is supported by 10 providers of telecom services and has over 2500 available nodes (7000 elements of network topology). The complex of facilities, used to monitor and manage the network and applications, ensures the clock round monitoring of the state of the distributed telecom infrastructure up to the final user level and the speedy removal of problems. The trading, settlement and depository systems help to organize trading in almost any type of instruments in the real time mode, using different trading methods. They provide clearing and settlements for the results of trading in money and instruments with ensuring of delivery against payment. In one day, over 220 thousand orders are processed and over 110 thousand trades are registered, for which clearing and settlements are also provided. The complex has the potential to handle several million orders and trades. The MICEX software and hardware complex serves as a basis for the country's largest system of electronic commerce, both in terms of technological parameters (the number of users, the efficiency of software and hardware facilities, etc.) and economic figures (the number of processed orders and transactions, turnovers, etc.). The MICEX electronic commerce system is characterized by: ■ ■ ■ ■ high reliability and stability in extraordinary situations; potential for further development; flexibility and adaptability to the changing needs of financial market and users; the possibility of providing access to services via the Internet. In 2004, we transferred the Exchange's soft and hardware complex to a new, more powerful platform (computing facilities, the OS and the data base management system). Transition to a new platform increased our possibilities to handle information (which is important, given the widening range of services provided to market participants), improved the reliability of the complex and reduced the costs of its maintenance and operation (as a result of reduc ing the number of computing facilities). In 2004, the MICEX technological divisions focused their efforts in the following areas: ■ ■ ensuring the reliable operation of the technological infrastructure of the MICEX and other organization com prising the MICEX Group; step by step upgrade of the platform; 36 MICEX Annual report 2004 ■ ■ ■ IT support of the beginning of operation of the MICEX Stock Exchange; improvement of the functional capabilities of the MICEX electronic systems, IT support of the development of financial markets; improvement and standardization of the hard and software base of the accounting systems of the MICEX Group's organizations. In 2004, the MICEX continued to take protective measures against technological risks, maintain the efficiency of the computing centers and the telecom infrastructure and ensure the reliable operation of the applied systems. During the year, the MICEX also took steps to perform transition to the new platform. The trading system migrated to a new version of the operating system (HP_UX 11.i) and the system of data base management (Firebird 1.0). All this enables us to fully utilize the capabilities of the new computing facilities, reduce the number of servers and the costs of their operation and support, increase the computing power and improve the reliability of the MICEX hard and software complex as a whole. The MICEX IT divisions performed all the necessary work to ensure information and technological support of the beginning of trading on the MICEX Stock Exchange. The work included the development of technological schemes for carrying out exchange operations on the basis of the MICEX HSC, the allocation of a special copy of the Trading System for the MICEX Stock Exchange and the modernization of the MICEX HSC. As a result, the MICEX Stock Exchange was technologically fully prepared for trading. In 2004, in order to expand the functional capabilities of the MICEX soft and hardware complex, we implemented the following projects: ■ ■ ■ ■ ■ ■ ■ ■ the unification of the two trading sessions in the currency market; auctions to place money deposits with the Central Bank in the framework of the government securities market; trading in Eurobonds with settlements in rubles in the government securities market; maintenance of money accounts on the clients level in the government securities market; improvement of the system of clearing and settlements in the stock market (introduction of the status of clear ing and trading companies, settlements for the subsidiaries of participants in trading); ensuring the possibility of transferring securities in the course of trading between trading and master depositary accounts in the government securities market and the stock market; ensuring the possibility of maintaining special position accounts in the standard contracts market; improvement of the technology of government commodity interventions in the grain market, including the possibility of opening additional regional trading floors. Information security In 2004, the MICEX Security Service focused its efforts on: ■ ■ protecting information in the MICEX soft and hardware complex (MICEX HSC); operating and upgrading the integrated security system of the MICEX premises. Safe information handling in the MICEX HSC is based on national and international security standards (ISO, GOST, regulative documents of the Federal Service for Financial Markets, the Federal Service for Technical and Export Control, the Federal Agency for Information Technologies and the RF Federal Security Service). Today, we are bringing the MICEX normative base, regulating information security, to conformity with the Bank of Russia's Standard "Information Security of the RF Banking System Organizations", adopted by the Chairman of the RF CB and put into effect on 1 December 2004. In 2004, the MICEX Security Service prepared the MICEX automated sys tem for certification in compliance with international standard ISO/MEC 15408. The MICEX Security Service worked on indentifying and evaluating threats to the MICEX business and imple mented and upgraded the means of information security. MICEX Annual report 2004 37 Last year we emphasized the development of the protected system of electronic document turnover (MICEX EDT). Our aim is to minimize the costs of the Exchange and clients and improve the convenience and effectiveness of information exchange. We also improved the normative base of the MICEX EDT considering the current legisla tion and the demands of authorized agencies. In 2004, the MICEX EDT ensured the effective operation of the fol lowing projects: ■ ■ ■ ■ ■ web based trading; web based banking; the depositary system; the settlement system; provision of reports. The MICEX Center for Certificate Management, established in compliance with the Federal Law "On Electronic Digital Signature", implements technological processes connected with the management of certificates of electronic signature keys and cryptographic keys. In 2004, reserve technological facilities of the MICEX Center for Certificate Management were installed in Krasnyie Vorota Building. These reserve facilities can work in the real time mode. At the end of 2004, the number of participants in the EDT exceeded 660 organizations, while the number of issued certificates exceeded 5000. Every month about 10 new organizations are connected to the EDT. 2004 saw the growth of the use of international payment system SWIFT for settlements on the MICEX. SWIFT is becoming more popular thanks to its reliability, speed and security of settlements. Last year we paid special attention to maintaining and upgrading the integrated security system of the MICEX com plex of buildings, the aim being the insurance of secure trading and the safety of the MICEX premises. The MICEX security system is based on: ■ ■ ■ complying with the RF legislation; dynamic monitoring of threats and adapting the security system; reasonable adequacy (security requirements must not interfere with the core business, while expenses involved must be within established limits). Close interaction with the Federal Service for Technical and Export Control, the Federal Agency for Information Technologies, the RF Federal Security Service, Chief Office for Security and Information Protection of the RF CB and other government agencies helped us to achieve the necessary level of security and legality. To protection information in the MICEX HSC, we used the products of such companies as Hewlett Packard and CISCO and solutions of the Russian developers of cryptographic protection of information: MO PNIEI and Validata companies. In 2004, there were no threats to the MICEX security that could jeopardize the work of the MICEX markets and systems. Future projects In 2005, to upgrade the MICEX technological base, we intend to: ■ ■ ■ put into operation Oracle RDBMS platform and use it for the implementation of pilot projects connected with office work and accumulating and processing statistical data on trading; put into operation a new version of the MICEX web site on a new hard and software base; provide a new hard and software base for a number of auxiliary systems of the MICEX soft and hardware complex. 38 MICEX Annual report 2004 In 2005, to improve the functional capabilities of the MICEX soft and hardware complex and widen the scope of its services, we intend to: ■ ■ ■ ■ ■ promote the market of euros in the framework of the currency market; provide technological support to the launch of the market of interbank credits in the framework of the govern ment securities market; create a technological base for the improvement of clearing procedures in the market of non government secu rities and partial refusal from deposition of funds; prepare technological conditions for the launch of trading in options in the framework of the standard contracts markets; provide for collecting electronic reports from participants in trading. Creating a specialized clearing organization in the framework of the MICEX Group The Settlement System (the MICEX Settlement House) and the Depositary (the National Depositary Center) are separate organizations within the MICEX Group. This arrangement is in line with world trends in the institutional development of exchange business. The creation of the MICEX Stock Exchange (a specialized stock market floor) within the MICEX Group was a new phase in the development of independent types of activities in the chain "trad ing – clearing – settlements – technological services". The development of clearing is linked with the creation of a new system of risk management, which must provide the necessary level of control over risks in the conditions of growing trade volume without causing the growth of partici pants' costs. The main areas of development of clearing are: ■ ■ ■ the creation of a system of default risks management and the preparation of transition to centralized clearing; the development of the institution of clearing brokers; the development of clearing operations and technologies in the conditions of integrated clearing in the curren cy market, the derivatives market, the stock market and the government securities market. The improvement of clearing in the exchange currency market is among the MICEX priorities. The advantage of the existing MICEX system of risk management is the limited volatility of exchange rates of currencies, guaranteed by the Bank of Russia. Combined with the MICEX terms of margining and the mechanism of the Bank of Russia's partici pation in trading, this provides the necessary level of reliability for market participants. However, the growing volume of the exchange currency market and the transition from the policy of regulating the volatility of the ruble/US dollar exchange rate to the policy of regulating the volatility of a basket of currencies call for changes in the system of risk management which are impossible to implement within the organizational framework of the MICEX, which com bines a trading floor and a clearing organization. Thus, the liberalization of currency control and the integration of Russia in the world financial system call for the cre ation of a specialized clearing organization in the framework of the MICEX Group: a Clearing House, which is a credit institution able to perform clearing activities. In 2005, we will focus on preparing the Clearing House Charter, developing a business plan and other documents necessary for the registration of the Clearing House and obtaining an appropriate license. MICEX Annual report 2004 39 Information products In 2004, effective marketing efforts enabled the MICEX to earn increased income from its information business. Despite the unfavorable situation in the market of information services, the total income amounted to 55.8 million rubles and exceeded by 58% the result of 2003. Table 12. Growth of income from information services Types of services Information services Advertising and marketing services Income for 2004 (million rubles) 52,94 2,89 Growth over 2003 +57% +83% Other indicators of the MICEX information business also showed impressive growth. Table 13. Contracts, products and services Numbers Number of products and services Number of contracts 2003 35 42 2004 57 65 Change +62% +55% Information services The main areas of the MICEX information business in 2004 were: ■ dissemination of exchange information in an electronic form via news agencies, regional exchanges, invest ment companies and other organizations partners; via the MICEX web site and e mail; using the systems of delivery to mobile devices of remote access; provision of delayed, End of Day and online exchange information on trading on the MICEX, used on web sites, in third parties' web products and in television programs; provision of once only reference and information services; provision of online exchange information on trading on the MICEX, used by third parties in simulation bro ker systems; development and sale of new information products and services under joint projects with news agencies and other organizations partners. ■ ■ ■ ■ In 2004, the MICEX and RBC TV Company signed an agreement of broadcasting exchange quotations in the pro grams of RBC TV, Russia's first business TV channel. As a result, the MICEX earned additional income from the sale of exchange information and began to use the advertising and marketing resources of RosBusinessConsulting (RBC) Group, including RBC TV channel and web resources (www.rbc.ru, www.ytro.ru, www.c news.ru and others), to promote the products and services of the MICEX and enhance its image. Under the agreement with RBC TV, live reports from the MICEX were organized, in March 2004, on the RBС TV channel, in which the MICEX experts comment on the situation in trading. In 2004, the MICEX launched a project connected with the use of current, delayed and End of Day exchange infor mation in information products of third parties: in web based trading simulation systems and for the calculation of indexes and other indicators. The MICEX signed agreements with all of Russia's leading Internet trading brokers and owners of information web resources specializing in information support of financial markets. 40 MICEX Annual report 2004 Advertising and marketing services In 2004, the MICEX continued to promote its web site, which plays a key role in the Exchange's advertising and mar keting activities. We redesigned the Russian version of the site, opened new sections, including "The MICEX Stock Exchange" and "The MICEX Forums" sections, and optimized the presentation of advertising materials. This enabled the Exchange to earn additional income from posting advertising banners on the MICEX web site. We also prepared the redesigning of the English version of the web site and its further development. In 2004, the MICEX held, with the support of its partners, 35 presentations, conferences and exhibitions. Some of those events were held on a commercial basis, including conference "Analysis of the impact of the exchange rate of the euro on the Russian economy: prospects of rate formation in the internal market"; the 1st conference exhibition "Automation of a financial company's back office"; seminar "Legislation on joint stock companies: annual general meetings of stockholders"; seminar "The issues of currency regulation and currency control with respect to the activ ities of depositaries and registrars"; round table "Strategies of management companies in the pension system in 2004" and other events. In 2004, the MICEX Group was represented in 11 large events devoted to the Russian financial market (conferences and exhibitions) with the aim of promoting its products and services and positioning the Exchange as the country's leading financial institution. Strategy for the MICEX information and marketing activities To improve the competitiveness of the services and products of the MICEX Group and to ensure further growth of income from the sale of exchange information, we need to perform a number of marketing, financial and organiza tional tasks. First of all, we must make our information and marketing policy more client oriented. There are three areas we must focus on: ■ ■ ■ improving the effectiveness of the MICEX information projects (commercial information area); advertising and marketing the MICEX products and services (advertising and marketing area); developing the system of information and technological support of the Exchange's clients and partners (infor mation and technological support). Commercial information We intend to perform the following tasks in the area of commercial information: ■ ■ ■ ■ ■ further development of information business, including the launch of new information products and services; search for new partners; optimizing the scale of rates and forming subject units (by types of instruments) by separating them from the flow of data on markets; improving the protection of the MICEX rights to its information resources; implementing joint projects with international partners aimed at creating new and promoting existing infor mation products of the MICEX in international financial markets. Advertising and marketing Advertising and marketing include: ■ effective marketing support of the MICEX activities in the professional financial community, using modern marketing methods as well as advertising and image enhancing means (further improvement of the Russian version and the re designing of the English version of the MICEX web site, publications, participation in exhi bitions and conferences, etc.); coordination of the activities and harmonization of the interests of market, information and technological sub divisions of the MICEX; MICEX Annual report 2004 ■ 41 ■ further development of the MICEX services connected with organizing presentations, conferences, seminars and other events for third parties, supporting the development of the markets of the MICEX and the MICEX Stock Exchange or interacting with companies providing services to participants in the financial market; holding conferences devoted to the development of certain segments of the domestic financial market and its infrastructure. ■ Technological support In this area we intend to emphasize: ■ ■ support of clients and partners of the Exchange (including the implementation of agreements concluded by the Department for Information Services and Advertising and Marketing Support). improving the quality of information services by implementing up to date methods of client support and organizing a full fledged contact center. The successful performance of these tasks will help us to increase our income by 20 30% over 2004 and improve the effectiveness of the work of all subdivisions of the Exchange and organizations comprising the MICEX Group. This, in its turn, will ensure better coordination of efforts of the MICEX and its partners in the MICEX Group. Information and analytical work Transparency of the exchange market and access to information for investors are among the MICEX priorities. In 2004 in order to ensure more transparency, improve the analytical work and increase the volume of disclosed infor mation, several subdivisions of the Exchange were reorganized into the Office for Information and Analysis. The main goals of the Office for Information and Analysis are: ■ ■ ■ ■ generating ideas for the MICEX Group's short term and long term plans; providing analytical support of the MICEX public stand; implementing commercial projects within the sphere of the analytical work; providing the Exchange's clients with information and analytical materials. The MICEX Office for Information and Analysis participates in preparing and implementing the MICEX projects, which include: ■ surveying the activities of the international financial community; studying the world experience in exchange business and promoting the MICEX international cooperation. In 2004, we prepared analytical materials on the topical problems of financial infrastructure, tariff policy and the income structure of leading foreign exchanges, the organizational and legal forms of central depositaries. ■ Analysis of the trends and forecasts of the development of the world financial system: the evaluation of the euro's future position on the financial market, the international regulation of banking operations, Russia's inte gration in the world financial system. Study of the financial markets of the CIS countries and the prospects of integration in the sphere of currency and finances. Participation in working out the concepts of markets' development and the MICEX Group's strategy; partici pation in the creation of the Central Depositary. When the MICEX Stock Exchange was established, we began to provide the new floor with information and analytical materials on a contractual basis. ■ 42 MICEX Annual report 2004 The MICEX Office for Information and Analysis prepares materials on the situation on the MICEX financial mar kets for daily, weekly and monthly publication on the MICEX web site and in the media. The number of our products is growing. At present, we produce 14 daily issues of news, statistics and commentaries: ■ ■ ■ daily information bulletin "Good morning, MICEX"; daily commentaries on the MICEX markets, broadcast live by Mayak, Govorit Moskva and Ekho Moskvy radio stations and RBC TV and TVC television channels; the MICEX web site – an important channel of dissemination of information and analytical materials. From 9:00 till 18:00, Moscow time, its main page carries brief reports on the course of trading in the MICEX markets; information and analytical surveys of the MICEX financial markets are regularly published by news agencies RBC, MFD InfoCenter, FK News, newspapers Gazeta, Rossiiskaya gazeta and Delovoy Peterburg. They are also posted on web sites ОРЕС. RU, SKRIN, CBONDs, Guild of Investment and Financial Analysts and other organizations. ■ The MICEX Office for Information and Analysis publishes monthly corporate journal The Exchange Review and a special statistical bulletin devoted to the work of the MICEX markets (in cooperation with The Securities Market journal). Public relations Our main task in this sphere is promoting the image of the MICEX as a key infrastructure organization in the Russian capital market. In 2004, the Exchange changed its information policy priorities: instead of emphasizing general image enhancing events we began to provide targeted information and marketing support to numerous business projects of organiza tions comprising the MICEX Group. In 2004, the MICEX Press Service took part in preparing and holding PR events in dozens of cities in Russia and abroad. This helped to boost the positive image of the MICEX and strengthen its role in financial and information markets. The main events of 2004 were: ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ conference "Russian regions and cities: the possibilities and the future of borrowings"; St. Petersburg economic forum; conference "The Russia bonds market"; conference "Currency policy Russia and euros"; exhibition auction "Securities of the new Russia"; the 5th all Russia bank forum "Banks and economic growth in regions"; conference "IPOs: problems and the future of Russian companies"; all Russia conference "Russia's currency policy"; presentation of the results of Standard & Poor's study "Information transparency of Russian companies in 2004"; conference "The Russian ruble: 15 years on the path to full convertibility"; the 8th all Russia contest "Best Russian enterprises"; presentations of bond loans of leading Russian issuers; MICEX Annual report 2004 43 ■ ■ Nikitski Club's events devoted to the global issues of Russia's development, including educations, science, financial and economic issues; new projects and services in the exchange market, including the creation of the MICEX Stock Exchange, the transformation of the UTS and the SELT into a unified trading session in the currency market, the beginning of service of banks' deposit operations, the launch of REPO operations, the calculation of the MICEX Index of corporate and government securities, etc. Information about these events and other materials devoted to the MICEX activities were regularly published in the Russian and foreign media, including: newspapers Vedomosti, Vremya Novostei, Gazeta, Izvestia, Kommersant, Nezavisimaya Gazeta, Rossiiskaya Gazeta, Financial Times, Liberation, The Moscow Times, Wall Street Journal Europe, The Independent, New York Times, The Russia Journal; magazines Euromoney, Business Week, Economist, Emerging Markets, Analiticheski Bankovski Journal, Bankovskoye Obozrenie, Valutni Spekulant, Delovyie Ludy, Kommersant Dengi, Kompania, Nationalni Bankovski Journal, Profile, Financ., Finansovyi Analitik, Expert, Rynok Tsennykh Bumag; TV programs Vremya, Vesti, Strana I Mir, Segodnya, Denezhnyi Vopros and others. Information on exchange trading and commentaries are regularly broadcast by Russia's first business TV channel RBC TV and other TV channels: ORT, RTR, TVTZ and NTV. Information on the MICEX is published in directories "Who is who in the securities market", The Handbook of World Stock & Commodity and Derivative Exchanges, Who is who in Russia, and the official publication of the Federation of European Stock Exchanges (FESE) "European Capital Markets". Exchange news was regularly disseminated by news agencies Associated Press, Bloomberg, Reuters, France Press, Interfax, Prime TASS, MFD Infocenter, Konsultant, RBC, AK&M, RIA Novosti, Finmarket and web sites. The MICEX and Russia's leading news agencies and trading floors are members of the Association of Distributors of Financial and Economic Information, which develops unified rules of disseminating financial and economic infor mation in the real time mode, thus improving the transparency of the Russian financial market. The Association has its Code of Behavior of Distributors of Financial and Economic Information and a mechanism of settling debates. The MICEX Press Service has its monitoring system, which enables to track information on the situation in the finan cial market and in the economy as a whole. The Press Service performs daily monitoring of information coming from leading news agencies, newspapers, magazines and web based publications as well as TV and radio stations. We also focus on popularizing the Russian stock market and improving the investment culture. With this purpose in mind we held an exhibition auction "Securities of the New Russia", which presented collections of modern securities. The MICEX has Russia's only Museum of Exchange Business History. Its materials illustrate the centuries old his tory of Russian exchanges, beginning from 12th century till present days. Visitors include representatives of foreign and Russian financial companies and banks, business partners as well as high school and university students. In 2004, we launched the web based version of the MICEX Museum. Regional policy: scope and goals In 2004, the main goals of the MICEX regional policy were: ■ ■ ■ the full scale development of the national financial market and the creation of a unified system of trading, clearing, settlements and depositary service in the framework of MICEX Group; involving regional currency and stock exchanges in the MICEX Group's market and technological policy and promoting the MICEX Group's products and services in regions; attracting regional issuers and investors to the market and creating favorable conditions for their work. 44 MICEX Annual report 2004 The MICEX's main partners were regional currency and stock exchanges: ■ ■ ■ ■ ■ ■ ■ the Asian Pacific Interbank Currency Exchange (APICEX); the Nizhni Novgorod Currency and Stock Exchange (NNCSEX); the Rostov Currency and Stock Exchange (RCSEX); the Samara Currency Interbank Exchange (SCIEX); the St.Petersburg Currency Exchange (SPCEX); the Siberian Interbank Currency Exchange (SICEX); the Urals Regional Currency Exchange (URCEX). At present, the MICEX and regional exchanges can conduct joint activities in domestic financial markets, hold exchange trading under unified rules and provide the functioning of common technological chains. Regional exchanges act as representatives and technological centers of the MICEX and interact with regional participants in trading. The successful creation of a unified trading, depositary and settlement system on the regional level enabled regional banks and companies to provide equal conditions of access to trading on the Exchange. Close cooperation between the MICEX and regional exchanges enabled to launch new exchange instruments, fully satisfying the needs of market participants. Regional exchanges ensured the implementation of new information technologies, provided a wide range of infor mation and consulting services and held seminars for participants in trading, issuers and investors. The MICEX experience of cooperation with regional exchanges will help to involve the new member of the MICEX Group, the MICEX Stock Exchange, in national scale interaction between exchanges. At present, all regional exchanges show stable growth of turnovers in all segments of the financial market. Table 14. of exchanges in the gross turnover in 2004 Floor MICEX Regional exchanges including: APICEX NNCSEX RCSEX SCIEX SICEX SPCEX URCEX * with deposit auctions UTS 95,62% 4,38% 0,17% 0,26% 0,12% 0,04% 1,12% 1,81% 0,85% Segment of financial market GSM* 92,71% 7,29% 0,05% 0,38% 0,07% 0,01% 4,65% 1,22% 0,92% NGSM 77,83% 22,17% 0,06% 1,94% 0,17% 2,15% 8,66% 7,75% 1,43% In our regional policy we emphasized the improvement of technological interaction between the MICEX and region al exchanges, which meant upgrading the technological base of trading floors. Regional cooperation on the corporate level was submitted to the strategy of each individual exchange. To strengthen its positions in the strategic planning of regional exchanges, increase its role in the development of the regional exchange infrastructure and enhance its image in regions, the MICEX took efforts to enter the authorized capital of regional exchanges and their managerial bodies. At present, the MICEX has stakes in a number of regional exchanges and regional settlement centers. In particular, the Exchange owns controlling interests in the RCSEX (50.79%) and the Settlement House of the APICEX (75%). It also has stakes in the NNCSEX and St.Petersburg and Siberian Settlement Centers. The MICEX Settlement House, which is a member of the MICEX Group, has a stake in the authorized capital of the SPCEX. The MICEX intends to promote integration with regional exchanges by joining their stockholding structures and their managerial bodies. MICEX Annual report 2004 45 Charity In 2004, the MICEX adopted two documents reflecting the Exchange's basic values and standards of corporate charity: the MICEX Charity Policy Concept and the MICEX Rules of Charity Activities. According to these doc uments, the priority areas of the MICEX charity work are: health care (assistance to specialized children institu tions), education, culture and arts. On this basis the MICEX management and employees developed a wide range of social programs. The MICEX provided assistance to the victims of Beslan terrorist attack. The MICEX Group collected about 1 mil lion rubles for the assistance to the families of 18 children who suffered as a result of the attack. Representatives of the MICEX special Commission delivered the money to the relatives of the children, who undergo a course of medical treatment at 3 Moscow hospitals. Besides, the Exchange transferred over 3 million rubles to a special charity fund, established to assist Beslan victims, the Russian Red Cross organization and the families of commando officers, who were killed or wounded in the attack. The MICEX largest charity project is the long term assistance to Moscow Regional Psycho Neurological Hospital for children with injuries of the central nervous system and psychic injuries. In 2004, the MICEX allotted over 2 mil lion rubles for the renovation and the re equipment of the operating unit. Besides, the Exchange financed the new system of ventilation and oxygen supply, which the hospital intends to use for non invasive therapy, used to treat patients with nervous and muscle illnesses. On 22 December 2004, representatives of the MICEX and the RF Health Care Ministry attended the ceremony of opening the renovated operating unit. In the framework of charity program for visually impaired children, the Exchange provided assistance to the Regional Fundу "Illustrated Books for Visually Impaired Children" and to a specialized kindergarten for visually impaired chil dren. The MICEX participates in the UN and UNESCO program of providing books for blind children. The Exchange also provided assistance to choreographic club Istzelenie (Healing) for children with orthopedic prob lems. The Exchange's program of cooperation with Istzelenie Club is a long term one. It has already continued for a number of years. Another part of our program of social investing is our charity work in the sphere of science and education. The MICEX supports the Department of Systems Software of Moscow Institute of Physics and Engineering. The Exchange's long term assistance helped the Institute to start a new specialization: Computer Technologies of Exchange and Bank Systems. In 2004, the MICEX sponsored the publication of the book "350 Years of the Russian Ruble" and A.Skryabin concert of piano music. The implementation of both projects was possible thanks to the MICEX's cooperation with Moscow Kremlin museums and Yevgeni Svetlanov Charity Fund. At the end of 2004, the Exchange initiated two large scale projects: the restoration of the Coronation Hall of Yusupov Palace in St.Petersburg and the restoration of the iconostasis of Nikola Velikoretski Pokrovski Cathedral (in cooper ation with the RF Historical Museum). Both projects will be completed in 2005. Our last charity project in 2004 was the New Year gifts for disabled children. The MICEX has its Charity Commission, which controls the MICEX charity programs and evaluates their effec tiveness. In its charity strategy the MICEX has replaced traditional donations with long term programs and social investments, aimed at solving tasks which have an effect for a long time in the future. 46 MICEX Annual report 2004 Main events in 2004 January The MICEX begins to publish its corporate bonds index (RCBI), which is calculated in the real time mode follow ing the results of transactions on the MICEX. The MICEX and the London Stock Exchange sign the Memorandum of cooperation, envisaging exchange of infor mation on securities of Russian issuers, admitted to trading in the LSE international share market and the MICEX. The National Securities Association adopts the basic terms of repo transactions in government securities on the MICEX as a standard. Bonds of Severstal Auto and bonds of Tomsk Region's internal loan are placed on the MICEX. February The MICEX establishes the Department for Government Securities and Money Market Instruments. Bonds of Gazprom, UTK, Rosbank, International Moscow Bank, AvtoVAZ, INTECO, SUEK and Krasni Vostok Invest are placed on the MICEX. The MICEX launches trading in the RF eurobonds and bonds of the Bank of Russia with settlements in rubles. The National Mercantile Exchange and the Central Russian Universal Exchange launch trading in the framework of state commodity interventions in the grain market, using the MICEX technological infrastructure. March The MICEX and the Vienna Exchange (WBAG) sign the Memorandum of cooperation in the sphere of developing and promoting stock indexes. Bonds of Volga, IzhAuto, Zenit Bank, Vneshtorgbank, SU 155 Capital are placed on the MICEX. The Bank Russia begins deposit operations with credit institutions using the MICEX trading and settlements systems. April Bonds of Alfafinance, AKB BIN, Lenenergo, APK OGO, MGTS, AIKB Tatfondbank, Inteco Invest and bond of the state loan of Sakha (Yakutia) Republic are placed on the MICEX. Shares of Kalina Concern are placed on the MICEX. The MICEX holds the conference "Impact of the euro's exchange rate on the Russian economy: the prospects of exchange rate formation in the domestic market", organized by the National Foreign Exchange Association. The MICEX, the Association of Financial and Business Information Distributors and Russia's leading brokers work out measures aimed at improving the protection of rights of investors and guaranteeing the reliability of disseminated information. MICEX Annual report 2004 47 May Open index mutual fund "Birzhevaya Ploshchad – the MICEX Index" is established, based on the MICEX Index. The MICEX meeting of stockholders presents the results of the MICEX's work 2003 and decides to pay dividends in the amount of 106 mln rubles. The general meeting of stockholders of the National Commodity Exchange presents the results of the Exchange's work in 2003. Bonds of Mortgage Housing Lending Agency and bonds of Krasnodar Territory and Volgograd Region are placed on the MICEX. The MICEX CEO Alexander Potemkin is elected member of the Council of the National Securities Association. The MICEX unites trading held in the Unified Trading Session of Interbank Currency Exchanges and trading held in the afternoon session in the SELT. This helped to concentrate the liquidity of the currency market within the new UTS and improve the reliability of the trading system by combining the advantages of the collective and the individ ual systems of risk management. June In the MICEX Derivative Market Section trading begins in currency futures with maturity up to 1 year. In order to keep the RF Eurobonds, traded for rubles on the MICEX, the National Depositary Center imple ments the new scheme of depositary service of Eurobonds, using the accounts of the MICEX Settlement House with Clearsteram Bank. Bonds of MiG Finance and bonds of Ufa city are placed on the MICEX. The MICEX holds exhibition auction of collectible securities and launched the web site of the Museum of Exchange Business History. July Bonds of Systema Finance Investments, Sibirtelecom and Yaroslavl Region are placed on the MICEX. The general meeting of the International Association of Exchanges of the CIS Countries (IAE CIS) is held in Odessa. Heads of 16 organizations from 8 states of the CIS discuss the state and the prospects of development of exchanges in the CIS. The MICEX CEO A.Potemkin is elected member of the Council of the IAE CIS. Vadim Subbotin, who is in charge of the MICEX financial activities, is appointed Deputy CEO of the MICEX. The MICEX holds the round table talk "The Work of Boards of Directors: Results for Years 2003/2004", organized by the Association of Independent Director with the support of CapitalLogica, the Anne McBride Company, Inc. and the US Agency for International Development. August On the MICEX, trading begins in shares of mutual funds supervised by Olma Finance Management Company, Metropol Management Company and the Management Company of Industrial and Construction Bank. The MICEX and the NDC start information exchange in the real time mode between the trading and the depositary systems in the market of government securities. The MICEX Stock Exchange completes the formation of the new structure of the stock capital and submits the appropriate documents to the Federal Service for Financial Markets to obtain the stock exchange license. Bonds of TsentrTelecom (CenterTelecom) and Russian Standard Bank are placed on the MICEX. The MICEX is named among the best correspondents of JP Morgan Chase Bank. 48 MICEX Annual report 2004 September The MICEX reduces the commission for transactions in government securities. The MICEX allocates 3 mln rubles for people who suffered from Beslan terrorist attack. The MICEX Stock Exchange obtains the stock exchange license from the Federal Service for Financial Markets. The license entitles the MICEX SE to organize trading in the securities market. Zero coupon bonds of the Bank of Russia with the volume of issue of 50 bln rubles at par are placed on the MICEX for the first time in the last two years. October The NDC and the MICEX hold the conference "The Bonds Market: the Current State and Prospects of Development". The National Foreign exchange Association and Reuters launch a new project: the calculation of the indicative USD/RUB Russian InterBank Exchange Rate (RIBER). Bonds of Gazprom, Uralvagonzavod Finance, SMARTS, HKF Bank, TD Euronetwork and bonds of Khabarovsk Territory, Krasnoyarsk Territory, Tomsk Region and bonds of Bryansk and Krasnoyarsk are placed on the MICEX. Standard & Poor's and the MICEX present the results of their survey of transparency of largest Russian companies (Transparency & Disclosure Survey 2004). The MICEX CEO A.Potemkin wins the contest "Russia's Best managers", held by "Company" magazine. The MICEX adopts the plan of transferring stock business to the MICEX Stock Exchange in the framework of the MICEX Group. November On the MICEX trading begins in investment trust shares under the management of Alemar Management Company, Vektor Management Company and Oil and Gas Assets Management Company. Bonds of LUKoil, Uralsvyazinform, Salavatnefteorgsintez, Yutair Finance and bonds of Komi Republic, Krasnodar Territory and Nizhni Novgorod Region are placed on the MICEX. The MICEX begins to publish the Russian Government Bonds Index (RGBI) under the program of development of the government bonds market. International conference "The Russian ruble: 15 years on the path to convertibility", organized by Moscow International Foreign Exchange Association with the assistance of the MICEX, is held in Moscow. The MICEX and the Shanghai Stock Exchange sign in Shanghai the Memorandum of cooperation. December "The Russian Bonds Congress – 2004", organized by the MICEX and Cbonds.ru, is held in St.Petersburg. Bonds of Transmashholding, Novatek, AIZHK, Tulachermet, NGK Itera, JFC International, Rosselkhozbank, Roskhleboproduct, Russian railways, Finance International Invest, the Federal Network Corporation UES, Salut Energy and the bonds of Kaluga and Novosibirsk regions are placed on the MICEX. The National Mercantile Exchange wins the contest, organized by the Federal Agency for Agriculture to select an exchange for government procurement interventions to be performed to regulate the market of farm products, raw materials and food products in 2004. The 8th all Russia contest "Best Russian Enterprises" presents its results. The contest is organized by Russian Union of Industrialists and Entrepreneurs jointly with the RF Chamber of Trade and Industry and Expert Institute with the support of the RF Government, government agencies and public organizations. The MICEX acts as the strategic sponsor of the contest. The general meeting of the National Depositary Center appoints Nikolai Yegorov Director of the NDC. The first (constituent) conference of the Association of Central Depositaries of Eurasia is held in Moscow. Non prof it partnership The National Depositary Center joins the Association. MICEX Annual report 2004 49 Financial results Balance sheet (thousand rubles) 31 December 2004 Assets Item I. Fixed assets Intangible assets Fixed assets Work in progress Long term financial investments Deferred tax assets Total Section I II. Current assets Inventories Value added tax on acquired assets Accounts receivable (payment expected beyond 12 months after the reporting date) Accounts receivable (payment expected within 12 months after the reporting date) Short term financial investments Cash Total Section II Balance 210 220 230 240 250 260 290 300 69 347 10 844 14 965 178 844 2 235 939 1 833 147 4 343 086 6 326 547 54 534 13 931 8 741 170 291 2 802 969 2 969 562 6 020 028 7 868 677 110 120 130 140 145 190 3 289 1 812 263 45 167 021 843 1 983 461 2 904 1 756 992 199 88 470 84 1 848 649 Line code Beginning of year ths rubles End of year Liabilities Item III. Equity and reserves Charter capital Additional capital Reserve capital Retained earnings Total Section III IV. Total long term liabilities Deferred tax liabilities Total Section IV V. Short term liabilities Borrowings and loans Accounts payable Total Section V Balance 610 620 690 700 2 193 1 756 130 1 758 323 6 326 547 515 590 63 698 63 698 410 420 430 470 490 115 415 80 675 22 926 4 285 510 4 504 526 Line code Beginning of year ths rubles End of year 346 245 80 181 22 926 4 461 024 4 910 376 68 902 68 902 2 049 2 887 350 2 889 399 7 868 677 50 MICEX Annual report 2004 Profit and loss account 1 January – 31 December 2004 ths rubles Item Operating revenues and expenses Net receipts from the sale of goods, work and services (minus VAT, excise taxes and similar compulsory payments) Cost of sold goods, work and services Gross profit (loss) Profit (loss) from sales Other revenues and expenses Interest receivable Other operating revenues Other operating expenses Non sale revenues Non sale expenses Profit (loss) before tax Deferred tax assets Deferred tax liabilities Profits tax Other payments Net profit (loss) of the reporting period 190 060 090 100 120 130 140 141 142 150 222 269 90 958 (135 337) 445 545 (562 437) 694 802 (759) (5 204) (176 788) (183) 512 234 245 690 1 348 (81 145) 304 076 (481 667) 278 055 (12 343) (31 635) (45 474) (535) 188 068 010 020 029 050 1 619 411 (985 607) 633 804 633 804 1 130 612 (840 859) 289 753 289 753 Line code Accounting period Appropriate period of the previons year Chief Executive Officer Chief Accountant A. Potemkin O. Gordienko Independent auditor Independent auditor PricewaterhouseCoopers Audit Close Joint Stock Company. Certificate of state registration # 008.890 of 28 February 1992 issued by Moscow Registration Chamber. License to perform audit #E000376 of 20 May 2002 issued by the Finance Ministry of the Russian Federation. The License is valid until 20 May 2007. Independent auditors' report In our opinion: ● ● the attached financial statements of the Moscow Interbank Currency Exchange give a true and fair view of the state of affairs of the Moscow Interbank Currency Exchange at 31 December 2004 and its financial and economic performance during the period from 1 January till 31 December 2004 inclusive; the financial statements have been properly prepared in accordance with the legislation of the Russian Federation regulat ing the preparation of financial accounting. 29 March 2005 Director of PricewaterhouseCoopers Audit Auditor Qualification certificate #010181 for making audits of exchanges, off budget funds and investment institutions (permanent). O. Kucherova S. Blokhin MICEX Annual report 2004 51 Moscow Interbank Currency Exchange 13, B. Kislovskiy per., Moscow, 125009, Russia Telephone: +7 095 2344811 Fax: +7 095 2344840 +7 095 7059622 Web server: www.micex.ru