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Bank of Russia proposes new approaches to market-making regulation

The innovations proposed by the Bank of Russia are aiming to mitigate the risks of market manipulations that may be committed under the guise of maintaining exchange trading parameters. The relevant draft ordinance is available on the Bank of Russia’s website.

Market making is a tool to provide liquidity to the financial market. It implies that bidders and offerers (market makers) maintain prices, demand, supply, and trading volumes based on agreements with exchanges by using particular financial instruments, currency, or commodities. However, over the course of its inspections, the Bank of Russia established cases where brokers’ clients had been actually manipulating the market posing it as market making.

The draft ordinance specifies which transactions are essentially classified as maintenance of exchange trading parameters. The new approach is also intended to limit the range of clients on whose behalf market-making transactions may be conducted. Specifically, individuals will be obliged to meet the requirements stipulated by the exchange.

According to the draft ordinance, market makers should only be able to fuflill their obligations based on ‘passive’ bids and offers, that is, such bids and offers that result in actual transactions provided that a market order of the opposite direction is issued afterwards.

Exchanges should verify market-making orders for consistency on a daily basis, including for marks indicating that they have been issued as part of a market maker’s obligations.

The innovations are expected to become effective in April 2021.

You are welcome to send your feedback on this draft ordinance to the Bank of Russia until 26 June 2020. After scrutinising all comments and suggestions, the Bank of Russia is going to carry out additional discussions of the draft ordinance with the market community.