1. Moscow, 20.11.2008National Foreign Exchange Association, Russia 1 Impact of World Financial Crisis on Interbank Markets (international and Russia view) Dmitry Piskulov, Ph.D. (Econ.) Chairman of the Committee for Professionalism, Ethics and Education, Senior Adviser, ICAP

2. Moscow, 20.11.2008National Foreign Exchange Association, Russia 2 Interbank operations on global markets 2 segments of interbank cash market: –FX markets (spot + FX swaps) –cash MM instruments (interbank deposits, CDs, CPs) FX market: Daily volume: ~3 trln. US$ (April 2007) Cash MM: –Unsecured MM deposits (declining since 2007) –Secured lending (Repo against general collateral) – show an increase

3. Moscow, 20.11.2008National Foreign Exchange Association, Russia 3 Main problems of global interbank Worsening creditworthiness of banks (declining credit ratings) and bankruptcies Crisis of confidence: started 2007 –Almost all interbank credit lines were closed in London, NY, Tokyo etc. (after Lehman was allowed to collapse, September 2008) –cash money stopped to be placed between banks – moved to the Central bank deposits –Money authorities (Central banks) in many countries had to guarantee commercial banks

4. Moscow, 20.11.2008National Foreign Exchange Association, Russia 4 Results of confidence crisis Lack of liquidity: interbank turnovers dropped, Now only short-date maturities: - O/N, T/N: 99.9% - longer than O/N: 0.1% Central banks became large lenders to commercial banks (Repo, lending against collateral, buy-outs) LIBOR malfunction: it moved from being representative of US$ interest rate to a reference rate open for different interpretations. Problem is huge volumes ($350 trln). of financial products fix-off LIBOR)

5. Moscow, 20.11.2008National Foreign Exchange Association, Russia 5 NYFR versus LIBOR ICAP NYFR (New York Funding Rate) – alternative to BBA LIBOR, launched on 11June 2008 calculated by ICAP on same methodology (16 US based banks ). NYFR released daily at 9:30 a.m. NY time NYFR LIBOR 1-mth 3-mth 1-mth 3-mth AUG AVE. 2.48 2.82 2.47 2.81 SEPT 16 2.85 2.97 2.75 2.88 SEPT 30 4.36 4.39 3.93 4.05 OCT 8 4.83 4.90 4.29 4.52 NOV 14 1.48 2.32 1.48 2.24 NOV 17 1.46 2.34 1.47 2.24 NOV 18 1.48 2.34 1.45 2.22

6. Moscow, 20.11.2008National Foreign Exchange Association, Russia 6 Global assets funded in 2000-2008 in 2 ccy: USD JPY Central banks, Sovereign Wealth Funds formed liquidity pools in USD, JPY, less EUR USD, JPY funding were swapped into national currencies for investments When USD market became short supply – all other markets suffered as investors were forced to sell local assets they could not fund Low liquidity in national currencies

7. Moscow, 20.11.2008National Foreign Exchange Association, Russia 7 Prospects of global interbank Volumes dropped in some instruments (maximum in unsecured loans) Slow restoration of credit lines (takes months) Need changes of regulatory model – less self-regulation, more state regulation Increased role of money brokers

8. Moscow, 20.11.2008National Foreign Exchange Association, Russia 8 Problems of Russian money market 3-tier banking system: low flows between segments Concentration of cash resources within largest (government owned banks) – led recently to the Distorted model of money supply (from the Central bank) Distorted interest rates structure (interbank rates MosPrime lower than official CBR rates)

9. Moscow, 20.11.2008National Foreign Exchange Association, Russia 9 Crisis impact on Russian interbank No funding from abroad Interbank credit lines closed: funding from CBR Increased RUB interest rates for 2-3 tier banks No RUB FX forward rates (or distorted) Dark pools of liquidity (very segmented) Increased role of state banks in transfer of funds to other banks Less unsecured credits, unability of FX swap (forward market) to generate liquidity MosPrime rate accuracy

10. Moscow, 20.11.2008National Foreign Exchange Association, Russia 10 MosPrime Rate of NFEA MosPrime rate: short-term MM RUB reference rate Jan 08: inclusion into ISDA 2006 Definitions Aug 08: increase in # of panel banks (from 8 to 10) Use of MosPrime % Analysis and statistics purposes83.3 Fixing base for interest rates of lending/funding products66.7 Settlements of Interest rate derivatives61.1 Accounting and internal benchmarking16.6 Tenor of MosPrime mostly used (82%)3 мth

11. Moscow, 20.11.2008National Foreign Exchange Association, Russia 11 Tasks of banking community Re-establish credit lines (will take 1-2 years) – needs support from government New methodology of credit ratings –use domestic Rating Agencies –Accounting issues (IAS vs RAS) – huge impact of balance sheets and capital Initiatives of self-organization of banks (for instance create liquidity pools secured by gurantee funds) Keep MosPrime accuracy and discipline, introduce new procedure of inclusion/exclusion New Master Agreement (developed by NFEA, ARB, NAUFOR) Changes in taxation regime

12. Moscow, 20.11.2008National Foreign Exchange Association, Russia 12 Legal framework Bilateral legal interbank agreements used for derivatives trading (percentage of respondents): ISDA Agreement 200278% In-Housemade agreements69% Elaborated by legal firms15% NFEA agreement8% GMRA8%

13. Moscow, 20.11.2008National Foreign Exchange Association, Russia 13 Cooperation with monetary authorities To establish joint Money Market Working Group (CBR-NFEA) with representatives of CBR + banking professionals To discuss parameters of monetary policy (exchange rate, interest rate targets)

14. Moscow, 20.11.2008National Foreign Exchange Association, Russia 14 Contact Details 13 Bolshoy Kislovskiy Per., Moscow, 125009, Russia, Tel.+7 (495) 705-9693, Fax: +7(495) 705-9675. www.nva.ruwww.nva.ru, www.nfea.ruwww.nfea.ru @ The Copyright National Foreign Exchange Association, 2008. All rights reserved. Any reproduction is only permitted with prior consent of NFEA.