New Index Calculates Brokerages' Reliability

Russia finally has a reliability rating for brokerages operating on the stock market.

The National Association of Stock Market Participants, or NAUFOR, on Friday published a partial list of its new ratings using a methodology it developed in conjunction with leading analysts from domestic and international brokerages, accounting giant PricewaterhouseCoopers and Ratings, an agency that for years has compiled similar ratings for commercial banks.

NAUFOR, a shareholders rights group that unites about 1,000 brokers, said the new rankings are based on data from quarterly reports that brokerages submit and are aimed at investors, issuers and market participants.

"Now brokers’ risk-management expenses will be reduced, while it will become much simpler for investors to choose a company," said NAUFOR chairman Ivan Tirishkin.

"Now issuers, investors and professional participants will have a new system of coordinates. It is also very important that the rating provides for the detailed disclosure of information," said Alexander Pleshakov, a member of the Federal Securities Committee.

Previously, NAUFOR listed brokerages in terms of their transaction volumes, capital, assets, profits and so on — but that was a far cry from a true reliability rating.

The new reliability ratings are determined on the basis of three components: "scale of business, effectiveness and reliability of operations conducted and respectability."

A company’s "scale of business" includes its average monthly turnover, its own capital and average monthly profits. "Effectiveness and reliability of operations" estimates the level of trading security, equity capital sufficiency and profitability of assets. "Respectability" refers to the number of licenses, age of the company, its reputation and … its membership in NAUFOR.

So far, NAUFOR is only disclosing results for the top three ratings.

Only five brokerages earned the top rating of A++: Aton, LUKoil Reserve Invest, NIKoil, United Financial Group and Troika-Dialog.

And only six received the second-best rating of A+: Metropol, Olma, Prospekt, Renaissance Capital, Eastern Investment Co. and Solid.

These ratings, however, are unlikely to interest nonresidents.

It is no secret that the majority of business conducted by Russian brokers takes place offshore.

"Foreign investors aren’t interested in Russian brokers, but rather the whole group [including affiliated companies and all offshore branches]," said Olga Morozova of ABN AMRO.

But NAUFOR’s financial limitations have not allowed them to research the major brokers’ "groups" and make a rating in line with international methods.

The Thomson Bank Watch agency, a leader in international ratings, charges $400,000 a quarter for compiling such rankings.

"Only the top 20 affiliates and offshores can be traced, any further and it is impossible," said Tirishkin.

"Therefore a rating like this would not be representative for Russia," he said. "If a company is on the brink of bankruptcy, the management will not save it with funds from offshore accounts," Tirishkin said.

For this reason, one of the leading companies, Brunswick UBS Warburg, only made it into the third-best reliability group.

"If one formally ignores that behind the Russian Brunswick is the Swiss Brunswick and behind them is UBS, then anything could be possible," said Prospekt managing director Andrei Galperin.