(Bloomberg) — Currency traders are preparing to jettison Russia’s local exchange rate for the ruble on some transactions, a sign of the growing split between the country’s domestic currency market and its international counterpart since the outbreak of the war in Ukraine.
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The Trade Association for the Emerging Markets is recommending that, starting on June 6, traders use pricing data from WM/Refinitiv as a primary settlement rate option for some derivative contracts, according to an April 20 statement. That could come as a relief to traders who had questioned the reliability of the ruble’s foreign-exchange rate since Russia was slapped with wide-reaching sanctions and imposed capital controls after the invasion.
The planned change will, unless otherwise agreed, update EMTA’s template terms, which act as a recommended basis for contracts on ruble non-deliverable foreign-exchange forwards, currency options and cross currency foreign-exchange transactions. The template will still offer a fallback reference price tied to the Moscow Exchange’s rate.
Prior to Russia’s invasion of Ukraine, traders had few qualms about using the domestic rate given what had been the very close relationship between that one and those used in foreign banking hubs such as London. But in the months since the outbreak of the war, some have said the local rate is being inflated by capital controls, with the currency rebounding sharply from the deep losses seen in the early weeks of the conflict.
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The potential for the onshore and offshore rates to diverge was demonstrated in the wake Russia’s invasion, when the Moscow rate differed markedly from those quoted abroad as the currency plunged. While the two have since converged closer together, there’s still a gap, with the ruble trading at 69.4 per dollar on the local exchange and 67.9 per dollar offshore on May 6, according to Refinitiv data.
Non-deliverable contracts are those that are not settled in the local currency, which is often non-convertible, but instead in currencies such as the dollar. The payoff is the difference between the agreed forward rate and the reference rate on the day of maturity.
“This Market Practice is a recommendation only, intended to promote and enhance market efficiency, and is not binding,” EMTA wrote in the April 20 statement. EMTA declined to comment further.
While EMTA’s recommended market practices are not binding, its members include major international banks such as Barclays Plc, Citigroup Inc. and Goldman Sachs Group Inc. As such, they readily become the default in markets.
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