Updated September 5, 2008

   Russia's managing companies will get a new tool permitting them

to get an additional income for the stockholders.

The Federal Financial Markets Service (FFMS) intends to permit the managers signing repo agreements using the assets of the investment funds. Since the beginning of the year, the mutual funds' losses reached 21% on average. So, according to the experts, the FFMS's innovation will help them to compensate these losses.

   The FFMS prepared the exposure draft "About risks' restriction related to the trust management of assets". This statement gives permission for the managing companies to reach repo agreements using the assets of the mutual funds.

"At the moment, such deals are forbidden by the law in force "About investment funds", and only these cases are the exception, when some companies require facilities to repay the shares", as the director of Otkritie FC's legal department Aleksey Bykov explains.

   According to the new document, the FFMS empowers the managers to use the securities, where the shareholders' facilities are invested in, as money resources on security.

Thus, according to the FFMS's project, several terms should be fulfilled.

So, any deal should be reached only through a stock exchange, the term of lending shouldn't exceed 30 days, and a managing company should give in pledge and get back the same amount of assets with the obligatory payment of the interest for using them.

Moreover, a regul ator sets a prohibition on the conclusion of a repo deal with a security the issuer of which has taken the decision about reorganization. Unlike the FFMS, the Central Bank that is lending actively the banks on the auctions of a daily repo, doesn't set such requirements for the deals concluded with the lending institutions.

   This innovation acts as an analogue of the interbank lending market for the managing companies, as the experts agree.

"The security-based operations with money resources on security will be in demand among the market participants, for instance, in case, when a market participant will require some securities to close a short position", as the managing director of KIT Fortis Investments Vladimir Tsuprov supposes.

   The managers would get the additional income for the shareholders due to this source of liquidity, he adds. "The brokers will take these securities by means of repo, then return them to the managers paying the interest for using them", as the portfolio manager Maxim Bekenev considers. According to the data of Investfunds.ru, last year, the shareholders of the open end mutual funds received 7,61% as the income, and from the beginning of the year to August, they lost 20,89%. "It is quite obvious that the repo operations can' t compensa te all losses. Even under the most optimistic version, a manager will give a half of his securities listed in a fund to a repo, because the securities of the large issuers are in demand at such deals, and the real revenue for using them will hardly exceed 4% per annum, and it means that they income of the whole fund will total 2%. "But, under the condition that the demand for the securities will be constant", as Maxim Bekenev says.

   Moreover, the experienced investors will take interest in repo deals: they will permit them establishing products with the wider range of tools. "However, the cost of variety and the profitability growth is a growth of risk: at the fulfillment of obligations, a company may not have enough facilities", as the director of Troika Dialog's management for portfolio investments Oleg Larichev marks.

The failure of Prolog Investment Agency to fulfill obligations on the range of repo deals as a result of which the company lost the license in 2003, can serve as an example of refusal of paying money for using the securities