1. 1 Short Selling in Russia: Main Regulations and Empirical Evidence from Medium and Long Term Portfolio Strategies

2. 2 Reading Questions What are the main regulations for short selling in Russian stock markets? Did Russian regulation change during the financial market crisis in 2008 and 2009? What were the effects of the short selling ban? What are the average costs for implementing short selling in Russia? Which Russian brokers allow for short selling? What is the time evolution of Russian market risk and performance indicators from 2000 till 2010? What were the results for long only portfolios in 2008-10? What were the results for short only portfolios in 2008-10? What were the results for mixed long-short portfolios in 2008-10?

3. 3 Main Regulations Short selling in Russia is regulated by a governmental body called Federal Financial Markets Service (FFMS) and by specific rules set by the stock market. The rules for brokers wishing to provide margin accounts to their clients was approved in 2006 and then later modified in 2007 and 2009. Brokers are entitled to short sell only quoted securities. Moreover, each exchange should form a list of the most liquid securities on a quarterly basis which can be traded in the next quarter, according to the liquidity rating rules set by the FFMS Brokers can further limit this list but are not allowed to extend it.

4. 4 Securities Allowed for Short Selling (as of Q4, 2010) at MICEX - (Example)

5. 5 Securities Allowed for Short Selling (as of Q4, 2010) at RTS - (Example)

6. 6 The Short-Selling Ban in 2008 and 2009 Due to the drop in stock prices on Russian stock markets, the FFMS banned short selling to prevent further speculations on September 18, 2008. During the last quarter of 2008, the Russian regulators allowed short selling several times, but had to restore the ban on the same day or the next day because of sharp decreases of major Russian stock market indexes. Short selling was finally allowed again only on June 15, 2009, to improve market liquidity because many market operators and institutional investors abandoned the Russian market due to prohibition of short selling

7. 7 The Short-Selling Ban in 2008 and 2009 In general, the effectiveness of the measures taken by the FFMS has resulted in mixed opinions. The repeated decision to stop trading has incurred criticism, as well as the extreme length of time for the short- selling ban. These measures had limited the liquidity of the Russian stock markets, and led many operations to be redirected towards foreign markets, as well as to grey schemes aimed at circumventing and bypassing the established rules

8. 8 Brokers Allowing Short Selling and Average Costs (as of end 2008)

9. 9 Time Evolution of Market Risk and Performance Indicators: Volatility, Sharpe ratio, Skewness and Kurtosis, Frequency of Extreme Events and Maximum Annual Drawdown

10. 10 Empirical Analysis: A Comparison of Asset Allocation Strategies We consider three types of portfolios: (1) portfolios with long positions (2) portfolios with short positions and (3) portfolios with both long and short positions The calculations are performed by using Russian stocks allowed for short selling in fourth quarter of 2010 Active portfolio strategies appear to provide the best results over a long investment horizon Particularly, when the market changed directions many times over a two-year period (or longer), the long-short strategy had a return eightfold better than the MICEX Index and twofold better than the long-only (actively managed) portfolio.

11. 11 Conclusion We discussed the main regulations and common practices of short selling in Russian stock markets. We then assessed its importance by comparing different asset allocation strategies. The comparison is performed by using the stocks allowed for short selling in fourth quarter of 2010 in Russian stock markets. Our research demonstrates the advantages of using short selling in active portfolio management in Russian markets. The most preferable strategy on a long-term investment horizon resulted to be the long-short trading strategy