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Edited Transcript of MOEX.MZ earnings conference call or presentation 8-Nov-19 1:00pm GMT

Q3 2019 Moskovskaya Birzha MMVB-RTS PAO Earnings Call (IFRS)

Moscow Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Moskovskaya Birzha MMVB-RTS PAO earnings conference call or presentation Friday, November 8, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anton Terentiev

Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR

* Maxim Vyacheslavovich Lapin

Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board

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Conference Call Participants

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* Andrew Keeley

Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst

* Andrey Mikhailov

Sova Capital Limited, Research Division - Research Analyst

* Andrey Pavlov-Rusinov

Goldman Sachs Group Inc., Research Division - Research Analyst

* Elena Tsareva

BCS Financial Group, Research Division - Senior Banking Analyst

* Olga Veselova

BofA Merrill Lynch, Research Division - Equity Banking Analyst

* Sergey Garamita

Raiffeisen CENTROBANK AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the MOEX Third Quarter IFRS Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today on the 8th of November 2019.

I would now like to hand the conference over to our first speaker today, Anton Terentiev. Please go ahead, sir.

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [2]

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Thank you. Good afternoon, everyone, and welcome to Moscow Exchange's Third Quarter 2019 IFRS Results Conference Call. As usual, after the prepared remarks, we will have a Q&A session. Today, we have on the call our CFO, Max Lapin.

Before we start, I would like to remind you that certain statements in this presentation and during question-and-answer session may relate to future events and expectations and, as such, constitute forward-looking statements. Actual results may differ materially from those projections. The company does not intend to update these statements to reflect events occurring after the date of the call prior to the next conference call.

By now, you should have received our press release containing the results for the third quarter 2019. Our management presentation is available on the company's website in the Investor Relations section.

I will now hand the call over to Max Lapin. Max, please go ahead.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [3]

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Thanks, Anton, and thank you all for joining us today to discuss Moscow Exchange's financial results.

Slide 2, delivery on strategic initiatives in the third quarter and beyond. First of all, as you know, in mid-October, Moscow Exchange presented a new corporate strategy that covers the next 5 years. The full strategy presentation is available on our website. I will pass on its main points shortly. We also managed the dividend policy to introduce a target payout of the entire free cash flow and, hence, narrow the range of expectations. The minimum payout ratio rose to 60% of IFRS net profit. We envisage that we will continue to pay dividends on an annual basis.

Now let's turn to overview of key strategic deliverables in the start of the third quarter. First, we have seen the launch of several new instruments. Asset management companies continue to introduce new Russian-law ETFs. Since June, they have launched 5 ETFs on Russian corporate bonds, a European stock index and a global technology stock. September 2019 marked the first anniversary of this type of funds being traded on our platform. A little over a year after the inception, 15 Russian-law ETFs have traded on MOEX, and their assets under management exceed RUB 11 billion. Together, we have 14 law ETFs. MOEX now offers trading in 31 ETFs with total assets under management of more than RUB 30 million.

On the derivatives market, we have expanded the offering of deliverable commodity contracts by introducing futures on silver. Global futures appeal to corporates and banks and provide a strong basis for the development of domestic precious metals market.

In October, MOEX launched on-exchange repos with the Federal Treasury. The Federal Treasury has been using NSD repos with collateral management since 2015. However, NSD services have been limited to settlement, clearing and collateral management. Bringing repo with the Federal Treasury onto the exchange allows MOEX to use its own interface and provide a complete service. TCS Group, Tinkoff, listed its depository receipts on MOEX. This brought the total number of DRs traded on MOEX to 7.

Second, the exchange is continuously developing new services. In October, 48 liquid corporate bonds and 12 Finance Ministry Eurobonds began trading in T+1 mode. Previously only T0 mode with a full trade pre-funding was available. In the near future, we plan to expand the range of bonds admitted to T+1. We also expect that this change will incentivize market participants to trade more actively. So far, we have seen some 20% increase in trading volumes in our participating bonds as an early effect. Retail investors can now top up their brokerage accounts via the CBR's Faster Payments System. This technology reduces the time needed to transfer funds and lowers the cost of transfer. Our test transaction was executed in October. Brokers will soon begin providing this technology to end clients.

NSD's repository has come out with 2 new services aimed at simplifying reporting of and control over OTC deals. This is in line with our ambition to provide efficient infrastructure to come up with solutions that help our clients streamline their business processes.

Third, MOEX continues to develop the client base and partnerships. The number of unique retail clients currently exceed 3.3 million. The total number of individual investment accounts, IIAs, has approached 1.3 million. The number of corporate issuers on our bond market has been on the rise. In the third quarter, 70 corporates, including 33 newcomers, placed more than 160 bond issues worth RUB 680 billion.

The exchange signed MoUs with Uzbekistan Republican Currency Exchange and Zhengzhou Commodity Exchange. As usual, we are looking for potential areas of cooperation. We held our annual forums in New York and London. NCC also became a clearing member on Shanghai Gold Exchange. This opens up a path to establish a trading link between MOEX and Shanghai Gold Exchange in the future.

Slide 3, Strategy 2024 our mission, areas of responsibility and areas of development. Let me give a very brief recap of our 2024 strategy. We see the company's mission has been in trust, efficiency, innovation to the financial markets and helping companies and individuals to achieve the goals of tomorrow. Our 2 main areas of responsibility are the penetration of the core markets and fostering a culture of trust and responsibility. And we see 3 areas of development. The first is building a market gateway for retail clients, the marketplace for financial and investment products. The second is balance sheet management, provide provision of services that allow our corporate clients to manage their balance sheet. The third area of development is building a financial platform on top of MOEX and NSD's current infrastructure.

Slide 4, on key drivers of fee commission income growth through 2024. We believe that in the absence of new initiatives, the macroeconomic environment would allow us to grow fees at 3%-4% per annum over the next 5 years. Planned initiatives aimed at deepening our existing businesses lines -- and business lines will add another 3-4 percentage points to the fee income growth. Such initiatives include development of primary capital markets, development on exchange and OTC derivatives market, expansion of trading hours and new market data offering.

To achieve further growth, we will have to go beyond the exchange, beyond our existing markets and business lines. We intend to build a financial platform on top of our existing infrastructure. NSD will become a registrar for the financial transactions and will continue to develop Transit 2.0, a platform that connects corporates and banks, allowing seamless flow of payments instructions and other documents. MOEX will build a marketplace for corporates and introduce several OTC solutions for managing balance sheets. For retail clients, we are developing a financial product and investment marketplace. All of these initiatives together beyond the exchange initiatives may add 3-4 percentage points per annum to fee and commission growth over the 5-year horizon. The resulting cumulative average growth rate adds up to approximately 10% per annum.

Slide 5, third quarter 2019 summary of financials. Now let us turn to the third quarter financials. Operating income grew 8.6% year-on-year, and fee income increased 8.1% year-on-year. NII rose 8.7% year-on-year largely due to realized gains on financial assets. Recurring operating expenses stand at 7.6% year-on-year. The cost-to-income ratio improved slightly by 0.3 percentage points year-on-year. EBITDA expanded by 8.4% year-on-year. The EBITDA margin was at a solid 72.5%. Reported net income was up by 6.8% year-on-year. We created a technical 4-month risk management formula-driven provision in the amount of RUB 0.11 billion that does not reflect any deterioration of the underlying business. Resulting adjusted net income grew by 7.1% year on year.

Slide 6, diversified fee and commission income. While fee and commission income increased by 8.1% year-on-year, the growth was driven by the performance of the equities and derivatives markets, both of which posted record quarterly fees and commission income. Depository and settlement services also contributed noticeably to fee income growth.

Money market, next slide. Fee income from the money market was flat year-on-year despite 9% decline in trading volumes. The quarterly share of repo with the CCP grew by almost 3 percentage points year-on-year and by 1 percentage point quarter-on-quarter. The lower value-added types of repos, such as the interdealer repos, continued to underperform. The discrepancy between year-on-year performance of fee income and trading volumes come down to higher average repo terms and the UCP, Unified Collateral Pool, linked fee rate revision that was placed in November 2018.

Money market, its recent trends on the next slide. Even though repo trends hit a local high in the first quarter of 2019, we still see a healthy increase in the average term compared to last year. Open interest in the money market dropped in August 2019 and made a surplus of liquidity but since have slightly recovered and stabilized since then.

Depository and settlement. Fees and commissions from depository and settlement added 16.1% year-on-year. Average assets on deposits of NSD increased by 10.1% year-on-year. The growth was registered across all asset classes but was most pronounced in government bonds and packages. The gap between growth rates of fee income and assets on depository is the result of business lines beyond safekeeping. In particular, income from book entry transfers, clearing, settlement, cash services, it all expanded in third quarter '19.

ForEx market on Slide 10. Fee and commission on the ForEx market declined 9.5% year-on-year. The decline was driven by lower trading volumes. Spot trading volumes decreased by 20% amid very low ForEx volatility. Swap volumes were down by 5.8% year-on-year. The UCP-linked fee rate revision of last November supported the average fee, but this effect was partially offset by the mix evolving in favor of swaps.

The ForEx market share versus onshore OTC in 9-month '19 was 44%, which is 10 percentage points lower than in the corresponding period last year. The number of active clients in 9-month increased substantially to reach 92,000 in September, up 87.6% year-on-year. The average daily trading volume of corporates was $60 million in 9-month, up 107% year-on-year.

Derivatives market. The income from derivatives increased 37% year-on-year. Overall trading volumes of on-exchange contracts added 9%. Trading volumes shifted in favor of commodity derivatives, which surged at 80.2% year-on-year. Trading volumes of ForEx contracts declined 21%. Equity contract volumes were flat, while index contracts posted growth of almost 7%.

The favorable evolution of product mix together with the UCP-linked fee revision supported the effective fee on the derivatives market. In the OTC derivative market, trading volumes declined by 19% year-on-year. But fees from this line performed better than volumes due to increasing average contract terms.

IT services, listing and other fee income. The income from this business line was up by 7.7% year-on-year. Listing fees increased 98.7% year-on-year due to the tariff model update and a higher number of issues. Sales of market data rose by 7.7% year-on-year. Sales of software and technical services grew 18.6% year-on-year due to unification of tariffs. Other fee income declined by 53.9% (sic) [53.1%] year-on-year due to diminished contribution from the grain market.

Equities market. Fee income from the equities market grew 28.3% year-on-year, following a similar increase in trading volumes. Rising price levels for equities supported trading volumes. Volatility was in line with previous quarters, but velocity of trading volumes increased compared to several preceding periods.

MOEX market share versus the LSE in dual-listed stocks in the third quarter was 70%, 5 percentage points higher than in the third quarter last year. Also, in early October, Interactive Brokers granted its entire client base full access to the Russian market.

Fixed income. Fee income was flat year-on-year despite an 11.2% decline in trading volumes. Primary placements were down by 36% year-on-year due to lower placement of Central Bank bonds. At the same time, placements of OFZs were up by 32% year-on-year, although they declined by almost 70% quarter-on-quarter. A higher share of longer-term corporate bonds and OFZs on top of placement volumes was favorable for the average fee.

Secondary trading volumes increased by 21.8% year-on-year. I would like to point out that we are currently observing high corporate activity in the primary bond market. This has been visible during the past few quarters, including the third quarter, and continued through October. In fact, October was the best month of the year for the Russian corporate bond market. The key factors are high demand from investors and falling interest rates amid easing monetary policy. On a separate note, we plan further admissions of corporate bonds to T+1 mode in 2019 and 2020.

Slide 15, interest and finance income in the third quarter. It rose by 8.7% year-on-year largely due to realized investment portfolio revaluation. Excluding this effect, core NII was down by 9.4% year-on-year. The effective yield on the portfolio decline expectedly, reflecting the dynamics of ruble interest rates and the currency mix of client funds. Average funds available for investing grew by almost 23% year-on-year but mostly owing to the growth of euro-denominated client funds whose share went from 53% in the third quarter last year to 61% in the third quarter this year.

Operating expenses. Operating expense in the third quarter '19 added 7.6% year-on-year. It brought total OpEx growth for 9-month to 8%, the lower end of our guidance range, which we keep for our full year OpEx guidance growth unchanged at 8% to 10%. Personnel expenses increased 14.2% year-on-year. The main drivers behind this were headcount growth, one-off personnel expenses and salary adjustments.

Professional services costs declined by quarter. This was largely due to the fact that our third quarter '18 professional services expense included pass-through costs paid to grain storage facilities. The contraction of the grain market reduced this cost. CapEx for the quarter was RUB 0.56 billion. The total year-to-date CapEx then stands at RUB 1.35 billion. We keep our 2019 CapEx guidance intact at RUB 2.0 billion-RUB 2.5 billion.

This concludes the first part of our call. We are ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Andrew Keeley from Sberbank.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [2]

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I have a couple of questions. First of all, could you give us any kind of color or comments on what is happening with your average yields in money markets and fixed income? I mean, basically, we saw quite a strong drop in the third quarter. And I'm just wondering, I mean, do you think that we were kind of a little bit spoiled by very high yields in the first half of the year and that we're probably at a more kind of normalized level for yields?

And one thing, I suppose, on the money market side is that the yields came down quite a bit even though looks like average terms and kind of open interests were relatively stable relative to the second quarter and actually kind of trading volumes were up a bit on the second quarter. So it would be good just to kind of understand a little bit more about why there was that pressure on the yields in the money market. And I'll ask another question afterwards.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [3]

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Thanks, Andrew. Let me start with the fixed income or NII type of question. As in the -- core NII went down expectedly, 2 reasons behind that. The interest rate environment, we -- start to affect us and we -- what I'm saying expectedly, I think I have been mentioning like for at least 0.5 year already.

The second factor, we also have the utilization of ruble balances. It might be different from quarter-to-quarter depending on the durations or the -- in the third quarter, we have not been able to utilize ruble balances as full as in the other quarters. Therefore, we had some effect on the average yield.

In terms of the money market question, while the open interest indeed affects the yield, so we have this slight deterioration. But when looking at the graph with the open interest, you had a trough in August. We're already observing some recovery in September. And we will be looking at the money market or -- in the fourth quarter, we have a couple of tricks in our minds to do to improve this market performance. Let's see how it evolves.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [4]

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Okay. Okay. That's helpful, Maxim. I guess just a follow-up question on -- actually, on your net interest income. I mean if we strip out the kind of realized gains in the third quarter, the numbers look quite a bit perhaps lower than expected. Could you maybe talk a little bit about where these realized gains kind of came from? Are they coming from kind of ruble or FX portfolios? And if it is the kind of FX portfolio, can we kind of basically assume that your interest income from kind of FX portfolio is going to be quite a bit lower going forward given that it suggests that you would have basically realized gains on kind of -- perhaps kind of higher interest parts of the portfolio and given where rates are now, that will put quite a bit of pressure on your kind of forward-looking interest income on the FX side?

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [5]

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All right, Andrew. Let's decompose your questions in 2 parts, the outlook and what happened. So what happened is that we realized part of our FX portfolio. So we saw that at the very beginning of the second quarter. So we had to rebound, and it did affect the recurring part of the income, of course. Whether it's -- so for ruble, there was about the utilization that Max has mentioned. For FX, that was like a front-loaded realization or front-loaded rebalancing of our FX portfolio.

Now you are trying to get the outlook. And what I can tell you is that the third quarter was in many ways unusual. And I would for now refrain from extrapolating its performance onto next quarters. I'd say we have to look at a normalized quarter. Maybe fourth quarter this year will be more normalized. And then we will make conclusions. But I wouldn't be making conclusions at this point.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [6]

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Okay. And just finally, on these sugar provisions, which sounds like it's a kind of a technical thing. Would you -- I guess have you done this before? And perhaps we didn't really see this because it's perhaps a small segment. And would you expect that these would be unwound and over what kind of time period?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [7]

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That's a very good question. All right. It was happening before by the third quarter, the quarter of the harvesting. Therefore, we had the overall volumes up. Therefore, this is like a risk-type -- risk or linked type of provision. So it is expected to unwound as the harvest is going down, as the sugar gets processed further. So that's why we call it technical.

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Operator [8]

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The next question comes from the line of Elena Tsareva from BCS.

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Elena Tsareva, BCS Financial Group, Research Division - Senior Banking Analyst [9]

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My question -- first question is on OpEx dynamics. It seems like third quarter was quite strong, and OpEx declined quarter-over-quarter. So maybe you could share your views for fourth quarter. Maybe you can say that you can be below low end of your guidance, below 8% for the year. And if you -- just a small additional question on this side. What is one-off personnel expenses were attributed to in the third quarter? This will be my first question.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [10]

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Good. I mean the OpEx -- recap the full year guidance are unchanged, although we are sitting in the lower end of the guidance. We would usually have very strong seasonality in the fourth quarter, the closing of the deliverables on a vast majority of projects being delivered. So since we are investing this year and the strategic process -- project for the future, I would not be revising the guidance below 8% the bottom range and 10% the upper range. So it stands. Your next question, please.

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Elena Tsareva, BCS Financial Group, Research Division - Senior Banking Analyst [11]

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Just this one-off personnel expenses. What is this attributed to?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [12]

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That's classical thing, like severance packages, so when some people leave the company.

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Elena Tsareva, BCS Financial Group, Research Division - Senior Banking Analyst [13]

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I see. And just another question of -- if you could provide the actual level of capitalization for NCC and other entities compared like with the requirements, how comfortable you are running now.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [14]

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The target capital is unchanged. So you might actually download our strategic presentation, which was released less than a month ago. You'll see the capital structure in there. The numbers are still the same.

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Elena Tsareva, BCS Financial Group, Research Division - Senior Banking Analyst [15]

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And maybe it will be helpful to see it just like a separate slide in the presentation. It's just like my small suggestion.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [16]

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Thank you, Elena. That's a good suggestion. We'll think about it in the future.

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Operator [17]

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The next question comes from the line of Sergey Garamita from Raiffeisen Bank.

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Sergey Garamita, Raiffeisen CENTROBANK AG, Research Division - Research Analyst [18]

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Just a couple of questions left because most of my questions have already been answered. This RUB 100 million provision, should we exclude it from the dividend base or not? This is my first question.

And the second question, what's the fate of the missing grain provision? Is there any like proceedings that we should probably exclude part of this provision by the year-end from the dividend base or not? Could you give us some guidance on that and update?

And my second question -- my third question is on free cash flow, but I will ask it after you answer these 2.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [19]

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Thanks, Sergey. With the grain provision, it stands unchanged. So it's almost exactly to the tune of several million ruble, the same as in the last quarter. So it unchanged.

So with the sugar provision, it's seasonality-driven due to the harvesting. We will be expecting the balances to go down somewhat. So that means that in the next quarter, we will have to recalculate the provision accordingly, depends on the amount of balances with the superstore facilities -- stores.

That means that in regards to your dividend question, the grain provision, in accordance today, our cash flow formula that we provided, the grain provision is the cash outflow itself. Therefore, judging by the formula, it should be affecting the dividend calculation.

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [20]

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At the same time, it's quite small a magnitude. So it's probably kind of -- assumptions you are doing might not be more precise than this RUB 100 million. So it's not a big deal.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [21]

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Your third question is welcome, Sergey.

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Sergey Garamita, Raiffeisen CENTROBANK AG, Research Division - Research Analyst [22]

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Yes. My third question is quite technical because I see that you publish this net cash position of yours. So my question was when we look at the regulatory capital of yours, which stands at like roughly RUB 80 billion to RUB 81 billion, does this capital include your portfolio also not realized gains? Or do you liquidate part of this portfolio by the time you need to pay dividends or not? So it's quite a technical thing.

So if it's all included, then judging by the figures, you already have accumulated like RUB 10 billion on top of the regulatory capital coming. And this also means that you've basically closed the gap in the net cash position after the dividend payments. So if all goes well, how do you see the next quarters? And how many months should we include in our like dividend projections of -- based on your free cash flow generation in the future? So should we include only like the next 4 and the first quarter maybe some movements because your dividends have paid only like in the beginning of summer?

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [23]

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Sergey, so your conclusion about RUB 10 billion of cash, like spare cash that we have, that's like -- it comes into the dividend capacity, that conclusion is correct.

And as for the -- as for how many months of calculation shall we include, I mean, quite frankly, we are not ready to answer that question at this point. Let's see at the end of the year and towards March, I think we'll be able to provide -- I mean with the full year results, we'll be able to provide something more specific on that, but not today.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [24]

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In regards to the capital adequacy regulation, as per most recent regulation, the unrealized gains are not recognized in the capital. So we had to realize gains, and then they're recognized in the capital.

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Sergey Garamita, Raiffeisen CENTROBANK AG, Research Division - Research Analyst [25]

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Okay. And also just a small thing on this dividend. Do I understand it clear that, judging by the figures, this RUB 10 billion on top of RUB 80 billion regulatory capital does not include this missing gain provision? So in that regard, should we exclude like the whole RUB 2.4 billion or maybe RUB 2.4 billion...

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [26]

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Well, the grain provision money was the cash outflow. So therefore, the cash position already reflect the grain outflow. Do you get that, Sergey? Do I need additional comments? Or do you need additional comments to provide?

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Operator [27]

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Excuse me, dear speaker, the line of Sergey has been disconnected.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [28]

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All right. Got it.

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Operator [29]

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The next question comes from the line of Andrey Pavlov-Rusinov.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [30]

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I've got a couple of questions. First of all, on the -- your ruble interest income outlook and ruble yield essentially. Given what you say, basically, some decline in the ruble yield was driven by lower utilization. Should we expect a more articulated decline then in the fourth quarter due from already in the market movement in the rates?

And also, I can see from your financials that you have around RUB 1 billion of the reserve for the securities regulation gains. Do you expect to be recognizing some of that in the fourth quarter or throughout early in 2020? How should we generally think about your security gains? That's my first question, and I'll ask a couple of others after.

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [31]

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So Andrey, just on securities, so you're looking to the capital and you're referring to the unrealized gains securities portfolio in the capital, right?

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [32]

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Yes, the reserve part in the equity.

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [33]

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Okay. Well, theoretically, that particular line depends on whether we bought securities below par or above par. If we bought them above par and they perform further, then this gain is amortized against the coupon -- against the accrued coupon because when the bond is redeemed and if we hold it to maturity, then we just -- we'll leave it to 100 at par. So this gain will be gradually amortized until maturity.

However, if we bought the security below par, then it still amortizes 100, so this gain will be transferred gradually into P&L, into the accrued income. So that is how you can see it. Did I answer your question on that?

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [34]

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Yes, with regard to the reserve. But generally, with regard to kind of the outlook for ruble yields and for whatever the gains could be realized, do you expect to see a couple of quarters of accelerated securities gains? Because what's happening with the -- let's say, the sovereign curve from the beginning of the fourth quarter, we saw another strong rally. So should we expect some stronger fourth quarter with regards to the securities gains? And at the same time, should we expect a bit lower from the -- your core NII because of the -- what's happening with the market rates?

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [35]

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Well, what I can tell about this is, quite frankly, we don't have much of an expectation on the realization of gains. But if you look back into our history from 2015 until the middle of 2018, when the Central Bank was easing, we basically had a little bit of extra from realized gains every quarter, and that was positive pretty much every quarter. Then when the CBR moved to heightened rates, we had a couple of times negative revaluation, but that was small. Now we are back to the same mode when the CBR is easing quite actively. And historically, this is accompanied by us being able to realize some of the gains. So without providing any outlook, I can just refer to this history that against this macro backdrop, we usually had some support from positive realized gains.

And back to your question on the ruble yield outlook and how fast it all feeds into our results, well, obviously, interest rates are affecting us, and they are gradually feeding into our investment portfolio. I cannot say that we have a firm view on how fast it gets into our income. So I would -- I discuss with colleagues, and I don't have a decisive answer on that. So I would for now refrain from any certainty on that. Just saying that interest rates are getting into our income gradually, and it's inevitable.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [36]

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Yes. That's helpful. Then my second question is about -- just a follow-up on the money market yield. Given that basically the tenors have actually increased but it looks like the average yields have declined, was it connected to somehow with the deferred income on the money market or not really?

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [37]

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No, Andrey. No. It's all about the position that subsided slightly and hit a trough in August. Your question to accounting factor or IFRS factors about the money market, and the answer is that in third quarter, we had like nominal RUB 20 million extra year-over-year compared to third quarter 2018 positive effect into both money market and derivatives. But as you can see, RUB 20 million -- to the tune of RUB 20 million, it's not factored in for derivatives. So you can basically neglect it.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [38]

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Yes. And also, I have just a follow-up question regarding the sugar market. Just could you give us maybe a bit more context to how big is this market? And essentially, your total storage exposure with regards to sugar, is it sizably lower than with grain? What could be your total exposure? Maybe just comparing it with grain market.

And also how this market operates? Is it also primarily the swaps that generate some of the exposure for which you need to provision? Or it's also some spots operations?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [39]

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Well, the size of the market itself is order of magnitude smaller than the grain market. The provision is calculated that we have risk parameters that are pretty tough. So having seen the situation with the grain market, the risk policies we are tuned, which is very aggressive provisioning for any positions. But so far, the market is way smaller than the grain market, and therefore, the provision here is (inaudible).

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [40]

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And as for the type of contract, as far as I remember, it should be all spot because the swap in grain was kind of a unique product. For grain market and in sugar, we trade essentially spot.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [41]

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Very helpful. And just my final technical question, I just noticed that your depreciation rate have declined in the third quarter a little bit for the equipment. Did you make any changes? Or it's just a volatile thing?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [42]

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Well, the depreciation rate -- I think you might be referring to the overall depreciation amount in the presentation, right?

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [43]

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Yes. Basically, the amount as well have slightly dropped.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [44]

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The question is that they are -- we have revised the depreciation rates beginning with the last year and some in this year, wound down some of the nonmaterial assets, so we have diminished the depreciation base.

As for the rate, the terms of the depreciation itself have not been changing this year. So accounting policy stand the same. But the decline might be to the effect that some of the equipment that was used for the data center migration 3 years ago went off the depreciation schedules given the accounting policy, but physically, it was not written off. Therefore, it stands. Therefore, the physical amount are -- is there, but in accounting terms, the equipment is not.

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Operator [45]

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The next question comes from the line of Andrey Mikhailov from Sova Capital.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [46]

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I have a few questions. The first one is on the tricks that you mentioned that could happen in the money market in Q4. Would you be in a position to elaborate on this?

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [47]

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No, not really because, look, we launched a new product that we referred to in one of our first slides, the repo with the Federal Treasury. So that's a new product line right there. Then we are elaborating whether we can do repo transactions with foreign clients. It's an open question now, which we are elaborating. Plus, we still hope that position improves, open still but interest improves and maybe terms become longer as we try to make them longer with the business RUSFAR curve that we are building. So this is the inventory of (inaudible) that we're sitting on basically.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [48]

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(inaudible) the opportunities in the money market are namely that follows. Some of them are happening. Some of them will take a little bit longer. Federal Treasury, that's good. We are looking into the international access. Third, corporates -- additional corporates and the pricing structure for those.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [49]

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Okay. That's very helpful. My second set of questions in this sugar business again, sorry about that. First of all, the provision against the sugar exposure, how big is it as a percentage of the total exposure?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [50]

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Well, let's say, it's really high given the aggressiveness of the risk policy since the grain incident, like real high, meaning real high.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [51]

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And my second question on this, but I think I probably know the answer. With the absence of swaps in the sugar market, how smaller is inherent risk in this business compared to the grain business, the way the grain business was before you discontinued the swaps?

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [52]

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Well, it's not comparable because, again, I should reiterate, it's not -- this situation is not linked to swaps. And you're basically remembering this case in grain that swaps blew up. In sugar, there are no swaps. And it's just a credit exposure to a storage facility that's just pure application of risk management policy like a bank does, for instance.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [53]

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And my third set of questions is in your collaboration project with the Kazakhstan Exchange. As I understand, they're basically building a lot of their new products using your existing platform and your software and your knowledge. And basically, I wanted to ask and understand how big your revenues are from selling your know-how software and anything else? And maybe you could give an estimate of such revenues that were recorded in Q3 specifically.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [54]

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We are providing our technical consulting services to the KASE Exchange. Yes, indeed, helping them to build a range of products similar to the Moscow Exchange. These technical consultancies are relatively miniscule. The overall amount of the contracts, I already mentioned it probably in the previous call or before that, is to the tune of several million dollars over the course of the consultancy and technical service. In exchange, we are getting a stake in KASE up to 20%. So that's the overall structure of the deal. So therefore, the overall revenues for that consulting services are relatively miniscule to be visible on our revenue roster.

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Andrey Mikhailov, Sova Capital Limited, Research Division - Research Analyst [55]

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So just to make sure, it's a packaged deal, and most of the cash flows, if you will, as part of this deal are recorded, are included in the consideration for the stake and in the stake itself. So on a quarterly basis, there are no -- or they're very small period of payments. Is that correct?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [56]

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Yes, you got it right. It's basically like a consulting services in exchange for the stake.

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [57]

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And plus, against the stake, we also have their cash position. So you cannot just net equity against the cash flow consulting services because we have a claim -- a partial claim on their cash position as well. That has to be included into the calculation if you are trying to understand the rationale of the deal.

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Operator [58]

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The next question comes from the line of Olga Veselova from Bank of America.

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Olga Veselova, BofA Merrill Lynch, Research Division - Equity Banking Analyst [59]

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I have 2 questions. One is about your provisioning pool. What part of your provision pool is now in form of securities? And what portion is in cash? And how this proportion has been changing this year, year-to-date, if you disclose this in valuation?

And my second question is, I'm happy that you mentioned about Interactive Brokers. Do you see any visible impact on trading volumes from -- for investors via Interactive Brokers? Can you share any figures with us?

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [60]

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Olga, can you please clarify a little bit the first question because maybe -- a quick comment before you do. We have expected credit loss provisions on the securities portfolio that we do under IFRS 9. And then we have provisions, but these are technical, again, provisions that we never expect to realize really. And then there is a second part that refers to the grain. So I'm not sure how -- what was the point of your question because...

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Olga Veselova, BofA Merrill Lynch, Research Division - Equity Banking Analyst [61]

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Sorry, maybe I just should clarify. So I mean the collateral pool used by your customers in Moscow Exchange, it can be in the form of securities, it can be in the form of cash. That one, the collateral pool.

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [62]

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Okay, that one. It's more than 90% of the whole body of collateral securities. It's -- the vast majority of it has been securities for at least 1 year or 2 already.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [63]

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That means that the collateral pool you see in the slides is the cash collateral part only. The securities collateral is not shown there, but it's like 10 full times bigger.

In regards to the Interactive Brokers, we will not be sharing data as of yet. Let's see how it pans out for the quarter. But as a side note, the retail interest is one of the drivers that is in our next 5-year strategic horizon, and we are betting on retail to support the securities market.

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [64]

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Yes. I mean the story with Interactive Brokers is only emerging now. So they have several hundred thousand active clients. But their activity in -- on our platform has just started to be visible, and it's an emerging story in the very initial stage.

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Olga Veselova, BofA Merrill Lynch, Research Division - Equity Banking Analyst [65]

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I see. And maybe last one is congratulations to Maxim with the award of the best CFO this year.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [66]

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Thank you. That's a real pleasure. Nice. Thank you.

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Operator [67]

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(Operator Instructions)

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [68]

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Yes. Let's wait for more questions. I'm checking the webcasting interface. We have no questions on the webcasting interface. So all further questions have to go through the telephone line.

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Operator [69]

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Dear speaker, there are no further questions at this time, please continue.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [70]

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Okay. Let me now provide a closing remark. So we approach the end of the third quarter earnings call, we expect the annual reporting to be released. As usual, the first week of March, we'll be scheduling the call around that time in 2020. So looking forward to hearing from you all again. Thank you very much.

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [71]

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Thank you, everybody, for your good questions, and hope to reconnect in 2020.

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Operator [72]

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That concludes our conference for today. Thank you for participating. You may all disconnect. Have a nice day. Dear speaker, please stand by.