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Edited Transcript of MOEX.MZ earnings conference call or presentation 23-Aug-19 1:00pm GMT

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

Moscow Aug 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Moskovskaya Birzha MMVB-RTS PAO earnings conference call or presentation Friday, August 23, 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

* Andrzej Nowaczek

HSBC, Research Division - Analyst

* Elena Tsareva

BCS Financial Group, Research Division - Senior Banking Analyst

* Sergey Garamita

Raiffeisen CENTROBANK AG, Research Division - Research Analyst

* Svetlana Aslanova

VTB Capital, Research Division - Equities Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to today's Moscow Exchange second quarter IFRS results conference call. (Operator Instructions)

I must advise you that this conference is being recorded today on the 23rd of August 2019. I would now like to hand the conference over to your 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 Second 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 of the second 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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Thank you, Anton, and thank you all for joining us today to discuss Moscow Exchange financial results. Let me start with Slide 2. We delivered on strategic initiatives in the second quarter and beyond. As usual, a brief overview of delivery on strategic business initiatives during the start of the second quarter.

First, we have made several additions to the range of traded instruments. On-exchange futures on RUSFAR, the new Money Market benchmark, are now available in the Derivatives Market. Prior to that, we introduced overnight index swaps on RUSFAR in the OTC Derivative Market. We continue to develop the benchmark, having recently added overnight RUSFAR in U.S. dollars. In the products market, a new currency pair, U.S. dollar-Japanese yen, started trading. This pair is available in standard order books as well as for OTC trading. The latter is possible, thanks to MOEX's service of providing access to global ForEx liquidity. Yet another asset management company came out with 2 new [Russian-law] ETFs. Both these ETFs track Russian corporate bonds. This brought the total number of Russian-law ETFs listed to Moscow to 12. We have further additions in the near future.

Second, MOEX delivered several improvements to its services. These are so MOEX OTC bond platform can now clear transaction through the CCP. This allows expansion of CCP services into securities not listed on MOEX such as Eurobonds. Corresponding settlement is also doable in foreign currencies. The standardized OTC Derivatives Market connected to the Unified Collateral Pool. Participants in this market can now use securities as collateral. In the Derivatives Market, we introduced online registration of clients. This reduced the registration time from almost 1 day to mere seconds, vastly improving the onboarding experience.

Third, we continue to develop our client base and partnerships. DCM was in the spotlight in the second quarter as 71 corporate issuers placed bonds on MOEX. Of those, 8 were newcomers to the public bond market. We also saw a substantive interest in the Russian bond market from Belarusian issuers, both sovereign and corporate. They placed bonds worth RUB 15 billion in July and August. MOEX deployed points of presence, PoPs as we call them, in several new locations: in Hong Kong, Singapore, Shanghai and Mumbai. They allow connectivity to MOEX infrastructure for new clients based in these locations. In absence of the solution, these clients will have to use PoPs in a place like London, which might have been inconvenient for them.

Finally, Interactive Brokers, a global electronic brokerage with a large client base, obtained sponsored market access, SMA, to MOEX. We hope this solution will bring us additional foreign retail clients in due course.

Next slide, Slide 3, an update on RUSFAR. We already talked about RUSFAR, Russian Secured Funding Average Rate, during the last earnings call. As we continue to develop the benchmark, I'd like to provide a brief update. To date, 20 market makers insured the liquidity of GCC repos with ruble supplement across [different maturities]. In August, we launched USD-denominated RUSFAR in addition to the ruble RUSFAR curve. It reflects the cost of secured overnight dollar lending in Russia. Unlike other benchmarks, it's the first clean indicator, meaning that it's unaffected by characteristic of a particular collateral.

As I mentioned, RUSFAR now serves as underline for 2 types of derivatives: on-exchange and OTC. Their trading volumes have just started to pick up. With interest rate derivatives being an underdeveloped segment in Russia, we hope these new products will make it more visible as the new benchmark obtains broader use over time.

Slide 4 on increased corporate activity in the primary bond market. The second quarter saw a clear surge in DCM activity of corporate issuers as measured by both number and value of bond placement. Previously delayed demand for capital and expectations of key rate cut drove that. Strong corporate activity persisted in July as well. To illustrate, a retailer, Eurotorg, placed its inaugural issue of RUB 5 billion in July, becoming the first Belarusian corporate issuer on Moscow Exchange. In August, Fitch upgraded Russia's sovereign rating from BBB- to BBB, triggering upgrades on the corporate level. We expect this to have a positive effect on placement going forward. Also in August, MOEX created the Sustainability Sector for financing of projects in the field of environmental and social sustainability.

Later in 2019, we plan to begin trading corporate bonds in T+ mode and introduce large block trade in mode for OFZs Russian sovereign bonds. We see these events and measures as supportive for further bond market development.

Let us now turn to financials. Slide 5, the summary of financials for the second quarter 2019. The operating income increased 9% year-on-year. Fees and commission income was up by 10.7%. Net interest and other finance income added 9.4% year-on-year. Recurring operating expenses, excluding the other operating expense line, were up by 10.6% year-on-year. OpEx growth for the first half of the year was contained to 8.3% year-on-year, below the full year guidance.

The cost-to-income ratio improved versus recent quarters to 34.9%, the lowest rating of the last 4 quarters. EBITDA adjusted for one-off provisions and movement in the IFRS 9 allowance grew 9.6% year-on-year in the second quarter. The adjusted EBITDA margin improved to 73.1%. Adjusted net income increased by 8.7% year-on-year, and return on equity bounced nicely to nearly 19%.

Slide 6, the diversified fee and commission income. [That are] half. This increased 10.7% year-on-year to another all-time high driven by strong performance of the Money Market and bond market as well as Depository & Settlement Services. With the single exception of the products market, all of the markets also contributed to fee income growth. We are particularly pleased to observe strong performance of equities and bonds. It reflects MOEX's standing as the principal capital-raising platform for the Russian economy.

Slide 7, on Money Market. The Money Market fee income increased 14.5% year-on-year despite a 7.9% year-on-year decline in trading volumes. The latter is attributable to muted activity in interdealer repo as well as deposit and credit auctions, the 2 lower value-added segments. At the same time, trading volumes for the higher value-added segment of CCP repos, including GCCs, increased year-on-year. The discrepancy between fee income and trading volumes was attributable to higher average repo terms; the UCP-linked fee rate revision, UCP meaning Unified Collateral Pool; as well as the higher share of the GCC repo.

Next slide. The average term on -- of unexchanged repos increased by 0.5 day to 3.6 days year-on-year, a decline quarter-on-quarter by nearly a day. The driving force behind changing terms of our GCC repo were a number of participant trading longer term adjusted their strategies. Open interest in the Money Market moderated from the highs of the first quarter, but on average, was still higher than in the second quarter last year.

Depository & Settlement, next slide. Fees and commissions from Depository & Settlement Services rose 19.5%. The main factor behind this was the usual growth in average assets on deposit. It happened across all asset classes, but especially so in government bonds.[Volumes] of repo with collateral management growth NSD new additional 42.7%. This boosted income from clearing and collateral management.

Trading volumes in the ForEx market, that's the next slide, declined by 11.5%. The product mix shifted toward swaps as trading volumes of the spot segment declined 32.3% year-on-year partially because of subdued volatility. Fee income was down 15.2% year-on-year. The UCP-related fee rate change in the swap segment did support the effective fee. But the mix shift in favor of swaps dampened the effective fee.

In 2019 year-to-date, MOEX ForEx trading volumes have been broadly in line with global peers. At the same time, MOEX market share versus the onshore OTC market declined by 10 percentage points to 45% in the first half 2019.

To conclude with the ForEx market, I would like to highlight a couple of positive developments. First, the number of active retail clients increased sizably by 83% year-on-year in the first half of the year. Second, the ADTV of corporate surged by the same magnitude of 83% from around $30 million to $55 million.

Slide 11, Fixed Income Market. The bond market fee and commission income climbed 36.3% year-on-year to a record level of RUB 752 million. Trading volumes excluding overnight bonds increased by 20.3%. Volumes of primary placement in the second quarter rose by 63.7%. We saw growth in activity of both sovereign and corporate issuers. Bonds of government bonds placement grew fourfold year-on-year. Placement of Central Bank bonds also increased, although to a lesser extent than government bonds. This, coupled with robust activity of corporate issuers, supported the effective fee.

Slide 12. Fee income in the Derivatives Market grew 4.9% year-on-year, while trading volumes declined 12.0% year-on-year. The decline of volumes was attributable to ForEx and index derivatives. Volumes of more expensive commodity and single-stock contracts increased by more than 20%. Trading volume of interest rate contracts, while still quite low, has started to become visible. Volumes in the OTC Derivatives Market grew by 46% year-on-year. OTC derivatives volumes were down quarter-on-quarter, but growing on average terms supported the effective fee.

For the last 12 months, the effective fee in the OTC Derivatives Market expanded 3x due to the emergence of longer-term contracts. Currently, the effective fee in OTC derivatives is higher than its on-exchange counterpart by an order of magnitude.

Option trading volumes declined by 29.9% due to low activity in strikes far from at-the-money level, but trading of at-the-money options continued to pick up. The shift to more expensive contract [tariffs] support -- from the OTC Derivatives Market and the UCP-related fee rate provision helped the effective fee.

Slide 13 on IT services, listing and other fee income. The income from our IT services, listing and other fees added 18% year-on-year. Listing fees increased 90.7% year-on-year due to scheduled tariff update and a higher number of issuers. Sales market data rose by 14.8% year-on-year on the back of the weaker ruble. Sales of software and technical services grew 13.8% due to unification of tariffs as well as the weaker ruble. Other fee income declined by 28.5% year-on-year due to diminished contribution from the grain market.

Slide 14, Equities Market. Fee income from the Equities Market grew 4.7% year-on-year in the second quarter. Equities trading volumes increased 3.7% year-on-year, driven by higher market capitalization. The average value of MOEX Russia index advanced by 15.7% year-on-year. The volatility of the index was higher year-on-year by almost 50%. MOEX market share in trading of dual-listed stocks versus the LSE strengthened year-on-year by 6 percentage points to 68 percentage points in second quarter.

Slide 15. Quarterly net interest and other finance income advanced by 9.4% year-on-year. Core NII, the NII excluding realized gains on the investment portfolio reevaluation, was virtually flat year-over-year. Bonds available for investment grew by almost 5% year-on-year, mostly due to contribution of euro-denominated client balances. The share of euro-denominated client bonds went up year-on-year from 54% to 63%.

Slide 16, operating expenses. Operating expenses grew by 10.6% year-over-year. This can largely be accounted for by personal expenses that rose 17.8% year-over-year due to a combination of 4 factors: First, the timing factor. The bonus provision reversal happened in the first quarter of 2019. In the base year 2018, it happened later in the second quarter. This mismatch lowered the OpEx of the base and technically inflated the OpEx for second quarter of 2019. This effect explains 7.3 percentage points of growth out of 17.8%.

Second, 4.5 percentage points came from salaries revision. Third, 4.2 percentage points of growth were due to higher head count as we hired people for new projects. And fourth, 1.8 percentage points resulted from heightened social charges that we outlined at the beginning of the year.

Professional services costs declined by 31.9% year-on-year due to lower pass-through cost of the grain market. In the first half of the year, OpEx growth was 8.3% year-over-year, below the lower end of the guidance. We now revise and narrow OpEx growth guidance from 9% - 12% issued earlier down to 8% - 10% for the full year. We also lowered CapEx guidance for the year to RUB 2.0 billion - RUB 2.5 billion.

Completing the presentation, I would like to touch upon a couple additional topics. First, interim dividends are not on the agenda. We have been calling ourselves an annual payer for the last 11 months, but the market has no expectations for interims. I would like to reiterate this once again. All dividends for 2019 will come in 2020 as a single payment.

Second, there were certain changes in the regulation that affected the regulatory capital of the group. Moscow Exchange, as an organizer of trading, is now obliged to hold capital on top of its NCC clearing center and NSD settlement depository capital. Therefore, the trading engine now has its own regulatory capital of RUB 5 billion. One can interpret this capital as restricted cash, which is investable but unavailable for distribution of dividends. But we have that money as cash or cash equivalents anyway, so no new capital is required. Overall, the regulation of financial institutions in Russia is evolving. The ideas are under discussion. Changes, if any, would affect the entire financial system, not just us. We will keep you updated during next calls as and if novelties become tangible.

So therefore, I'm completing my speech. Let us reach for the questions. You're welcome.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first questions come from the line of Sergey Garamita from Raiffeisen Bank.

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Sergey Garamita, Raiffeisen CENTROBANK AG, Research Division - Research Analyst [2]

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Congratulations on excellent results. My question regards kind of the sustainability of the high average fee, especially in the Money Market. As we can see from the slide -- I forgot the number. On Money Market, there's a chart of open interest. And we can see that in June, the open interest was almost on par with the figure in June 2018. So do I understand it clear that probably in the second half of this year, the average fee would kind of be lower than in the first half, yes? And my second question regards this -- there's an income tax one-off in cash flow statement, as I understand it. There was some income tax prepayments and also the reduction in income tax liabilities, which kind of pressed your cash -- your operating cash flow in 2Q. So does this affect -- is this effect going to be reversed later this year or not? And did I get it clear that you're able to pay like everything you earn now, so almost 100% of net income or more, provided that your capital doesn't change? Is that your message or not?

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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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Good set of questions. Thank you, Sergey. So let me dissect them one by one. The system liability of fees in the Money Market. The Money Market, we would compare it year-on-year between the subsegments in the Money Market. The interdealer repo is down by, let's say, 40% and their direct repo with the Central Bank is virtually 0 year-on-year. So our -- that means that the lower, let's say, priced repos of the structure, they have their share in the overall structure of repo market below the last year. That means that we have the higher average fees because of migration into central counterparty repo. The share of the central counterparty repo trade now at the 88%, like historical high. That improves the average fee. The difference between, let's say, interdealer repo and the CCP repo on a comparable duration is like to the tune of 4x. So CCP repos are like 4x more expensive. So that means that the market is moving on to the centralized solution. Then within that, the GCC repo share is also improving because of, let's say, standardized collateral service management that the clients prefer. So it's kind of standardized service. And we are still onboarding the corporates to the Money Market. We have like 100-plus corporates in the Money Market already, with the average speed of onboarding over the duration of 2 years -- of the past 2 years, like one additional corporate a week. And we will continue to do that. So we will continue to add the new clients to the Money Market.

The question is that the Money Market, yes, it is a mature market. It's hard to drive further growth of the Money Market as the share is saturated and the new demand that we are getting is mostly coming from new types of clients like corporates given the substantial liquidity overhand in the Russian market. So I would think that Money Market has shown [sustainable] for further growth, but it will be a rather limited one compared to the previous result when it's being run in -- saturating the market and building the new product presence.

But let me repeat, our plans for the Money Market, let's say. According to different rating agencies and business publications, there are 400 to 600 large corporates in Russia. So they're -- every one of those is a potential client for us. So we are talking to all the corporates one by one, and we're onboarding them to the average tune of one a week. Therefore, this trend will continue. We will tap into corporates in the future.

The second, on the taxation itself. The taxation, assets and liabilities, yes, they fluctuate. The average -- I would encourage you to look into the average taxation rate. The average effective income corporate tax rate will be relatively stable. It's not fluctuating that much. So if you see the migration of assets and -- tax assets and tax liabilities between the quarters, on average, they will cancel each other out on a rolling 12-month basis.

And switching to the dividend. With the dividend, we have a lot of explanation throughout the past year. With the dividends, we still have this logic that we strive to pay the dividend the cash that we do not need for the capital of the banking subsidiary such as [data] center, the depository and the trading engine itself and whatever we don't need for the CapEx-ing and developing of the new projects.

I would like to remind that our earlier calls in regards to the development on capital requirements, I have been mentioning and still mention 2 facts. First, our CapEx requirements are not that high. Let's say, historically and this year again, our CapEx is, let's say, roughly like 10% to 15% of the -- or even lower, 10% to 12% of the net income, give or take. So CapEx is not like a huge chunk. And even if you would look into the largest project that we've been engaging into, the marketplace -- the deposit marketplace, the overall development cost for that project is to be tuned below RUB 1 billion to have it done as an infrastructural solution. So that means that we don't have that much capital requirements on the new product development that support our further growth. We are not like a CapEx-heavy company. Therefore, with the dividends, we will -- I am expecting to get -- to be getting that question in the future as well, and I will be repeating the same thing again. We have a track record for several years' trade of RUB 7-plus DPS. We had a track record that we are capable of delivering on good dividend payment. We've explained the logic behind the dividend payment like many times. It stands the same. So thank you, Sergey. If you need additional clarification, just let me know.

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [4]

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I'll -- while we're waiting for further questions, I will read one from our webcasting interface. It comes from [James Thursfield]. It's about the FX. So he's asking, what do you attribute to the decline in volumes and income from the FX segment?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [5]

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Oh, brilliant questions. Yes. ForEx is not doing good compared to other market. The question is why. Two major factors, roughly split 50-50 between them. One is macro. The volatility is down year-on-year again in ForEx. So ForEx is not a volatile market, and we are recipients of short-term volatility. And the higher the volatility, the better are the velocities in the ForEx market.

But the second thing comes from the share in the overall onshore ForEx market. Our share versus OTC declined because the competition is toughening. The ForEx market is a competitive market with banks and platform present in there. Therefore, our plans for the ForEx market, we are looking into building an OTC ForEx platform in Russia. The logic behind the OTC ForEx platform in Russia that we have, like on-exchange trades and ForEx, which are mostly order-driven trades, so the price might fluctuate. And we want to have like a competitive OTC solution that would be quote-driven and would behave and smell like on the standard platform to reach all other market participants, and stay familiar because the similar platform exists already. So we're developing -- looking into developing the OTC ForEx market via the exchange.

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Operator [6]

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The next questions come from the line of Andrey Pavlov-Rusinov.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [7]

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Congrats with the results. I've got several questions. First of all, I would like to discuss the net interest income dynamics. Basically, it looks like on our calculations that your ruble yield actually strengthened throughout the second quarter. I guess maybe lagged effect of a higher risk -- higher rate environment early in the year. So going forward, what should we expect in terms of the effect of recent Central Bank rate cuts by 50 basis points? So would it be felt already in the third quarter? Or is it likely to also come with a certain lag? And when should we expect it to be felt?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [8]

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Andrey, good question. On the NII, the average yields are a little bit up. The -- if you are looking at the NII altogether, not the core NII, but also the realized gains, the realized gains drove the, let's say, weighted average yield year-on-year. And the realized gains were from the sale of some of the portfolio. Longer term the ruble yield of the portfolio, the one you're referring to, are -- is indeed a recipient of the decrease in the Central Bank rate, the key rate. The question is how fast and quick it will migrate and show up in the results. The duration of the ruble portfolio is up to 18 months. So I would say that you would see a slight chunk of that decrease in the third quarter, but you wouldn't be able to dissect it from the reporting. It will become more visible by the end of the year, and then it will, let's say, have a pretty substantial impact over the duration of the next year. So it does have some lag. It's not immediate.

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [9]

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I should also remind that about 60% of our ruble income comes from securities and 40% from money market instruments. Those money market instruments reprice pretty much [instantly], while the securities portfolio stands on similar amounts irrespective of CBR rate changes. Plus within the structure of securities market in Russia in general, we have securities -- sovereign securities with floating coupon that is backward-looking basically that reprices with a quarterly lag. That also might affect the results.

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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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Okay. You had another question, Andrey. Please proceed.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [11]

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Yes. I do. My second question is about your -- just a follow-up to your dividend thinking. It's connected with the fact that you mentioned you're also now facing RUB 5 billion capital requirements in your trading activity. Is this change in anyway affect your thinking about the full year dividend or not really?

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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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Not really. Let me just deep dive into that a little. We always had like internal policy with the trading engine, with the legal entity of the MOEX itself that it should have approximately like a 0.5 year reserve for expenditures, so like for operational risk management. So what happened in effect is that this internal regulation, risk management procedure, has been officialized by CBR regulation. We have received a notification of that like a year ago, and it went into effect this year. But let me assure you that we always have that kind of policy internally to have like cash as operational stability reserve for the exchange. So that's why I mentioned that no additional capital is required for the MOEX to go on further -- MOEX as a trading engine. So this didn't change the visibility -- the capital requirements since the restricted cash has been sitting inside anyway. It has been officialized by the regulation.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [13]

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Okay. That's pretty clear. And just my kind of final question is regarding dynamics of the fields. I just wanted to check, basically, what was the effect of your usual deferrals on the derivatives in Money Market front? So I think last time, derivatives were benefiting from -- derivatives yield was benefiting from deferrals. So could you please just clarify what happened this quarter in Derivatives and Money Market with deferrals?

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [14]

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Okay. Andrey, so talking about Derivatives Market deferrals both on year-over-year and quarter-on-quarter basis, they have basically negligible effect on the (inaudible) [Derivatives] Market, meaning that they are pretty much equivalent, very, very similar in magnitude in the 2 quarters of 2019 and the second quarter of 2018, the base quarter.

In the Money Market, though, it's -- there's a little bit of effect, but again, very similar figure between the 2 quarters of 2019, a little bit higher in first -- in the second quarter 2018. So no big deal there this time.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [15]

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And can I have your next question please?

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [16]

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I will read out -- can I read out a question from our webcasting interface? Another question from [James Thursfield]. So he is asking, "How do you plan to boost overall volumes in the Derivatives Market after this 12% drop?"

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [17]

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Well, the Derivatives Market, it's the question of the structure itself. The -- part of the Derivatives Market that dropped were the ForEx derivatives. So ForEx volatility is down, the ForEx derivatives are down, the -- we are recipients of volatility in here. We are lucky to have the fee structure that ForEx derivatives are lower priced than commodity derivatives that are on the rise. We're doing 2 classes of actions to support the Derivatives Market. First, we're launching new instruments. We've been talking about a lot of commodity derivatives before, and we will be looking into new derivatives [spare] going forward. So it's like natural development of the business plan of the Derivatives Market. But the other one we're talking here is the OTC derivatives. The OTC derivatives are up year-on-year. Yes, indeed, they are down quarter-on-quarter. And we are looking to that as the opportunity to develop OTC market further. We know it can work. We know that we can onboard more clients there. So our OTC derivative platform is definitely for further development. But all in all, in Derivatives Market, the Derivatives Market is far much more sensitive to volatility than other markets.

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Operator [18]

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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 [19]

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I have 3 questions. The first one is on those grain losses on insurance and, in particular, whether you have now more clarity on how much -- how big is the part of those losses that can be covered with insurance? And the second question is on OTC derivatives. They did grow visibly year-on-year, but they fell almost 4x quarter-on-quarter. So is there any seasonality there? And the third question is on the Marketplace project. I would be grateful if you could elaborate on this and give a bit of an update?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [20]

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Thanks, Andrey. Great questions. On the grain loss, first, the size of the reserve itself at RUB 2.4 billion is stable. So our -- by stable, I mean that we recognized all the losses possible. So we provisioned for every potential loss. So whatever fluctuation is there is only probably to the change in the pricing of the grain, but it's not much. It's not that sensitive.

So by provisioning in full that we did in May and through the second quarter, we went elevator-by-elevator, grain storage by grain storage to double check with the surveyors, the balances. We unwound all swaps. Last call I've been talking that the grain swaps being extending to the end of the year. We unwound all swap positions, so there is no additional risk pertaining to the swaps. The swaps section of the market itself is effectively stopped, so the risk is not there. That means that in terms of origination of new risk, there is no new opportunity. The size of the reserve is recognized to being full. The sensitivity of the reserve is only to the pricing changes, but it's only to the fraction of reserve, let's say, approximately 15% to 20% of the reserve might be sensitive to the changes in the grain prices, not much.

Then the question comes what we are doing for the recovery. With the recovery, we have a criminal case opened. So we opened the criminal case. We are participating in the bankruptcy procedures. We are claiming our rights on any grain that we can find, and we have had such precedents. We have some -- we do -- we are engaging with the -- in negotiations with the owners of the grain storage facilities so that they would be able to pledge their other assets at the deal settlement. So yes, we are utilizing all of those measures.

With the insurance itself, we filed the full package of insurance documents, including the criminal case confirmation in June. So the insurance company is looking at the claim itself, and they are likely to -- run an additional investigation. So it might take additional, probably, couple of months, give or take, I don't know. It depends on their procedure. So then they will have the decision on the settlement of the insurance claim. So far, I would reiterate again, the insurance has not been covering all the size of the reserve itself and all the size of the loss. I wouldn't be engaging into a lot of forward-looking statements here due to the unpredictability of the insurance claiming process. We will recognize the insurance funds against the reserve only when the money -- the cash flow hit our accounts. By IFRS standards, I'm not recognizing those potential recuperation of the reserves before I have the money in the account. So even if the insurance company decides, I would still be looking for the money in the account before I will wind down the reserve. So let me, therefore, not yet manage your expectations on to that.

With the OTC derivatives, we are studying the market. There might be some seasonality. Anton, would you comment on that?

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [21]

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Well, generally speaking, what we had earlier when we had this elevated volumes, participants were testing the market and they were engaging in short-term deals. Now they are engaging in longer-term deals, so we are not expecting much of a seasonality there. It's just about transition to longer-term contracts, and we mentioned that during the introductory speech. And your final question is about the Marketplace, which coincides with the question of [Boris Jillian], and he's asking that question through the webcasting interface. So thank you, Boris, for that question.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [22]

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As for the Marketplace development, we are running -- we are -- internally, we are developing the infrastructure solution. Effectively, we are doing the coding, and we are coding the solution. We are still reliant on -- we need the law -- the digital passport law that would enable the Marketplace to work. So once the law is in place, we will be able to ramp up the project quick enough. So on our hand -- on our side, we are developing the system, even there is not yet the regulation on that. We want to hit the ground running once the law is in place.

And I would like to draw your attention to yet another question that I've been expecting but I have not got yet that had the legal case provision last year. The legal case provision, we already unwound the reserves in the first quarter in the annual reporting. But additional good news, I mean, I would even call them great news happened this summer that -- let me remind briefly the story. Bankruptcy manager filed a claim to unwind some deals on the exchange. The -- eventually, the cassation denied that claim and the bankruptcy manager proceed -- wanted and did go to the Supreme Court. The Supreme Court denied the claim to review the cassation court decision. Finally -- eventually, on the 10th of July this year, so we have the additional statement by the Supreme Court that this claim is not valid, that the cassation's decision stands. That means that we unwound the reserve in full and did it correctly.

Moreover, in August, a similar decision on totally unreliant case when another bankruptcy manager wanted to file a claim against the change. They have been denied in the very first hearing of the -- in the very first court. So that means that we have set a precedent that the bankruptcy law is separate from the clearing law, and specifically to the on-exchange deal, the clearing law supersedes as being the most specific law, it supersedes the bankruptcy law. So that means that we have our legal system -- we have our systems protected and that similar cases are not likely at all to be one in the future. So I will really stressed that it's one of the most important decision that we had from the court system this year because it fully protects us, and it fully confirmed that the legal infrastructure, the legal framework we had developed for the exchange over the past years has been done correctly, and it worked out correctly.

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

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And also I shall add a very good comment to the previous question, as Boris was particularly interested in long-term economics of the Marketplace, so it's a little bit premature to elaborate deeply on our economics. We will just remind that our calculations and our assessment of this project was based on a few things such as the market share, such as the turnover that we're looking at, annual turnover of RUB 1 trillion and the range of fees that elevates this project on to RUB 1 billion scale in revenues on an annual basis. We still stand with these calculations and with this understanding, but we need to get regulatory framework and legislation first to continue with this project and to provide you some more information on that.

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Operator [24]

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The next question comes from the line from Elena Tsareva from BCS Global Markets.

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Elena Tsareva, BCS Financial Group, Research Division - Senior Banking Analyst [25]

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I just have a question, like, what could be, like, new sanctions implication on potential markets? Like, maybe for Fixed Income in terms of new placements of sovereign debt? Or you do not see any risk like this? And you think this like more or less natural and just like -- also, for the same subjects of sanctions, is there any, if you know, implications for EBRD in terms of new sanctions, in terms of owning the stake in MOEX if you know something about it? This is my first question.

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [26]

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Okay. So the new sanctions, you're referring to the slide to U.S. dollar debt, which we did not administer. So for us, this particular set of sanctions means nothing as we administer ruble sovereign debt. We're, of course, thinking about risks all the time as out of market participants, but this particular set of sanctions seems to be inapplicable to what we do. And on the EBRD, they haven't told us anything new. Last time I spoke to them, they didn't identify themselves as sellers or whatever. So we are where we are at the moment, nothing new.

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Elena Tsareva, BCS Financial Group, Research Division - Senior Banking Analyst [27]

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And just second question, you introduced the real estate index, and potentially, you have ETF on the index. So maybe you expect -- you may share any estimates you expect from this type of product? And maybe you see pipelines of products like this or something, some other initiatives, if you can just share something?

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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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Good question. The ETFs market, with the Moscow Exchange, I'm talking about with the Russian-law ETFs, is a new market. It's a smallest one. It's a subsection of the equity market. For the ETF market and all other, say, indexes, like real estate index to pick up, they have to have like broader range of clients who are migrating on the Moscow Exchange. With the ETFs, what we would be expecting the customer journey that the customer is first, they are switching to bond or bonds ETFs and then they switch into equities and equities ETFs. It will require education. So we are very much reliant in that education on our partners. The funds and banks who are launching these ETFs support the indexes. So that means that the retail clients, I would be looking into the retail clients the statistics that we provide in the presentation that is booming. The individual investment accounting -- accounts are on the rise.

Every month, we have 100,000 new clients. We see like 100,000 new clients every month. So the retail demand is growing, okay? It's relatively in infancy, but the client base is being cross-sell by the large banks. They cross-sell their clients with the brokerage clients, and we expect -- would expect that to grow. But second thing that needs to happen, that people got to have to be accustomed to the equity market and the ETFs subsection of it. It will need education.

So I think it will take some time to pick up. And whenever I've been asked about the, let's say, duration of that, I'm talking that culture is one thing. I'm looking into retail plans as a longer-term potential for growth, let's say, 5 to 10 years horizon that is helping the equity market to grow for 5 to 10 years over. It's not like a 1 year pick up with corporates in the Money Market. It's rather a profound, basic, fundamental but longer-term impact on the equity market.

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Operator [29]

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The next question comes from the line from Andrzej Nowaczek from HSBC.

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Andrzej Nowaczek, HSBC, Research Division - Analyst [30]

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My question was on grain, and it was answered. But since we still have some time, I wanted to ask about securities gains. Bond yields have, of course, fallen. Bond debts have gone up. As of the end of Q2, you have this large revaluation reserve in your equity account. That was RUB 725 million at the end of June, presumably significantly bigger today. Are you planning to lock in some of those gains again in Q3, Q4?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [31]

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Okay. Andrzej, this might happen. We do not necessarily foresee that. But with the gain that is a fact of the second quarter, it's just driven by market opportunities, so guys decided to pick some profits on Eurobond, in particular.

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Andrzej Nowaczek, HSBC, Research Division - Analyst [32]

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Okay. So opportunistic then?

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

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Pretty much.

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Operator [34]

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The next 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 [35]

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Again, questions have been answered, but a question on your costs. I'm just trying to think about kind of costs heading into next year. And obviously, if we look at this year, you've had higher expenditures on the Marketplace and staff hires kind of relating to that. But you've also had the kind of offsetting benefit of lower professional services costs. I'm just wondering, would you say that in terms of staff hiring, you would expect that there would be kind of less need in terms of kind of new hires kind of heading into next year? And in terms of the Marketplace and given the kind of pushing back of the legislation, can you give us any idea of kind of what percentage of the Marketplace costs are really -- are expected to kind of fall into this year? And what kind of percentage into next year?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [36]

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Wonderful question, Andrew. With the staff numbers, the FTEs, as the FTEs drove the costs in the second quarter by approximately 4% like the headcount change, it has been happening a little bit slower than we expected because of the slowdown in the Marketplace legislation. So we decided to proceed with the development of the platform, just not do it at the full speed we wanted. We're just doing it at half speed. Therefore, the expenditures on Marketplace this year are a little bit lower -- going to be a little bit lower than we've been expecting. It will not be RUB 1 billion. It will be smaller. And we will have some additional hiring pushed onto the next year. That's exactly why I lowered the guidance for OpEx from 9% -12 % that stood for the higher speed of development, Marketplace to 8% - 10%, that stands for lower speed of development.

So we, although, indeed, have additional hiring in the next year for the Marketplace and similar banks. And longer term, we have this history of our cost basis growing lower than our fees and commission. We are aiming that our fees and commission will have higher growth than the growth in costs, but we want to have good leverage in there. The longer term, our strive to maintain the same figure as before in cost is just to be, let's say, give or take, 8%. So looking forward, we will be looking exactly into that.

The logic is that we want to have the business model that is to have potential to improve its cost-to-income ratio with the expansion of the business. We have kind of, let's say, semi-fixed business model. We don't have that much of a variable cost. So we want to utilize our fixed cost basis -- base that we can do more deals, and we can support more volumes with relatively same headcount.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [37]

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Okay. That's helpful, very helpful. And just a quick question, I'm not sure whether you mentioned any uptake on this provision that was taken in the first quarter relating to these incorrectly processed payments. I think when you had the first quarter call, you said it was kind of under investigation, you'd kind of comment later. Is there anything on that?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [38]

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The provision is down by RUB 30 million. You might see that in the note. So there is some recovery, and we're working on that as well.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [39]

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Okay. And would you think there could be more recovery on that?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [40]

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Well, the provision currently is conservative, the same logic that we applied with the Grain Market. So let's see how it evolves.

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Operator [41]

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The next question comes from the line of Svetlana Aslanova.

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Svetlana Aslanova, VTB Capital, Research Division - Equities Analyst [42]

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I have 2 small follow-up questions. Talking about OpEx, we discussed the development of the staff costs. If we look at the other expenses growth, I understand that the situation in the grain market significantly decelerated growth in this segment. What do you see as a run cost for the coming quarters if we assume that operations of the grain market do not recover?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [43]

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If I might ask you to clarify the last sentence, you might -- and what did you exactly mean by not recover the grain market?

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Svetlana Aslanova, VTB Capital, Research Division - Equities Analyst [44]

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As far as I understand, there were some costs in this line that were related to the grain market. And at the moment, as we see, this item is lower in the second quarter, in particular. So what kind of performance should we expect?

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [45]

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Well, the professional service is here. I'm referring to the professional services decline. We had the reimbursable cost, the pass-through cost, with the grain market. The baseline for the expense, frankly, in the second quarter, we are more or less to the normal way of business that are relatively unaffected by the grain market. So let's say, professional services to the tune of RUB 100 million a quarter seems to be like a robust number. And until the grain market is restarted, that business line with the pass-through of cost is not expected to grow -- I mean not expected to...

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Svetlana Aslanova, VTB Capital, Research Division - Equities Analyst [46]

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To change, yes. Okay.

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

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Yes. Let me remind you that there are 2 lines that reflect Charter and go hand-in-hand, which is the other fee income and these professional services. So reimbursable costs from professional services then goes to other fee income. So these 2 lines are subdued as you see, and that's what we expect going forward.

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Svetlana Aslanova, VTB Capital, Research Division - Equities Analyst [48]

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And I have another question, just to clarify. I remember that previously you were announcing that the new strategy might be announced by the end of September. Is this still the case?

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [49]

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Okay. Svetlana, so the strategy is being finalized. As soon as we get the date internally, we'll announce it promptly. So far, we are looking towards mid-autumn, and that's all update I can tell you at the moment. Once we are ready, we'll tell more.

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Operator [50]

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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 [51]

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My most important question on strategy was already answered. And my second one is a follow-up on this legal case provision. So the remaining sum, as far as I remember, was something above RUB 200 million. And as you've clearly said that the case was particularly won by you. When do we expect the reverse of this remaining sum of the provision in your report? So is it next quarter or maybe by the end of this year? And as a clarification also on OpEx. You said that you see further on the growth in OpEx at around 8%. Does it include the extra OpEx for Money Market next year? Or is it the figures after that longer term?

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

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So regarding the legal case, we actually released the provisions for that before. Three quarters were out in the fourth quarter last year. The remaining quarter was out into first quarter this year. And we had very good understanding that the case was about to end in our favor. And what Max mentioned is that the case did end in our favor, and it's completely over. And...

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [53]

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The number that you're referring to is for the expected credit losses, and it falls into that section of the IFRS. So it changes quarter-on-quarter. That's it. So those 2 numbers are not correct -- correlated.

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [54]

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So we have investment portfolio. And under IFRS 9, we are obliged to keep a bit of technical provision for expected credit losses, which we actually did not expect in real life to happen ever. But technically, we keep it in our accounts as per standards.

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Sergey Garamita, Raiffeisen CENTROBANK AG, Research Division - Research Analyst [55]

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Okay. And on OpEx?

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [56]

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Our OpEx is for this year -- so 8% to 10% is guidance for this year. For next year, I don't think we are ready to provide guidance because we have just started the budget process for the next year. It will be completed in December -- by early December. So Max if you can...

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [57]

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Like last year, please expect like updated guidance for the year with the next call for the third quarter. That's going to be in the fall. And the new guidance for the new year will be released with the annual report as well. So the annual call in the first quarter next year, I will provide guidance for 2020.

So we are not providing, like, longer-term guidances, but I would like to reiterate that our strategic development is not like that CapEx headed and the majority of development is happening with the usual growth speed through the OpEx count. So I wouldn't be expecting like huge fluctuation in there at all.

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Operator [58]

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Dear speakers, there are no further questions at this time. Please continue.

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [59]

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Okay. So we'll wait for maybe 1 more minute to see if there's any follow-up questions. But I'm still happy for us and very thankful for the audience. I think we already have set a new record for the length of Q&A session, at least in Max and myself era. So I'll just keep talking for another few seconds to taste it, to taste this experience of the new record.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [60]

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Thank you, Anton.

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Anton Terentiev, Public Joint-Stock Company Moscow Exchange MICEX-RTS - Director of IR [61]

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Okay. I'm checking the webcasting interface. We have no further questions here. We've answered everything we had. And for the regular Q&A interface, we have no further questions. So I think at this stage, I should wrap it up. Thank you very much, everybody, for your very good and insightful questions. It's really rewarding because we spend some time preparing and then we get all the questions, we are happy with that, and looking to hear you at the next call.

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Maxim Vyacheslavovich Lapin, Public Joint-Stock Company Moscow Exchange MICEX-RTS - CFO & Member of the Executive Board [62]

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Okay. Thank you, and bye.

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Operator [63]

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