MOSCOW, Oct 23 (Reuters) - Russia's fledgling derivatives market may fall victim of a new tough gambling law because the country's courts treat futures and forward contracts as risky bets that should come under gaming rules.
The practice is a legacy of a 1998 financial meltdown when business courts ruled that trading in currency derivatives amounted to gambling. The courts therefore gave no legal protection to the contracts, allowing banks to default.
This month President Vladimir Putin sent parliament a draft law which would force casinos and other gambling institutions to move outside large cities into four gaming zones in remote areas, including one in Siberia.
Traders say there is a risk some judge may rule that trading floors at Moscow bourses which trade $500 million worth of derivative contracts a day will have to follow.
"Everything is in the hands of a judge right now. The judge may decide that derivative trading is not gambling but unfortunately they more often take an opposite view," said Alexei Timofeev, head of stock market lobbying firm NAUFOR.
NAUFOR sent a letter to the financial markets watchdog last week urging it to amend the draft gambling law before it is too late and add a clause specifying the law does not apply to derivatives trading.
"If judges maintain their views and regard derivatives trading as gambling, it might have catastrophic consequences," Timofeev said.
NEED FOR HEDGING RISKS
The market is regulated by a law from 1993, when commodities and stock exchanges were in their early years, while court decisions after the 1998 crisis dealt a blow to the development of derivative trading and risk management in Russia.
Before 1998 foreign investors hedged their rouble risks by buying non-deliverable forward contracts that enabled them to manage risk without taking delivery of currency. But when Russia devalued the rouble in 1998, banks opted to default.
When investors went to courts they learned they were engaged in risky betting and might not get their money back, which killed their appetite for Russian derivatives for years to come.
"People got worried about the legal protection of their contracts. They thought NDF court decisions would automatically apply to other derivatives," said Ilya Yershov, head of Derivative Expert think-tank.
Meanwhile, the need for hedging risks is becoming more acute for Russian exporters who lose their revenues because of the appreciating rouble as well as volatile commodity prices.
The financial markets watchdog has been working on the derivatives law for years but Timofeev said that while there was a clear difference between gambling and derivatives, it was very hard to come up with a legal definition.
"The derivative market is very difficult to formalise. All attempts to write a special law for this market in Russia have so far failed," said Mikhail Temnichenko, head of equities trading at Moscow's MICEX exchange.
"We can waste another five years working on this law but we need to act now," Timofeev said.
Yershov said that traders could bypass regulation by including physical delivery in the contracts but on some assets, such as RTS stock market index, delivery was impossible.
Russia's two main bourses, MICEX and RTS, trade futures contracts on oil, gold, RTS index, shares, currency exchange rates and interest rates. There is also a large market in rouble non-deliverable forward contracts.Reporting by Gleb Bryanski;