Driving change in Russia’s securities processing marketplace

30 April 2014
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The National Settlement Depository (NSD) has published a business plan that will guide its development planning over the next three years. This focuses on five core directions, notably the extension of CSD services, trade repository services, clearing and collateral management, payment services and providing centralised and standardised corporate actions processing. Bob Currie talks to Eddie Astanin, CEO of NSD Russia, about the content of this development agenda and the significant advances that have been made in making Russia’s securities processing markets more efficient over the past 24 months.

It has been an exciting few years for the National Settlement Depository, which in 2012 became Russia’s sole CSD in accordance with the provisions of the Federal Law on the Central Securities Depository. Previously NSD took over the functions of the Depository Clearing Company (DCC) and the RTS Settlement Chamber, which previously also provided depository services in the Russian market.  

During 2013, NSD has been working with domestic and international market participants to establish a full portfolio of CSD services in line with the parameters established in the 2012 CSD Law. “A wide body of international and domestic firms, including most members of the Association of Global Custodians, have accepted NSD as an eligible securities depository in line with SEC 17f(7) provisions and that has been an important step for us,” explains Astanin. “We have managed the transfer of a large body of equity assets that were previously held with registrars on to the CSD register,” he comments. “By the end of 2012 this was RUR 12 trillion in NSD custody but by October 2013 this figure had grown to more than RUR 20 trillion.”

Through links that NSD has established with Clearstream and Euroclear ICSDs during 2013, international investors now have an effective pipeline through which they can to invest in the Russian OFZ government bond market. This has been an important step in enabling the Russian government to reduce its funding costs. “With this development, the average yield on OFZs has dropped by more than 100bps and, understandably, this has met with a highly positive reaction from the regulator,” says Astanin. By the end of 2013, approximately 24 per cent of OFZs by value were owned by foreign investors.

With these links in place, access for international investors to the Russian corporate bond and municipal bond markets was extended in January 2014. Some amendments to Russian law and, in particular, the Tax Code, the Law “On the Securities Market” and the Law “On Joint Stock Companies” were required in order to support this development. By the end of 2013 these regulatory changes were achieved through NSD’s active participation.

Collateral management

A flagship service that NSD introduced 2013 has been the provision of collateral management support for OTC transactions with the Central Bank of the Russian Federation. This provides a tool through which the central bank can deliver liquidity into the banking system via repo transactions between the central bank and commercial banks. A next step in the development of this tri-party service is to support repo transactions between commercial banks in the OTC repo market, thus providing an avenue for secured inter-bank lending. NSD has plans to offer a new collateral management tool by the end of the year, which allows market participants to utilize advantages of securities basket for OTC interdealer transactions. The new service will facilitate an automated selection and revaluation of securities and a margin call execution.

“Collateral management is one of our core services as CSD for the Russian market,” explains Astanin. “We have plans in place to extend the coverage of our tri-party collateral management services, supporting repo interbank transactions in RUR and other currencies. Also inside the Moscow Exchange Group we are considering development of pooled collateral for Repo trades with CCP. We are analyzing international best practices, for example, the GC Pooling service offered by Eurex and Clearstream, to refine our own approach”.  

More broadly, NSD expects to extend collateral management linkages between itself and the ICSDs during the coming 18 months, thereby widening the range of collateral that NSD clients can utilise when seeking to collateralise positions through NSD’s tri-party service.

DVP

Delivery versus payment (DVP) is NSD’s one of the core settlement services, which covers all settlement models (DVP 1, 2,3) operating with cash accounts opened with NSD (in RUB, USD, EUR) and cash accounts opened with the foreign banks: Citibank, New York, J.P. Morgan & Co., New York and recently NSD has extended the number of linked foreign banks with Deutsche Bank Trust Company Americas, New York (in USD). NSD also analyzes the client demand for settlement in Asian currencies via Asian banks.

It is very important indicator for us that internal DVP transactions significantly increased recently. Development of internal DVP is one of NSD’s key priorities. Bringing into life primary measures, aimed at internal DVP development NSD is working on electronic matching mechanism and broadening DVP settlement scheme by option to settle deals using “central bank money” via RTGS system, negotiates with the regulator in respect of currency control facilitation and taxation.

NSD Trade Repository Service for OTC Derivatives

In the aftermath of the global financial crisis, G20 leaders agreed to a comprehensive programme of reforms designed to mitigate risk in OTC derivatives markets – including mandatory central clearing for certain categories of OTC derivative transaction and a requirement to report contract details to a registered trade repository . In keeping with these commitments, NSD introduced a trade repository service to the Russian market during 2013 and, by law, market participants have been required to report all OTC repo and FX swap contracts to this TR from the beginning of November 2013 (see article).

“The release of the TR service has gone broadly according to expectations,” notes Astanin. “Initially we encountered some challenges in processing reported information, particularly when this was submitted in paper form, but by the end of 2013 most of these constraints had been resolved and the reporting process was functioning smoothly.” NSD’s Repository Committee has been liaising with domestic and international clients and has made several selective refinements as a result of this consultation process. At the same time, the government is finalising a new draft law, Concern on Trade Repository Activity, and this will integrate most of the key refinements from this consultation process and provide the legislative foundation for an efficient operational model for the TR.

On the basis of experience from early months of TR operation, current efforts are being made to standardise and simplify the range of data fields that trading parties must report to the TR. OTC derivatives are often specialised, highly bespoke instruments and this can present problems for reporting parties in capturing key contract details within a standardised message format and ensuring that fields are correctly matched and reconciled. The Russian central bank is currently reviewing reporting requirements with a view to streamlining required message fields and matching procedures.

Additionally, the NSD TR is in communication with TRs in other jurisdictions in order to facilitate reporting requirements for international firms with OTC derivative and repo trading activity across multiple jurisdictions. Under EMIR, firms registered in the EU are be required to report to an EMIR-licensed TR. However, if they are active in trading OTC derivatives in the Russian market, they will also be required to report their Russian OTC derivatives contracts to the NSD TR. This involves a double reporting obligation and a double expense. To ease this burden on international firms, NSD aims to improve information flow between registered TRs such that this data can be shared, thereby reducing the duplication of reporting obligations on trading parties. This problem can be solved when new regulation providing exclusion for foreign market participants and possibility for them to use for close-out netting purposes information registered in foreign TRs comes into effect.
 
                                                                                                                                                                                                        
Corporate Actions Reform

An important component of NSD’s current development agenda is to facilitate reform of corporate actions processing in the Russian market. Existing procedures have given rise to a range of inefficiencies and costs when measured against international standards and a far-reaching plan of action has been devised to address these shortcomings. “We have received strong backing for this agenda from the Ministry of Finance and the Central Bank,” says Astanin. “An aggressive timeframe has been set out to achieve this reforms and this will be demanding, given that this requires technical and procedural changes within the market as well as amendments to Russian corporate law. But we have strong support from the market regulator and local and international communities, which are keen to see Russia’s corporate actions procedures brought more fully into line with international practice as cross-border access is extended to Russian government bonds, corporate and municipal bonds, and ultimately to the Russian equities market.”
                                      
A Corporate Actions Market Practice group has been established to co-ordinate these activities, which includes representatives from NSD and the stock exchange as well as sub-custodians, registrars and the issuer community. A comprehensive blueprint for change was established during Q1 2014 and this is now being aligned with forthcoming legislative reforms in accordance with policymakers and with financial supervisors.

This will place an obligation on securities issuers to disseminate information on forthcoming corporate events using ISO 20022 format message standards. A priority, in accordance with international standards, is to avoid all paper communication. To facilitate timely communication of accurate CA data, NSD will serve as a golden source of information for each corporate event, thereby minimising the need for sub-custodians or other intermediaries to collate CA information from multiple sources and to reconcile any discrepancies in information that may be found across these sources. “We are optimistic that this reform agenda, though demanding, can be completed during 2014, thus sending a strong message regarding our commitment to the international financial services community,” says Astanin.

         
Projecting forwards

In FSR Q3 2012, we reported that NSD has opened correspondent accounts with a number of CSDs in the CIS region, including Ukraine, Belarus, Kazakhstan, Kyrgyzstan, Armenia and Azerbaijan. NSD continues to explore opportunities to establish itself as a regional hub for the CIS region, supporting account relations with other CSDs and bilateral links to deliver issuer services, corporate actions and other non-settlement activities. “We are currently in dialogue with the Armenian CSD to provide the access of international investors to Armenian government bonds via CSD links,” says Eddie Astanin. “This illustrates how we can use the experience and international links that we have in place at NSD to help other CSDs in the CIS region to develop and internationalise their activities. We believe that we can develop our post-trade environment in the region through collaboration.”

More broadly, NSD’s Strategy Committee has recently released a 3-year business plan that will guide development planning for NSD in times ahead. It will focus on 5 core directions, notably the extension of CSD services, trade repository services, clearing and collateral management, payment services and providing centralised and standardised corporate actions processing, with NSD offering golden source corporate actions information to support this process. “These are the major topics on the table at NSD and the initiatives that will form the backbone of our development ambitions over the next three years,” concludes Astanin.

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