Global custodians may be permitted to open direct accounts with NSD

14 July 2017
Print version

Author: Emma Terchenko

The article was published in Vedomosti issue No. 4363 of 14 July 2017 under the title Investors will be given accounts by NSD

According to National Settlement Depository, this will help attract investors to Russia.

Global custodians have a need to open direct accounts with National Settlement Depository (NSD). "Now the time has come", said Eddie Astanin, NSD's CEO in an interview to the Interfax news agency. This right is only available to foreign CSDs and Russian companies, whereas global banks have to do it via a Russian subsidiary or use the services of another participant.

During the recent meeting of the International Investment Committee (under the auspices of NSD), representatives of major custodians, such as The Bank of New York Mellon, Raiffeisenbank, Citibank, JPMorgan, Credit Suisse, SEB, and Société Générale, complained that for them being unable to open a foreign nominee account directly with NSD is "regulatory discrimination", said Mr Astanin. Such regulation infringes on their interests and "impairs the value of this market for them". NSD and investment banks are discussing the situation with Russia's Finance Ministry, said Mr Astanin. We need to change the Law on the Central Securities Depository.

"There is a group of ultraconservative investors that will only come to Russia if they can open direct accounts with NSD", stated Mr Astanin. And their assets will be managed by a local agent." Russian custodians do not like this idea, but NSD does not share their concerns that they may lose part of their business.

"Rather, we do not support the idea, but generally, we take it easy," said a Sberbank officer. He added that even the world's duopolists on the settlement market, Euroclear and Clearstream, do not interact with NSD directly (even though since 2014 they have had direct access to accounts with NSD and can work with Russian shares and bonds. – the Vedomosti note), but through VTB Bank and Sberbank – these banks adapt NSD's services for their needs. Furthermore, under Russian law, NSD is not permitted to provide lending facilities to them. In addition, Sberbank's custody department cooperates with BNY Mellon, JРMorgan и Citigroup.

International CSDs have been present on the Russian government bond (OFZ) market since 2012. As a result, according to the Central Bank of Russia, non-residents' share of transactions in government bonds has more than quadrupled to RUB 1.7 trillion. The inflow of foreign investors' funds is observed precisely in the OFZ bond market, but has not occurred on the equities or corporate bonds market because of the geopolitical events of 2014, Mr Astanin explained. Formally, global custodians' overseas customers now keep their funds with Russian intermediary banks, whereas certain players would like to keep their funds directly with NSD so as to reduce risks.

BNY Mellon, Credit Suisse, SEB, and JРMorgan spokespersons were not available to respond to the Vedomosti's question. The fact that the negotiations with the Finance Ministry are underway has been confirmed to the Vedomosti by a top manager of one of the international custodian banks. He notes that Russian participants' concerns are understandable: a number of major banks earn by acting as intermediaries between global custodians and investors mostly by handling purchases and safekeeping of depositary receipts.

For example, Sberbank supports 55 depositary receipts programs for 32 Russian issuers, including Sberbank, Magnit, MTS, Rosneft, Megafon, etc.

"The only risk we face is that of sanctions being imposed and a ban on our operations in Russia, said the Vedomosti source.

Global custodians' direct access to NSD's services has both advantages and disadvantages, but still many questions remain unanswered, including those of service fees, said Ms Larissa Gorbacheva, Citibank's Securities Country Manager - Russia.

Competition with foreign custodians is good for investors, stated Ms Nadezhda Ushakova, Head of Custody at VTB Bank. The lifting of the ban to open direct accounts with NSD might be of interest to global custodians, as their service offerings in Russia are not competitive compared to the services offered by Euroclear and Clearstream both in terms of fees and processing speed, said Sberbank's spokesperson.

"Direct access to NSD may make investments in Russia a more inexpensive process," states Vladislav Kochetkov, Finam's CEO. For many foreign financial companies, the regulations only permit operation through the CSD, he said. There will be no redundant link – i.e., a Western bank's Russian subsidiary – in the transaction settlement chain, notes Alexander Losev, CEO of Sputnik Capital Management, "In that case, the country risk associated with Russia is removed."

Mr Astanin believes that if custodians are granted direct access to NSD this might also prevent difficulties with issuing sovereign Eurobonds. In May 2016, the Russian Eurobond issue encountered significant difficulties, as Euroclear and Clearstream were at first reluctant to accept the issue. As a result, the Russian Finance Ministry had to offer a premium, setting the interest rate for the issue at 4.75% per annum. Later on, the Russian government debt instruments were admitted, but if Euroclear had refused to settle OFZ bonds, this would have seriously undermined the demand and affected the yields on further issues. It is precisely the Finance Ministry that is one of the main beneficiaries of foreign investors' access to the government debt market, explained Mr Astanin to the Vedomosti. The Finance Ministry's and Gazprombank's officials were not available to comment.

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