ISS: It is five years since NSD was granted CSD status in Russia. How has the Russian post-trade infrastructure changed in that time?
Maria Krasnova: Russia's CSD was established in 2012, since then the Russian financial market infrastructure has undergone a series of transformational changes. Foreign investors now have direct access to the market through accounts of foreign nominee holders. Foreign CSDs or ICSDs are allowed to hold their accounts with NSD, others – with local custodians. Since 2013, we have seen a steady increase in the use of such accounts. In the case of Russian sovereign debt securities in particular, this direct access has been an immense success. More than 30% of sovereign debt is now kept by foreign nominees directly.
Nowadays, NSD holds both securities and cash settlement licenses and has been recognised as a systemically important infrastructure by the Bank of Russia. We also operate a nationally important payment system, a trade repository and a settlement depository. NSD has more than $620 billion worth of assets under its custody. We also provide tri-party services, and perform the functions of a national numbering agency and a local operating unit for assigning legal entity identifiers to market participants.
I have mentioned only some of the changes which have occurred recently in the local market. The list of enhancements is really impressive, it includes the launch of T+2 settlement, the establishment of a central counterparty, the creation of a trade repository and other important changes aimed to ensure that the Russian securities market infrastructure meets modern international standards for safety and efficiency.
ISS: You’ve recently implemented a large-scale corporate actions reform in Russia. How did this affect the financial markets?
MK: In a number of ways. We decided to introduce the reform to make the financial market more appealing to domestic and international investors and to provide more instruments for investor protection in those areas where automation has not yet been properly introduced.
Historically, while the Russian market had been well-equipped in terms of basic safekeeping and settlement services provided by an established network of depositories and custodians, corporate action processes were still paper-based and provided through direct interactions between issuers and investors. The idea of the corporate actions reform was to change that, to establish transparent, automated and standardised processes in order to reduce risks and costs attributed to corporate actions. All kinds of market participants – investors, issuers, infrastructure – have been affected by the reform. In July, the entire market switched from the old mode of corporate actions processing to the new one. It was important to ensure the coordinated transition of the entire market: systems of all participants had to be updated, new processes and services had to be introduced, customers had to be educated. We believe that the changes have had a positive outcome and we have received some excellent feedback from our international clientele.
International market participants can now participate in general meetings electronically through their intermediaries (e-proxy voting): brokers, banks and custodians, which give instructions electronically. PoAs (power of attorney) or any other documents are no longer needed. The first post-reform statistics for participation in general meetings via e-proxy voting are quite positive. Previously, shareholders could only vote by personal attendance or by paper voting ballots. Now they have two more ways: apart from e-proxy voting , in 2017 NSD launched the e-voting service, which allows shareholders to participate in general meetings remotely via a dedicated website. It does not require any intermediation or payments, for a voter it is easy to access and is free of charge. Meeting participants can observe an actual meeting on a screen, ask questions, and vote remotely. Sberbank was the first pubic joint stock company to provide its shareholders with e-voting facilities maintained by NSD. In total, 806 shareholders of Sberbank holding 33.3% of votes participated in the AGM electronically (including those who used the e-proxy voting technology). The second issuer that used e-voting services at its general meeting was our parent company Moscow Exchange. The statistics for that event suggest that more than 70% of the votes were submitted electronically.
ISS: NSD has been actively enforcing international standards in Russia. Is this done to achieve domestic benefits, or is it a part of your international strategy?
MK: Both. Our aim is to build an efficient, transparent, and low-risk infrastructure to provide safe and affordable access to the Russian market for all kinds of users and participants. In Russia, there are participants who are active SWIFT users. In fact, all banks use SWIFT for their cash settlement transactions. For securities settlements, it’s not that widely used. From the very beginning, we decided to stick to technologies that allow the implementation of STP processing as widely as possible. We understand that there are smaller or medium-sized participants which are not inclined to use SWIFT as a channel of communication, therefore, we developed our proprietary means of communication that allow using SWIFT formats alongside with our domestic formats.
For us, the implementation of internationally recognised standards for electronic communications was an obvious choice beneficial for both our international and domestic clientele. ISO 20022 is NSD’s internal standard on which our systems are based but since our international clientele mostly uses ISO 15022, we have made it possible for them to use both ISO 20022 and ISO 15022.
For our smaller participants it was important to get a proper instrument enabling the manual creation of ISO-based messages. NSD has developed a GUI which allows smaller participants to avoid extra costs when participating in the new corporate actions system without any loss in quality or extra risk.
There are other areas of NSD business where the implementation of ISO 20022 is seen as beneficial. For example, we used it for the fund settlement platform. Another NSD project’s objective is in line with the efforts of the Central Bank of Russia pursuing an ambitious goal to implement ISO 20002 based messaging standards in the cash settlement area in the Russian market.
ISS: Which other NSD projects do you consider critical for integrating Russia’s infrastructure into the global financial system?
MK: We have already achieved a lot. We now have the infrastructure which meets the requirements of the international securities market community but there are always areas for improvement. I would mention further enhancements in the area of settlements for both cash and securities. We have already implemented a number of tools to allow participants to handle their settlements in a safer and more efficient way, such as pre-matching, linked transactions and instruction prioritization.
Recently, the Bank of Russia introduced a mandatory RTGS settlement for amounts above 100 million roubles. The results are very positive – we can see that the volumes of transactions settled through the RTGS are steadily growing.
Since the settlement in Central Bank money is really important for our international clients, we are working on further development of our DVP with Central Bank money settlement services.
ISS: NSD has announced a blockchain based platform that will use and store tokenised assets and assign IDs to the owners of crypto-wallets. How do you see this changing global financial infrastructure?
MK: Blockchain has been quite a popular topic over the last couple of years and NSD has paid significant attention to the trends in this area. Our shareholders want us to be a driving force for change. If we see that the new technology will benefit our clients, we have to be prepared to develop it and negotiate the required legislative changes with the regulators.
The amount of investment into Fintech all over the world shows us clearly that substantial changes in the way financial market infrastructure operates may occur very rapidly.
The crypto-asset market is rapidly growing and attracting enormous attention. Our goal is to build a secure and user-friendly infrastructure for digital assets. We believe that the new technology should not only provide technological and legal protection for all parties involved, but also extend variety of post-trade services for investors, custodians and new institutions emerging in this sector of economy. It is also important to synchronize our efforts with the work of regulators in this field.
Our experience suggests that possibilities offered by DLT may help traditional infrastructure to solve certain issues but they will not entirely replace the key technologies.
Do you think there will be more regulations in Russia?
MK: Russian regulators are actively involved in international regulatory initiatives, and, as we can see, are continuously following international regulatory trends.
As a systemically important institution, NSD is following international requirements applicable to financial market infrastructures. Among other things, NSD is CPMI-IOSCO compliant, we disclose respective information on our website like infrastructures in other jurisdictions do.
I believe that regulations will continue getting more stringent, and we should be prepared.
As a result of a series of recent reforms, the Russian infrastructure is now in line with the international standards, however, we continue working on the next set of projects and initiatives to make our market infrastructure more reliable and affordable for its participants.