Eddie Astanin has commented on the idea of liberalising global banks' access to opening accounts with National Settlement Depository.
Moscow. 13 July [2017]. INTERFAX.RU - Russia's central securities depository, National Settlement Depository (NSD), believes that the time has come to liberalise global banks' access to opening direct accounts with NSD; this will attract new foreign investors to the market and reduce risks associated with the issuance of sovereign Eurobonds, said Eddie Astanin, NSD's Chief Executive Officer, in an interview to the Interfax News Agency. He also responded to the criticisms against NSD in relation to setting tariffs for users and spoke about the business development plans.
Direct access of global banks to NSD
- The Finance Ministry believes that the Russian Federation should grant global banks providing custody services to non-resident customers the right to open foreign nominee accounts with NSD. Do you think this will make the Russian market more attractive for foreign investors?
- Yes, this subject is very important for foreign investors. At present, a global custodian is required to open an account with NSD through its Russian subsidiary or through another participant and bear the accompanying risk instead of opening a direct account with the Central Securities Depository. Just a month ago, we held a regular meeting of the International Investment Committee at NSD, which includes representatives of European and US offices of the world's largest financial institutions present in Russia —BNY Mellon (Brussels), Raiffeisen Bank (Vienna), Citibank, JP Morgan, Credit Suisse, SEB, Société Générale, etc. They say that being unable to open a foreign nominee account with NSD is regulatory discrimination, which gives you a feeling that the market is unfair to foreigners. In their opinion, such regulation infringes on the interests and rights of foreign investors and impairs the value of the market in their eyes.
If foreign securities depositories are permitted to open direct accounts with NSD, this does not mean that they will rush to do it right away. But it is an important option which will create extra comfort for our participants. For the ultimate client, to keep assets with the CSD appears to be less risky than to keep them in accounts with a local professional market participant. Some large banks say that there is a group of ultraconservative investors which will come to Russia only if they are able to open accounts directly with the CSD. Naturally, these assets will be managed by a local agent of the international institution, as a rule by a subsidiary bank which has a much better understanding of the local market peculiarities. That's what happens everywhere. So I don't see any risk for Moscow branches of foreign banks. Such model is more transparent, fair and will encourage major foreign investors to deal in Russian assets on the local market.
Certainly, we can work within the existing circumstances, but I would like to point out that, initially, the existing system was introduced as a transitional one, when the right to open accounts with the Russian CSD was only granted to foreign CSDs and Russian market participants.
- Maybe the time has come to move on to the next phase?
- We believe that it has. We support this model, i.e., the right to open foreign nominee accounts with the CSD for all participants. Our colleagues, Russian custodians, do not support it yet. They have their arguments in favour of their position, and we respect that. But, let me reiterate, in our view, since the model is optional, and, as a rule, local markets use agency models, Russian custodians will not be deprived of their business. That's the way Euroclear and Clearstream currently operate in Russia.
NSD has a neutral position in this respect, as it does not affect our earnings whether securities are held in an account with Citibank's Moscow branch or in a Citibank London account with the CSD, we are not pursuing anyone's interests. But if we look at the situation from the viewpoint of whether the market infrastructure is perceived as fair, which creates additional possibilities to attract capital, then everyone should be given the right to open accounts with the CSD. In that respect, we are counting on the long-term growth of the market and because of that, we are interested in that.
- Global banks have already applied to the Finance Ministry, and the Ministry's 2017-2019 Debt Policy Guidelines include this subject.
- We have discussed this matter with the Finance Ministry, and banks interact with the Ministry directly without our involvement. Everyone will remember the situation which we had last May in the course of issuing Russian sovereign Eurobonds, and the break taken by the international CSDs to assess their geopolitical risks. We believe that the model under discussion which seeks to liberalise market access will help minimise such risks.
- And where's the guarantee that global banks too will not take a break to "think over the geopolitical risks"?
- There is no such guarantee. Everyone assesses the geopolitics in different ways, this is a matter of discussion on international fora. But, for instance, US and UK investors bought 60 percent of the most recent Russian Eurobond issue.
- What needs to be changed to enable global custodians to open accounts with NSD?
- It is necessary to make amendments to the Law on the Central Securities Depository.
From the technology perspective, if we take the agency model, where the role of the agent is played by a local bank, there is nothing to be done—the model will continue working, as there is an account and the agent operating this account. If we take the model where a foreign participant opens a nominee account with NSD and operates it independently, then we will need to further adapt the client channels, introduce reporting in English and create an English-language interface. Foreigners claim that they work through agents in emerging markets. For example, in Italy, which is a developed market that has very complicated tax laws, they find it simpler to work through agents. In Germany, in contrast, they work directly, without agents.
Which model to use is up to the account owner. But global custodians claim that Russia will continue to use the agency model, with subsidiaries responsible for operating their accounts.
Fees
- Some market players accuse NSD of using its monopoly position in the settlement infrastructure market to inflate tariffs. What they mean is, in particular, the tariff increase starting from 2016 for the long-term storage of assets in NSD accounts. Could you clarify your position please?
- Prior to 2016, we provided long-term safekeeping subaccounts free of charge. They were in place even before the creation of the CSD. We had an idea to create something similar to registrar services, i.e., free safekeeping of assets in accounts at the settlement depository so that they can be traded on the stock exchange.
When the Central Securities Depository was created and the process was launched to move assets from accounts with registrars to the CSD, we said that we would not change those tariffs, i.e., have a grace period. But other clients started asking us questions like this, 'Why are you creating tariff arbitrage, I keep my assets in my CSD account and pay fees, but there are subaccounts for which no fees are charged, and they are also used for trading. They told us that it is not the right thing to do, that this creates risks, as the CSD cannot merely safekeep an asset, it is obliged to provide, for example, servicing for that asset, process corporate actions and settle trades. If NSD charges fees for such services for some accounts but not for others, it means a systemic imbalance. This made us think whether we should remove such long-term safekeeping accounts altogether and introduce a more fair and homogeneous model for everyone.
For two years, we discussed this issue with market participants and agreed that would remove long-term safekeeping subaccounts but would instead reduce the safekeeping fees for equities and bonds. Furthermore, we believe that those participants who do not need the CSD's services but merely want to safekeep their asset and not to incur any charges relating to such safekeeping, would be able to move their assets from the CSD to registrars.
As a result of such decisions, the tariff change had a neutral effect on NSD, we did not earn any additional revenue. We started to discuss this model with the market community back in 2014, but it was not until 2016 that we introduced it. In addition, we introduced a one-year grace period for owners of subaccounts where the underlying assets are kept for DR programs. The tariff was capped at 1 million roubles.
As a result, the tariff burden has become lower. For instance, the effective rate for equities declined by 40 percent to 70 percent for different market players, whereas for bonds the rate fell by 15 percent and for Eurobonds, by 30 percent. The tariff reduction affected all groups of NSD participants. I would like to stress that the tariff burden has been declining systematically during all the five years of the CSD's existence in Russia. In 2012, with 10.9 trillion roubles in assets, NSD generated 1.2 billion roubles in safekeeping fees. By the end of 2016, the assets holdings reached a record of 36.4 trillion roubles, with the safekeeping fees making 2.5 billion roubles, a significant lag behind the growth of assets. This is a direct consequence of the descending fee scale, in which the rates decline as the assets in safekeeping increase (economies of scale).
At the same time, the cost of the "admission ticket" to use NSD's services remains extremely low. It is NSD's principled position to give even small companies a possibility to use the CSD's infrastructure. At DTCC, the US central securities depository, the minimum asset servicing charge is USD 4,000 per month, whereas at NSD, the charge remains as low as 3,000 roubles.
I consider it to be a major achievement of the Russian infrastructure that the market community is engaged in the CSD development, including detailed discussion of fee-related matters. The current model was not created overnight: first, we had discussions with the market community for two years. Second, we discussed this matter at users' committees. We have a committee for settlement and securities safekeeping activities and tariffs, a committee of users of CSD services, which is required under the laws and regulations of Russia's antitrust watchdog FAS and which consists of market participants accounting for more than 55 percent of NSD's revenues. The committee has 25 members representing major trading participants, registrars, stock exchanges and clearing houses. They discussed this matter and voted "for". After that, the matter was submitted for approval to the NSD Supervisory Board. The committee can vote against a tariff change, and in that case, the change may be approved by a two-thirds vote of the Supervisory Board. However, over the five years of our operations, we have not seen such a thing happen, even once.
Please note that the Supervisory Board also includes market representatives—top managers of Russian and foreign financial institutions, and that members of the users committee and members of the Supervisory Board are different people. All information on the composition of these committees is transparent and can be viewed on NSD's website. Can you imagine that other national monopolies, for instance, those supplying heat or water to your household, would need to agree on utility charges in such a manner and defend them vis-à-vis different groups of end customers.
Our tariff model went through all phases and was adopted by the committee of CSD service users, approved by the Supervisory Board, accepted by the Bank of Russia and became effective on 1 January 2016. But it was not until the autumn of the same year that the issue of the influence the tariff has on smaller participants arose. However, for some reason or other, no one seems to remember the following two things. First, how much was gained by the smaller participants as a result of the CSD establishment. You will recall that, previously, registrars charged a commission (a percentage of the transaction) for processing internal transfers between their own accounts, and participants paid them huge amounts in commissions. Now that all these securities have been moved to the CSD, the commission fell to 400 roubles, regardless of the transaction amount. However, no one seems to take into account this cost reduction, which is a lot of money. The main thing is that participants who do not trade actively are able not to use the CSD's services if they do not need to keep their assets at NSD.
- Can your participants withdraw their securities from the long-term safekeeping accounts with NSD?
- Yes, they can. If they are the owners of such securities, they can move them to their account with the registrar and keep them there. This March, during the start of corporate actions season, we were approached by brokers who said that they wanted to move part of their securities from long-term safekeeping subaccounts with the CSD to accounts with registrars. We charge a fee for such withdrawals, but we offered the brokers a three-month marketing period so that they could withdraw the securities free of charge. Of the RUB 3 trillion worth of assets then held in our long-term safekeeping subaccounts, RUB 1.5 trillion of assets were moved to registrars. In our view, this completely removes this item from the agenda.
By the way, quite recently, there was a report on the draft Ordinance of the Bank of Russia "On the maximum fee charged by a registrar from registered holders …" intended to replace the similar order of the Federal Service for Financial Markets of Russia, which has been in effect since 2012. In most cases, the maximum fees that can be charged by registrars for their transactions have been increased by a half.
- Sergey Shvetsov, First Deputy Chairman of the Bank of Russia, expressed an opinion that NSD is a monopoly, and for that reason, the descending fee scale is not correct, as it is only suitable for commercial entities. Do you agree?
- I have told you previously that the descending fee scale makes it possible to reduce the cost of post-trade processing for the market as volumes increase. It is called "economies of scale". At present, a mere 5 to 10 percent of market players account for as much as 80 percent of NSD's revenues. Let us suppose that everyone pays the same percentage charge or a fixed charge. NSD's revenues will decline dramatically. In that event, there will be issues with the CSD's financial resilience, its technological development, the development of the systemically important trade repository and the nationally important payment system, the corporate information centre, etc. One should answer the following question: what will be the source of finance to develop these facilities?
I am not aware of a CSD model which has a flat fee model, in which everyone pays a small fixed amount and, despite that, the infrastructure is developing rapidly. There are no miracles in this world. Someone has to finance the market development. Currently, this development is financed by the major participants, those who bring most of our revenues. For example, we have implemented a corporate actions reform which gives a significant effect for issuers, ultimate investors, and the regulator,—we have the benefit of fully electronic processing, reduced costs, and a greater protection of shareholders' rights and interests. This reform has cost us hundreds of millions of roubles, with finance coming from the common infrastructure resources. If we had charged money from participants who make one transaction per year with just a few securities, we would not have been able to create anything at all.
Who will pay for information security? These projects do not generate income, but if they are not implemented, the CSD may lose 36 trillion roubles worth of assets, or some part of them, as a result of a cyberattack. We have seen a complete system 'standstill' at the Ukrainian CSD after the Petya virus attack. And there was a theft of 1 billion dollars from the Central Bank of Bangladesh during a single evening. Do we want that happening to us?
If we want to have an ultra-reliable CSD, both in terms of operational resilience and financial stability, offering a broad range of products and having an advanced risk management system compliant with the international standards and the CPMI-IOSCO principles, which is trusted by investors, we have to pay for that, invest in that. It is understandable that, in the current model, it is the major participants who pay for that—they earn a lot on the market and spend part of their earnings on the infrastructure development. If smaller participants wish to benefit from the CSD's quality and hi-tech services, they should understand that good services must be paid for. If they do not need such services because of the high price tag, they may use the registrar's services or those offered by one of the major participants which buy services from the CSD 'in bulk'. It will be cheaper that way.
- How do you think the composition of the users committee should be changed, if at all?
- This is related to the previous question. There is a bifurcation here. The first alternative is that we can evolve towards a "wholesale" central securities depository whose clients are companies that can afford to pay for a financial supermarket's services. The rest of participants become clients of the CSD's participants, not the CSD itself, i.e., move one level down. It is similar to our work with SWIFT as a service bureau. For smaller participants, it is too expensive to get a direct connection to SWIFT, and NSD offers a shared connection, that is, provides an opportunity to get connected for a group of participants, each of which pays a small amount. The same thing is also possible for smaller investor participants when they become clients of a larger professional participant of the securities market and pay acceptable charges for working on the market.
The second alternative is to make the one-level CSD for everyone, with every participant paying some commission. I do not know whether its fees should be based on a descending scale or have a cost plus basis, or have any other model, we have not done any calculations in that respect, but such option is possible, especially as direct access technology evolves. This will give an economy of scale, as we will have dozens of millions of accounts instead of the currently existing 3,500 accounts. Then the large number of clients will provide a source of financing.
From the viewpoint of social equity, perhaps, a better option would be to have a flat-fee model when each participant pays a certain amount, regardless of its size. But this model cannot serve as a source of finance to develop infrastructure—someone will still have to subsidise it. Furthermore, NSD is a member of a corporate group of a public joint stock company which has to take account of the interests of its shareholders who want to earn dividends on their shares. We are open to discuss different schemes.
- What will be your response to the Federal Antimonopoly Service of Russia, which will be reviewing NSD price setting this year?
- First, our model is in strict compliance with FAS Russia's ordinance. It is a matter of principle for us, we cannot afford to violate law or to act contrary to the regulator's orders. Second, we are now in dialogue with the market community: since the tariff model is not a dogma, we can look for some new ways to optimise the process. We have already entered into consultations with the market on the subject in order to find a balance. For instance, we have noted requests from fund depositaries which keep assets for non-governmental pension funds whose licences have been revoked. We have drafted a resolution and expect to submit it to the Supervisory Board for approval shortly.
- Perhaps it would be simpler to reduce the fees for smaller clients.
- You see, today they say it is too expensive for them to pay 100 roubles, because the market is weak, and they seem to forget that they used to pay a fixed percentage of the transaction value. But tomorrow, they will tell you that 90 roubles is also too expensive. In this respect, there is one more important thing. If my model on the market is not competitive or if I cannot develop my business, this should be dealt with not only at the cost of infrastructure, but also by changing the business model. We have calculated that if an investor buys 500,000 roubles worth of securities on the market, it will receive income of around 50,000 roubles per year. In that case, it will pay NSD 60 roubles for its safekeeping services. Just a little more than it would pay for a ride on the Moscow metro. It is merely a matter of perception: first you pay 10 roubles, then 12 roubles, and that's a problem Ok, let's look what can be adjusted and where we can get the money to ensure development and reliability.
- When do you expect to find answers to the questions on the tariff model?
- We have been in negotiations with participants since last autumn, when the roundtable with the Central Bank of Russia was held. We made promises, we are acting up to them—I think we will offer some options already this year.
- FAS Russia's threat that if NSD fails to reach an agreement with the market, the antitrust watchdog does not rule out that it will use its authority to regulate monopoly tariffs and thus accelerate the quest for an acceptable model, does it?
- We believe that a transparent multi-tier system for coordinating tariffs by market participants, which are ultimately approved by the Bank of Russia, is more effective than the one where the decision is taken by the regulator alone, even if it acts for the benefit of the market. And we treat FAS's position with respect.
Collateral management
- For the Moscow Exchange Group, of which NSD is part, the key project this year is to implement a single collateral pool. The stock exchange is now putting processes in place in order that this project can be fully implemented at the start of next year.What role does NSD have to play in this project, and what sort of preparations are you making?
- This project is the right one for the market. It seeks to optimise the use of participants' collateral for transactions across different markets and to reduce their costs. NSD's services will not change after the single collateral pool is implemented. The changes will mostly affect the stock exchange and the National Clearing Centre (NCC), clearing and risk management operations. We provide collateral for NCC, but the very collateral management mechanism, the algorithm covering NCC's risks is determined by the central counterparty. In other words, this project does not have a direct influence on NSD, but it will benefit the entire group by helping cut costs of trading participants and invigorate their activities.
- NSD has put in place a collateral substitution process. How relevant is this project for market participants?
- This technology was very extensively used by the Central Bank in its repo transactions during the 2013-2015 liquidity crunch. In March 2016, the Central Bank announced that it would scale down repo activities because of excess liquidity. At present, the Central Bank occasionally uses this technology, when the Central Bank provides liquidity at a fixed rate, as necessary. But it is Russia's Federal Treasury that is active in repo and collateral management operations via NSD. Since last year, the turnover of such transactions has doubled, making up for the Central Bank's scaled down programme. This mechanism is now very much in demand.
Apart from the Federal Treasury, there is interest in this technology from other so-called 'global creditors'. We at the Moscow Exchange group are negotiating with some of them to elaborate on the technical peculiarities of this service. Among them are extra-budgetary funds and constituent entities of the Russian Federation for which repos are a real chance to significantly increase the effectiveness of idle cash management, and treasury departments of large corporate participants.
- When do participants resort to collateral substitution, and how often does that occur?
- The collateral substitution service is needed when, for example, a coupon payment is forthcoming on a debt security, or when participants need this security for a trade they have made—and that is when they substitute it with other securities. This service is very actively used in weekly repo transactions.
- Will collateral substitution be possible within the single collateral pool?
- Such models are rapidly developing on the global markets; for instance, Deutsche Börse has a similar service. We are now in negotiations with National Clearing Centre, the stock exchange and participants and are trying to understand how much they are interested in the service. In terms of technology, we are certainly able to achieve that; the question is whether it will be in demand. In my personal opinion, this model has very good prospects within the framework of the group.
- Have market participants expressed interest in using collateral substitution as part of the single collateral pool?
- Participants are different. There are groups—medium sized and small participants—which have an interest in that. There are groups—for the most part, these are major companies—for which it is less relevant, because they do not have liquidity problems.
For such participants, the most pressing issue is liquidity management across market sectors, between the on-exchange and over-the-counter markets. Today, managing account balances on the OTC and exchange markets involves significant costs for participants. We, together with NCC, have developed an algorithm for the collateral management system which will automatically select, on the client's order, funds or securities from any of its accounts, and deliver them to its counterparty's relevant account. For example, if the participant says it wants RUB 100m worth of collateral, will select such collateral from the participant's assets held in the group's different accounts—there are many of them, at NCC, at NSD—clearing, trading, foreign currency and rouble accounts. This will be done the same way as we now select collateral in repo transactions.
This service is in demand on our market. Asset movements across accounts needs to be monitored by the participant at any time. In western markets, there is a single account maintained both for securities and funds, which reflects the assets owned by the participant. Our foreign clients tell us that the fact that assets are dispersed across different accounts complicates trading on the Russian market.
- Have you considered the possibility of uniting all the accounts?
- The concept of consolidating all accounts into a single account is a correct one, but it will require massive changes in the regulatory framework and technologies. We have discussed this question with the Central Bank, and, as a matter of fact, everybody understands that it is the right model. The question is what costs the market will have to incur in order to implement it. It comes with a rather high price tag. So on our part, we can optimise the management of accounts in terms of technology, which would be a light version of the single account arrangement.
Plans
- NSD provides e-voting services both to legal entities and individuals.Summing up the experience you have gained from the previous shareholder meetings, what do you think needs to be changed in order to make this service offering more popular with investors?
- Corporate actions are a rather conservative part of the financial infrastructure business. Things do not change quickly here. In order to be able to use electronic voting, issuers need to amend their charters and bylaws. It takes time to overcome inertia, but ultimately, everybody will switch to e-voting. Even now, we have seen that 30 percent of Sberbank's shareholders used e-voting at the bank's general meeting. As soon as the information spreads through the market—along the entire chain, from the issuer to the final investor, the system will begin to work. We believe that it is a matter of time rather than some change in the technology itself.
- How will the role played by the recordkeeping infrastructure in corporate actions processing change in the near term?
- I believe that, as time goes by, the entire recordkeeping infrastructure will increasingly rely on sophisticated technology and everything will be standardised to the maximum extent possible—there will be common standards and common channels of interaction. It is extremely important for us to create a convenient infrastructure for collecting and circulating information as part of corporate actions processing. The principal changes to the regulatory framework in this area have already come into force. Now there are two technological tasks on the agenda. The first task is to create a "single window" to support disclosure of information by issuers. They have to transmit large amount of data via various channels. Some data goes to the ownership recordkeeping system, other data is made available to the general public through a network of news agencies. We want to unify this process by creating convenient 'single window' services in partnership with the authorised agencies in order that information for the purposes of disclosure and for corporate actions processing be transmitted via a single channel, i.e., the recordkeeping system.
The second task is to create a single data warehouse, a source of high-quality information for the entire market, based on our Corporate Information Centre. Regrettably, there still is a problem of multiple sources of information on the market, which have to be checked by participants; then there is a problem of time lag when information is distributed via news agencies and recordkeeping institutions. These processes must be harmonised. We need a single source of consistent data which could be promptly delivered to data users. We are also cooperating with news agencies in this respect.
In general, I am sure that the infrastructure model will evolve towards a 'retail' one, where an individual will be able to directly obtain information about his/her assets, pay taxes, buy insurance policies and manage his/her pension plan through a single platform. I believe that we will see further consolidation in the registrar industry. But the whole chain of cooperation will be preserved—from the issuer to the registrar to the central securities depository and on to the CSD's customer. I hope we will see a liberalisation in foreign investors' access to accounts with NSD. There is a prospect of emergence of electronic assets, such as title to immovable property in the form of an electronic record, third party liability insurance, or your pension plan.
- What is NSD's key project that you will be working at next year?
- Over the past years, we have introduced a lot of innovations, services and products. Today, NSD is not only the central securities depository, it is also a trade repository, payment system, pricing centre, and corporate information centre. So, in 2018, we will focus on improving the operational reliability of all our platforms. The Supervisory Board keeps telling us that everything should run like clockwork.
- How much are you going to invest in IT under your business plan?
- Approximately 12 percent of our budget. These are significant amounts.