The Ministry of Finance proposed making legislative amendments that will allow foreign custodian banks to directly open foreign nominee securities accounts with National Settlement Depository (NSD). This initiative is included in the 2017-2019 Key Directions of the State Debt Policy of the Russian Federation published yesterday. The Ministry’s task is to engage foreign investors in operating on the Russian Eurobond market. However, local custodians are not interested in implementing this idea, and services for end clients are unlikely to become cheaper.
Yesterday, the Russian Ministry of Finance published the 2017-2019 Key Directions of the State Debt Policy of the Russian Federation on its website. Among various initiatives, the document contains a proposal to grant to foreign custodians the right to open foreign nominee securities accounts with National Settlement Depository (NSD), Russia’s central securities depository. The document points out that the experience of using the nation’s infrastructure when placing Russian Eurobonds was positive. Apparently, this is why the Ministry decided to provide the national infrastructure (represented by NSD) with additional preferences – an opportunity to render services directly (rather than via intermediaries) to foreign investors who buy Russian securities. NSD officials said that they were ready for this development. Eddie Astanin, Chairman of the Executive Board of NSD, said: “Having worked via “bridges” with international and foreign central securities depositories, we have accumulated great experience and competence in the sphere of servicing foreign market participants.”
Currently, in accordance with the law “On the Central Securities Depository,” only central securities depositories and settlement and clearing systems may open foreign nominee securities accounts with NSD. Foreign investors are serviced via intermediaries – local custodians. Most of these intermediaries are subsidiary banks of global international financial organizations. The new scheme proposed by the Ministry of Finance cuts out these intermediaries. Boris Cherkassky, advisor to the CEO of Infinitum Special Depository, said: “This removes artificial obstacles and upgrades access to our market. The speed of operations grows, the cost of services is reduced, and intermediary risk is eliminated.” He thinks that direct access to NSD’s accounts is mostly of interest to global custodians. NSD confirmed this. Mr. Astanin said: “Following our negotiations with global custodians and investors, we can say that there is significant interest. Moreover, written requests regarding this issue were sent by foreign custodians to the regulator.”
However, according to representatives of the professional community (Russian custodians have not officially commented on this issue), this request may have been made by only one market participant — the Bank of New York Mellon. Representatives of the Bank of New York Mellon did not respond to Kommersant’s questions yesterday. An official of one of the major local banks that provides custody services wonders: “Why should other global custodians kill the well-functioning subsidiary business in Russia which brings them good revenues?” He adds that global custodians will have to go to “advanced” local players anyway for assistance, because working in Russia requires special competence. He says: “For our clients, we will simply become operators of accounts with NSD. We won’t keep assets and take appropriate risks. These services are cheaper; however, the amount of work will actually remain the same.” According to a representative of another major Russian bank, direct access to accounts will not allow NSD to gain a lot. "Of course it will not increase the amount of assets — they already are kept in NSD, only in our accounts. To provide services with the appropriate quality to which our clients have become accustomed to, NSD will have to invest a lot into developing its custody business,” he explains. As a result, services for investors are unlikely to become cheaper.
NSD does not think that the Ministry’s initiative excludes the existing model of entering the market. Mr. Astanin said: “This is an option for investors, and the presence of options increases interest, as it allows market players to satisfy the requirements of a larger range of investors.”