OTC Market to Become More Reliable

31 October 2013
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After the 2008 crisis and the bankruptcy of Lehman Brothers, one of the biggest investment banks in the USA, global regulators paid attention to strengthening control over risks in the OTC financial market. Currently many countries are working on founding repositories, the infrastructural organizations involved in registration of transactions concluded in the OTC market.

Elena Gusalova, Director, Head of Research and Development, National Settlement Depository (NSD), told Prime about the advantages of using repository services provided by NSD to market participants.

The idea of a repository is new for the Russian financial market. Could you tell us what the functions of the repository are, and when NSD will launch its repository activities?

The idea of creating the repository emerged after the 2008 crisis in order to mitigate the risks in the OTC market and increase the transparency of the derivatives market. This is a global trend in the registration of OTC transactions; this is among the obligations taken by G20 countries during the Pittsburgh summit in 2009, as it was considered necessary to control the huge and non-transparent derivatives market.

It is worth adding that Russia goes in line with other countries in respect of building the repository. For instance, in Europe the requirements of mandatory registration of transactions in the repository will be introduced only in February 2014. And the European regulator does not require reporting on repos.

According to Russian law, participants in the OTC market shall register in the repository all derivative and repo transactions concluded on the basis of master agreement. The transaction is deemed to be registered only if both parties have reported on it. They may report independently or through intermediaries, so called “informing persons,” i.e. a third party or another party to the transaction.

Moreover, if one of the parties to the transaction is non-resident, it shall report to the repository too. Some non-residents sign respective agreements with us.

When will it become obligatory for Russian participants to inform the repository about the concluded transaction?

Participants in the OTC market will report on repos and currency swaps starting 5 November, and starting July 2014 they will report on transactions with other instruments.

Formation of the repository is quite a new and complicated process, requiring technological changes both at the repository and market levels, so the regulator is introducing requirements related to the reporting by stages. In February, FFMS registered NSD as a repository, and since that moment we have provided our clients with the possibility to conclude repository agreements and to begin reporting. So our clients got a timeframe for adapting their systems to the repository operations.

How many agreements have you already concluded?

To date we have concluded over 400 agreements, the clients are testing the services, some of them have already switched from trial to full mode.

Moreover, soon we will introduce a service allowing non-residents to report on the transactions, not to our repository but to the foreign repositories with which they have concluded agreements.

The first foreign repository will be REGIS-TR, the European trade repository owned by foreign central securities depositories – Clearstream and Iberclear. Now we are working on concluding an agreement with them; according to the agreement, the non-resident client- will report on the concluded transaction not to NSD but to REGIS-TR which will send us the appropriate data on the transaction.

How often will the repository report to the regulator?

According to the regulator’s requirements, the repository will send data on transactions for the previous day on a daily basis. Reports on short term transactions with up to four days term of fulfillment (excluding repos) may be sent once per quarter.

What advantages of working through the repository for the market participants do you see?

First of all, the repository’s function is to mitigate the risks associated with low transparency of the derivatives market. Moreover, in case of legal proceedings or bankruptcy of one of the parties to the transaction the second party may use liquidation netting on the basis of the extract from the register of agreements.

Every transaction concluded in the OTC market will be tracked. In the 2008 crisis it was quite difficult to untangle the chain of repos. It will be simpler to do this if we have reports from the repository. The reports on transactions will contain information about prices, so it will be easier to track the process of price formation in the OTC market.

The repository will also provide services related to collection of information in a client friendly format and transmitted via convenient communication channels.

What expenses will the market participants incur while working via the repository?

Rates for repository services will be introduced in November, a promotional period with no charge is in effect until 31 October. We have different tariff plans for various categories of clients: according to one category of the rates, the fee is charged on the basis of value and number of transactions concluded, another category is based on the retainer. We have analyzed the rates for repository services of our peers abroad and approved our rates in late October.

If the market participants do not conclude the master agreements and do not report on the transactions to the repository but continue working on the OTC market as before, will there be any sanctions for them?

No, these transactions are not subject to regulation of the reports in the repository. However, as practice shows, most transactions are concluded on the basis of master agreements, as it allows mitigating risks. This is a format accepted by the market participants, it offers the convenience of dealing and transactions’ data processing by the back office.

What happens if the companies working on the basis of master agreements do not report to the repository?

They violate the reporting regulation and are not entitled to receive the liquidation netting in the course of legal proceedings.

Initially it was planned that the repository will be formed on the basis of Depository Clearing Company (DCC). What has changed?

It was decided to form the repository on the basis of NSD, as such integration of the services via the same legal entity was more convenient for our clients.

What will happen to DCC?

Currently a part of the depository business remains with DCC. The process of transferring clients from DCC to NSD has almost been completed, but DCC still functions as a separate company.

The RTS Settlement Chamber has also formed its repository. How many repositories can work in the market, what is your attitude to the competition?

The regulator does not establish the maximum number of repositories but sets some requirements to the companies that may function as repositories. Besides, a large number of repositories will not be very convenient for the clients. I cannot imagine a client who is eager to report to three or four repositories.

The creation of the repository by the RTS Settlement Chamber for us means that we work in the competitive environment, and we like this. However, we can see now that our repository and the RTS Settlement Chamber’s repository could have different client bases.

Does NSD plan to launch other services in the future?

The repository is only one of NSD’s projects. Now we provide a full range of settlement services to our clients (at the end of trading day, OTC settlements, collateral management services which are being developed now). In particular, we provide services of automatic selection of securities for repos, daily revaluation of liabilities, automatic payment of margins,  replacement of collateral in OTC repos with the Bank of Russia.

We plan to provide the similar service on OTC transactions with the Bank of Russia. In particular, Moscow Exchange plans to launch on-exchange repos with the basket of securities, and the collateral management system will be implemented on the basis of NSD’s platform.

Moreover, now we expect changes in the tax code. The changes assume the multi-stage payments on Russian securities. The procedure of payments and tax payments on shares will change, and the depositories, not issuers, will be the tax agents.

These changes will allow payments and tax withholding to be made in shorter terms and will give non-residents an opportunity to efficiently use the procedure of double taxation avoidance.

In addition to this, we have a number of initiatives related to improvement of the law on securities and law on joint stock companies in respect of conducting the corporate actions and the meetings of shareholders. Very soon we will submit them to the regulator and we expect to see the adoption of the respective legal changes in the foreseeable future.

Our initiatives are based on the principle of multi-staging during implementation of all corporate actions and of switching to the electronic vote procedure from the use of power of attorneys for this purpose.

For instance, now an owner of securities will issue an appropriate power of attorney to the depository for taking part in the meeting of shareholders or in any corporate action. However, the nature of relations between the depository and the client already assumes that the depository represents the client’s interests in compliance with the law and the agreement.

So the client does not need additional powers of attorney. In fact, we want to give our clients the opportunity to use electronic voting through the channels of NSD’s interactions with registrars.

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