Russia: Behind-the-Scenes Progress on Operational Risk

05 November 2014
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By Chris Kentouris

US and European sanctions aside, the Russian securities depository and regulators are staying on track toward their goal of turning Moscow into a major financial center through two badly needed operational reforms — the automated processing of corporate actions and electronic proxy votes for annual meetings in Russian corporations.

In line with the global trend toward using ISO-compliant messages for processing corporate actions, the National Settlement Depository today will begin sending information on all corporate actions — annual meetings, reorganizations and other events — associated with Russian and foreign issuers to its participants in ISO 15022 and ISO 20022 formats. As of today, the NSD will also send out information on the corporate agendas of shareholder meetings in ISO 15022 and will do so in ISO 20022 formats by the end of the year.

So far, the NSD has only been sending information on corporate actions related to Russian bonds — typically income payments —  in the ISO 15022 formats. In April 2015, participants will be able to cast their votes in annual meetings using either the ISO 15022 and ISO 2022 formats and the following month will be able to also vote on so-called voluntary corporate actions in those formats. The NSD says it will even provide participants with a vote confirmation — or verification — that their votes have been cast and received by Russian issuers. Until then, the bank and brokerage members can only vote on annual meetings using the NSD’s own formats through its proprietary network.

The ISO-15022 formatted information will be delivered through either the network operated by La Hulpe, Belgium-headquartered SWIFT for participants which are SWIFT-enabled or through the NSD’s own network. The ISO 20022 message types will only be used through the NSD’s network. Either way, participants benefit in two ways. “Relying on standardized message formats will help ensure that correct and complete information is provided to reduce the risk of misinterpretation,” explains Sergey Bernevega, director of corporate actions information for the NSD in Moscow. “It will also be easier for financial firms to download the data into their own internal applications.”

Data Straight from the Issuers

Processing corporate actions is serious business for banks and broker dealers who are on the hook from their clients for any errors. Thus, automation using standardized message formats is considered critical to reducing such operational risk because they are not only able to quickly understand the data but forward it onto their customers. Underpinning the NSD’s corporate actions initiative is a platform from New York-headquartered enterprise data management systems provider GoldenSource which reconciles any discrepancies in corporate actions data from multiple sources and stores the data in a repository.

Although the NSD has been providing its participants with information on corporate actions for free, that data only appears on its website and has been sourced from government agencies — not the issuers themselves. Hence, as some US fund management operations specialists tell FinOps Report, the Russian corporate actions information can be incomplete, inaccurate or conflicting. Granted, Russia’s NSD isn’t the first national securities depository to adapt the ISO-compliant messages for corporate action notifications and elections, but it is rare in also accepting information from issuers in the ISO-formats which will naturally make it easier to aggregate and process.

Instead of being forced to ask local custodians to cast their votes through paper ballots and hope they have the information in time to make their decisions, fund management firms can now also ask their service providers to cast votes through the NSD.  “Sanctions aside, the NSD’s automation will go a long way to easing critical obstacles to investing the we take into account in the investment decision-making process,” says one US fund management operations manager. “It won’t be a total solution to Russia risk, but it fulfills the basic requirements.”

Fees Still to be Disclosed

Until now, inefficiencies in corporate actions processing and voting have only encouraged the board of directors of investment funds — particularly US mutual fund complexes — to categorize Russia as a high country risk or inefficient when it came to handling basic post-trade functions. Fund operations specialists were unable to quantify the potential reduced costs of handling corporate actions and electronic voting, because the NSD has yet to disclose some of its fees and it is unclear just how many of the depository’s participants will capitalize on the new opportunities.

As plans for upgrading corporate actions processing and implementing voting were well underway before US and European sanctions were implemented, the NSD’s announcement last month of its progress on those two fronts helped neutralize at least some concerns related to Russian investments. The US and European sanctions are limited in scope to a handful of brand-name companies and only under certain circumstances — the new issuance of securities after the effective date of the sanctions over the summer. As a result, the sanctions don’t appear to have caused a substantial decline in investing in the Russian market, but could still easily deflect attention from the NSD’s critical role in transform the post-trade infrastructure in Russia from what has often been coined the “Wild West” by foreign investors into more accepted international standards.

Winning approval from the defunct Federal Financial Markets Service as the country’s official depository in 2012, helped the NSD gain legitimacy in the minds of foreign investors — particularly US registered funds — legally required to rely on recognized foreign depositories to hold foreign assets. This milestone led to electronic links with international securities depositories Euroclear Bank and Clearstream for settling cross-border trades, as well as NSD’s emergence as the new central hub for corporate actions and annual meeting information. Legislation adopted in January 2014 requires Russian companies to submit corporate agendas for shareholder meetings to the NSD and another measure passed in August mandated the companies send that data in the ISO message formats.

The NSD isn’t projecting the number of corporate action messages or annual meetings it will handle, but says that it services close to 3,000 securities of Russian companies.

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