Securities in Exchange

26 May 2017
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Service Offering for Foreigners and Bears

The National Settlement Depository (NSD) intends to launch securities lending services. The demand for such a service is shaped by Western banks serving overseas clients in Russia, and market players conducting short sales. Technically, the project may be implemented in as little as one year, but the lack of a regulatory framework may significantly extend that period.

NSD is in discussions with participants of the Russian financial market about its project to provide automated securities lending to support the settlement process. Quite recently, the project was presented at the meeting of the Committee for the development of financial market of the Association of Russian Banks (ARB).   "We see a potential demand for this service, as clearing participants are interested in settlement finality", said Alina Akchurina, Managing Director for Collateral Management and Tri-Party Services at NSD. She said that trades fail to settle on due date because the securities which one counterparty is to deliver to the other counterparty in accordance with the terms of the trade are not available when needed.  

"This is especially relevant for those active in short sales", said a spokesman for a major custodian bank.  So, a bear may borrow a security, sell it, receive the money, wait until the security prices fall, and buy the security thus making a profit on the price difference. However, it is not always possible to buy the quantity of securities one needs to repay the debt. According to Evgeny Morozov, CEO at Finans-Invest Investment Company, smaller brokers often use mutual quasi-securities lending arrangements. "These transactions are based on two repo deals, that is, they still involve the use of money.  If there is a common set of tools, even if one will have to pay extra for it, this will be hailed by the community", he said.  Furthermore, this service is in demand from NSD participants that are clearing members providing brokerage services on the Russian market to Western customers, said Ms Akchurina. "Quite often, they fail to deliver securities when due because of the time difference", she explained.  According to Ms Akchurina, the securities lending service will make it possible to settle trades when due.  

Market participants have confirmed their interest in the project.  "Our bank views this as an opportunity to further expand our operations", said Sergey Avramov, Acting CEO at BNP Paribas Bank.  According to Boris Cherkassky, Advisor to General Director of INFINITUM Asset Services, the service may turn out to be more lucrative than its existing counterparts. "Repo transactions, which involve money, are a more complex structure than direct securities lending. A simpler structure should be less costly", he noted.

However, NSD's project is still at a concept stage.  In terms of technology, it can be implemented quickly enough, said Ms Akchurina.  But very many things will depend on the legal structure underlying such transactions.  According to Ms Natalia Sidorova, Head of Global Securities Services at UniCredit Bank, such product is in high demand on the Western markets, but in Russia, the civil law basis for this type of contracts is different from that used in Europe. "In Russia, the transfer of a security between accounts is accompanied legally with the change of ownership, whereas in the West this works similar to loan accounts.  There is no change of ownership, from the legal perspective – the security is treated precisely as a loaned asset," she explained. It was the lack of such arrangements under Russian laws that prevented the launch of similar projects by major foreign players, said another major custodian bank's representative.  "For large investors who could provide a pool of equities within such securities lending, i.e., mutual funds, pension funds, insurance companies, a strict legal framework is of paramount importance.  No such framework is in place yet. Furthermore, there are corporate risks that they will not likely be willing to take. There is a demand for the service, but it is unclear whether there is anyone willing to be a lender," said the Kommersant's source. Yet, according to Mr Cherkassky, there are no direct legal obstacles for implementing the project.  "It is true that the law does not expressly provide that such transactions are possible, but it does not prohibit them either," he said optimistically.

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