Svetlana Gryanchenko, Director of NSD's Operations Department, spoke with the Bankovskoe Obozreniye magazine on certain secrets of the creation and operations of the payment system and settlement services of the National Settlement Depository.
— Ms Gryanchenko, let us begin our discussion with the history of NSD's establishment.
— The history of the National Settlement Depository began back in 1996 with the creation of the MICEX Settlement Chamber, the credit institution specialised in providing banking services, including cash settlement of transactions for financial market participants. A year later, the National Depository Center (NDC) was founded which was created as the principal securities depository providing services to the government securities market.
In 2010, the MICEX Settlement Chamber merged with the NDC to form a new entity, the National Settlement Depository (NSD). The merger of the two stock exchanges — MICEX and RTS — was followed by another merger between NSD and Depository Clearing Company (DCC). As a result, the Russian securities market saw the emergence of a unified and technology intensive organisation offering a full range of post-trade services. I joined the team in late 2013.
In due course, NSD saw the emergence of independent but closely linked activities which we call 'business lines'. I represent the payment system and settlement services business line (abbreviated as "NSD PS"). NSD holds a banking license and is able to conduct this type of activity. The payment system is part of the post-trade infrastructure of the Moscow Exchange Group and has a special role to play in the country's national payment system. In the Russian Federation, the NSD PS processes funds transfers relating to transactions made on the exchange and OTC markets and as part of open market transactions performed by the Bank of Russia and other global creditors. In December 2012, NSD's payment system was recognised by the Bank of Russia to be a systemically important payment system, and in July 2014, it was recognised to be of national importance.
— How are the payment system's activities regulated?
— Because we have a banking licence, we are able to provide banking settlement services. But this licence has certain limitations. NSD, being the Central Securities Depository and a holder of a banking licence is inevitably faced with limitations simply because we, being a unified entity, have to manage risks adequately and ensure unconditional reliability of operations without putting at threat our core activities. For that reason, our banking licence is limited so that we cannot undertake lending activities or provide services to private individuals.
We only work with legal entities. Our core activity is the settlement business which serves the needs of the securities market; along with that, NSD provides ancillary services which, in addition to direct operations on the securities market, give securities market participants some additional benefits in terms of settlement.
— But the key focus is on securities operations?
— Clearly, our core business is securities processing. Apart from the CSD functions, NSD offers market participants the settlement depository services, which results in multiple cross-functional overlaps, especially with the payment business line. NSD's payment system was created precisely because NSD, while providing services on the securities market and acting as the securities market's settlement hub, handles the volume of settlement across its clients' accounts which, according to the Central Bank's criteria, makes the settlement provider eligible for the role of the payment system operator.
In addition, the payment system handles the internal settlement needs of NSD as the clearing provider on the OTC market.
— What effect does the official status of a systemically important CSD have on your work?
— In November 2012, FSFM Russia assigned NSD the CSD status. As provided by clause 5 of article 22 of the Law "On the Central Securities Depository", the CSD status may only be granted to one legal entity. But we understand that you cannot just live by being aware of your uniqueness and "breathe in a relaxed way". We interact with market players and maintain an ongoing dialogue with the regulator. Our goal is, while satisfying the principles for financial market infrastructures, to be a market-driven company providing high-demand and diverse services which meet the clients' needs. Let me reiterate that, in developing any business line, especially the securities depository services, we seek to utilise all our cross-functional capabilities.
— We cannot avoid asking about the prospects of working with private individuals.
— We look to develop our services for private individuals, but we are yet trying to understand our place in that niche.
— We have somewhat departed from the subject, let us return to the payment system, or, to be more precise, risk management. What is the nature of risks?
— The payment system is a set of instruments, procedures and rules for funds transfers among its participants; the payment system is comprised of participants and the system operator. As a rule, the payment system is based on an agreement between its participants and the operator, and funds transfers are effected using the approved operational infrastructure. Risks are not unique, they can be subdivided into several types — settlement risk, financial risk, and operational risk. These include liquidity support measures by participants and the operator, the operator's capital adequacy and risks inherent in day-to-day operations.
— How was the NSD PS created?
— As I have already mentioned, NSD settles significant trade volumes and serves the market for systemic instruments. This meets the criteria established by Federal Law No. 161 "On the National Payment System" for a settlement provider to be recognised as a payment system operator. In other words, the payment system was created on the basis of NSD's existing settlement business.
— But such a scale and level of responsibility impose business continuity obligations on you, don’t they?
— Clearly, business continuity is a must for any organisation providing centralised or otherwise significant services. For that reason, we have business continuity requirements for the activities of the CSD, the clearing chamber and the payment system. We regularly test our ability to meet the recovery time objectives and maintain a hot standby office which can take over all the functions, should the principal office fail.
— NSD has solid experience in international operations. What effect have sanctions had on it?
— NSD is a client of the international infrastructures and banks, and, therefore, abides by the terms of coordination agreements and depends on the overall market environment. The indirect influence of the sanctions-related restrictions are felt to a certain extent by most market participants. I can tell you one thing: we continue to work, as before, in accordance with the market practices.
— What countries do you have interests in?
— We do not work with countries, but with these countries' infrastructures, which are centres providing certain services needed by our clients. We are asked many questions about Singapore. We do not have presence in that country in the form of opened cash or securities accounts, because our clients do not have a demand for operations with banks or securities depositories in Singapore.
— DPV and PVP settlement: what are they, who needs them and why?
— DVP (Delivery versus Payment) is the principle of securities settlement where the securities transfer occurs simultaneously with the final and irrevocable payment. It is a commonly used practice on the securities market, both internationally and locally. PVP (Payment Versus Payment) is a funds transfer which occurs only if another funds transfer takes place. This service is in addition to our core settlement business. Why have we introduced it? The PVP practice is very popular globally, because it offers an instrument for two counterparties to mitigate the risk of default on the delivery of the relevant asset. PVP in our practice is a conditional funds transfer. It is conditional because it is effected on condition that the matching funds transfer takes place. That is, the two parties are insured against a situation where they deliver their asset but fail to receive another asset in return. We help exclude such a situation. This service is used, for example, in OTC foreign exchange trades.
— The risks are reduced, but do you take them in the event of force majeure?
— NSD is only a settlement infrastructure. We effect the settlement only if both parties have sufficient cash, if we receive correctly completed instructions from both of them, and if there are no restrictions imposed on either party's accounts. If all of these criteria are met simultaneously, the settlement occurs immediately. We are not concerned with the underlying transaction. It is important to ensure that the format is observed and funds are available.
What's so good about this procedure? Clients may execute a certain number of sales and purchases of one currency against another currency (including roubles) on the OTC market. Let us assume that there were many such transactions and, at the end of the day, their mutual positions are netted. Say, one participant owes ten dollars to another participant against 100 roubles. In order for a non-defaulting client to eliminate the risk of its counterparty's default, we offer PVP settlement.
— Do they need to transfer the funds to their accounts with you?
— - Yes. Here we see yet another element of value offered by this service. Not without the influence of geopolitical shocks, foreign correspondent banks now very carefully consider each payment from their clients in Russia. Sometimes they undertake investigations into the reasons for a payment, its counterparties, and the business of the party initiating the payment. While such investigation is underway, the payment may be suspended for some time. But they are far less critical when clients transfer funds from their accounts with one entity to their own accounts with another entity. For a correspondent bank, such situation is transparent.
If you transfer your own funds from a foreign bank to your account with NSD, this will not cause heightened interest from the correspondent banks and they will be more willing to effect such funds transfer. This is much faster and simpler in terms of organisational arrangements.
— How can the PVP functionality be expanded?
— That's the right question, because we are taking certain steps forward, and first arrange for the service to be provided to one client segment and then extend that client segment. We have started working with credit institutions, but soon the PVP service will be offered to non-credit institutions and non-residents. The time lag is due to the additional factor, i.e., automatic currency control, and we control such conditional funds transfers in the context of conclusion and settlement of such trades with the participation of an authorised bank.
— What are your plans in terms of further infrastructure development?
— We try to move ahead, we constantly watch the market and periodically adjust our development strategy in line with the current trends. One of the trends is to conduct our business with minimal human intervention and minimal intermediaries, and it is here that we elaborate and modernise the very infrastructure for interfacing with the client. We are increasingly reliant on the electronic data interchange so that our clients do not need to manually transfer some data from System A to System B. We are actively modifying our systems for interacting through our EDI File Gateway, the web service to enable data to be automatically transferred to the client's application without the involvement of our operational personnel.
As to who will develop such software, we look for value-for-money and experience on the market. You don't need to reinvent the wheel and can use third party developers' off-the-shelf solutions. If we want our solution to be unique, we develop it in-house.
— Who drives the development process in this case?
— Of course it is the client with their requirements for speed, transparency and versatility. NSD has essentially become a de-facto marketplace. The only thing we lack today is labels for all applications on a single desktop, so that you click on them and try out our services. At present, before you can enter our marketplace, you have to knock on several doors simultaneously. But it is our task to consolidate those doors and provide a single point of access to any of NSD's services. In other words, the abundance of our services is already a market, so the only thing we need to do is create a "place" where this "market" will be at your fingertips. But these are not all of our plans, so as they say, follow the news.