The First Results of Russia’s CSD Operations

25 June 2014
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In November 2012, the National Settlement Depository was officially recognised as a central securities depository for the Russian market. The next year, 2013, became a special year for the Russian securities market infrastructure, as it was the first year of full CSD operations. This provided a considerably simplified infrastructure, reducing risks and helping Russia develop as an international financial centre.

Today, NSD is a central securities depository, trade repository, clearing system, collateral management system and systemically important payment system. It provides a wide range of services including: settlement and depository services, registration of OTC transactions with derivatives (repository services), information services, and clearing and collateral management services. It conducts all settlements on transactions concluded on exchanges and the majority of OTC settlements; the NSD services Russian securities as the CSD and foreign securities. The NSD services securities of issuers from more than 40 countries.

Formation of the full scale central securities depository on the basis of NSD was completed in only five months. After transferring assets to the CSD accounts, the total value of securities on deposit with the NSD increased 82%.

Official CSD status was a key reason the NSD was recognised as an “eligible depository” in accordance with Rule 17f-7 of the United States Federal Securities and Markets Commission, allowing US funds to invest directly in Russian securities.

There have also been changes in the legal base of Russia’s securities market – the Securities Market Law and Russia’s Tax Code. As a result, tax reform has simplified the procedure for applying contract provisions to avoid double taxation between Russia and foreign jurisdictions and resulted in easier taxation for foreign investors.

The Corporate Information Center and corporate actions reform

Direct access to the Russian equity market for foreign investors is scheduled to begin in July 2014. To fully realise the potential of Russian securities market liberalisation, international investors need access to information and an opportunity to execute their rights on an equal basis with local investors.

Forming the Corporate Information Center has been a large-scale project that is unique not only for the Russian market. Through the Corporate Information Center, NSD as the CSD strives to give market participants access to timely, reliable and well-structured information.

In recent years, NSD has been focused on developing the technical platform of the Corporate Information Center. Using an Enterprise Data Management system licensed from GoldenSource Corporation, NSD will be able to collect from various sources, automatically match data to reveal discrepancies and to select benchmark data, and provide clients with well-structured corporate information about issuers, securities and corporate actions.

The Corporate Information Center is designed to distribute information about corporate actions in a convenient format that also corresponds to international standards. NSD also plans to launch complex products that minimise client labor costs; this is possible because NSD utilizes a wide array of information sources and a mechanism to verify information. These products include SIR-NSD (the securities and connected information database), the issuing library, and the Price Center that provides clients data on fair bond values.

NSD has developed legislative initiatives in the field of corporate actions which provide equal rights to all shareholders, regardless of their location. These initiatives may be possible by implementing e-voting on the Russian securities market, as well as by centralising corporate actions conduction via record-keeping system institutions and by refusing paper documents. These initiatives were supported by authorities and securities market participants.

This is a crucial year for developing the Corporate Information Center. A full-scale project launch is planned for the beginning of 2015. Key NSD goals  in 2014 include developing technologies and preparing to implement the automated corporate actions processing system, taking into account market participant requirements. NSD also plans to add nine new services.

Service development

The emergence of the CSD for the Russian market and the international settlement and clearing centers’ entrance have given momentum to developing settlement services for the Russian market.

In 2013, NSD together with the Bank of Russia and Bloomberg developed and launched collateral management services – trilateral repo with the Bank of Russia. By the end of 2013, the value of collateral on deposit exceeded RUB1 trillion. In less than a year, market participants began concluding fewer transactions, but their total value grew, meaning liquidity growth has not overloaded the system.

A trilateral service on inter-dealer repos is being developed. It will let market participants take advantage of transactions with a basket of securities including: a system for automatically selecting securities, collateral assessment and margin payments.

The DVP settlements service is developing rapidly. The DVP service uses the NSD clearing platform, which lets it conduct these operations in a number of clearing sessions with netting on cash (DVP-2), with netting on cash and securities (DVP-3), and beyond clearing sessions with settlements on each transaction (DVP-1). The new service allows customers to utilise a unified instruction for securities and cash, to make both ruble and foreign currency (dollar or euro) settlements, and to establish priorities for executing instructions.

A modified service that allows participants to make settlements on the DVP transactions using foreign currency accounts opened with foreign banks (J.P. Morgan & Co., New York; Citibank, New York and Deutsche Bank Trust Company Americas) is very popular with NSD clients. The NSD is also analysing market participants’ demand for conducting settlements in Asian currencies via Asian banks.

Launching a repository for the Russian market

Following G20 initiatives on mandatory OTC derivative market regulation, NSD launched a trade repository for the Russian market. On 5 February 2013, NSD announced that its repository was ready to receive reports on two types of OTC contracts: currency swaps and repos. Since 1 October 2013, it has been able to receive reports on all contract types. In accordance with current Russian regulations, market participants must register their OTC repos and currency swaps in a repository.

NSD provides several telecommunications channels for different client categories. Except for its traditional “Louch” software (which only has a Russian version), participants can have access to a web client that allows them to send information in both Russian and English to the repository without installing additional software. The repository also offers a web service that directly connects to participants’ office systems and the SWIFT FileAct. In 2014, new access channels will be developed such as desktop versions of the web client and a file gateway which will simplify access to the repository server.

Pursuant to Russian law, non-residents trading with Russian counter-parties must provide reports to the Russian repository. It is expected that by late June 2014 amendments allowing foreign participants to avoid providing data to the Russian repository will come into effect.

NSD continues to develop links with foreign repositories; in particular, it is discussing establishing links with some European repositories. This would allow Russian participants to register cross-border transaction data in compliance with EU laws and to control information registered by foreign counterparties.

Risk management

NSD pays special attention to complying with international risk management standards.

At least once every two years, a leading international audit company conducts an operating audit at NSD’s request, checking corporate compliance with ISAE-3402. Following the results of risk management audits, NSD has developed a Strategy of Risk Management System Development for 2014-2015.

In 2013, international ratings agency Thomas Murray affirmed NSD’s rating at AA-, with a stable outlook. NSD pays great attention to meeting CPSS-IOSCO requirements: in April 2014, Thomas Murray conducted the NSD’s audit and recognised that the NSD observes CPSS-IOSCO principles in general.

Integration into the global infrastructure

NSD’s activities to build relations with the international financial community have two principal areas of focus: development of relations with foreign CSDs and formation of an NSD-based regional liquidity hub for Eurasian countries.

Last year, Euroclear and Clearstream, opened CSD foreign nominee accounts with NSD, a key milestone in the development of CSD relations. OFZ bond market liberalisation marked the first step towards boosting the attractiveness of the Russian market for foreign investors.

For more than a year, Euroclear’s and Clearstream’s customers have been able to conduct operations on the OFZ bond market using these companies’ accounts with NSD. In January 2014, international investors received access to Russia’s corporate bond market. According to Bank of Russia data, foreign investors’ share on the OFZ bond market exceeded  22% as of 1 March 2014.

Foreign investors’ entrance into the Russian stock market allowed it to attract more than US$10 billion and to decrease State debt costs by more than 100 basis points. NSD’s range of services has changed since foreign investors came into the Russian market. Foreign currency clearing services, dollar DVP settlements via the NSD’s accounts and utilising corporate correspondent accounts with major international banks are all being developed.

In line with its work to create a regional liquidity hub for Eurasian countries, NSD provides foreign investors access to Belarus, Ukraine, Kazakhstan, Kyrgyzstan, Azerbaijan and Armenia via NSD’s accounts with CSDs in these countries.

A key strategic step in recent years has been the decision to focus on five core development areas: CSD services, the Corporate Information Center, corporate actions reform, trilateral services, and clearing, repository and settlement services. These five directions will guarantee a balanced and dynamic development at both the local and international level.

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