Maria Krasnova, CEO of the National Securities Depository, explains developments in the Russian market on CISI TV
The Russian wholesale financial markets, and the securities markets in particular, are among the most developed in the world, having undergone a modernisation programme of late built on the solid foundations laid in the mid-1990s. That was when the Russian authorities engaged with partners overseas to launch a then ‘state of the art’ cross-asset trading and settlement system adopting best international standards and applying these to the Russian domestic and, in turn, cross-border markets.

This development process has continued over the past decade and has resulted in the merger of the two main stock exchanges, MICEX and RTS, to form the  Moscow Exchange (MOEX). Subsidiaries of the Moscow Exchange Group are Russia’s first qualified central counterparty (CCP) clearing house, the National Clearing Centre (NCC), engaged in the central clearing of derivatives, securities, repo and foreign exchange; one settlement depository, the National Securities Depository (NSD); and one registrar.

The National Securities DepositoryThe NSD traces its roots to 1996, when the MICEX Settlement House was incorporated and launched to provide a broad range of securities settlement services, primarily in equities. Trades were settled; that is, securities delivered by sellers from one account at the settlement house against the receipt of payment provided by buyers from another. In parallel, the National Depository Centre (NDC) was formed in 1997 to offer a full range of settlement depository functions, primarily in the government debt markets, and later in corporate, sub-federal and municipal securities.

In 2010, the NSD was formed after the merger of the MICEX Settlement House and the NDC. It was assigned central securities depository (CSD) status by the then regulator of the Russian financial markets, the Federal Financial Markets Service (FFMS), and as Russian CSD law states, this status may only be granted to one organisation. It plays a unique role in the Russian financial markets. In 2013, it launched a trade repository, receiving details of derivatives and repo trades from counterparties in Russia who are mandated to report to the Central Bank of Russia, providing specific and general reports by counterparty.

It is a systemically important settlement depository, trade repository and a nationally important payments system, a non-bank financial institution and a key member of the Moscow Exchange Group, where it is headquartered.

The NSD's operationsThe NSD is the central securities depository for the Russian stock market and in this role acts as the nominee holder of Russian and foreign debt and equities. It provides safekeeping for global certificates and depository receipts for the Russian federal loan bond, known as OFZs, and for most Russian corporate and regional bond issues.

The NSD acts as the head depository and a tax agent for the Ministry of Finance and other bond issuers. It has the capacity to deal with a high volume of instructions and settlements in the continuously traded markets of physical equities and debt listed on MOEX or traded over-the-counter in Russia, or internationally, and settled in the Russian domestic markets.

The two largest international central securities depositories (ICSDs), Euroclear and Clearstream, gained access to the Russian securities post-trade markets by opening accounts with the NSD to enable them to settle debt and equity domestically in Russia. Currently, only CSDs and ICSDs are allowed to open foreign nominee accounts with the NSD. In 2014, the NSD was registered with the US Internal Revenue Service in compliance with Foreign Account Tax Compliance Act (FATCA) requirements. It also meets all the requirements of an ‘eligible securities depository’ in the US under Rule 17f-7 of the US Investment Company Act of 1940.

In comparison, in Europe several ICSDs and CSDs  offer a similar suite of services, such as safekeeping, pre-settlement matching, settlement, management of corporate actions, automated securities lending, tri-party repo and other collateral management services. In the past, most major countries maintained a locally owned CSD partly out of pride – not unlike the desire for many countries to provide a national airline – but also to maintain a form of governance or control over post-trade in securities issued, and in some cases listed, in their own countries. This particularly applied to the settlement and custody of government debt. Over the past decade, many CSDs have merged into larger post-trade services groups, such as the London Stock Exchange Group, Deutsche Börse Group and Euroclear.
The NSD's settlement servicesHistorically, securities were settled in Russia on a T+0 basis; that is, on the date the trade had taken place. This tight time frame had the advantage of reducing the risk of loss should a trade fail to settle correctly and the payment not be received between the date of trade and settlement in the international markets of T+2 or T+3; that is, two or three days after the trade was concluded. However, dealing on a T+0 basis required buyers to pre-finance their accounts at the settlement depository the day before trading, and sellers to pre-position their stocks or bonds at the settlement house so as to allow for settlement on a ‘delivery-versus-payment’ (DVP) basis on T+0.

In Russia, as in most other domestic and international markets, there has been a trend to settle trades on T+2 for DVP settlements but on T+0 for ‘free of payment’ (FOP) settlements. This trend has been accentuated in the Russian cross-border markets where international counterparties contract with Russian-based participants. Trades are settled in the currency the shares or debt are issued in – the Russian ruble (RUB) or US dollar. (Many outright purchases and sales of securities denominated in RUB between two Russian counterparties continue to be settled FOP.)

In comparison, in Europe very few outright purchases and sales of securities settle on an FOP basis and most settle DVP on a T+2 basis. However, the repo markets settle on a T+0 or T+1 DVP basis as many trades are driven by the need to finance inventory and soon to be settled new purchases or sales. FOP trades are very rare internationally and most markets do not require pre-financing of purchases or pre-positioning of securities ahead of a sale.

NSD settlement services development About the expert

Danny Corrigan is co-chair of TheCityUK Eurasia Market Advisory Group and is a member of the CISI’s International Committee. He has extensive experience in the London and Moscow markets, has been a member of a number of CISI exam panels over the years, and is currently a senior adviser to the Astana International Financial Centre on the development of a new exchange for Kazakhstan.

The NSD is working on five projects:

1. Electronic matching: It plans to offer preliminary matching of FOP and DVP instructions, adopt the ‘hold and release’ mechanism and use aliases for securities accounts and sub-accounts.
2. DVP process optimisation: It plans to optimise its collateral management system based on clients’ standing and DVP instructions and select securities and transfers to dedicated sub-accounts for over-the-counter DVP settlement.
3. Record-keeping of investment funds units: To develop the open architecture for primary market transactions and record-keeping of investment funds units.
4. Instruction priority with regard to linked transactions: Currently the NSD allows market participants to prioritise between DVP and FOP by means of a priority code and it plans to extend this to linked transactions and provide asset segregation facilities.
5. Issuer services enhancement: In 2017, the NSD plans
   to offer multi-currency bond placement to corporate issuers. The Ministry of Finance of the Russian Federation plans to issue government bonds in Chinese renminbi and issue OFZs in Russian rubles to retail investors.

This article was originally published in the Q2 2017 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.