The creation of a central depository in Russia in the form described by law could deprive custodians of a substantial portion of their business, several representatives of custodian banks, including foreign ones, told Interfax.

The law On the Central Depository went into effect on January 1, 2012. The Finance Ministry and the Federal Financial Markets Service (FFMS) are now working on the regulatory foundation for the introduction of this institution in Russia. The only contender for this role is the MICEX-RTS group’s National Settlement Depository (NSD).

Earlier, only registrars complained that they would lose part of their business due to the creation of a central depository.

Representatives of custodians said the problem is far wider, warning that revenues will be lost not only by them, but also by Russian brokers, and the exchange itself due to the movement of liquidity in Russian assets abroad.

This danger, Interfax sources said, lies in the central depository law itself, which allows the central depository to open foreign nominee deposit accounts for “international centralized systems for registration of rights to securities and/or settlements on securities.” The largest representatives of such systems are Euroclear and Clearstream.

“Euroclear is not a custodian that buys securities for a client and sits on them, it’s an organization that represents a system of settlements that it conducts in its books. In other words, Euroclear will open a nominee account at NSD, but all settlements between its clients will be conducted within itself, all deals will be conducted abroad. The central depository won’t even know whether the owners of the securities have changed,” a representative of a major custodian complained.

Taken by surprise

Under the central depository law, the list of foreign organizations that can open nominee accounts at the central depository must be approved by a federal financial markets authority, the FFMS.

“When they wrote this in the law, we expected that the list of such organizations would emerge far later than the central depository itself would be created, which would give NSD an opportunity to introduce services of the same quality and price as those of Euroclear and Clearstream,” one representative of a custodian said.

The FFMS posted on its website a draft decree “On the approval of the list of foreign organizations for which the central depository opens depo accounts of a foreign nominal holder.” The list includes companies that are part of Euroclear and Clearstream group, but does not include the parent companies. The draft decree does not envision post-dated implementation.

“If we make an analogy with natural resources – oil, gas, metals – then on the financial market this role is played by underlying financial assets: shares, bonds, and money. If you grant direct access to such assets, in other words export them, then all the added value will be realized somewhere else,” the head of Merrill Lynch in Russia Konstantin Korishchenko said at a round table on the creation of an international financial center in Russia.

He said one of the points of the central depository law grants just such access through the opening of accounts for foreign central depositories. “This is a potential channel through which the underlying Russian asset will simply be exported in raw form, and all subsequent processing, that is trading, settlements, clearing, the work of financial intermediaries, will be done somewhere else. We need to think hard here, perhaps we need the same rules that exist on other markets, for example to discourage exports of crude oil and stimulate exports of processed products,” Korishchenko said.

This issue runs a fine line between “liberalization on the one hand, and protectionism on the other,” he said. “The development of the financial market should observe the main rule of medicine – don’t hurt the patient. A reasonable balance is needed,” Korishchenko said.

Meaning well

Meanwhile, several financial market sources told Interfax that Euroclear has already held a number of meetings with investors promoting its settlement services for Russian securities.

One source said that NSD cannot currently compete with Euroclear and Clearstream in terms of the quality and price of services. “They have services that we don’t have, for example, settlements in euros and dollars. An account can be opened in two days, there are fixed T+3 settlement cycles, electronic trade matching the next day, netting. Settlement conditions in Euroclear are far more attractive and interesting than in Russia,” he said.

“If nothing is changed now and the work of Euroclear and Clearstream with Russian securities is not restricted, in a year, all liquidity will leave the country,” the representative of a foreign custodian said.

Euroclear spokesperson Stephanie Heng confirmed that a number of meetings were held with clients. Participants of the Russian and international capital markets have long expected the Euroclear Bank to begin working with Russian securities, and the company recently organized meetings with some clients to explain its services and assess their interest. Euroclear’s clients are not end investors or participants of the securities market, but primarily custodians and broker-dealers, Heng said.

She said Euroclear’s services would help Russia raise capital on international markets, simplifying post-trade operations related to the issue, trading, and custodial holding of Russian bonds and other securities that the Russian authorities plan to place among foreign investors. Based on past experience, the liquidity of assets increases both on the domestic and international markets when foreign investors gain the ability to conduct settlements on deals with counterparties on the local market, Heng said, adding that this would be Euroclear’s main contribution to Russia’s achieving the goal of making Russian securities more attractive to foreign investors.

Euroclear and NSD said in a joint press release earlier that the creation of a central depository would enable more than 1 300 of the most active international trading companies with accounts in Euroclear to conduct transborder trades through the Euroclear Bank with counterparties in Russia.

Representatives of two custodians said that, after Euroclear held the meetings, investors began to ask “why they should work through us and conduct deals in Russia, if already in July they can do this through Euroclear, which will be cheaper for them.”

Defensive measures

Worried market players intend to draft proposals to restrict temporarily the operations of Euroclear and Clearstream. The depository committee of the National Association of Stock Market Participants (NAUFOR) on April 4 discussed issues concerning the opening of nominee accounts at the Russian central depository for foreign organizations, including foreign settlement and central depositories.

“The concern of market participants in regard to the opening of nominee accounts for foreign central depositories is obvious. Further discussions will be held and a position will be prepared,” NAUFOR head Alexei Timofeyev said.

The representatives of custodians are proposing two options for resolving the problem: postponing the implementation of the list of foreign organizations that can open nominee accounts at the Russian central depository, or raising the cost of Euroclear and Clearstream settlements with Russian securities by increasing NSD’s rates. In the latter case, Euroclear and Clearstream could be obligated to provide regularly information to NSD on client transactions with Russian assets on a paid basis.