Russia
30 October 2018
Russia鈥檚 securities finance industry has enjoyed growth recently, with increases in the value of repo transactions, FOP transactions, and positive hedge fund returns. Now the country aims to lay down the foundations for the development of the digital economy
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As 2018 begins to draw to a close, it is worth reflecting on Russia鈥檚 securities lending landscape over the last 12-24 months. The largest country in the world achieved much in 2017 and it is continuing to grow and develop, with aims to lay down a foundation for the development of the digital economy and to ensure the emergence of new asset classes for investors.
At the beginning of the year, Russia鈥檚 National Settlement Depository (NSD) revealed its 2017 annual results, which found a 12 percent increase in the value of repo transactions compared to the previous year. In April, Russia鈥檚 Federal Treasury successfully conducted its first repo auction with a floating rate via NSDs collateral management system. Then later that month, Russia鈥檚 central securities depository received the status of authorised depository of Belarus. The authorisation allowed NSD to record the rights to government securities issued by the Ministry of Finance, on behalf of the Republic of Belarus. Most recently in October, it was reported that, internationally, Russia-focused hedge funds surprised in September with positive returns of 3.75 percent.
Russia鈥檚 NSD explained that their clients are showing a greater interest in foreign securities. In 2017, the number of foreign securities issued in custody at NSD increased from 5,100 to 8,500. The number of free of payment (FOP) transactions at the international central securities depository (ICSD) grew by 10 percent, while the number of delivery versus payment (DVP) transactions at ICSDs surged to 74 percent.
In late 2017, as part of efforts to improve foreign securities services, NSD launched a new service for individual accounts with ICSDs, to allow for segregated holding of clients鈥� securities through separate accounts held by NSD with Euroclear Bank.
A spokesperson for the NSD said: 鈥淭he key advantages offered by the new service include the possibility to segregate assets in a separate account, availability of additional services that can be used at ICSDs (such as technical netting, transaction linking, and instruction prioritisation), which contributes to a higher liquidity and makes it possible to fund the trade right before the settlement, rather than in advance.鈥�
On the theme of reflection, the NSD explained how collateral management services have developed over the last 12 months. The spokesperson said: 鈥淚n 2017, there was a reshuffle in the market of liquidity providers using the collateral management system (CMS) services鈥�.
鈥淥n the one hand, the Bank of Russia switched from supplying to absorbing the liquidity. The discontinuance of liquidity auctions and the dear-money policy pursued by the Bank of Russia resulted in a sharp drop in the volume of Bank of Russia鈥檚 repo trades with collateral management: from RUB 9 trillion ($136 billion) in 2016 to RUB 688 billion ($10 billion) in 2017.鈥�
鈥淥n the other hand, the Russian Federal Treasury continued its increasingly active involvement in financial market transactions. For the purposes of Federal Treasury repo trades, NSD made a number of improvements resulting in a wider range of securities that could be accepted as collateral.鈥�
Meanwhile, in April 2017, NSD offered CMS Web-client, an integrated solution for over-the-counter (OTC) repo trades, incorporating state-of-the-art software for clients, to new types of market players: brokers, dealers, corporate clients, and non-credit organisations.
The spokesperson also highlighted that in late December 2017, the NSD launched the new 鈥楲iquidity Management鈥� service intended to automate money transfers between clients鈥� trading bank accounts for clearing of trades by NSD or National Clearing Centre (NCC), making it possible to regularly transfer cash liquidity to NCC鈥檚 clearing bank account by using the clearing participant鈥檚 settlement code.
鈥淭he new service allows clients to reduce their costs associated with the management of cash positions at NSD and National Clearing Centre clearing houses. As part of the efforts to harmonise services and to make an integrated value proposition to Moscow Exchange Group鈥檚 clients, NSD has decided to apply the group-wide approach to the pricing of collateral management and repo trade clearing services鈥�, the NSD said.
鈥淔rom the beginning of 2018, clients are able to benefit from their preferred pricing plan offered by Moscow Exchange for trades involving the use of CMS. The Moscow Exchange Group intends to further develop NSD鈥檚 CMS for on-exchange and OTC repo and derivatives trades.鈥�
Robust and attractive
In 2016, Russia鈥檚 NSD had a busy year making its securities finance market more robust and attractive to outside investors, and according to the NSD, the volume of assets serviced by NSD surged 55 percent鈥攆rom RUB 27 trillion ($411 billion) to RUB 44 trillion ($670 billion) over the period of four years (2014 to 2018). The Russian Ministry of Finance has announced their plans to build up internal debt (+5-7 percent of GDP in six years) to ensure funding of development projects.
A spokesperson for the NSD noted that NSD has replaced ICSDs as a common depository with regards to the issuing of MinFin Eurobonds and, starting from 2016, new Eurobonds were issued through NSD as clearing and depository centre.
鈥淲e are witnessing growing client demand for both investor CSD services (safekeeping and settlement of foreign securities owned by Russian clients) and issuer CSD services (providing access to the Russian market for foreign investors, bypassing ICSDs)鈥�, the spokesperson said.
They added: 鈥淩egulatory efforts focused on financial market growth and attraction of financial resources from long-term investors and individuals (such as Federal Loan Bonds (OFZ) for retail investors, Individual Pension Capital project, marketplaces, and digital economy) contribute to the evolution and greater stability of the
domestic market.鈥�
鈥淣ational services providers receive an extra incentive and gain opportunities for growing their business. NSD, which, in addition to a business-to-business model, is developing a business-to-consumer model, is a good example.鈥�
To innovation and beyond
The importance of innovation is a widely spread topic in the industry, and currently the NSD is working on the development of blockchain-based platforms for e-voting, settlement of trades in commercial papers, and record keeping of digital assets resulting from initial coin offerings (ICOs).
Discussing the blockchain platform, NSD explained that: 鈥淭here are currently two business cases for NSD and blockchain: shareholder voting and commercial papers. In 2017, NSD presented a settlement platform for the issuance of commercial papers by a major mobile network operator.鈥�
鈥淎s part of the project, the challenges of ensuring confidentiality of data regarding securities balances and ensuring compliance with specific requirements of Russian laws were successfully solved. A bit earlier, an e-voting system prototype for bondholders was rolled out.鈥�
鈥淚n 2018, NSD and Sberbank CIB, a corporate investment banking arm of Sberbank, announced their intention to jointly test the ICO blockchain-based technology through the Bank of Russia鈥檚 regulatory sandbox.鈥�
The NSD added: 鈥淭esting the pilot project through the regulatory sandbox will allow us to assess the specifics of such transactions, minimise related risks, and receive feedback from the Bank of Russia as to how to improve the mechanisms of those transactions. Our plans are to actively develop the technology, but this would only be possible if the required laws and regulations are in place.鈥�
鈥淲e believe it is crucial to lay down a common regulatory framework for distributed ledger technology across all sectors. We are actively cooperating with the regulator in various working groups. NSD has established the CSD Working Group on distributed ledger technology (DLT) to work on requirements and standards and shape best practices in order to make reliable the process of assets movements within DLT-based networks.鈥�
Discussing goals and priorities, the NSD said: 鈥淲e are moving step by step, building expertise and demonstrating to the market the long-term benefits of the new technology. Our goal is to scale up the technology for various financial transactions and processes. One of the priorities is to reduce the cost of transactions for all players through greater volumes of transactions and involvement of a wide range of issuers and investors.鈥�
Meanwhile, in terms of opportunities and challenges, NSD noted that financial technology will inevitably change of the business model of many companies, whether that be retail, banking or infrastructure business, including the CSD.
A spokesperson for the NSD said: 鈥淭he most obvious trends are the regulators鈥� initiatives in the field of collection and analysis of market big data, the use of artificial intelligence and blockchain, and service providers鈥� efforts to bring together the internet, banking services, social media, and financial technology solutions to create a single data stream for market analysis and launch of new products for clients.鈥�
鈥淩obotisation is in the focus of the financial sector, while active digitalisation entails irreversible qualitative changes in the corporate culture of businesses. A keen interest industry players have in digital assets gives rise to the demand for custody services for such assets.鈥�
鈥淲e at NSD are actively involved in so-called digital transformation: we analyse new technology emerging in the market, assess its potential impact on us in terms of both opportunities and threats, and decide on our further steps.鈥�
NSD added: 鈥淭he financial sector today is a cyberspace, with processes transitioning online, and there is no doubt that the trend will continue. Some companies would be able to adapt and add value to clients, while others will have to leave.鈥�
Looking to the future, the NSD predicted what they expect to see over the next 12 months: 鈥淭here is no doubt that technology is transforming the role of market infrastructure. For us at NSD, the ultimate goal is to lay down a foundation for the development of the digital economy in Russia and to ensure emergence of a new asset class for investors, as well as ecosystems for ICOs and digital assets trading in the secondary market鈥�.
鈥淭ogether with the market leaders, we are working on the project to build settlement infrastructure for digital assets, which is an essential prerequisite for institutional investors to enter the market and for ensuring its dynamic development and capitalisation growth.鈥�
At the beginning of the year, Russia鈥檚 National Settlement Depository (NSD) revealed its 2017 annual results, which found a 12 percent increase in the value of repo transactions compared to the previous year. In April, Russia鈥檚 Federal Treasury successfully conducted its first repo auction with a floating rate via NSDs collateral management system. Then later that month, Russia鈥檚 central securities depository received the status of authorised depository of Belarus. The authorisation allowed NSD to record the rights to government securities issued by the Ministry of Finance, on behalf of the Republic of Belarus. Most recently in October, it was reported that, internationally, Russia-focused hedge funds surprised in September with positive returns of 3.75 percent.
Russia鈥檚 NSD explained that their clients are showing a greater interest in foreign securities. In 2017, the number of foreign securities issued in custody at NSD increased from 5,100 to 8,500. The number of free of payment (FOP) transactions at the international central securities depository (ICSD) grew by 10 percent, while the number of delivery versus payment (DVP) transactions at ICSDs surged to 74 percent.
In late 2017, as part of efforts to improve foreign securities services, NSD launched a new service for individual accounts with ICSDs, to allow for segregated holding of clients鈥� securities through separate accounts held by NSD with Euroclear Bank.
A spokesperson for the NSD said: 鈥淭he key advantages offered by the new service include the possibility to segregate assets in a separate account, availability of additional services that can be used at ICSDs (such as technical netting, transaction linking, and instruction prioritisation), which contributes to a higher liquidity and makes it possible to fund the trade right before the settlement, rather than in advance.鈥�
On the theme of reflection, the NSD explained how collateral management services have developed over the last 12 months. The spokesperson said: 鈥淚n 2017, there was a reshuffle in the market of liquidity providers using the collateral management system (CMS) services鈥�.
鈥淥n the one hand, the Bank of Russia switched from supplying to absorbing the liquidity. The discontinuance of liquidity auctions and the dear-money policy pursued by the Bank of Russia resulted in a sharp drop in the volume of Bank of Russia鈥檚 repo trades with collateral management: from RUB 9 trillion ($136 billion) in 2016 to RUB 688 billion ($10 billion) in 2017.鈥�
鈥淥n the other hand, the Russian Federal Treasury continued its increasingly active involvement in financial market transactions. For the purposes of Federal Treasury repo trades, NSD made a number of improvements resulting in a wider range of securities that could be accepted as collateral.鈥�
Meanwhile, in April 2017, NSD offered CMS Web-client, an integrated solution for over-the-counter (OTC) repo trades, incorporating state-of-the-art software for clients, to new types of market players: brokers, dealers, corporate clients, and non-credit organisations.
The spokesperson also highlighted that in late December 2017, the NSD launched the new 鈥楲iquidity Management鈥� service intended to automate money transfers between clients鈥� trading bank accounts for clearing of trades by NSD or National Clearing Centre (NCC), making it possible to regularly transfer cash liquidity to NCC鈥檚 clearing bank account by using the clearing participant鈥檚 settlement code.
鈥淭he new service allows clients to reduce their costs associated with the management of cash positions at NSD and National Clearing Centre clearing houses. As part of the efforts to harmonise services and to make an integrated value proposition to Moscow Exchange Group鈥檚 clients, NSD has decided to apply the group-wide approach to the pricing of collateral management and repo trade clearing services鈥�, the NSD said.
鈥淔rom the beginning of 2018, clients are able to benefit from their preferred pricing plan offered by Moscow Exchange for trades involving the use of CMS. The Moscow Exchange Group intends to further develop NSD鈥檚 CMS for on-exchange and OTC repo and derivatives trades.鈥�
Robust and attractive
In 2016, Russia鈥檚 NSD had a busy year making its securities finance market more robust and attractive to outside investors, and according to the NSD, the volume of assets serviced by NSD surged 55 percent鈥攆rom RUB 27 trillion ($411 billion) to RUB 44 trillion ($670 billion) over the period of four years (2014 to 2018). The Russian Ministry of Finance has announced their plans to build up internal debt (+5-7 percent of GDP in six years) to ensure funding of development projects.
A spokesperson for the NSD noted that NSD has replaced ICSDs as a common depository with regards to the issuing of MinFin Eurobonds and, starting from 2016, new Eurobonds were issued through NSD as clearing and depository centre.
鈥淲e are witnessing growing client demand for both investor CSD services (safekeeping and settlement of foreign securities owned by Russian clients) and issuer CSD services (providing access to the Russian market for foreign investors, bypassing ICSDs)鈥�, the spokesperson said.
They added: 鈥淩egulatory efforts focused on financial market growth and attraction of financial resources from long-term investors and individuals (such as Federal Loan Bonds (OFZ) for retail investors, Individual Pension Capital project, marketplaces, and digital economy) contribute to the evolution and greater stability of the
domestic market.鈥�
鈥淣ational services providers receive an extra incentive and gain opportunities for growing their business. NSD, which, in addition to a business-to-business model, is developing a business-to-consumer model, is a good example.鈥�
To innovation and beyond
The importance of innovation is a widely spread topic in the industry, and currently the NSD is working on the development of blockchain-based platforms for e-voting, settlement of trades in commercial papers, and record keeping of digital assets resulting from initial coin offerings (ICOs).
Discussing the blockchain platform, NSD explained that: 鈥淭here are currently two business cases for NSD and blockchain: shareholder voting and commercial papers. In 2017, NSD presented a settlement platform for the issuance of commercial papers by a major mobile network operator.鈥�
鈥淎s part of the project, the challenges of ensuring confidentiality of data regarding securities balances and ensuring compliance with specific requirements of Russian laws were successfully solved. A bit earlier, an e-voting system prototype for bondholders was rolled out.鈥�
鈥淚n 2018, NSD and Sberbank CIB, a corporate investment banking arm of Sberbank, announced their intention to jointly test the ICO blockchain-based technology through the Bank of Russia鈥檚 regulatory sandbox.鈥�
The NSD added: 鈥淭esting the pilot project through the regulatory sandbox will allow us to assess the specifics of such transactions, minimise related risks, and receive feedback from the Bank of Russia as to how to improve the mechanisms of those transactions. Our plans are to actively develop the technology, but this would only be possible if the required laws and regulations are in place.鈥�
鈥淲e believe it is crucial to lay down a common regulatory framework for distributed ledger technology across all sectors. We are actively cooperating with the regulator in various working groups. NSD has established the CSD Working Group on distributed ledger technology (DLT) to work on requirements and standards and shape best practices in order to make reliable the process of assets movements within DLT-based networks.鈥�
Discussing goals and priorities, the NSD said: 鈥淲e are moving step by step, building expertise and demonstrating to the market the long-term benefits of the new technology. Our goal is to scale up the technology for various financial transactions and processes. One of the priorities is to reduce the cost of transactions for all players through greater volumes of transactions and involvement of a wide range of issuers and investors.鈥�
Meanwhile, in terms of opportunities and challenges, NSD noted that financial technology will inevitably change of the business model of many companies, whether that be retail, banking or infrastructure business, including the CSD.
A spokesperson for the NSD said: 鈥淭he most obvious trends are the regulators鈥� initiatives in the field of collection and analysis of market big data, the use of artificial intelligence and blockchain, and service providers鈥� efforts to bring together the internet, banking services, social media, and financial technology solutions to create a single data stream for market analysis and launch of new products for clients.鈥�
鈥淩obotisation is in the focus of the financial sector, while active digitalisation entails irreversible qualitative changes in the corporate culture of businesses. A keen interest industry players have in digital assets gives rise to the demand for custody services for such assets.鈥�
鈥淲e at NSD are actively involved in so-called digital transformation: we analyse new technology emerging in the market, assess its potential impact on us in terms of both opportunities and threats, and decide on our further steps.鈥�
NSD added: 鈥淭he financial sector today is a cyberspace, with processes transitioning online, and there is no doubt that the trend will continue. Some companies would be able to adapt and add value to clients, while others will have to leave.鈥�
Looking to the future, the NSD predicted what they expect to see over the next 12 months: 鈥淭here is no doubt that technology is transforming the role of market infrastructure. For us at NSD, the ultimate goal is to lay down a foundation for the development of the digital economy in Russia and to ensure emergence of a new asset class for investors, as well as ecosystems for ICOs and digital assets trading in the secondary market鈥�.
鈥淭ogether with the market leaders, we are working on the project to build settlement infrastructure for digital assets, which is an essential prerequisite for institutional investors to enter the market and for ensuring its dynamic development and capitalisation growth.鈥�
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