Setting Technology Standards for Proposed CSD

Denis Solovyov

At a time when the efficiency of the Russian securities market is sought to be raised through the establishment of a Central Settlement Depository (CSD), Denis Solovyov, Deputy CEO of Russia's National Depository Centre, analyses operational technological issues relating to it and the implications for Russian securities market infrastructure.

The Russian Securities market infrastructure currently consists of five major depositories and around 80 registrars. Having such a large number of infrastructure providers negatively impacts both market efficiency and costs. Russia is behind developed financial markets in terms of reliability, transparency and technology and investors in Russian companies are faced with the gloomy prospect of exchanging money for ownership title recorded in a very imperfect system. Not surprisingly therefore, a substantial share of secondary market trading in Russian securities occurs outside the domestic market in the form of GDRsandADRs.

The market regulator-the Federal Service for Financial Markets (FSFM) - is very concerned about the current situation and worries that increasing listing of Russian securities in foreign exchanges could drain away the local market's liquidity. In an attempt to draw more investors to the country's stock market, Mr. Vyugin, head of the FSFM, has recently proposed changes to the country's securities law. The proposal is that any company with more than 75% of its assets in Russia would have to list not less than 20%, or even 40%, of its shares on local exchanges before registering on a foreign bourse.

Three-Level Recordkeeping System

Efficiency of the Russian securities market is also sought to be raised through the establishment of a Central Settlement Depository (CSD). The draft bill "On Central Depository" prepared by the FSFM sets out a three-level recordkeeping system, which seeks to establish in an efficient manner the interrelationship between the registrar as a primary source of information about ownership rights and a depository as a secondary tier. According to the bill, the central depository will be the only depository entitled to be the nominal holder in registers.

The establishment of a CSD will primarily benefit equity trades as most bond issues (100% of government bonds and 99% of corporate bonds) are already being settled in one depository - The National Depository Centre (NDC). Volume of government bonds in custody at NDC at the beginning of 2005 reached $27 billion and volume of corporate bonds totalled $9.2 billion.

The standards of operational interaction between depositories in Russia have yet to develop. Straight Through Processing which is a basic requirement as regards settlement infrastructure technology has yet to develop in Russia. NDC, however, is a leader in this regard with its own electronic data interchange system and its own software. NDC can provide straight through processing from investor to the primary recordkeeping system i.e. to the registrar. The NDC has made considerable investments in modernising its technological platform to create a common EDI between registrars as the primary link and depositories and their clients. If these efforts receive the regulator's support, NDC's technological platform could serve as the infrastructure backbone for the proposed Russian CSD.

At the moment each settlement depository in Russia works with its own stock exchange and complies with the standards and formats set by that exchange. Depending on the trading system, the formats and standards differ quite a lot. Market players choose one or two trading systems at the most and adjust to it. Different standards of trading floors do not allow transfer of assets between systems in a time frame and at cost sufficient to maintain the necessary liquidity in all the trading systems. The "bridge" that exists between two leading trading systems i.e. "bridge" between NDC, which services MICEX and DCC (Depository Clearing Corporation) which services RTS, partly solves this problem. But the "bridge" is subject to certain operational requirements and technological restrictions that do not permit for example switch to online trading. And overall it is not a proper solution for establishing transparent infrastructure, which would enable market participants to trade in different trading systems.

Establishment of the central settlement depository should provide the institution that will become the CSD one of two options. Either it will set a uniform standard of interaction with all trading systems and will service them using uniform formats or it will take the standard used by one of the trading floors as a base and will service other trading systems using that standard.

In the first case, it should establish the recordkeeping and EDI systems between trading floors and settlement depository. It is quite an efficient solution from the central depository's point of view. But is it efficient for each of the trading systems? They handle different securities, use different technologies, follow different standards and, as all rivals, compete in terms of the quality of service - in this case quality of the operational technology. And if a trading system regards it operational technology as more efficient on the market, it has a full right to press the central settlement depository to support its technology and standards.

Hence it becomes a question of competitiveness. There is no ready-made solution to this problem at the moment. Probably this question should be brought up more often during the public debates so it will not be forgotten by the people responsible for establishing the structure of the CSD and preparing the legal framework to regulate it.

NDC, for its part, is prepared to consider any option: either to develop a uniform standard of interaction with all trading systems or to support the standards used by one of the systems. And at the moment NDC's technology and operational framework is ready to service all Russian trading systems, including RTS stock exchange. The NDC went thought negotiations with the RTS stock exchange and took into account requirements set by RTS while designing the new technological platform, which will be put in place by NDC in the third quarter of 2006.

This new platform aims to satisfy all the technological requirements of a CSD. The software for it will be provided by the Indian software services major Tata Consultancy Services (TCS) while the business integrator will be Accenture. TCS, which has extensive experience of working on similar solutions for the Canadian Securities Depository and for some other well-known depositories, has offered NDC favorable and optimal terms as regards customisation and further maintenance. Due to this initiative when the CSD is officially set up in Russia the market infrastructure technology for making it operational will also be ready.

Two Concurrent Processes

While the CSD status will be given by the government based on the prevailing Federal law or by-law, it will be the market participant's task to develop the necessary structure. So the central depository establishment should result from two concurrent processes: 1) preparation of a technological and institutional basis and 2) law implementation. The role of central depository is to improve current market infrastructure and therefore it should follow the guidelines already in place and should be recognised by the foreign market players as a reliable and transparent institution.

Essentially this institution can be created from the main elements of the current settlement and depository infrastructure, which comprises National Depository Centre (NDC), Depository Clearing Company

(DCC) and Settlement Depository Company (SDC). The NDC has acquired shares of DCC and SDC and introduced its representatives in their Boards of Directors: two directors on the Board of SDC, which settles trades with Gazprom shares, and four directors on the Board of DCC, which services RTS stock exchange.

Following the official announcement about the liberalisation of the Gazprom shares market by the end of 2005, there is similar optimism with regard to the prospective agreement of the market participants on the infrastructural issues. Considering that the majority of trades on RTS stock exchange are with Gazprom shares, liberalisation of this market should influence the negotiating parties.

 

Раздел обновлен 19.05.2011