How is Russia’s securities finance market doing? How does it compare with the rest of Europe?
Securities finance is conducted via repo mechanisms, and this is very specific to the Russian market. The causes of this stem from the history of the Russian market’s development, bankruptcy laws and banking system stability. However, the concept of a repo transaction is clearly determined by the Federal Law on the Securities Market. Repo mechanisms are intelligible, tested and examined by legal usage. Blank loans or the use of collateral without a title transfer cannot always protect a bona fide participant in the current market situation given legislative imperfections related to pledge.
The repo market works well. The total size of open positions in repo as of the middle of 2016 was about $125 billion, $78.5 billion of which are concluded over-the-counter. However, internationally it is not well understood that in Russia equities use repo transactions instead of securities borrowing and lending. Perhaps, it has something to do with international expectations.
Currently, securities lending for Russian custodians is not mentioned in the law. In other words, a custodian, or NSD in particular, cannot conclude securities lending deals on behalf of a client as an agent lender without a brokerage licence.
NSD initiated a change to the existing legislation to empower custodians to conclude securities lending as an agent lender as an agent. We expect the changes to come into force this autumn, which will legalise operations via custodians.
On the other hand, according to the law, brokers can already conclude trades. However, the current wording of the Civil Code does not stipulate undocumented securities as a possible subject of loan agreements.
This omission in the law imposes a risk of securities lending deals being unwound. Amendments being made to the law will be a considerable step towards popularising securities lending in Russia.
How have the NSD’s collateral management services been developed in the past year?
The collateral management platform based on the Russian central securities depository (CSD) was produced in 2013, when the Bank of Russia, in conjunction with NSD, launched a new instrument—repo transactions with the Bank of Russia with a securities basket. The service gained momentum and has become successful and popular. Since 20 May 2015, a similar instrument has worked for the Federal Treasury of Russia. It has been remarkably dynamic since its launch, growing from $23.3 billion in Q2 2015 up to $152.3 billion by Q2 2016.
NSD’s collateral management system is unique to the Russian market. On the one hand, this is a young system that we are continuously developing and improving, and adapting for new market segments, for example, for the inter-dealer market, corporate clients, and the derivatives market. On the other hand, our system is based on best global practices. Moreover, in some aspects it utilises unique technologies. For example, multilateral clearing is usually provided by central counterparties (CCPs). However, NSD’s system conducts multilateral clearing not just in cash, but also using securities. This lets participants conveniently and efficiently conduct repo settlements. As a result, the participants do not need to fully move funds or securities when the second phase of transactions is closed and new transactions are settled.
This year has been marked by liquidity excess on the money market, since the Bank of Russia has transitioned from a policy of providing liquidity to a policy of absorbing liquidity.
The recent trend of replacing monetary organisations’ liquidity with that of inter-banks raises the issue of how prepared the infrastructure is to tackle new challenges. To answer that we need to look at what NSD offers today.
NSD combines a number of systemically important institutions that together provide unique synergy: the CSD, the systemically important trade repository, the systemically important payment system recognised by the regulator, and the clearing organisation with developed clearing technologies. NSD is also developing the valuation centre, which is now in the process of arranging Bank of Russia accreditation. All of this makes our platform attractive for the development of triparty services on the inter-dealer market. Therefore, in addition to the repo business of global lenders, we have begun to provide services to inter-dealer market participants.
How has the repo market fared in Russia?
The instrument was launched for the global lender (the Bank of Russia) and is also successfully being used by the Federal Treasury. In the case of the Bank of Russia, repos are used as an instrument of monetary policy regulating liquidity. The Federal Treasury, on the other hand, has used the instrument to mitigate risks when placing a clear balance in the federal budget account and placing budget funds in repo for overnight, and for two-week terms.
Compared with last year, in 2016 the volume of funds placed by the Federal Treasury via the NSD’s collateral management system increased more than five times. The Bank of Russia and the Federal Treasury are not the only suppliers of liquidity in the global and state lenders segment.
Finance departments of large cities and major funds that place their funds in deposits are considering and updating for them repo transactions with the securities basket and collateral management based on NSD as a better alternative. For example, Moscow City’s Department of Finance is preparing to launch repo transactions to efficiently manage budget funds and mitigate risks. Probably, the high level of the state segment’s interest via the central infrastructure’s mechanisms is the specifics of the Russian market.
What innovations has NSD been focusing on in securities finance to develop the business?
In addition to expanding triparty services for inter-dealer operations and offering connections to the platform to new global state lenders, as well as the development of the securities lending market in Russia, 2016 has been principally dedicated to the launch of the flagship product of the Moscow Exchange Group (which includes NSD)—the repo general collateral certificate (GCC).
Some call this product ‘GC pooling a la Russe’, but actually this product does not have international equivalents. It is an efficient instrument for increasing money market liquidity. This product is kind of Russia’s version of general collateral pooling. The new type of securities issued by the CCP, in this case the National Clearing Center, which is a part of the Moscow Exchange Group, is used as collateral this type of transaction. NCC issues GCCs and credits them to client accounts in an online mode collateralised by securities placed by clients in one of three pools—shares, bonds, and sovereign bonds. Securities are used in repo transactions with the CCP as homogenous universal collateral.
NSD’s role is to keep GCCs and basic assets, and to provide collateral management services to automatically select clients’ securities for the pool on the basis of selected parameters and for margins calls. We work to provide acceptance of GCCs to the Bank of Russia’s repo basket. The launch of repo with GCCs is a great example of the synergistic effect achieved by member companies of the Moscow Exchange Group. We are working now to make GCCs central bank-eligible. Alongside the widening services range, we constantly work on improving our technologies. With the big data tools integration, our collateral management system has achieved a performance improvement, with the average execution time for clearing sessions reduced from 300 seconds to as little as four seconds.