Central Depositary Strengthening the Russian Market’s Competitiveness
Over the past several years, the Russian financial market has undergone momentous changes. Russian enterprises are raising material financial resources domestically. Positive trends, however, are accompanied by a number of problems that can hinder further development of the financial sector.
One of the major factors impeding the development of Russia’s stock market is poor market infrastructure. As a result, large issuers and the most active investors are forced onto foreign stock floors. Discussions have taken place for many years in Russia on the necessity of creating an institution that has been established in practically all developed stock markets – the Central Depositary.
The establishment of this market institution will allow a variety of problems to be solved. First, it will guarantee better protection of ownership rights to securities in comparison with the current system, reduce a risk that investors’ rights be violated in corporate conflicts and eliminate the problem of “double registers.” Second, the Central Depositary’s operation will allow settlements for transactions with securities to be both simplified and expedited. Third, through centralization of the DEPO accounts keeping and use of the advanced technology, the Central Depositary will be able to make client service less costly, which will reduce expenses for stock market participants.
All of the abovementioned factors will strengthen the competitiveness of Russia’s stock market in relation to international markets, which means they will enable an increase in the competitiveness of the Russian economy as a whole.
At this stage, the FSFM’s goal is to ensure the passage of a special law, which, given the opinions of all parties concerned, will determine the status of the Central Depositary as well as principles of its establishment and operation. The FSFM regards this goal as one of its priorities:
The law should cover the following key issues:
- the special status of the Central Depositary and its exclusive powers (it is expected to be the only depositary entitled to open accounts for nominee in registers of securities holders);
- a mechanism for establishing the Central Depositary; parties that can become shareholders in the Central Depositary; distribution of ownership rights among shareholders (including allowable state participation, requirement for diversification of capital among shareholders, balance among various groups of shareholders, etc.);
- the management structure of the Central Depositary (able to meet the interests of various groups of shareholders much as possible, and raise confidence of other stock market participants in the Central Depositary);
- interaction between other institutions of the recording system (registrars, settlement depositaries, and custodians) and the Central Depositary.
The law should provide for the Central Depositary’s right to make clearing settlements as a result of transactions on exchanges provided that certain conditions are met. The Depositary’s functioning as a central counteragent will allow for the introduction of a system of centralized clearing on Russian exchanges, which in turn will shorten the time period for delivery of securities and payment, will reduce expenses of market participants and increase liquidity. The Central Depositary can perform clearing functions on a curb market as well.
It is worth noting that establishment of the Central Depositary does not imply that other participants in the stock market’s recording system (registrars, settlement depositaries and custodians) will lose business: they will retain their market niches. In the end, all stock market participants – issuers, investors, investment intermediaries, and infrastructural institutions – will benefit.
Source: Federal Financial Markets Service
