ISS: What trends have you seen in the settlement and clearing space over the last 12 months, as well as some of the work NSD has been doing?
Eddie Astanin (NSD): The financial sector today is a cyberspace, with business processes increasingly becoming digital, 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. The most obvious trends are the regulators’ initiatives in the field of data collection and analysis using big data, the use of artificial intelligence and blockchain, and service providers’ efforts to bring together the Internet, banking services, social media, and FinTech solutions to create a single data stream for market research and launch of new products for clients.
This is coupled with the increasing demand by both institutions and end users for faster or even instant processing of transactions and requests of all kinds and greater flexibility with cut-off times. These trends together lead us into a world, where decisions will have to be made instantly, automatically and taking customized user data into account – a much more flexible and personalized solution than the STP we have today.
Industry players have a keen interest in digital assets which gives rise to the demand for custody services for such assets. We see that the industry is entering into an era of “Hybrid Market Infrastructure” where infrastructure platforms will be partially decentralized, which will enable increased efficiency and business opportunities.
Operators in the space need to have a greater degree of transparency with the marketplace, thinking in terms of the value that their data can give to the market, providing open APIs and easy integration with other systems. Regulatory compliance has no doubt been a major trend in the last few years, and the costs for these operations have been growing quickly for the whole market.
The attempts to make compliance more efficient for individual organizations and for the market as a whole will no doubt be continued by FinTech companies and large enterprises alike. With all business processes becoming increasingly digital, cybercrime protection has been a major expense for all institutions recently. Customer Security Programmes have been established by many institutions, and will continue the shift of cyber protection measures from end clients and front offices to the infrastructure organizations. This is a difficult and expensive process that will make significant impact on many market participants and will make the market overall more secure and efficient.
We at NSD are actively pursuing digital transformation: we seek new ways to use technology to create further value for our clients, to change our processes to serve the market better and improve efficiency for both ourselves and our clients. We explore new business opportunities via PoC and MVP solutions where appropriate and decide on further steps based on the feedback that we receive.
ISS: Is the Marketplace project on which NSD is actively working together with the Bank of Russia part of that digital transformation? What benefits will it bring to the market and market players?
EA: It certainly is. Marketplace is a nationwide project focused on end consumers – individuals, for whom it offers increased choice and convenience in selecting their investments. For the institutions, it offers new business opportunities and ways to reach their clients with more customized products. Among other things, marketplace will enable the use of Big Data to create value for both businesses and individuals at the same time.
The project involves many technical challenges and is an excellent example of how technology enables faster, more convenient services for the consumer, forcing the market players to adapt their business models. NSD sees its role in this project in providing a trusted, reliable and secure infrastructure for storing marketplace transactions. We leverage our experience in building infrastructure solutions like the trade repository, along with our lack of affiliation with any of the big banks or brokers, preventing any conflicts of interest.
ISS: One of the recent legislative initiatives is a possibility for non-Russian residents to open foreign nominee accounts with NSD. How will this affect the Russian and global infrastructures?
EA: This is just an option that provides comfort to foreign players. Asset custody in accounts with a CSD is believed to be less risky than with a local custodian. CSDs are responsible for the assets held by them in custody, even if nominee accounts held with the CSD are managed by a local agent. This practice is common to many European CSDs, and this approach is in line with the Europe-wide process of integration and centralization of the securities market infrastructure. For Russia, the potential benefits include diversification of the investor base. A direct account with the CSD reduces the time required for a transaction to be processed, thanks to a lesser number of intermediaries involved. The possibility for foreign organizations to open an account with the CSD will, therefore, make the Russian securities market more flexible in terms of various options available for market entry and settlements.
ISS: NSD has been reported to test an initial coin offering (ICO) technology at the Bank of Russia’s regulatory platform. How did this go? What challenges is NSD facing? What opportunities could this bring to the industry?
EA: We are moving step by step In line with efforts to the development of legislation, 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. In 2018, NSD and Sberbank CIB, a corporate investment banking arm of Sberbank, announced their intention to jointly test the Initial Coin Offering (ICO) blockchain-based technology through the Bank of Russia’s regulatory sandbox. Testing the pilot project through the regulatory sandbox will allow us to assess the specifics of such transactions, minimize related risks, and receive feedback from the Bank of Russia as to how to improve the mechanisms of those transactions.
ISS: How is the geopolitical environment affecting NSD and investor behavior?
EA: Of course geopolitical environment affects our strategy. We focus on the development of the local investor base.
Growing geopolitical tensions and market fragmentation may open up new opportunities for businesses, including import substitution. For instance, the volume of assets serviced by NSD surged 55% (from RUB 27 trillion to RUB 44 trillion) over the period of 4 years (2014-1/2H 2018).
The Russian Ministry of Finance has announced their plans to build up internal debt (+5-7% of GDP in 6 years) to ensure funding of development projects. NSD has replaced ICSDs as a common depository with regards to the issuing of MinFin Eurobonds and, starting from 2016, new Eurobonds are issued through NSD as clearing and depository centre. We 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).
Regulatory 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. National services providers receive an extra incentive and gain opportunities for growing their business. NSD, which, in addition to a B2B model, is developing a B2C model, is a good example.