NSD’s Maria Krasnova reveals how market participants will now be able to build their relationships at a new level and outlines further developments planned at the Russian central securities depository
– The Federal Law № 210-FZ has come into effect. Its provisions will inevitably lead to significant changes in Russia’s stock market. What is the key message of this reform?
– With effect from 1 July 2016, the law changed the format for interactions between issuers and investors in the Russian market, speciafically how it related to settlement infrastructure institutions in corporate action processing. The idea behind the reform was to make corporate action processing transparent and efficient via the use of the newest electronic technologies. Everyone knows the principal shortcomings of the current corporate actions procedure: it requires exchanging paper documents and there is a lack of access to reliable corporate information. Prior to this reform being implemented, market infrastructure opportunities – depositories and registrars integrated into a developed correspondent network and equipped with modern electronic technologies – were rarely involved in corporate action processing.
Many things have changed after 1 July. Now, corporate actions are processed mostly in an electronic format, investors can participate remotely in security holders meetings, and reliable official information on corporate actions is now generally accessible. If investors keep their assets in a depository, they can participate in any corporate action by sending instruction to their depository.
– How important are these changes?
– They are crucial. The changes are intended to resolve longstanding serious challenges associated with large expenses and investors’ high risk level. We facilitated investors’ ability to participate in all types of corporate actions: in respect to exercising pre-emptive rights, in repurchasing shares, and in making voluntary and mandatory offers.
The opportunity to use electronic voting, to send requests to call general meetings in a centralized way, to add items to the agenda, and to nominate candidates to issuers’ executive bodies was very important for investors. Addressing these issues will improve the quality of Russian companies’ corporate governance and, subsequently, the overall investment attractiveness of the Russian market.
– What innovations will be proposed by NSD due to changes in the format of interactions with issuers and investors?
– It is essential to provide market participants with information on corporate actions for efficient processing. They have to receive this information as soon as possible, and the information has to be identical for all participants. The creation of the Corporate Information Center (CIC), on the basis of NSD, will be one of the reform’s elements. The CIC receives information on corporate actions from issuers in a structured form. This information is then automatically transmitted to NSD clients and is placed on the website for all interested parties.
– So as of 1 July, all issuers submit information on corporate actions to NSD in a certain format?
– This is now covered by the Law On the Securities Market. There is a paragraph obliging issuers to submit information to NSD. It also says that corporate information distributed by the central securities depository (CSD) is recognized as official. The recognition of the official status of this information means that in the case of discrepancies between information disseminated by NSD and data from other sources NSD’s information will take priority.
– How will the format of shareholder meetings change? Will there be new voting methods?
– Firstly, there is no need to draw up a list of shareholders beforehand. The list is formed on an accrual basis as depositories submit information on their clients entitled to take part in the meeting. Along with presenting this information, a depository can also state how its client voted at the meeting.
Secondly, submitting shareholder information is no longer mandatory if a shareholder does not want to disclose this information and properly instructs the depository.
Thirdly, the range of options for participating in meetings has been significantly expanded. In addition to traditional ways – attending in person or submitting a paper ballot – there is now the opportunity to vote via the depository (e-proxy voting) and to participate by voting on a special website (e-voting).
The e-voting service that NSD plans to launch will let shareholders not only vote simultaneously with participants who attend in person, but also to watch the meeting in real time, ask questions, and exchange information via chat.
– You’ve mentioned that the reform will contribute to upgrading corporate governance quality. How will this happen? By increasing the number of voting shareholders?
– In addition to the potential increase in the number of participants at general meetings of shareholders, I would highlight several other factors. The opportunity for an investor to interact with an issuer in electronic form via the chain of depositories substantially decreases the possibility of issuer abuse. A message which is transmitted via the closed loop system in a structured form can be found easily and quickly reaches the recipient. There are no risks associated with the post, and the guarantee of taking the shareholder’s vote into account increases.
– Do you think that all investors will view the innovations positively?
– When planning the reform, we assumed that we had two distinct groups of investors: the first one included Russian investors who were used to the outdated procedure for corporate action processing (exchanging paper documents via the postal service); and the second group was foreign investors who are accustomed to other, more efficient ways of participating in corporate actions in other markets. So, by qualitatively changing the Russian system, we decided to use the newest international practices as a basis for the system’s design and operational principles.
We relied on standards for convening shareholder meetings and corporate action processing developed by the international industry. Moreover, we chose ISO 20022 and ISO 15022, the standards that allowed us to automate processes for participants who required this. As a result, foreign and local investors will be able to get the necessary effect from the reform.
– All of these changes, are they just a tip of the iceberg? Is this the beginning of reform that will continue to gain momentum?
– The changes that came into force after 1 July have been on a very large scale,so some time will need to pass for us to realize their true effect. By creating the CSD in 2012, we solved numerous problems related to attracting foreign investments and creating a secure settlement structure. By undertaking corporate actions reform, we have made the next important step towards improving infrastructure. However, possible financial market infrastructure improvements do not end there, because we have a lot to enhance, for example in the sphere of tax administration, as well as automating processes that are currently conducted in a paper format.
International practice shows us that the financial infrastructure is often used as a key agent in making improvements required in the country. Our projects of creating the CSD and conducting corporate action reform demonstrated that NSD can be a change driver in Russia and can effectively represent the professional community’s interests. Being at the centre of the infrastructure, unifying issuers, investors, and professional securities market participants, functioning as a settlement bank and a systemically important financial institution, NSD, in terms of its overall qualities, can and should be considered as a promoter of best practices and modern technologies. Furthermore, NSD can help other market participants to solve their problems by supporting the functionality that is important for all participants and connected with carrying out regulatory obligations, providing information, and managing risks, in a centralized way.
– Which functions do you mean?
– At present, the economic situation is not the best, so companies do not have enough opportunities to gain. Meanwhile, regulations are getting stricter. This concerns not just Russia, but other countries too. Since 2008, regulatory requirements have significantly expanded, and many market participants have even expressed their concerns about further development opportunities.
Against the backdrop of these discussions, an evident concept has emerged – the concept of creating market utilities that can provide on their platform services that will be universal for all customers. Instead of paying €10 to solve a regulatory problem, for example, one will pay RUB 1 per year to outsource this service to a market utility.
These centralization options using the infrastructure for improvements demanded by the market which will make its participants’ and regulators’ lives easier can be implemented on the basis of NSD. We think we have all the necessary prerequisites to play this role.