Thomas Murray has issued an overall A+ CSD rating, translating as ‘low Overall Risk’, for Russia’s National Settlement Depository (NSD).
The ratings provider carried out an independent CSD rating on NSD’s operations following the merger between the previous National Depository Center and MICEX Settlement House in November 2010. NSD is expected to become Russias official CSD following a presidential mandate last November that called for the creation of a CSD.
NSD received individual ratings of A+ for asset commitment risk, liquidity risk and operational risk, AA- for counterparty risk and asset servicing risk and AA for financial risk.
Thomas Murray said the companys overall risk could be altered by significant developments in the market place in the future, including the likelihood that NSD will become the official CSD in Russia, as well as the forthcoming merger with the Depository Clearing Company (DCC). The ratings provider noted that these developments are expected to have a significant impact on NSD’s operations in the near future. MICEX-RTS is planning to change the existing model of on-exchange trading and settlements by introducing a T+n cycle using margining in the settlement process, with trades being cleared through a central counterparty.
NSD operates a pre-funded model for on-exchange transactions, which entails blocking of securities for both buyers and sellers during trading hours. For off-exchange and OTC settlement, there is no blocking and settlement takes place on a continuous basis as soon as both securities and cash are available for settlement.
Liquidity and counterparty risks for MICEX-RTS-traded securities are mitigated by the use of the pre-funding model, said Thomas Murray. However, off-exchange trades have a higher degree of risk exposure due to the use of non-DVP settlement for the majority of trades In addition, cash settlement is in commercial bank funds through NSD, which holds a restricted banking license.In the area of asset servicing, NSD is the central paying agent for Bank of Russia’s bonds, most municipal bonds and most corporate bonds.
For equities, asset servicing risk exposure is low, said Thomas Murray. This reflects the high level of liability that NSD must accept in accordance with Russian Civil Law, which protects participants in the event of losses caused by an incorrectly processed event, it said.
In rating the NSDs financial risk exposure, Thomas Murray said the companys capital at around USD 150 million appears to be adequate for a depository that provides internal cash settlement services. Although by law, NSD takes a high level of liability that is not limited to direct losses, there has never been a successful claim made against NSD, said the provider.
NSD mitigates operational risk by maintaining well-defined procedures, said Thomas Murray. The internal control department acts as internal auditors and undertake periodic audits on different areas and processes. A dedicated Risk Management Department is responsible for the risk profile of NSD’s depository and credit businesses although it remains work in progress. NSD has not had an external operational audit undertaken on its controls and procedures since the merger with MICEX SH, although a pre-audit gap analysis was undertaken in October 2011. The pre-audit examined a minimal number of processes. A full SAS-70 audit is planned for 2012.
Thomas Murray said NSDs review of its Disaster Recovery (DR) / Business Continuity (BC) arrangements following the merger with MICEX further mitigates operational risk. The primary data site houses a back-up system and also serves as the business continuity site for NSD staff members. A second back-up system is located 15 kilometres from both the production and the primary data sites. DR / BC arrangements have been revamped following the merger and full DR / BC procedures, have been developed and partially tested. A test on the BC procedures was undertaken in December 2011.
The NSD’s governance arrangements appear to have improved since the transition from NDC to NSD, added Thomas Murray. A number of committees have been established within the Supervisory Board. Minority shareholders, who are participants of NSD, are actively involved in making decisions with regards to fees changes, new services, IT developments and such.
Simon Thomas, CEO and Chief Ratings Officer of Thomas Murray said: “Our analysis shows that NSD has made significant progress in harmonizing procedures and minimizing risks. NSD’s outlook remains on watch. We will monitor developments in the market and report on any impact on NSD’s rating. Once the merger with DCC is completed further analysis will be required to assess the impact”.
Eddie Astanin, CEO of NSD, said “Risk management is a major focus of attention for NSD’s Supervisory Board and Executive Board. Our goal is to create a risk management system meeting international standards and fully conforming with the nature and the scale of Russia’s central depository. Conducting an external audit as a Thomas Murray rating assessment allows us to evaluate the level of our system’s maturity and helps us to choose the basic trends for its development, especially during our company’s large scale transformation.”
(JDC)