Elapsed Time. Winner of Photo Competition Among NSD Clients

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1 Elapsed Time Winner of Photo Competition Among NSD Clients CONTENTS REGULATIONS... 2 Issue of Securities Simplified in Russia... 2 Bank of Russia to Control Rates on Deposits... 2 MARKET NEWS... 3 Final Decision on Financial Megaregulator... 3 Russian Regulators Elaborating a Black List of Companies Caught on Financial Fraud... 3 MOSCOW EXCHANGE GROUP... 4 NSD Notifies FFMS about Repository Intention to Maintain Register of Contracts... 4 NSD Reports Results of Its Customer Committee... 4 NSD Supervisory Board Approves Tariffs... 5 Thomas Murray Upgrades the Central Securities Depository Rating for Russia s National Settlement Depository (NSD) to AA- with Stable Outlook... 5 NSD Supervisory Board Elects New Members of Committees... 7 NSD Receives Clearing License... 8 Bank of Russia Assigns Payment System Operator Status to NSD... 8 PROSPECTS... 8 Owners of Securities Concealing Information Will Pay Larger Taxes... 8 Ministy of Finance Wants to Make Investments in Securities More Attractive... 9 FUTURE EVENTS Events Calendar Disclaimer: The content reflects the views of the authors and may not reflect editor s opinion. All rights reserved. No part of this publication may be reproduced without prior permission from National Settlement Depository.

2 DEPOSITARIUM 2 REGULATIONS Issue of Securities Simplified in Russia , Rossiiskaya Gazeta The State Duma approved in the third reading the law aimed at simplifying the securities issue procedure. The Federal Law On the Securities Market and several other laws are being amended in order to provide certain simplifications of this procedure for issuers whose securities are listed. The document contains requirements for information disclosure by securities owners. The law also specifies the issuing procedure in case of reorganization of legal entities. The bill was originally prepared in April by the Federal Financial Markets Service and the National Association of Securities Market Participants. According to the Head of the FFMS Dmitry Pankin, those amendments will not only simplify issuing of securities by Russian issuers but will also make it easier for foreign investors to work on the Russian market. Bank of Russia to Control Rates on Deposits , Prime-TASS The State Duma of Russia adopted in the first reading a draft law aimed to provide the Bank of Russia with the right to limit interest rates on bank deposits and to nominate authorized representatives to lending institutions under certain conditions. The document could grant the Bank of Russia the authority to put a lid on deposit rates, the authority it had in , when the highest average rate at Top 10 deposit banks reached 17 percent. Presently, the highest rates range from 12 to 13 percent. Half of 12 banks, whose deposit rates the regulator capped in the crisis year of 2008, operate normally right now, and the other half was deprived of their licenses, according to Mikhail Sukhov, Deputy Chairman the Bank of Russia. He noted that a deposit product drawn at a high rate and invested in high-risk assets is a rotten and improper bank product. This autumn the Bank of Russia altered its methodology of calculating the highest average deposit rate which is a benchmark for the Russian deposit market. Since October it has been defined excluding the influence of interest rates on combined deposit products, i.e. on deposits with additional conditions, the implementation of which leads to the accrual of a higher rate. Such conditions include, for example, the purchase of fund units by a deposit holder for a certain amount or conclusion of an insurance agreement with an insurance company. The Bank of Russia noted at that time that the new calculation principle was introduced in order to more accurately reflect the highest average interest rate and taking into account the changes on the deposit market. The Bank of Russia also mentioned that close attention would be paid to cases when the established deposit rate deviates from the highest market average rate by more than 2 percent.

3 DEPOSITARIUM 3 MARKET NEWS Final Decision on Financial Megaregulator , RBC Daily The government of Russia made its final decision on the establishment of a mega regulator. Next year a separate division of the FFMS will be formed within the Bank of Russia, and a year later it will be reformed into a special committee at the Bank of Russia. So the Federal Financial Markets Service is to be integrated with the Bank of Russia. It was reported that in the first half year legislative acts will be approved to specify functions of the Bank of Russia, financial regulation, and gradually, during the next years, the integration of the FFMS with the structure and the system of the Bank of Russia will be taking place. The Chairman of the Russian National Association of Securities Market Participants (NAUFOR) Alexei Timofeev considers this plan a compromise decision: Until that, an option of complete dissolving of a number of the service s functions across several departments of the Bank of Russia was discussed. It is delightful that a lingering process of the financial regulation reform is getting closer to completion, said NAUFOR s Chair Konstantin Volkov. Russian Regulators Elaborating a Black List of Companies Caught on Financial Fraud , Izvestia The Federal Tax Service, the Ministry of Internal Affairs and the Bank of Russia will work together on creation of a black list of companies involved in illegal financial operations. The list will be stored at the Bank of Russia s website with access to it open to commercial banks. The decision was made during the latest meeting of the intergovernmental workgroup against illegal financial transactions created on 30 July 2012 upon Vladimir Putin s decree. It coordinates actions of all government bodies working to prevent illegal financial operations. The blacklist will be primarily made of companies registered in possession of so-called nominal directors this is a widespread problem in Russia. From time to time regional offices of the Federal Tax Service publish warning messages at their websites. There they describe the most common model of registration performed by some entities: for a certain fee they propose their clients to temporary become nominal directors of the business entity. They assure their clients that the legal entity will soon be registered to the real director without any consequences. According to Federal Tax Service, upon receiving an invitation to come to the tax office people start to deny any relation to operations of companies registered in their possession. However, because of the fact that registration of companies is formally done without violations, they can t free those people from responsibility for illegal operations performed by those businesses. Legislation does not mention the term nominal director, so any private individual in Russia who voluntarily presents documents becomes an actual owner of the company until the opposite is ruled out by a court s decision.

4 DEPOSITARIUM 4 Another group of companies to be in the list are firms held by malevolent entrepreneurs disqualified by a court s decision. There are various types of actions listed in the Code on Administrative Violations for which disqualification is applied. Such entrepreneurs are not allowed to establish new companies or occupy managing positions in other companies for a period of up to 3 years. The third category of companies will consist of those which are absent at the address of their legal registration or use mass registration. If a company has no office where it should be according to its registration documents, it is one of the most certain attributes of fly-by-night companies. There are also certain popular addresses commonly used by such entities for registration. They are called mass registration addresses. The Federal Tax Service already has a list of such addresses in its possession and acts suspiciously. MOSCOW EXCHANGE GROUP NSD Notifies FFMS about Repository Intention to Maintain Register of Contracts MOSCOW On 7 December, National Settlement Depository (NSD), Russia's central securities depository, submitted to the Russian Federal Financial Markets Service (FFMS) notification of NSD s intention to maintain a register of repo and currency swap contracts in accordance with repository services agreements concluded with its customers. To date NSD has concluded repository agreements with 78 organizations. NSD will begin maintaining a register of contracts on these financial instruments starting on the date of publication of information about NSD s repository on the web site of FFMS. During the testing of the repository s technologies conducted from 15 October to 7 December by NSD jointly with its clients, the company successfully registered over 150 general agreements and transactions, and checked all regimes of the repository s functions. The results of the testing are available on NSD s web site (in Russian). To minimize client costs at the first stage of the repository s functioning, NSD introduced a repository services rates discount for the input of information in the register of contracts. The promotional period applies from 10 December to the date of publication of information about NSD s repository on the web site of FFMS. An additional promotional period during which the maximum monthly cost of NSD s service for registration of information about repos in the register of contracts will not exceed RUB100,000 will begin on the day of publication of information about NSD s repository on the web site of FFMS and will remain in effect until 1 April, More information about the company s repository services and terms is available at NSD s web site (in Russian). NSD Reports Results of Its Customer Committee MOSCOW National Settlement Depository (NSD), Russia's central securities depository, announces results of its Customer Committee s meeting held 13 December.

5 DEPOSITARIUM 5 The participants of the meeting approved: The amended tariffs for depository services; The amended tariffs for services related to operations with securities for which NSD opened central depository s nominee holder account or regarding which NSD acts as an entity providing centralized custody. These tariffs were recommended for approval by the company s Supervisory Board and will be published after approval. NSD Supervisory Board Approves Tariffs MOSCOW - National Settlement Depository (NSD), Russia's central securities depository, reports results of its Supervisory Board s meeting held 19 December. The members of the Board approved the new version of NSD Tariffs for settlement and cash services and the Tariffs for servicing bond issues held in the customers issuer and treasury accounts. The approved tariffs will be put into effect on 4 and 1 January 2013 respectively. The Supervisory Board also approved the amended Tariffs for depository services and Tariffs for services related to operations with securities for which NSD opened central depository s nominee holder account or regarding which NSD acts as an entity providing centralized custody. These tariffs are subject to Russian Federal Financial Markets Service s approval; after that they will be put into effect. Thomas Murray Upgrades the Central Securities Depository Rating for Russia s National Settlement Depository (NSD) to AA- with Stable Outlook LONDON Thomas Murray, the specialist custody rating, risk management and research firm, has upgraded the CSD rating for Russia s National Settlement Depository (NSD) to AA-, which translates as very low Overall Risk. Its previous rating was A+. The rating is made up of the following components: The overall rating of AA- reflects a weighted average of the six risk components and relates to a very low risk exposure profile with Stable outlook. Of the six risk components, only Operational Risk was upgraded from A+ to AA-. The outlook indicates there are no significant developments in the marketplace that may alter the Overall Risk in the near future.

6 DEPOSITARIUM 6 NSD is the result of a merger on 3 November 2010 between National Depository Center (NDC), a securities settlement depository, and MICEX Settlement House (MICEX SH), which was a banking institution with a restricted licence that provided cash settlement. In 2012, the services, previously provided by DCC and Settlement Chamber RTS, were transferred onto the NSD platform. Subsequently, having been granted CSD status from FFMS of Russia on 6 November, 2012, NSD became the sole CSD in the Russian market. Some key features of NSD s operations are as follows: NSD operates a pre-funded model for most on-exchange transactions which assumes blocking of securities for both buyers and sellers during trading hours. Off-exchange settlement takes place on a DVP1, DVP2, DVP3 or FOP basis Liquidity and Counterparty Risks for Moscow Exchange-traded securities are mitigated by the use of the pre-funding model. However, off-exchange trades have a higher degree of risk exposure due to the use of non-dvp settlement for the majority of trades and there being no settlement guarantee measures in place. Asset servicing risk exposure is low. 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). Nevertheless much of the processing involves manual operations and there is considerable scope in this area for the processes to be automated to enable STP of corporate actions with the resultant beneficial impact on asset servicing risk. Financial Risk exposure has been assessed as AA. NSD s capital at around USD 180 million appears to be adequate for a depository that has a restricted banking license to provide cash settlement services. NSD has additional resources in the form of liquid reserves and an insurance coverage of USD 65 million. It also has the ability to borrow from the Bank of Russia on a secured basis either intra-day or overnight. The company has been profitable over the past few years, although a significant proportion of its revenue is derived from interest income. Operational Risk has been upgraded to AA- due to improvements in a number of risk factors. Audit arrangements have noticeably improved. The internal control department which acts as internal auditors and undertake periodic audits on different areas and processes including the IT operations has increased its staff complement. NSD had an external operational audit (ISAE 3402 Type 1) undertaken on its controls and procedures in February Also a pre-audit gap analysis was undertaken in October Other external audits were undertaken during the year such as an information security audit, an audit arranged by FFMS of Russia, another by Bank of Russia and an audit on the risk management system. A dedicated Risk Management Department [RMD] is responsible for the risk identification and profiling of NSD s depository and other businesses risks. An external review resulted in recommendations from which RMD has developed a relevant roadmap for the further strengthening and improvement of the risk-management system adopted within NSD. NSD has continued to improve its Disaster Recovery (DR) and Business Continuity (BC) arrangements. 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. Testing of the DRP and BCP arrangements has improved over previous practices but there remains scope to enhance arrangements further. Governance and transparency arrangements have improved with enhanced user representation on Board and management committees. Some improvements could be made to NSD s data mining capabilities to provide the market with more statistical information on the settlement and custody operations. Asset safety has been enhanced partly as a result of improved legal conventions stemming from recent law changes. The foreign nominee concept is now recognised and NSD, as the CSD, can legally grant ownership of securities in Russia while the beneficial ownership of participants is legally recognised. NSD is now recognised as the central place for safekeeping for traded securities and securities held at registrars following the adoption of the CSD law.

7 DEPOSITARIUM 7 Simon Thomas, CEO and Chief Ratings Officer of Thomas Murray said: Thomas Murray has carried out an independent CSD public rating on NSD s operations following a momentous year. NSD was impacted by the merger of the exchanges, MICEX (its majority owner) and RTS, changes to a number of securities market laws and being granted a license to operate as a CSD by the market regulators. The rating has upgraded the CSD risk rating on the back of improved arrangements to manage operational risk. Going forward NSD will need to continue to make improvements, especially in the area of asset servicing, if it wishes to maintain or improve on its AA- rating. Eddie Astanin, Chief Executive Officer of NSD, said Risk management continues to be a major focus of attention for NSD s Supervisory Board and Executive Board. We recognised its importance given the extent of change that we have had to manage in the past year. Our efforts have been suitably recognised by the upgrade to our rating and we intend to push ahead in making improvements in areas where weaknesses have been identified. The Thomas Murray rating assessment will help us to identify those areas of our operations that can be further improved and provide Russia with a world class clearing and settlement infrastructure. The CSD rating assesses the risk exposures for investors associated with the processes the CSD has in place to facilitate the safekeeping and the clearing and settlement of securities, where applicable. It assesses six key risks. The methodology considers the capabilities of the depository and the quality and effectiveness of its operational infrastructure. It also assesses the depository s willingness and ability to protect its participants or clients from losses. As part of the rating, the scope and quality of the depository s services is assessed. The ratings are on a consistent global scale, using the familiar AAA to C ratings scale. Once the rating is assigned there is an ongoing surveillance process to monitor the depository. Separately, Thomas Murray has maintained proprietary assessments of over 130 CSDs globally as part of the Thomas Murray Depository Risk Assessment services. These reports are available via the Thomas Murray on-line store at For further information contact: John Woodhouse Thomas Murray +44 (0) jwoodhouse@thomasmurray.com Olga Rink National Settlement Depository (NSD) +7 (495) Ext rink@nsd.ru About Thomas Murray Thomas Murray is a specialist custody rating, risk management and research firm specialising in the global securities services industry. Thomas Murray was established in The Company tracks and analyses over 250 custodians globally and monitors the risk of around 90 capital market infrastructures. The Company has a strong position as a provider of public and private ratings and risk assessments on global custodians, domestic custodian banks and capital market infrastructures. NSD Supervisory Board Elects New Members of Committees MOSCOW - National Settlement Depository (NSD), Russia's central securities depository, reports results of its Supervisory Board s meeting held 21 December. The participants of the meeting elected the new members of the Customer Committee for Quality Control and Risk Management and of the Customer Committee for Registrar and Depository Relations.

8 DEPOSITARIUM 8 NSD Receives Clearing License MOSCOW On 26 December 2012, National Settlement Depository (NSD), Russia's central securities depository, received a license for clearing activities and got the following internal documents registered by Russia s Financial Federal Markets service: New version of the company s Clearing Rules; Internal Control Rules of NSD as a professional intermediary in the securities market and a clearing organization; A list of measures aimed at minimizing risks associated with clearing operations and conducting clearing and other types of NSD's operations in securities market simultaneously. Bank of Russia Assigns Payment System Operator Status to NSD MOSCOW On 26 December 2012, the Bank of Russia assigned payment system operator status to National Settlement Depository (NSD), Russia's central securities depository, under the registered name NSD Payment System. A record reflective of this was generated in the register of payment system operators the same day (registration number 0014). NSD Payment System has been recognized by the Bank of Russia as systemically important on the basis of reasons established by Federal Law #161-FZ On a National Payment System dated 27 June 2011 (Section 1, Clause 22). Eddie Astanin, Chairman of the Executive Board, NSD, said: To secure payment system operator status, NSD integrated the most important infrastructural functions: the functions of the central securities depository, the clearing organization and the payment system. Such position is in line with NSD s development strategy approved by our Supervisory Board. Our task is to achieve a synergy by integrating these functions, which we need to increase the efficiency and competitiveness of the Russian financial market. NSD Payment System is based on the company s settlement system following the decision made on 30 March 2012 by the NSD Supervisory Board in accordance with Federal Law #161-FZ On National a Payment System dated 27 June, The rules of NSD Payment System will be published shortly on the company s web site. PROSPECTS Owners of Securities Concealing Information Will Pay Larger Taxes , Gazeta.ru The State Duma is discussing amendments to the current legislation, according to which the owners of Russian securities who hide information on themselves will have to pay taxes at the maximum rate of 30%. The reason for this is fighting with offshore companies. However, some experts remind that tax evasion is not the only reason for doing business in offshore zones.

9 DEPOSITARIUM 9 The amendments to the Tax Code related to disclosing information on final beneficiaries are expected to be approved in the second reading. New clauses are to be adopted in sections on profit taxes of private individuals and legal entities. For example, it is proposed to apply the maximum 30% tax rate in case the securities owner does not disclose full information. Full information to be disclosed includes given name, family name, number of securities in possession, the name of the company which managers the portfolio of securities, tax residency, and reasons for tax preferences, if any. The proposed amendments originated in the State Duma s Financial Markets Committee. They explained that instead of enforcement of formal requirements for information disclosure it would be better to employ economic leverages. Similar ideas have many times been discussed in the Duma, but only after last week s message by Putin they were finally formulated. Putin proposed to achieve transparency of offshores and disclosure of tax information like many countries do it. Many Russian companies have already completely disclosed their ownership structure even without being asked to by the government. Publicity is needed to attract large investors and receive large credits in banks; it is also required for an IPO. However, many lawyers indicate that those amendments will first of all hit not large institutional investors, bur rather small owners of securities. Ministy of Finance Wants to Make Investments in Securities More Attractive , Izvestia The Ministry of Finance prepared amendments to the Tax Code which should equalize conditions for investing in various types of financial securities. On that informed head of the National Association of Securities Market Participants (NAUFOR) Alexei Timofeev. For example, Russian citizens investing in financial securities and mutual investment funds will be freed from the profit tax from selling those assets if they hold them for more than three years. For innovative companies one year will be enough. Not long ago the Ministry of Finance presented similar proposals for dividends and coupon yield. The current legislation frees from taxes dividend income of private individuals and income from selling real estate property (upon certain conditions). Owners of financial securities have no such preferences at the moment. The proposed amendments to the Tax Code will change the way it is done with listed securities and investments in mutual investment funds independently of whether they are traded or not. The problem today is that investments in financial market instruments are not stimulated by the taxation regime. In case of bank deposits private citizens are freed from the income tax. If somebody owns real estate property for 3 years and sells it, it will also allow to evade paying taxes. This tax preference affects all types of property except for securities.

10 DEPOSITARIUM 10 FUTURE EVENTS Events Calendar Event Location Date Web-link Third annual forum Derivatives in Russia Swissôtel Krasnye Holmy, Moscow, Russia February online.com/2013/542/derivativ es-in-russia SWIFT Business Forum - Madrid Casa de América, Madrid, Spain 5 March /business_forum_madrid/ index.page SWIFT Business Forum - Canada The Westin Harbour Castle, Toronto, Canada 8 April /business_forum_canada/ agenda.page XBRL International Conference Dublin, Ireland April IPO Congress Moscow, Russia 17 April XXII International Banking Congress Saint-Petersburg, Russia 4-7 June m The 9th Annual Russian Securities Forum Moscow, Russia 5-6 June events.com/event/russia- Securities-Forum-conference The 13th Annual NeMa Network Management Conference The 20th Annual European Clearing and Settlement Hilton Warsaw Hotel & Convention Centre, Warsaw, Poland The Royal Horseguards Hotel, London, UK June June events.com/event/european- Clearing-Summit-conference Sibos 2013 Dubai Dubai World Trade Centre (DWTC), Dubai, UAE September The 4th Annual NeMa Asia - Asia's Leading Network Management Event Venue TBC November The 24th Annual Global Custody Forum 2013 The Hilton, London Paddington, London, UK 3-4 December m.com/