Collateral management is fairly new to the Russian market. Why is this coming about now?
Collateral management first appeared on the market about two years ago, but we were thinking about it for some time before that. Repo already existed in Russia, and it has been very successful. The difference is that, internationally, bond repo is an over-the-counter (OTC) product, and in Russia it is an exchange market. Like on many markets, our main liquidity provider is the central bank, so our main repo transactions come from repo or bilateral repo with the central bank, through the exchange.
Two years ago, the National Settlement Depository (NSD) and the central bank introduced OTC repo, which was something of a revolution. The central bank is still the main source of liquidity, but there is a collateral basket, and after the global financial crisis, liquidity has become quite precious.
We have proposed not only overnight repo, but repo for three days, for seven days, even for months. The central bank is even thinking about repo for a year, which means promoting the term and finding a way to secure good collateral. We have looked at what international central securities depositories (ICSDs) such as Clearstream and Euroclear are doing and the equities they propose as standard, and we’re adapting some of those products to suit our own system. We have ended up with a lot of the same features—we have market-to-market and automatic selection of securities and replacements.
The main point to consider is that there was a need for this service in the Russian market. We started with about 100 clients and now, after just two years, we have more than 200 clients, including banks, brokers and investment companies. Of the total volume of repo in the market, we already represent 32 percent.
What we have had to do, and what we are still doing, is create a bank of information and teach market participants the benefits of collateral management. They have to adapt their systems and put in quite a lot of additional effort, so it’s important that they understand the possibilities offered. The central bank has been very helpful in this, as it understands the international markets and the benefits of this kind of repo.
What do the new repo products mean for Russia?
We are certain that the facility will make the market more liquid and a lot safer. This is a difficult time in Russia—and everywhere—and when it comes to times of market stress, banks can find themselves in some difficulty. If money can be taken out of the banks in a way that is safe for the whole market, that will benefit everyone.
We hope that our efforts will also make the market more interesting, and we see this creation of a repo market as a first step, and a service that we intend to expand. We are planning to propose the same kind of repo with the central bank, offering collateral management to on-exchange transactions, too. This will use the connectivity of the shareholders, including the Moscow Exchange, and allow us to include more and more participants in to the process.
In the future, we are also thinking about introducing securities lending. Repo in Russia has two purposes, to avoid failing to deliver securities and to facilitate borrowing. Securities lending is only used for avoiding failing to deliver securities, so why not introduce a specific mechanism based on repo to help make the market even more liquid and even safer? We are working on that initiative, but it might not come to light until 2016 or 2017. It will involve changing legislation and adapting our systems, and a lot of work with the market.
What are the benefits of developing a collateral management business from scratch?
We have learnt a lot from the experience. There is always a difficult choice: buying a system that already exists or developing it from scratch.
There are existing systems out there that allow securities lending and collateral management that could be extended to other products, because the technology is so perfect now that it can be easily applied to various platforms. We considered it carefully and decided that it would be more interesting for us to develop it ourselves.
Doing it this way adds an element of safety. Considering that we are still in the midst of a crisis, and there is still a question of possible sanctions, we have to remember that this service is a crucial element of the Russian infrastructure. It’s like the circulation of blood—the liquidity that comes from the central bank is circulated around the other participants, and if it stopped there could be a crisis. We have to take responsibility for this.
On top of this, it might not be perfect just yet, but in the near future we expect to be able to offer our own solution to other countries, such as our colleagues in the Commonwealth of Independent States, who could learn from our experience.
We are happy that we chose to do it ourselves, but we are open to alliances. We have been in discussions with Clearstream and Euroclear about possible collaborations in the future, joining the ICSDs to create a link between our systems that could allow, for example, Russian participants to use euro bonds in the international environment, for collateralising Russian transactions, and vice versa.
Is it important for Russia to fall in line with international standards for collateral management?
It is very important. Even with the political pressure on Russia, we must continue our work on the infrastructure side, and we want to make sure that everything we do corresponds to international standards. For example, if we start from the basics, in the financial industry everyone is using the ISO 15022 format applied for SWIFT communications, and this will soon upgrade to ISO 20022—our collateral management project uses the same format, keeping up with international standards.
Secondly, we are using international documentation for repo transactions, which correspond to the International Capital Markets Association requirements.
We are looking at what international regulatory organisations are proposing and what is being adopted by internationally, and we are also trying to have an open infrastructure that will allow us to be as technologically connected as possible.
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