KELER Ltd. is the sole central securities depository in Hungary with a license to operate as a specialized bank. At the same time, KELER is the major owner of KELER CCP Ltd. According to the stipulations of the CSDR, KELER needs to obtain authorisation for its (i) central securities depository services (ii) services provided as a specialized bank (iii) ownership in KELER CCP Ltd.
As it is being finalized, KELER expects to submit the authorization request to the Central Bank of Hungary before the deadline at the end of September. KELER will make an announcement when the request is sent to the CBH. As the market regulator, the CBH has 6 months to issue the new license for KELER, which the CSD expects to receive in March 2018.
CSDR will have impact both on the direct clients of KELER (being the local brokers and custodian banks) and on the customers of the clients of KELER (among others foreign investors).
Please see below the potential impact of the CSDR provisions on KELER’s clients:
Measures to improve Settlement Discipline
The Settlement Discipline rules (that will enter into force in 2019) will require CSDs to impose financial penalties on clients for failed trades and introduce mandatory buy-in procedures to encourage their clients keeping securities accounts with KELER to settle trades until the intended settlement date. It is important to note that KELER’s clients will also be required to introduce measures in respect to their customers (e.g. foreign investors).
The final technical standards are expected to be published in the autumn of 2017 while the CSDR provisions on Settlement Discipline will have to be applied 2 years after the publication of the final technical standards.
KELER plans to set up a working group to inform market participants on the impact of the CSDR provisions. Besides the members of the CSDR User Committee (that has been founded by KELER in December 2016), the Settlement Committees of the Government Debt Management Agency (ÁKK) and the Budapest Stock Exchange, and the representatives of KELER’s clients with the highest turnover – including UniCredit Bank Hungary – will be the members of this new CSDR working group.
Protection of the securities of KELER’s direct clients (participants of the Securities Settlement System) and their customers
In operating the securities settlement system:
- KELER has to keep records and accounts that enable a participant (i.e. the client of KELER) to distinguish the securities of that participant from those of that participant’s clients (segregation of proprietary assets).
- KELER has to offer to keep records and accounts enabling a participant to distinguish the securities of each of that participant’s clients, if and as required by that participant, on an individual client account; such individual client accounts shall be maintained for keeping records of the securities of clients notified by that participant.
- The participant shall offer its clients further segregation of the accounts at KELER, and will inform them of the costs and risks associated with that option.
Summarizing the above: KELER has to ensure segregation at the following levels:
- the account of securities account holder „participant own account” – option a),
- single client account - „individual client segregation”, or the account in which the securities belong to multiple clients - „omnibus client segregation” – option b).
- In addition to the above segregation levels, KELER’s clients may offer further segregation for their own customers in KELER.
KELER already offers segregation of „participant own account”, „individual client segregation” and „omnibus client segregation” and also allows further segregation if requested by the client of KELER.
Reconciliation
CSDR requires that clients keeping securities accounts with KELER compare at least daily their own records to the daily information provided by KELER.
While the Act CXXXVIII of 2007 on Investment Firms and Commodity Dealers, and the Regulations Governing their Activities stipulate that investment firms must conduct, on a regular basis but at least once each month, reconciliations between their internal accounts and records and those of any third parties by whom financial instruments and funds are held, the CSDR will introduce the obligation to perform daily reconciliation for investment service providers, i.e. clients of KELER. It must be noted that most of the clients of KELER already perform daily reconciliation thus they already comply with the CSDR.
Internalized Settlement
Settlement Internalizers (institutions executing securities transfers on behalf of clients or for own account, without the involvement of the CSD, i.e. KELER) are required to report to their competent Supervisory Authority (in Hungary to the Central Bank of Hungary) the aggregate volume and value of all their trades settled outside KELER. The first such report will have to be submitted within 10 business days after the end of the first quarter counted from 10 March 2019. KELER will report the data to the competent authorities as per the applicable technical standards of the CSDR.
Legal Entity Identifier (LEI)
It is mandatory for KELER to collect and record the LEI codes (introduced by the European Market Infrastructure Regulation – EMIR) of their securities account holder clients and the securities issuer companies. This requirement allows KELER to meet its reporting obligations to domestic and European supervisory authorities. All the securities account holder clients and issuer clients of KELER are required to have LEI.
The LEI code of UniCredit Bank Hungary Zrt. is Y28RT6GGYJ696PMW8T44.
Provision of banking-type ancillary services
KELER as a specialized bank will continue to provide banking services to its clients after obtaining its CSDR license. In line with the stipulations of the CSDR, KELER will be able to provide banking services only to the participants of the securities settlement system, i.e. only to those of its clients that hold securities accounts at KELER.
Acceptance of clients, risk management
KELER’s client identification procedures already comply with the provisions of the CSDR and the AML/CTF regulations currently in effect.
KELER plans to introduce a new element and condition of account opening and account management for clients holding securities accounts at KELER, the Know-Your-Customer (KYC) questionnaire. With the implementation of the new form, KELER’s aim is to be able to assess more efficiently any counterparty risks. KELER will provide more information on the questionnaire before it would be introduced.
Impact on investors: In line with the stipulations of the CSDR, foreign investors will also have to comply with the Settlement Discipline Rules from 2019. Not executing securities transactions by the original settlement date might trigger penalties and buy-in procedure in the OTC market as well. KELER will provide asset segregation on different levels, thus even global custodians will have the option to open segregated securities accounts for their customers in the CSD. The daily reconciliation obligation for KELER’s clients will further strengthen investor protection. Other measurements KELER will implement to comply with the CSDR will improve the reporting capabilities and risk management procedures of KELER.
Your Contact
Dario Mariotto
Relationship Manager
Tel. +36 1 301 1910, Fax +36 1 475 3043
dario.mariotto@unicreditgroup.hu