The Challenges of T2S Triggered CSD System Replacement

The Hungarian CSD KELER signed a memorandum of understanding, signifying the official commencement of KELER’s participation in the T2S project. The National User Group (NUG), which aims at involving interested market participants into the project, was established shortly after that. UniCredit Bank Hungary, NUG’s Settlement Working Group and the Corporate Actions Working Group have been NUG members from the start. 

In 2012 the Central Bank of Hungary (CBH) decided not to include HUF in T2S as settlement currency (though the option remains open) and KELER announced that all securities issued in Hungary with HU ISIN codes will be included in T2S only when Hungary joins the system.

These decisions resulted in a partial-entry model, similar to the approaches of other national CSDs in Europe. CBH and KELER had originally decided to join T2S in the third implementation wave on 12 September 2016.

New migration plan

Due to Euroclear’s ESES CSDs’ delayed entry into T2S, a decision on a new migration plan was taken during a CSD Steering Group meeting held on 10 December 2015.

KELER has decided to go ahead with a two-phase go-live plan, i.e. first, the non-T2S functions will go live and, second, the T2S functions will be made available to the market. Adapting to T2S, however, will result in the harmonisation of certain processes. The aim was to include as many new functions and processes as possible in the first phase (3 October 2016), with the remaining functions implemented in the second phase (6 February 2017).

Hungary’s T2S accession is highly dependent on the completion of KELER’s system replacement project, it is also not possible without KELER having functioning and reliable IT infrastructure.

There is extensive work on BaNCS and T2S involving all market participants. Several working groups are engaged in discussions and preparatory work for testing, while a wider range of user-testing for BaNCS already took place in May and June 2016 and will continue during July 2016. The Hungarian National Securities Market Practice Group aims to define the new STP requirements before BaNCS goes live in October 2016.

Harmonisation of corporate actions processes and regulatory framework

The Capital Market Act was amended, with effect from 1 January 2016. For dematerialised securities it introduced the definition of "corporate action", defined KELER as the central source for corporate actions information and made it a requirement for issuers to pay income on the announced pay date.

Expected market changes in Hungary

As part of its system replacement project and preparation to join T2S, KELER published a service description document based on the important changes that will take place in different phases of the implementation of BaNCS.

UniCredit Bank Hungary has decided to become an indirectly connected participant of T2S via KELER. Under this structure, all instructions of UniCredit Bank Hungary’s customers will be sent to KELER, which will, in turn, automatically handle and route these instructions to the appropriate place of matching / settlement (i.e. KELER or T2S), without the need for UniCredit Bank Hungary or its clients to indicate any additional details or instructions.

Certain local regulations will need to be amended in order to be able to provide in full scope corporate actions services aligned with the T2S Corporate Actions Standards. These relate primarily to the area of taxation, i.e. the possibility for quick refund, simplified tax reclaim process and extension of the nominee concept to all types of securities. Thus, KELER has initiated discussions with the Ministry for National Economy to lobby for the necessary regulatory changes.

Additionally, KELER has established a new Corporate Actions Expert Working Group with the aim of working on these matters with the respective market players.

The topics of discussion are as follows:

• separation of the ownership identification process from the income collection process
• extension of the nominee concept to all types of securities
• introduction of standardised income collection process via the CSD
• identification of the applicable tax rate in the securities transaction process
• simplification of the process of tax deduction, relief at source and tax reclaim as well as harmonisation with international standards
• revision and optimisation of the data required to be disclosed by shareholders

Although there are still some unanswered questions in this area that need clarification, KELER has already published its rules in relation to market claims and transformation processes, in the areas that are not impacted by the above.

Based on the current information, clients of UniCredit Bank Hungary will be in the position to take part or opt out from the automatic market claim and transformation services provided by KELER by using the opt-out / cum-ex indicators once Hungary joins T2S.

However, as mentioned above, an important lobbying activity has been initiated in the market in this area. Therefore, new information will be disclosed in the future according to the rules and / or processes that may change as a result of the lobbying activity.

UniCredit Bank Hungary does not currently plan on changing its provided corporate actions messages, so standard messages will be sent to clients even for events impacted by the market claim / transformation services. Thus, messaging will have no impact on UniCredit Bank Hungary’s clients.

At this point, the relevant market participants and working groups are evaluating and elaborating on the practical steps and procedures needed for the adaptation of buyer protection rules to the local market. Thus, UniCredit Bank Hungary will be in the position to notify of the impact this will have on our customers once the market procedures for buyer protection have been agreed upon.