High season on the Moskva

Mon, 03/08/2015

While summer is traditionally a dead season in business, this does not apply to the Russian securities market. By Yuliya Umnova, Head of GSS Russia                                                                  

On-going infrastructural and legislative changes started three years ago continue to increasingly gather speed in Russia.

Corporate actions reform is the first thing that comes to mind when thinking about the most significant changes. Transition from paper to electronic document flow between all market participants is the core idea of the large-scaled CA reform. In 2014 legislative changes introducing e-proxy voting came into force. On 29 June 2015 the President of Russia enacted the rest of the amendments.

All communication and document flow related to corporate events will be “cascaded” by the issuers through CSD to custodians and their clients. In doing so market participants will be using international standards of financial communication ISO 15022 and ISO 20022 and process corporate information on a STP basis. Elimination of paper document flow will mitigate risks and decrease costs both for issuers and investors.

 

Standardised information

Another important aspect of the Corporate actions reform is the creation of a single source for corporate information. Currently, custodians chase through many different internet sources, media and bulletins to find corporate information for their clients. Moreover there are no standardised formats in which issuers are required to provide such information. The creation of a single source of corporate information on the basis of the National Settlement Depository, Russian CSD, legislated as such starting from 1 July 2016, will significantly reduce risks and enable the whole corporate actions procedure to be more technology-savvy in the Russian market.

 

Conditional tax rate

Another legislative initiative of this summer relates to the possibility of the application of a conditional tax rate to income that is received by entitled investors through Foreign Nominee (FN) accounts. Currently the FN holder should disclose the aggregate information for the purpose of income processing and taxation which includes the tax jurisdiction of the entitled investor, type of holders, and the total number of securities. Based on this information custodians may only apply the unconditional tax rate according to the DTT between Russia and country of tax residency of the entitled investor. At the same time, should the investor wish to benefit from a conditional tax rate under a DTT (with a dependency on term, size of the investment and any other conditions, etc.), then such a preference may only be obtained via the tax reclaim procedure.

Tax reclaim is a bureaucratic and long-lasting procedure in Russia and thus is not convenient to clients. The draft law suggests eliminating such inconvenience for the clients. It will be possible to apply the conditional tax rate but to benefit from it, a FN holder should disclose the entitled investors on an individual basis instead of the aggregated one. The documents confirming the conditions of this tax rate application should be provided as well.

 

Electronic matching

The last but not the least in terms of importance for the market is the long awaited service of electronic matching launched in the Russian market last year and now being tuned by NSD together with the custodians. The service was introduced as a result of one year of discussions by the participants of the NSD Committee on Settlement and Custody services. UniCredit Bank, as a member of the committee and a special working group dedicated to electronic matching established under the committee, took active part in working out the methodology and mechanism of electronic matching and was one of the first custodians switched to the service.

Electronic matching should replace the existing manual process where market participants pre-match settlement instructions via telephone or e-mail. The adoption of electronic matching by the majority of market participants is a necessary condition for the replacement the current system.

There are still plenty of things to do, to improve and implement on the Russian securities market. But I am proud of what has already been done on the way towards harmonisation and integration into the world economy through the joint effort of the Central Bank of Russia, CSD, custodians and other market participants.