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Scope of specialised depositories’ activity may be expanded: Bank of Russia’s consultation paper

10.03.2020 16:16 / The Bank of Russia

The Bank of Russia proposes that market participants consider the possibility of expanding the scope of specialised depositories’ activity and modifying this institute. These initiatives are aimed at reducing market participants’ and investors’ costs, increasing competition, and improving the quality of services rendered by specialised depositories.

The regulator’s proposals are stipulated in the report published for public discussion.

The institute of specialised depositories is an important element to increase investors’ confidence in the financial market and ensures the protection of the rights and legitimate interests of a wide range of market participants. Specialised depositories’ activity is crucial for consumers (investment unit holders, clients of non-governmental pension funds, insurants, and mortgage-backed securities holders) who need an independent organisation to control their counterparties.

According to the Bank of Russia, the institute of specialised depositories in Russia should switch to a new stage of development. This market is currently highly concentrated, with profitability of the business in decline. Major specialised depositories are dependent on services provided to large clients, which may cause a conflict of interest and affect the efficiency of controllers. In addition, the possibility for specialised depositories to engage in other activities is limited by law. Institutes performing similar functions abroad offer a wide range of additional services, including banking, trust management and consulting services.

The Bank of Russia believes that specialised depositories could become an institute responsible for accounting in the broadest sense of the word, which includes valuation of assets and liabilities and submission of reporting. A key initiative proposed in the report is to stipulate in laws the rights of management companies (MC) to voluntarily assign a part of their accounting functions to specialised depositories. This would help avoid double accounting and reduce market participants’ costs. In addition, it is important to retain the liability of MCs to investors for losses inflicted through incorrect valuation of net assets.

To increase competition, the regulator proposes that specialised depositories should be legislatively entitled to enter new market segments, namely to provide services to any person wishing to have an independent third-party controller (e.g. to control a trustee’s actions), and allowed to combine their core activities with those of professional securities market participants. However, it is necessary to assess the need to set additional requirements for specialised depositories’ activities if the scope of their liability expands.

The Bank of Russia considers that specialised depositories should be engaged in the ownership transfer procedure so as to mitigate the risk of transactions unknown to the controller. This will enhance the protection of investors’ rights. To this end, the Bank of Russia proposes that specialised depositories should be granted a special status enabling state registration of ownership to particular asset types (e.g. real estate and equity stakes in companies) solely upon their consent.

In order to enhance the efficiency of control, it is proposed that specialised depositories should be entitled to independently receive bank statements on accounts and deposits, as well as brokers’ and exchanges’ reports. In addition, the regulator proposes that the obligation of specialised depositories to store assets should be replaced by the obligation to ensure the safeguard of assets.

Suggestions and responses to questions within the public consultations will be accepted until 1 May 2020.

Financial markets megaregulatorProject Group №1