OREANDA-NEWS. March 14, 2012. Thomas Murray, the specialist custody rating, risk management and research firm, has issued a CSD rating for Russia’s National Settlement Depository (NSD) of A+, which translates as ‘low Overall Risk’. The rating is made up of the following components:
CSD Rating 
NSD Rating

Overall Rating А+

Asset Commitment Risk А+

Liquidity Risk А+

Counterparty Risk АА-

Financial Risk AA

Operational Risk А+

Asset Servicing Risk АА-


The overall rating of ‘A+’ reflects a weighted average of the six risk components and relates to a low risk exposure profile with ‘On watch’ outlook. The outlook indicates there are significant developments in the marketplace that may alter the Overall Risk in the near future. Those developments include the recent approval of the CSD law with the expectation that NSD will most likely become the appointed entity to act as central depository in Russia, as well as the forthcoming merger with the Depository Clearing Company (DCC). These developments are expected to have a significant impact on NSD’s operations in the near future. MICEX-RTS is planning to change the existing model of on-exchange trading and settlements by introducing a T+n cycle using margining in the settlement process, with trades being cleared through a central counterparty.

NSD is the result of a merger on 3 November 2010 between the National Depository Centre (NDC), a securities settlement depository, and MICEX Settlement House (MICEX SH), which was a banking institution with a restricted licence that provided cash settlement for trades executed on MICEX as well as OTC trades settled through NDC. Although most procedures remained unchanged, NSD has made significant effort to consolidate some of the processes and harmonise policies across the organisation during the past year.

Some key features of NSD’s operations are as follows:

NSD operates a pre-funded model for on-exchange transactions which entails blocking of securities for both buyers and sellers during trading hours. For off-exchange and OTC settlement, there is no blocking and settlement takes place on a continuous basis as soon as both securities and cash are available for settlement.љ

Liquidity and Counterparty Risks for MICEX-RTS-traded securities are mitigated by the use of the pre-funding model. . However, off-exchange trades have a higher degree of risk exposure due to the use of non-DVP settlement for the majority of trades In addition, cash settlement is in commercial bank funds through NSD, which holds a restricted banking license.

In the area of asset servicing, NSD is the central paying agent for Bank of Russia’s bonds, most municipal bonds and most corporate bonds. For equities:
NSD maintains a repository of participants’ payment details (used for dividend payments), which is updated electronically by participants through EDI via standard payment instructions.

Registrars send AGM and proxy voting-related information directly to NSD clients (shareholders) on the basis of the shareholder's list provided by NSD.
NSD receives information on corporate actions from the registrars as nominee holder either electronically through EDI or physically via post / fax.
NSD provides the list of shareholders to registrars for corporate actions purposes, and distributes to its participants the dividends payable to a participant or its clients.

Asset servicing risk exposure is low. This reflects the high level of liability that NSD must accept in accordance with Russian Civil Law, which protects participants in the event of losses caused by an incorrectly processed event.

Financial Risk exposure has been assessed as AA. NSD’s capital at around USD 150 million appears to be adequate for a depository that provides internal cash settlement services. Although by law, NSD takes a high level of liability that is not limited to direct losses, there has never been a successful claim made against NSD. NSD also has the capability to limit its liabilities (for services it classifies as value-added) in the agreements signed with participants.љ It has additional resources in the form of liquid reserves and an insurance coverage of USD 65 million. The company has been profitable over the past few years.

NSD mitigates operational risk by maintaining well-defined procedures. The internal control department acts as internal auditors and undertake periodic audits on different areas and processes. A dedicated Risk Management Department is responsible for the risk profile of NSD’s depository and credit businesses although it remains work in progress. NSD has not had an external operational audit undertaken on its controls and procedures since the merger with MICEX SH, although a pre-audit gap analysis was undertaken in October 2011. The pre-audit examined a minimal number of processes.љ A full SAS-70 audit is planned for 2012.

Following the merger of the previous NDC with MICEX SH, NSD also totally reviewed its Disaster Recovery (DR) / Business Continuity (BC) arrangements. The primary data site houses a back-up system and also serves as the business continuity site for NSD staff members. A second back-up system is located 15 kilometres from both the production and the primary data sites. DR / BC arrangements have been revamped following the merger and full DR / BC procedures, have been developed and partially tested d. A test on the BC procedures was undertaken in December 2011.

Governance arrangements appear to have improved since the transition from NDC to NSD.љ A number of committees have been established within the Supervisory Board.љ Minority shareholders, who are participants of NSD, are actively involved in making decisions with regards to fees changes, new services, IT developments and such.

Simon Thomas, CEO and Chief Ratings Officer of Thomas Murray said: “Thomas Murray has carried out an independent CSD rating on NSD’s operations following the merger between the previous National Depository Center and MICEX Settlement House. Our analysis shows that NSD has made significant progress in harmonising procedures and minimising risks. NSD’s outlook remains on watch. We will monitor developments in the market and report on any impact on NSD’s rating. Once the merger with DCC is completed further analysis will be required to assess the impact”.

Eddie Astanin, Chief Executive Officer of NSD, said “Risk management is a major focus of attention for NSD’s Supervisory Board and Executive Board. Our goal is to create a risk management system meeting international standards and fully conforming with the nature and the scale of Russia's central depository. Conducting an external audit as a Thomas Murray rating assessment allows us to evaluate the level of our system’s maturity and helps us to choose the basic trends for its development, especially during our company’s large scale transformation.”

The CSD rating assesses the risk exposures for investors associated with the processes the CSD has in place to facilitate the safekeeping and the clearing and settlement of securities, where applicable. It assesses six key risks.љ The methodology considers the capabilities of the depository and the quality and effectiveness of its operational infrastructure.љ It also assesses the depository’s willingness and ability to protect its participants or clients from losses. As part of the rating, the scope and quality of the depository’s services is assessed. The ratings are on a consistent global scale, using the familiar AAA to C ratings scale. Once the rating is assigned there is an ongoing surveillance process to monitor the depository.