Sketchy information on annual meeting agendas or corporate actions announcements is not going to plague investors in Russia equities in the future. Nor will fund managers risk losing money as many do today, because the operational difficulties discourage them from participating.
Russia’s corporate actions reform has given the country’s national securities depository National Settlement Depository (NSD) the legal clout needed to offer paperless voting and corporate actions processing, as well as control of critical information. Effective July 1, the NSD was accredited under the country’s new federal securities law as the sole official source of information on annual meetings and corporate actions. The new law also allows fund managers to cast their votes for annual meetings and corporate actions electronically through their custodians in the ISO 15022 or 20022 formats. They will no longer have to mail the paper ballots to corporate registrars or present them in person at annual meetings.
The new measures are the latest in a string of regulatory changes aimed at dispelling Russia’s image as “Wild West” market with uncertain and unenforceable rules. In 2012, the NSD won legal designation as the country’s national securities depository paving the road toward its subsequent linkage with international central securities depositories (ICSDs) Euroclear and Clearstream. The connectivity allows members of the rival ICSDs to settle cross-border trades in Russian equities and bonds on the books of the ICSDs.
The next steps took on the longstanding operational challenges of corporate actions. A January 2014 law required Russian companies to electronically submit to NSD all information on corporate action events and proxy materials for general meetings. In August of the same year, legislation was passed requiring that corporations accept electronic votes from fund managers delivered by custodian banks through the NSD. As of August 2015, the NSD has require that those votes be cast in either the ISO 15022-compliant or ISO 2022-compliant message types. Most custodians use the ISO-15022 message types transported through the network operated by La Hulpe, Belgium-headquartered SWIFT.
Although the NSD had previously been providing its participants with information on annual agendas and corporate actions on its website, the depository had to gather the data from multiple information agencies and corporate websites. Without any guarantee of completeness or accuracy, the financial intermediary and its fund managers were left at risk for error and potential financial liability. The new law requiring direct submission of the data from corporations changed all that.
“Without the NSD’s new official status. investors were not certain of whose data was valid in the case of a discrepancy,” says Maria Krasnova, deputy chairman of the NSD. “Now if there is a difference between information offered through NSD and other sources, only the NSD’s data will be considered valid.” The NSD will provide the information on corporate actions and general meetings in a daily datafile using the ISO 15022 and ISO 20022 formats.
When casting their votes for annual meetings and corporate actions through their custodians, fund managers now have a simplified process. They no longer have to present registrars — Russia’s equivalent of stock transfer agents – with documentation that custodian banks have their power of attorney to vote on their behalf or deliver paper ballots. An electronic vote transmitted by a custodian bank through the NSD will be considered legally valid.
However, fund managers still have an additional requirement to meet or they risk losing some rights of participation. “Fund managers wanting to participate in annual meetings or voluntary corporate actions must still disclose their identities and ownership stakes in Russian equities to their custodians to forward to the NSD. The depository will electronically pass along the information to the registrar of the issuer involved,” says Krasnova. Fund management firms which don’t disclose their identities to the NSD can still receive the benefit of income and dividend payments, but will not be entitled to vote in an annual meeting or for voluntary corporate actions.
A mitigating factor: Russian law will give fund managers more time to disclose their ownership of shares. Previously the information had to to be delivered to registrars in a paper-based mode 20 days before the event– the general meeting or payment — takes place. Now the information will be due electronically two days before the event.
Processing corporate actions can generate risk for banks and broker-dealers who are liable to their clients for any financial losses due to errors. Fund managers — particularly US mutual funds — have hesitated to invest in Russia because they couldn’t be sure they had accurate information on annual meetings and corporate actions. They also had a hard time proving their right to vote. The short timeframe required to deliver the necessary paperwork to registrars and high costs involved didn’t help matters. Operations managers at several fund management firms confirm that at best they voted or participated in corporate action elections about 20 percent of the time.
Although Russia’s NSD operates on a for-profit basis, it has decided to impose only “nominal fees” for the corporate actions process in order to promote participation. It will charge ₽135 (US$2.11) for processing a vote on a general meeting. The fee rises to ₽522 (US$8.61) when the NSD sends information on a voluntary corporate action and processes the participant’s vote. The NSD does not charge members for notifying them about pending dividend and income payments or for crediting their accounts with those payments. “We want to offer a fair pricing structure which will enhance the possibility that the NSD’s participants will participate in meetings and voluntary corporate actions,” asserts Krasnova.”We are hoping that improving the corporate governance and corporate actions process will also grow foreign investor participation in the Russian market.”
Will it? Ana Giraldo, head of risk products for Thomas Murray Data Services, a London-based custody and depository research and ratings firm, thinks the new legal actions and operational changes at the NSD for corporate actions will go a long way to promoting investor confidence in Russia. In March 2016 Thomas Murray reaffirmed the NSD’s rating as AA- indicating a very low overall risk to bank and brokerage participants when safekeeping assets and clearing and settling trades. The rating agency’s outlook for the NSD’s “asset servicing” risk was upgraded to positive to take into account the NSD’s role in automating and centralizing the corporate actions notification and voting process.
However, market infrastructure is just one of the factors used by fund managers to decide on asset allocation, cautions Giraldo. Fund managers will likely continue to rank Russia in the category of high country risk because of external macroeconomic and legal conditions. “Russia has come a long way to eliminating legal and operational obstacles that hindered foreign investment a decade ago,” she says. “However, we still have to consider the devaluation of the ruble and lack of liquidity on the Moscow exchange. Most trading is still conducted on the London Stock Exchange. Then there are the sanctions to deal with.”
The US and European Union imposed economic sanctions on Russia in 2014 and the EU renewed them last month to last until January. Complying with the limited investment conditions of the US sanctions has proven so difficult that some US fund managers have opted not to invest at all.
What do fund managers think of Russia’s corporate actions reform ? “It’s certainly better than previous circumstances,” says one global fund manager operations director. “We will have to see how custodians will implement it and what they will charge before getting too excited.”