CIS Legal Update - May 2013: New Orders Adopted to Facilitate the Activity of the Central Depository

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A number of orders were adopted in the second part of 2012 by the Federal Service for Financial Markets (the “FSFM”) in order to facilitate the activity of the central depository of the Russian Federation (the “Central Depository”) and address practical issues relating to its operations. These orders, inter alia, provide procedures for risk management, internal control, the opening and maintenance of depo accounts, and disclosure of information by the Central Depository. The relevant orders were introduced as part of the Federal Law On the Central Depository No. 414-FZ, dated December 7, 2011 (the “CD Law”) (please see the article on this topic in the September 2012 issue of the CIS Legal Update),which established the Central Depository and provided for the following.

The List of Foreign Organizations for which the Central Depository Opens Depo Accounts of Foreign Nominee Holder1

The list of foreign organizations for which the Central Depository opens depo accounts of foreign nominee holders (“Depo Accounts”) is limited. In total it includes around 80 organizations including Euroclear Bank S.a./N.V.; VP SECURITIES A/S; Euroclear Belgium; Euroclear France.

Prior to July 1, 2014, only securities issued on behalf of the Russian Federation (RF) and its subjects, municipal units, or bonds of Russian issuers and securities of foreign issuers can be credited to Depo Accounts. Beginning July 1, 2014, shares of Russian issuers, the rights to which are backed by the Central Depository, can be credited to the Depo Accounts.

Disclosing Information and Notifying the FSFM2

The Central Depository should, inter alia, disclose information about its shareholders, shareholders’ agreement (if any), charter, internal documents regulating activity of its managing bodies, information about individual members of managing bodies (except in the case of a shareholders’ meeting of the Central Depository), certain accounting information and annual reports. Such information, subject to certain exceptions, should be published on the website of the Central Depository.

The Central Depository is obliged to notify FSFM of the a) replacement/appointment of individual members of managing bodies, the temporary general manager, deputy general manager and chief accountant, and b) of inconsistencies in the amount of securities on depo accounts — revealed during the checking of accounts — that cannot be fixed. The relevant information should be communicated to FSFM by sending a hard or electronic copy of the relevant notification no later than on the day after which the Central Depository has replaced/appointed the relevant person as per item (a) or became aware of a mistake as per item (b).

Opening and Maintaining Depository and Other Accounts3

The procedure for opening and maintaining depo accounts should be established within the internal documents of the depositories. The activity of the depositories regarding opening and maintaining the depo accounts was to be brought in line with provisions of the new order4 by January 1, 2013. The types of accounts on the list have been substantially increased and now include the following: (i) owner’s depo account; (ii) beneficial owner’s depo account; (iii) nominee holder’s depo account; (iv) foreign nominee holder’s depo account; (v) foreign authorized holder’s depo account; (vi) depository programs’ depo account; (vii) depository depo account; (viii) issuer’s fiscal depo account; (ix) trading depo account; (x) clearing depo account; and (xi) transit depo account. The order also provides for the possibility of opening certain accounts that are not designed to record rights to securities, and that are opened for “technical” purposes, for example: 1) issuance accounts; 2) nominees holders’ clients accounts; and 3) special technical accounts (designed so as to fulfill the obligations resulting from the clearing).

In particular, the order provides details on the following: conditions for opening certain types of depo accounts, the types of securities that can be recorded on the relevant depo accounts, the procedure for entry and recording securities on depo accounts, the procedure for introducing the notes on encumbrances established over the securities recorder on the relevant depo account, etc.

Managing Risk, Internal Control and Internal Documents5

The Central Depository is tasked with managing, inter alia, the following risks: a) banking risks stipulated by the Bank of Russia; b) operational risks resulting in possible losses due to an interruption of the activity in the internal divisions of the Central Depository, inter alia, due to technical malfunctions; negligent or purported actions of the staff; c) regulatory risks consisting of possible losses due to non-compliance by the Central Depository with provisions of the CD Law and related regulations in the area of financial markets, the Bank of Russia and the internal documents of the Central Depository; d) reputational risks resulting in a possible decrease in the number of the Central Depository’s clients due to the potential development of a negative perception of the operational stability of the Central Depository, the quality of it services, or its activities; and e) strategic risks, constituting possible losses due to mistakes (drawbacks) while developing a strategy for the activities and development of the Central Depository. Detailed measures and procedures (which should comply with the mandatory provisions of the order) for risk management should be provided in the Rules for Risk Management adopted by the Central Depository.

The responsibility of monitoring risk management and the Central Depository’s compliance with provisions of the CD Law in their application is delegated to specially appointed members of staff and/or special departments, who are recognized by the Board of Directors of the Central Depository, and who, while exercising their duties, operate independently from other officials of the Central Depository.

Footnotes

1. Order on Approval of the List of Foreign Organizations for which the Central Depository Opens Depo Accounts of Foreign Nominee Holder (No. 12-65/pz-n, dated July 27, 2012)

2. Order on the Approval of Requirements for the Disclosure of Information by the Central Depository, Internal Document of the Central Depository Providing Rules for Disclosing Information and Order for Submitting Notifications to the FSFM (No. 12-75/pz-n, dated August 23, 2012)

3. Order on Approving the Order for Opening and Maintaining Depository and Other Accounts (No. 12-78/pz-n, dated August 30, 2012)

4. Previously the rules for opening and maintenance of depo accounts were to be in line with the Rules of Accounting of Depository Operations of Credit Institutions in RF No. 44 dated July 25, 1996, Provisions on Depositary Activity in RF adopted by Federal Commission on Securities Market No. 36 dated October 16, 1997 and certain other acts, depending on the types of securities accounted. The new order serves an addition to other relevant regulations.

5. Order on Establishing Requirements for the Activities of the Central Depository, Particularly Regarding Risk Management, Internal Control and Certain Internal Documents

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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