CSOB
AST talks to Marek Zacal of Czech Republic bank CSOB about the country’s capital markets, the new Russian CSD, and whether a local brand name can stand up to the big players in CEE countries
How are the Czech Republic’s capital markets faring?
The Czech Republic is one of those emerging Central and Eastern European markets that deserves attention. Capital markets have been making concrete shapes right after the revolution in the early 1990s and the focus has been clearly re-directed towards the West. Although they have not reached ‘Western’ parameters yet, the central European location itself, and strong EU-based partnerships, have helped to do a lot of the work.
Not by chance is the Czech financial market viewed as a relatively stable environment, with its own monetary policy and respected regulatory bodies. Major banks are well capitalised and their exposure to selected peripheral European countries is generally marginal. Regular stress tests of the central bank (CNB) declare the strength and readiness of the banking sector even if the severely adverse scenarios take place. Continual profitability of the largest Czech banks and high capital adequacy and liquidity in the post-crisis times will serve as the best evidence of good health and sustainable performance of the whole banking industry.
What are your feelings on the new Russian CSD?
The establishment of the Russian central securities depository (CSD) is definitely a significant change, and I believe that positive factors will prevail. From our own experience in the Czech Republic, a new CSD brought several features that made post-trade servicing much easier. Clearing and settlement is finally done in one house, which brings more effectiveness in communication with market participants, and there has been a cost reduction in terms of a single technical platform. On the other hand, a full nominee concept has still not been adopted in the Czech CSD. Therefore, from our perspective, the opening of foreign nominee accounts is undoubtedly one of the biggest milestones for the Russian financial market.
How can non-EU member states increase asset safety if they are not affected by certain European regulations?
Non-EU member states can indeed achieve similar safety of assets, if they manage to implement into their local legislative framework the principles and rules that are anchored in European legislation. Such implementation, however, may strongly depend on the political environment in this or that country. It is worth mentioning that in some states, no matter if they are EU or non-EU, the asset’s protection is even higher than what the European regulations stipulate. The Czech Republic, with its traditionally conservative banking sector, is an example of a state where local regulations are even stricter than the European ones.
What are the challenges and quirks of offering custody services in the Czech Republic?
After the establishment of a CSD in 2010, the settlement of securities that are traded on the Prague Stock Exchange was finally centralised under one roof. However, another challenge was last year´s introduction of the MTS market.
The current hurdle is the adoption of the Xetra platform by the Prague Stock Exchange, which poses higher demands on local entities in terms of clearing, settlement and other post-trading processing. Remote Membership introduction brings new options to the Xetra members that will now be able to trade Czech securities via Xetra without being a member of the CSD. Local custodians will be handling the settlement of their Xetra trades.
After the switch of Prague Stock Exchange from its current trading platform to the Xetra platform, the introduction of the central counterparty (CCP) will be another feature that will keep sub-custodians rather busy. Currently, it is expected that CCP implementation in the Czech market will take place in 2014.
A structural change arising from participation in TARGET2-Securities (T2S) can be expected. However, due to the cash clearing in Czech currency and other capital market specifics, the signing of a T2S agreement by the local CSD has been postponed.
An absence of the full nominee concept in the Czech CSD is perhaps the mostly frequent debate between local providers and foreign investors. Described as ‘bi-level’ or ‘two-layer’ evidence, it still seems that this concept does not bring much light into the discussion. To cut a long story short, the secret lies in the distinction between an owner´s account and a customer´s account. According to Czech legislation, disclosure of beneficial ownership is necessary either in a CSD’s records (segregation on an owner´s accounts) or in a local-custodian´s books (segregation on an owner´s accounts in local custodian´s books provided that these segregated accounts are linked to the customer’s account in the CSD).
Do you see the use of small custodians lessening in the CEE region, and is this a good or bad thing?
First of all, we have to deal with understanding who these “small custodians” are. I would rather divide custody providers into two groups: firstly, those companies that operate under the brand of a renowned global group, and secondly, companies whose brand is well-known locally or regionally. CSOB is a good example of the second group.
A global brand name of some local sub-custodians has a noticeable benefit, but these big names have a relatively short track record in terms of Czech custody services. Also, it’s not only Czech investors that will give preference to local institutions with strong historical roots, long-term experience and a significant domestic and foreign customer base. AST
