SECURITIES AND EXCHANGE COMMISSION

Agency decision

Ask Donna

What actually matters in this document.

Text

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

DIVISION OF

INVESTMENT MANAGEMENT

December 19, 1997

:rcA

8EOTIoN

-----

VIA FACSTh1ILE AND AIR MAIL

RULE

, Mr. Igox: Moryakov, 1st Vice President

Depository Clearing Company

1412, BId. 4, Staraya Basmannaya St.

Moscow 103064

RUSSIA

PUBLIC

I ,.., I I Or

0. '1

AVAILABILITY ~

175: -, S"

Dear Mr. Moryakov:

This letter is in response to your letter of October 24, 1997, asking the U.S.

Securities and Exchange Commission ("Commission") to consider the Depository Clearing

U.S.-registered

Company ("DCC") to be an eligible foreign custodian for assets

management investment (:Ompanies ("funds").'

In your letter, you explain that nee .seeks to provide market,participants, such as

U.S.-registered funds, with clearing and settlement selVices based on delivery-versus

payment principles. To do so, nec must temporarily hold market participants' securities in

DCC's nominee name, and accordjngly, DCC must be an eligible foreign custodian to

provide such selVices to U.S.-registered funds.

Section 17(t) of the Investment Company Act of 1940 ("1940 Act") sets forth the

custodial requirements for U~S>registered funds, Rule 17f-5 thereunder pe~.funds to

maintain their assets with certain categories of eligible foreign custodians. "Amended Rule

17f-5(a)(2)(iii) defineS the term "eligible foreign custodian" to include a "securlties

depository .or clearing agency that a~ as a system for the central handling of securities or

equivalent book-entries in the countiy that is regulated by a foreign ~cia1 regulatory',

authority. II 11

Amended Rule 17f-5 no longer requires that the centralized securities depository or

clearing agency be the only such system in a country.

Section 3(a)(23)(A) of the Securities Exchange Act' of 1934 defines "clearing agency"

generally as an intermediary that makes payments and/or deliveries in connection with

transactions in securities. The term includes any entity,' such as a securities

depository, that (1) acts as a custodian of securities in connection with a system for '

Mr. Igor Moryakov

December 19, 1997

Page 2

Rule 17f-5 is self-operative and does not require any foreign institution that satisfies

the definition of "eligible foreign custodian" to obtain the prior approval of the Commission

before serving as an eligible foreign custodian for U.S.-registered funds. Thus, based on

your representations that DCC is a clearing agency that acts as a system for the central

handling of securities (or book entries) in Russia, and that DCC is regulated by the Federal

Commission on Securities Markets, it appears that DCC would meet the defmition of an

"eligible foreign custodian," and would not need the approval of the Commission to provide

custodial services to U.S. funds.

If you have any further questions, please contact me at (202) 942-0660 or [FAX]

(202) 942-9659.

Sincerely,

~J:~

Veena K. Jain

Staff Attorney

Office of Chief Counsel

the central handling of securities whereby all securities of a particular class or series

of an issuer deposited within the system are treated as fungible and may be

transferred, loaned, or pledged by bookkeeping without physical delivery of securities

certificates, or (2) otherwise permits or facilitates the settlement of securities without

physical delivery of securities certificates.

Rule 17f-4 defines a "securities depository" as a "system for the central handling of

securities where all securities of any particular class or series of any issuer deposited

within the system are treated as fungible and may be transferred or pledged by

bookkeeping entry without physical delivery of the securities."

)

Rule 17f-5(a)(2)(iii) refers t<? both securities depositories and clearing agencies

because a foreign securities depository may be known as a "clearing agency" in

certain countries. See Investment Company Act Ret No. 13724 at n. 31 (Jan. 17,

1984) (reproposing Rule 17f-5).

Dec

,, ,

Depository-et~~ring Company

103064, Moscow, Staraya Basmannaya st., 14/2, bldA , ...., ,; .';.;plt. ,Tel: (095) 956-0999

'""~'

~'<,~:- ,-' . -f<"'~

Fax: (095) ~2-6804

1;' ,lillI--.

"':;:'{'nf!'Cf.;;

E-Mail: d c c @ d c c . m s k . r u . · ,

••

;:••

,-.

)

October 24, 1997

Ms. Kern McMillan

Division of Investment Management

United States Securities and Exchange Commission

450 5th St., N.W.

Washington, DC 20549

i'!-.

". ,"-' ,..

Dear Ms. McMillan,

During this year we have been in correspondence with John O'Hanlon and Ester Saverson

concerning an issue on whether Depository Clearing Company (DCC) needs to apply for a

"No Action Letter" or not in regard of our clearing and settlement services so that US

institutional investors can invest in our eligible companies. Following our recent telephone

conversation with Ester Saverson we are sending you the following description of our

operations that will give you, we hope, a better understanding as to what DC,C does, where we

are going, and why we would like to be considered by the US SEC as a foreign eligible

custodian in Russia.

The current situation in the Russian equities market attests to an urgent need for creation of

unified clearing, settlement and safekeeping mechanism which will reduce risks, costs and

time for trade settlement. We believe that the only effective way to solve this problem is to

provide market participants with clearing and settlement services based on safe and

internationally accepted Delivery-Versus-Payment (DVP) principles. In order to do this, a:

central clearing and settlement organization is needed and we believe that DCC has the

biggest potential to become such an organization. DCC's shareholders include major Russian

and foreign custodians and broker/dealer companies who already use DCC as the central re

registration agent in the Russian market.

At the current time, the majority of the traded securities in Russia belong to foreign

institutional investors and we expect that more foreign institutions will enter the market.

Many of these institutions are regulated by the US SEG--and, as a result, mt,lst use custodians

who meet SEC requirements.

In order for DCC to fulfil its main aim of providing clearing and settlement services based on

DVP, DCC must temporary hold market participants' securities in DCC nominee name.

Therefore, in order to successfully introduce clearing and settlement services based on DVP

throughout the Russian market, foreign institutional investors must be prepared to use DCC as

a custodian. This appeared to be almost impossible under the former version of regulation 17

f-5 of the United States Investment Compa:ntes Act which required that in order to meet this

regulation DCC must have capital of at least US$200 million. At the current time DCC has

paid-in capital of US$I.8 million, which will probably increased by US$0.5-1.0 million in the

near future. We also understand, however, that after amendments made to the Rule 17 f-5 it is

fund boards' responsibility to select and monitor foreign custodians without obtaining a no

action letter from the US SEC.

But we are still receiving requests from our foreign clients to clarify what our current status is

withregard to the new Rule 17 f-5, and what we need to do-to give confidence to American

institutions that they can invest in our eligible companies.

This is why we are writing to you to seek your advice on the possibility of DCC to be

considered by the US SEC as a foreign eligible custodian which is a clearing agency that acts

as a system for the central handling of securities (or book-entries) in Russia and is regulated

by the Federal Commission on Securities Market. DCC expresses its willingness to cooperate

with the US SEC on this issue and provide you with all of the information about the measures

which we are taking to ensure safety of providing depository services to foreign investors.

We have contacted people from several organizations (NYSE, IFC, NSCC, Chase Manhattan,

Credit Suisse, Barents Group KPMG and others) who participate in an international Expert

Council of DCC (the list of members is attached in the description) and they have expressed

their willingness to assist us in proceeding with our work with the SEC. I hope that you will

not mind to receive calls or take references from these people who really care about the

development of the securities market in Russia. They may give you some additional details

and insights which may be important for the SEC in considering our issues.

Thank you very much for your time and consideration. If you will have any questions we

would be. happy to assist you in any issue. Hope to hearing from you soon, w~.. will try to

contact you later next week.

Sincerely,

Depository

Mikhail

President

Cc: Mr. Ester Saverson, Jr.

Office of International Affairs, US SEC

Igor Moryakov

1st Vice President

DEPOSITORY CLEARING COMPANY

Background - Current Proble'msofRussian Equities Market

Infrastructure Development

The main factor in the development of the Russian securities market in the year 1997 is' the need ·of

the largest Russian issuers in financing in the capital markets, both international and domestic. The

possibilities and scale of financing in the capital markets are to a great extent determined by the

state and efficiency of the Russian securities market infrastructure. Only the creation of a unified

infrastructure for the trading, clearing, settlement, and safekeeping of securities may solve the

problem of effective securities market development. In this regard, the development of an efficient

system for clearing and settlement of transactions is of greatest importance.

A dramatic increase in the trading volume on the market has demonstrated this. The absence of a

clearing and settlement system is the main impediment to further groWth in trading volume and

liquidity and efficiency of the market as a whole.

It has become evident that many market participants are increasingly dissatisfied with the progress

made to date in the area of clearing and settlement. This dissatisfaction has manifested itself in

increasingly frequent discussions of various clearing and settlement schemes. But it is important

that the various alternatives for clearing and settlement systems be evaluated not solely on technical

merits but against a full set of requirements as set forth by participants. At this point market

participants have come to agreement on a list of basic conditions for a system to effect clearing and

settlement which shall be functional and reliable. In general, these criteria can .be broken into three

main groups: the functional-operational capabilities of the system; security; and ability of the

system to grow. Below is the "detailed list of stated requirements by groups.

1. Functional arid operational capabilities. The system should provide:

•

delivery versus payment, resulting in decreased credit risk

•

a reduction of settlement costs

•

faster settlement

•

an open client policy, but at the same time the system should take into account

issues of risk management which can be resolved by introducirig certain financial

requirements to the members of the system

•

maximum number of eligible issues

•

access from any location, thus implying an open regional policy

•

sufficiently fast and simple method of reconciliation with the registrar, meaning the

possibility to find the beneficial securities owner while executing a batch of

consecutive transactions

•

ability to work with non-resident accounts

•

compliance with international standards of settlement procedures

2. Security of the organization implementing the selected system shall be based on:

•

high degree of financial and legal responsibility

P~(JP' ?

•

maintenance of complete confidentiality - a requirement to be applied to all

employees of the organization

•

high control over operations, including:

•

immediate and operative control by the users over the organization activities

which directly affect their interests

•

strong and credible internal and external audit procedures

•

protection of the users against domination and possible full control,. over the

organization by one firm or a group of member-firms

•

capable top management who shall be experienced in the sphere of clearing and

settlement services" _ll~lVe a. clear Ul).der~tanding of the problems and development

directions of this sphere, have authority with the market participants, display

initiative, build relations with customers on the prin,ciple of confidence and respect

for their interests

•

efficient management systems and competence of the personnel

3. Ability of the system to develop and grow implies its ability, in the future, to:

•

handle high trade volumes with fast settlements

•

serve all categories of market participants regardless of investment size and location

•

execute multilateral securities and funds netting between participants

An effective clearing and settlement organization must comply not only with formal requirements

of the Russian regulatory authorities (Federal Commission of the Securities Market for non-bank

depositories and the Central Bank of Russia for banks), but also take into account the requirements

of foreign regulators (SEC and similar organizations) and clients (both Russian and foreign).

The requirements of clients and foreign regulators may include:

•

)

Diverse ownership structure (consisting of large financial institutions serious in developing a

clearing and settlement organization and market infrastructure)

Sound credit history (without serious incidents of not executing fiduciary responsibility

including loss of securities) and audit report from an international auditor

Possibility to provide clearing and settlement services on the basis of DVP jointly with a .

settlement bank chosen by market participants

Financial support for the development stage from independent sources (multinational

institutions such as IFC, EBRD, World Bank, USAID etc.)

Necessary approval from foreign regulators (such as "No Action"-letter from SEC)

Insurance coverage from an internationally respected institution to insure risks (preferably from

Lloyds market) based on a risk management survey made by a risk audit company, approved by

insurers (such as WBK International)

Expert assessment, from large foreign and international clearing and settlement organizations, of

the procedures for keeping securities and settlement (such as DTC, NSCC, Euroclear, Cedel

etc.)

•

Constant dialogue and collaboration with infrastructure organizations representing the interests

of market professionals (such as NAUFOR and PARTAD (Association for Registrars, Transfer

Agents and Depositories)) and their members

The majority of market participants have come to a conclusion that a centralized "clearing and

settlement system will be the most effective means" to meet the basic conditions and requirements

. set out above. The Depository Clearing Company (DCC) could be used as a starting point for such

a system.

Introduction to Dee

The Depository Clearing Company (DCC) was founded in October, 1993 to provide,settlement and

depository services for professional market participants.

The DCC has had a somewhat difficult history. One year ago, the chances for DCC to survive, let

, alone to flourish, were very slim. However, several developments over the past year point to DCC's' .

future success. The new team of managers of DCC, appointed last year, has restructured the

management system, developed a strategic development plan of DCC and undertaken measures for

cleaning up legal and financial problems of the company. Specialists of DCC developed rules,

procedures, automated systems and conducted training programs to develop qualified personnel and

to ensure the highest quality of services. The current organizational structure of DCC is represented

in Appendix 6.

Today DCC is a growing closed joint stock company that is continually expanding its

members/shareholders. DCC shareholders are comprised of major Russian and Western investment

companies and banks, including such financial institutions as: Sberbank, Vneshtorgbank,

Uneximbank, Troika-Dialog, Kreditanstalt-Grant, Rinaco-Plus, Renaissance Capital, Credit Suisse,

Chase Manhattan, Deutsche Morgan Grenfell, ABN Amro and other organizations influencing the

development of the securities market in Russia. Two of the most influential infrastructure

organizations of market participants - the National Association of the Stock Market Participants

(NAUFOR) and the Inter-Bank Credit Union (MKS), recently become shareholders.

Representatives of the Federal Commission on Securities Market (Mr. Kolesnikov - First Deputy

Chairman) and the Central Bank of Russia (Mr. Kozlov - Deputy Chairman) also participate in the

DCC Board of Directors meetings. Mr. Ryskin, First Deputy Chairman of the Uneximbank Board,

is currently the Chairman of the DCC Board of Directors.

The main goal of DCC is to create a centralized clearing and settlement system that is capable of

servicing stock market 'participants with maximum efficiency and reliability, while ;€ psuring the

minimum amount of risks and expenses.

Services Provided by Dee

• Clearing and settlement of trades executed by securities market participants. The services include

ensuring DVP in the event of deposited securities

• Depository custody of clients' securities and maintenance of depo-accounts

• Transfer-agent services, including re-registration and confirmation of ownership rights in the

shareholder registers

• Authorized representation of shareholders in the registers

• Distribution of dividends

• eorporate actions

Clearing and Settlement

One of the main services rendered by Dee is the performance of clearing and settlement operations

for securities.

. The market participant transfers to Dee information on concluded trades, either electronically or

through the courier service. Dee then processes the information to make sure that all the trade

parameters match. In case of partial matching of trade parameters, Dee informs the involved

parties about the discrepancy. Once the trades are processed and matched, D<;e effects the

settlements of the securities.

MKS has been selected as a settlement bank, and has worked with Dee to develop a DVP

settlement procedure. According to this principle simultaiieousmovement of securities in depo

accounts and money settlements between members are effected (see Appendix 2) . The development

of DeC as a central clearing and settlement organization in association with MKS will make it

possible to create a settlement system for the Russian securities market based OIl DVP.

Settlement-and-Depository System

In order to perfoITIl clearing and settlement operations, DCC has uses the automated Settlement

and-Depository System (SDS) developed by «DIASOFT», one of the leading Russian

manufacturers of software for banks, depositories and register holders. SDS was developed to

comply with the· government's program for the development of the Russian st~ck market

infrastructure and in accordance with the Federal Commission on Securities and the Stock Market

(FCSM). DCCemployees and consultants of «Deloitte and Touche» were also active participants

in its development.

The SDS system makes it possible to receive and process electronic messages in SWIFT format

from DCC participants. To verify the authenticity ofthe electronic messages, an electronic signature

system certified by the Federal Agency for Government Communications (FAPSI) is used, thus

ensuring the necessary level of secrecy and information security. The system also maintains an

accounting log to control funds movement on the participants' depo-accounts. The participants,

while using either the electronic message system or paper forms, may promptly obtain any

information-on the changes to their depo-accounts.

The majority of securities market participants are NAUFOR members and users of the Russian

Trading System (I3-TS). To help facilitate settlements of trades concluded on RTS, DCC, together

with the consultants of Barents Group KPMG, are developing and implementing an interface that

enables participants to receive trades from RTS for the further settlement in the Diasoft system.

Depository Services

DCC has received from the FCSM one of the first licenses for provi~ing depository and custodial

services as a clearing and settlement organization. Participants that use DCC as the nominee holder

of their securities are provided with a full scope of depository services. At the moment DCC has

opened nominee ~ccounts with more than 220 registrars of the most liquid stocks and holds shares

in the amount of almost I bIn. US dollars for more than 190 companies - participants of DCC

system and depo-accounts holders. DCC provides for the safe custody of extracts from the register

and certificates of transactions. The DCC system fulfills both the requirements--of the Central Bank

P"O"P'i

and international standards of safe keeping. This is necessary for the ability to .exercise shareholder

rights. In addition, the DCC provides the following services:

• Distributionafdividends

• Monitoring and, if necessary, participation in any corporate actions related to securities

• Exercise of shareholder rights on behalf of the Client, including participation in the general

shareholder meeting

Re-registration Services

The DCC provides services for the re-registration of securities. This service helps'reduce the re

registration expenses that arise when there is a transfer of shares of companies with registrars in

remote regions. Because DCC provides this service to many market participants, the cost is lower

than if the market participants performed the re-registration individually. DCC has become the

major provider of these services to market participants, having re-registered about 7,000 buy-sell

agreements with total volume of 1.5 bIn. US dollars during the last month which can be estimated as

55-60% of the whole trading volume on Russian market. The number of clients is constantly

growing and now is more than 300, including major international and Russian financial institutions.

Over the past year, DCC has managed to establish business contacts with registrars of more than

1000 issuers in the Russian stock market. Regular contacts with the issuers and registrars promote

strengthening of relations, thus bearing fruit in the ability of DCC to act as a nominee~

Confirmation Services

Confirmation services consist of visits to the registrar by a DCC representative, on behalf of the

Client, to perform a review of the share register in order to confirm the quantity of securities

registered in the name: of the Client. Confirmation services are popular particularly with foreign

participants, as they enable the foreign participant to maintain continuous contacts with registrars

and issuers.

Corporate Information Services

DCC has developed, and sends to its subscribers, a monthly bulletin of data concerning registrars

and documents required by the them for re-registration of ownership. The bulletin containst.:.~ularly

updated information on more than 300 issuers whose shares are most actively traded. In addition,

information on dividends paid by the issuers and on shareholder meetings is provided monthly to

DCC clients.

DCC also provides the folloWing information on issuers:

• Plans for enterprise privatization

• Issuer prospectuses

• Data on the financial status of the issuer (balance sheets, profit-and-Ioss statements, other

financial information)

• Audit reports

ISIN Assignment

One of the main conditions for the acceptaIwe of Russian securities on the interrtational stock

market is the assignment of unique identification ISIN numbers to the securities. ISIN numbers are

n .... __ .... L

used for easy identification of securities while'concluding international trades. ISIN assignment is

performed by the Westpapier-Mitteilunger international organization located in Frankfurt. DeC is

creating a special division that will be responsible for the assignment of ISIN numbers to major

issues of Russian securities.

On the initiative of DeC, ISIN numbers were assigned to shares of KAMAZ, Komineft, RAO

«DES Russia», Tomskneft, Noyabrskneftegaz and others.

The Ownership Structure of the Depository Clearing Company

The issue of DeC ownership is one of the most serious and important in the process of its

development. The ownership structure is to a great extent determined by the. existing institutional

market structure, inter.ests

of various groups, need for financing, as well as the State policy.

. .

presupposing representation of social interests (equal access to services, fair competition, healthy

market, investor protection, etc.).

There are 4 main models of ownership of clearing and settlement organizations. They may be

owned by the state, by members of a certain market sector, by members ofvarious market sectors,

or by a trading system. Each of the models implies search for a compromise betWeen a) the

possibility to balance competing group interests and b) the ability to obtain and maintain long-term

financing of the organization's activities.

As the result of nature of the Russian market and consistent with the desires of various market

sectors and infrastructure organizations, the most acceptable and logical model of ownership for

DCe seems to be the one where the clearing and settlement organization is owned by the members

of various market sectors which are interested in the efficientfunctioning of the organization and

the services it provides. DCe ownership represents a good example of the realization of such an

approach in practice. Broker/dealer companies hold 44% of DCe shares, Russian banks - 20%,

foreign banks/global custodians - II %, and illfrastructure organizations - 25%. According to the

DCC charter every member has the same amount of shares (400) except infrastructure

organizations which have 4 standard lots of shares (1600). A full list of the DCC shareholders is

attached in Appendix 3. Also DeC charter stipulates a special order of formation of the Board of

Directors which should include equal representation from the broker/dealer and banking sectors (4

from each), 2 representatives from foreign custodial banks, 1 from infrastructure organizations, 2

fmm government authorities (1 from FCSM and Ifrem the Central Bank), and 2 from the

Jllanagement of the company. This well-weighted ~mposition enables the Board to make

.compromise decisions suitable for all markef sectors. The full list of the DeC Board of Directors is

provided in Appendix 4.

DCC Participants and Access to DCC Services

For the purposes of managing risks, clearing and settlement organizations tend" to restrict access to

their services. Those market partiCipants who, according to the established standards and financial

requirements, are not able to use the organization's services directly, or decide not to use the

services offered, must have access to the services via members who will act as agents in providing

clearing and settlement services. Such relationships presuppose a tiered structure for clearing and

settlement systems. The proposed structure of the clearing and settlement system for Russia is

outlined in Appendix 1.

P.,<TP 7

Three main groups of potential DCC direct users may be singled out:

1. The major broker/dealer firms and commercial banks trading securities both on their

own account and on the instructions of their clients and mainly. responsible for the

share turnover in the market.

2. The largest Russian custodial banks which are now just beginning to develop the

custodian business, and foreign custodial banks keeping the securities of large

foreign investors.

3. Regional clearing and settlement organizations providing their services to smaller

regional broker/dealer firms.

Trade settlement services will be mostly required for broker/dealer companies because agent trades

(trades on the instructions and for the account of clients) account for a fairly large proportion of

turnover. Many foreign clients do not currently consider brokers as potential nominee holders of

their shares. However, the growth in the number of speculative trades made by brokers for their

own account will stimulate the process of depositing their shares in DCC, as it will eliminate re

registration costs and increase the efficiency of own-account trading.

In aggregate, the top 50 broker/dealers - members ofNAUFOR - provide for more than 90% of all

RTS trading volume and, in the first approximation, it would be worth considering them as first

priority users of DCC services. However, it is also necessary to take into account tne presence of

fairly large market operators, including foreign companies, which are not NAUFOR members but

which may be interested in settlement through DCC.

Russian custodian banks make up another group of DCC users. In spite of the fact that the

custodian business is just beginning to develop, many of the largest Russian banks see a great

future in its development and intend to take an active part in the creation of an infrastructure which

will make it possible to efficiently administer securities and corporate actions for their future

clients. Amongst these banks are Uneximbank, Vneshtorgbank, Sberbank, Stolichny Bank,

Menatep, Rossijsky Kredit, Inkombank etc. and they are recommended to be included in the list of

first priority users of DCC services with regard to securities safekeeping for domestic (primarily)

and foreign investors.

Foreign custodian banks representing the interests of foreign institutional investors in Russia may

become the-largest DCC clients. There are already DCC memb~s among such banks (Chase

Manhattan, Credit Suisse, Deutsche Morgan Grenfell, ABN Amro). However, the participation of

other large International custodians such as Bank of New York, lNG, State Street Bank, Citibank,

etc. seems to be important.

Risk management in Dee

Qne of the most important issues of the functioning oLa clearing and settlement system is risk

man~gement. There are two areas where risks must be managed: securities custody and trade

settlement.

The main risk in securities transfer to DCC nominee name is the risk of unauthorized securities

withdrawal from DCC account in the shareholders register. Strict operations rules and procedures

including strong internal audit function, which will eliminate securities manipulatIon in DCC

nominee holding without-beneficial holders permission, may considerably reduce-this risk. Another

way to protect DCC users from this risk is purchase of insurance from an internationally respected

institution like Lloyd's.

At the moment DCC has gone through risk audit by WBK International" (an official risk auditor of

Lloyd's insurance market), whose report was presented to Underwriters to define terms and

conditions of DCC insurance. DCC has become the second Russian financial institution (after the

National Registry Company) insured by Lloyd's in compliance with international standards. A

Leading Underwriter provides DCC with so-called "Depository Comprehensive Crime Insurance"

which represents standard "bankers blanket bond" and "computer crime" type of policy and covers

all major operational risks of DCC.

Another group of DCC risks relates to clearing and settlement operations. At the 'moment DCC .

provides users with a very reliable "trade-by-trade""settlement of trades concluded by them in

Russian Trading System and on the aTC market. A settlement scheme is represented in Appendix

2. There is no netting and that is why DCC- does not carry any credit risks of its users. Insurers

provide DCC" with coverage against operational risks of this type of settlement related to computer

misfunction and personnel crime.

It should be noted that Interbank Credit Union (MKS) which performs function of a settlement

bank for DCC has all necessary capabilities to provide fund transfers as a part of DVP settlements

as is described in Appendix 2. MKS was founded by 17 major Russian banks (from top 20) for

clearing and settlement purposes and has a special license from the Central Bank for providing this

type of services. This license allows MKS to use money from its users only for-settlement of trades

concluded on organized securities markets (like RTS and MICEX). Central Bank guarantees that

money on the users' accounts will not be used for any other purposes and that they can be

transferred from the user's main account with MKS only to the user's account in another banle

This provides a high level of security for all funds transfers in DCCIMKS settlement based on

DVP. An insurance policy covers MKS risks as well.

)

P"o-P Q

Measures DCC is Undertaking to Develop Depository Services and Increase Investor Confidence

in the Corporate Securities Market ofRussia

1. DCC shareholders currently include large Russian and international financial ins~ituti6ns, both

broker-dealers and banks. DCC will consider several new applicants from both the broker-dealer

and banking communities.

2. IFC has expressed an interest to provide an unsecured loan to DCC and become a shareholder of

DCC. IFC has conducted a due diligence investigation of DCC, the results of which have been

favorable. The decision of the IFC Investment Committee to provide DCC with a $500,000

loan and $50,000 equity investment has been made at the end of September, 1997. At the

moment a term sheet for the investment is being finalized by IFC and the decisiop. of IFC Board

of Directors is expected by the end ofNovember, 1997.

3. A risk audit of DCC has been completed. by WBK International, a company approved by

Lloyds, and a report has been forwarded to Lloyds. DCC has signed an agreement with WBK to.

assist DCC in the implementation of an internal audit function.

4. After negotiations with Lloyds market insurance brokers and several underwriters agreement has

been reached with Johnson & Higgins and AIG on issuing Depository Comprehensive Crime

Insurance policy. The amount of the insurance is $10 million and covers each and every loss in

excess of $1 00 thousand.

5. Discussions have taken place and contacts have been established with representatives from

DTC, N:SCC, NYSE, DKV and Euroclear. Agreement has been reached to include

representatives from these organizations in DCC's international expert advisory council (full list

of members is provided in Appendix 5). A memorandum of cooperation has been signed with

NSCC to provide DCC with consulting on the development of clearing and settlement services.

6. DCCINAUFOR working· group has been assembled and is currently developing steps to

organize a system to settle trades concluded in the RTS. The group drafted "Standards for

Depository Activities ofNAUFOR Members" adopted by NAUFOR's Board in January 1997

and included in "DCC Depository Standards" which have been approved by Federal

Commission on Securities Market.

7. As of February 1, DCC began to provide DVP settlement of trades in the RTS for several most

liquid stocks. Large broker-dealers have started to deposit their shares on bCC nominee name.

At the moment DCC has 185 participants who opened depo-accounts and deposited over 700

mIn. USD in stocks on DCC nominee name. DCC has opened nominee accounts in more than

220 registrars of the most liquid stocks.

8. DCC specialists have developed software for remote access to DCC clearing and settlement

system from broker-dealers' and custodians' back-offices. The software will allow sending of

settlement instructions from broker-dealerS and cl.!Stodians to DCC in electronic format using a

software ·licensed by the Russian Agency of Government Communications and Information

(F AP~I) for encryption and electronic signature. Installation of the software started on April 1.

..An agreement is signed. with the RTS that the RTS will be a subcontractor for installation,

,maintenance and servicing of the DCC remote terminals.

9. An agreement has been signed between DCC and National Depository Center (the organization

formed by MICEX and Central Bank of Russia to provide depository services for government

securities) on cooperation and development of a unified centralized system for de~ository and

clearing services. Later Russian Trading- System (RTS), Moscow Interbank. Currency Exchange

(MICEX) and S.-Petersburg Currency Exchange (SPCEX) joined to the Cooperative

Agreement.

10. An agreement has been signed between DCC and Uneximbank on providing clearing services

by DCC to Uneximbank for trades with shares deposited in Uneximbank.

11. An agreement has been signed between DCC and S.-Petersburg Currency Exchange on

prov~<Jing depository services by DCC to SPCEX for trades concluded on the exchange. SPCEX

04'),....0 10

has started trading equities at the end of September, 1997. DCC keeps securities of more than

110 members of SPCEX who trade every day with more than 60 stocks.

12. DCC is a Board member of PARTAD and actively participates in the development of specific

strategies to develop the depository business in Russia.

13. Deloitte & Touche has completed an audit of DCC for the year 1996 and has disclosed the

positive audit report to public.

Conclusion

The effective unified mechanism for trading, clearing, settlement and safekeepipg of Russian

securities cannot be created without developing an effective centralized clearing and settlement

system.

The current strategic vision is for DCC to become the core of the central clearing and settlement

system for the Russian Federation. In the short term, DCC's mission is to become the clearing and

. settlement organization for NAUFOR and the RTS.

A unified clearing, settlement and depository system supported by the stock market participants

will:

• Decrease risks for the trade participants and investors

• Reduce the time to transfer securities

• Greatly reduce the costs of transfer

• Increase the liquidity of Russian securities

• Increase volumes on organized trading systems

• Eventually give regional participants a greater chance of competing with the larger

Moscow members

Appendix 1.

National Depository & Settlement System Structure

1 level

2 level

3 level

4 level

National Depository &

Settlement System

Guarantee Fund

Major Custodian

Banks

Brokers

depo-acc6unt

depo-account

DCC

(central clearing

& settlement

organization)

Investors

CSOof

Ekaterinburg

Brokers of Ekat

depo-account

Regional

custodian

depo-account

Investors

depo-account

Regional

custodian

depo-account

Investors

CSOof

S-Petersburg

Brokers of S-Pet

depo-account

Regional

custodian

depo-account

other CSO

other brokers

depo-account

egional

custodian

depo-account

CSOof

Vladivostok

depo-account

Investors

Major broker

companies

(clearing brokers)

depo-account

Clearing Bank

(MKS)

Registrars

Investors

Brokers

Organized

Trading Systems

(RTS)

Appendix 2

Settlement scheme for dealer trades executed on RTS between

participants of Dee (Delivery versus payment)

Shares are deposited on Dee nominee name,

money settlement is done through MKS.

RTS

\.trade report

4.MT520/522

5.MT534/51O

533534

9.MTI02

10.

)

'---,'

Appendix 2

Trade settlement cycle of corporate securities

i on "Delivery Versus Payment" (DVP) basis

(Documents in electronic form)

I Day I Time I

T+l

. ,;

;

until

18.00

18.30

19.00

from

19.00

until

13.00

10.00

13.00

See

note I

Buyer

Seller

DCC

MKS

Conclusion of trades in RTS

Begin confirming "Settlement

. Instructions" and sending them to DCC

Receive information from RTS on trades concluded

until 18.00

Form "Settlement Instructions" on trades

concluded until 18.00

Begin receiving "Settlement Instructions"

confirmed by the Participants

Confirm "Settlement

Instructions" and send them to DCC

Match "Settlement Instructions" received from

the Participants (every 30 minutes)

2. Form "Matched" and "Unmatched Settlement

Instructions" reports and send them to the

Participants

Transfer funds for

matched trades to

MKS

1• payment order transfer time shall be specified individually for each Participant in compliance with its bank (banks) rules of procedure.

Page 14

'--_'-:

"~--

I Day I Time [

T+3

Seller

DCC

Send instructions to

MKS to transfer funds

necessary for today's

settlements from the

main (411) to transit

(412) account

Block Participants' transit (412)

accounts and send "Blocked Funds

Report" to DCC

1. Verify funds and securities sufficiency for

trades with the current settlement date and

postponed trades from previous dates

2. Block securities for trades with sufficient

amount of shares at Sellers depo-accounts

3. Form "Funds Transfer Instruction" for MKS

Send "Funds Transfer Instruction" to MKS

15.00

16.00

16.30

18.00

MKS

14.00

14.30

18.00

18.30

19.00

1. Receive and process a statement of

funds received on 163 corr~spondent

account of MKS with the Central

Bank division in Moscow

2. Distribute funds to the main (411)

Participants' accounts and make up

account statements

9.00

11.00

14.00

Buyer

1. Transfer blocked se'turities from the Sellers'

depo-accounts to the Buyers' depo-accounts

2. Submit reports on the results of the current day

settlements to the Participants

1. Transfer funds according to the

DCC "Funds Transfer Instruction"

2. Form "Funds Settlement

Confirmation" for DCC

Send "Funds Settlement Confirmation"

toDCC

Page 15

Appendix 3

Dee Shareholders

Company

1 NAUFOR

2MKS

3 Cash Union

4 Aktiv

5 Analyze

6 Aton

7 Brunswick

8 Capital Regent Securities

9 Center Invest Securities

10 Creditansta1t-Grant

11 CS First Boston·

12 Megatrustoi I

13 MFK-Moscow Partners

14 Olma

15 Rai, Man and Gor Securities

16 Renaissance Capital

17 Rinaco Plus

18 Russian Brokerage House C.A.

19 Troika Dialog

20 United Financial Group

21 International Moscow Bank

22 Olympiysky

23 Sberbank

24 Tveruniversalbank

25 Uneximbank

26 Vneshtorgbank

27 Zerich

28 ABNAmro

29 Chase Manhattan Bank

30 Credit Suisse

31 Deutsche Morgan Grenfell

Total

Business profile Number of Paid in capital % in capital

(US dollars)

Infrastructure

1600

200,000

Infrastructure

1600

200,000

Infrastructure

400

50,000

Broker/dealer

400

. 50,000

Broker/dealer

400

50,000

Broker/dealer

400

50,000

Broker/dealer

400

50,000

Broker/dealer

400

50,000

Broker/dealer

400

50,000

Broker/dealer

400

50,000

Broker/dealer

400

50,000

Broker/dealer

400

50,000

Broker/dealer

400

50,000

Broker/dealer

400

50,000

- 3

Broker/dealer

400

50,000

Broker/dealer

400

50,000

Broker/dealer

400

50,000

Broker/dealer

400

50,000

Broker/dealer

400

50,000

Broker/dealer

400

50,000

Bank

400

50,000

Bank

400

50,00Q

e 3

Bank

400

50,000

Bank

400

50,000

Bank

400

50,000

Bank

400

50,000

Bank

400

50,000

Global custodian

400

50,000

G1obaLcustodian

400

50,000

Global custodian

400

50,000

Global custodian

400

50,000

14,800

1,850,000

100

~...

Appendix 4

Dee Board of Directors

I. Uneximbank

2. Vneshtorgbank

3. Sberbank

4. Renaissance Capital

5. Chase Manhattan Bank

6. Credit Suisse First Boston

7. Troika-Dialog

8. Creditanstalt-Grant

9. Rinaco PI\.Js

10. Brunswick-Waburg

II. Federal Commission on Securities Market (FCSM)

12. Central Bank of Russia

13. Russian Trading System (RTS)

14. President ofDCC

15. 1st Vice President ofDCC

Appendix 5

DCC Expert Council

Richard Bernard - Executive Vice President & General Counsel, NYSE

Dennis Earle - Managing Director, NSCCIDTC

Rudiger von Rosen - Director, Deutsches Aktieninstitut

Claudia Morgenstern - Principal Investment Officer, IFC

Ester Saverson - Assistant Director, Office ofInternational Affairs, US SEC

Keith Seibert - Vice President, Morgan Stanley (New York)

Andrew Bond - Vice President, Global Investor Services, Chase Manhattan Bank (London)

Bruce Lawrence - Managing Director, H.B.L. Consultancy Services (London)

Sophie Pompea - Director of Project Development, EMTA (Emerging Markets Traders

Association)

10. Wim Claeys - Vice President, Euroclear (Brussels)

11. Jonathan Bulkley - Managing Director, Barents Group KPMG

12. Bertram Lewis - Project Director, Arthur Andersen Consulting

13. Andrei Kozlov - Deputy Chairman, Central Bank of Russia

14. Ivan Tyryshkin - Head of Department, Federal Commission on Securities Market

IS. Peter Rylko - Chairman, NAUFOR Financial Operational Committee

16. Mikhail Alekseev - Deputy Chairman of the Board, Uneximbank

17. Dmitry Mozgin - Head of Custody, Vneshtorgbank

. \

)

Appendix 6

DCC ORGANIZATIONAL CHART

Security

-----

I--

Accounting

Office

President

Human Resources -

Compliance

Internal Audit

- ' Financial Director

1st Vice President

Legal Department f -

Vice PresidentlDevelopment

Technical Director

Clients

Relations

Department

New Projects

Department

Software

Development

Department

Corporate

Information

Division

Vice President/Operations

with Registrars

Marketing and

PR Department

Department

Secretariat

Operations

Department

Agents

Department

Transfer.Agent

Department