Banks asked to return euros stuck in NSD in another currency

Banks asked the Central Bank to mitigate the consequences of sanctions against the National Settlement Depository. They want their hung euros back and no fees on their deposits. Experts are not sure

Russian banks are trying to minimize the losses they suffered due to EU sanctions against the National Settlement Depository (NSD), RBC learned. The Association of Banks of RUSSIA (ADB) sent a letter to the Central Bank with a proposal to develop mechanisms that would allow market participants to return funds frozen by NSD - to receive them not in euros, which are no longer available, but in another currency. RBC got acquainted with the document, its authenticity was confirmed by the ADB representative.

“The Bank of Russia has received a letter from the association and will respond in the prescribed manner,” said a representative of the Central Bank. “NSD is in constant dialogue with the regulator and clients, discussing possible options for resolving the current situation,” a representative of the depositary told RBC.

The EU imposed sanctions against the Russian National Settlement Depository Economics

How sanctions against NSD hit banks

On June 3, the EU authorities approved the sixth package of sanctions against Russia, among other measures, the NSD, a structure of the Moscow Exchange that keeps records of ownership of securities, as well as settlements on transactions, then fell under restrictions. His inclusion in the black list was unexpected: the NSD itself called the situation an emergency and warned of the suspension of operations in euros in the interests of counterparties.

For banks that make transactions in the financial market through the NSD, this meant freezing the euro balances on correspondent accounts. Frank Media, citing sources, cited estimates that €4.5–7 billion were blocked.

What are the bankers asking for now?

As noted in the ADB letter, the blocking of credit institutions' funds at NSD does not exempt them from executing clients' orders related to currency. The co-owner of Sovcombank, Sergey Khotimsky, spoke about this problem earlier. “A very cleverly constructed Moscow exchange agreement made it possible to say to those who kept their liabilities there: “Guys, we don’t owe you anything, we were blocked here.” When we have something blocked, we owe all our clients, and the Moscow Exchange, as if due to the competent work of lawyers, they are great, ”the banker ironically said at one of the sessions of the St. Petersburg International Economic Forum.

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It follows from ADB's letter that market participants would like to receive the funds blocked in NSD back, even if not in euros. They offer at least two solutions to the problem:

involve the Bank of Russia as a third party — the Central Bank will conclude swap deals with NSD’s affected counterparties (banks) “in the amount of held balances in euros” on special terms. In particular, at a zero or minimum possible rate, for a long period, with the possibility of prolonging the transaction until the problem is resolved, with the possibility of its early closure at the initiative of the bank without penalties; the second option is to determine the procedure for NSD to independently return to banks funds from correspondent accounts opened in euros in any other currency.

The essence of the proposals is to somehow compensate banks for liquidity, which turned out to be frozen, explains ADB Vice President Alexei Voylukov. “One of the tools is interest-free swaps in rubles, so that the Central Bank, not being able to make transactions in euros, would give at least rubles, but would not take a fee. In any case, banks need free liquidity, it somehow compensates for the losses,” he says. The option with payments from NSD, according to him, is not a complete alternative to the first mechanism, since it may not be implemented as quickly.

“No one is trying to make money, everyone is trying to somehow compensate for the frozen money, because there are obligations to customers,” says Voylukov. He did not give an estimate of how much balances of credit institutions on correspondent accounts with NSD were blocked, since market participants do not disclose their statements: market participants are not named. At the same time, there are a lot of requests from different players.”

What sanctions against NSD mean for payments on public debt and foreign shares Finance

What do the experts think about it?

Investment DIRECTOR of Loko-Invest Dmitry Polevoy recalls that banks have always had the opportunity to keep foreign currency in their accounts with NSD, but against the backdrop of increased sanctions in mid-May, the depository warned clients about the risks of freezing. “I believe that many people withdrew money from NSD to the NCC (National Clearing Center. -) or to private banks. The amount of funds that hung up probably turned out to be less than it could have been, but something still turned out to be frozen, ”says Polevoy. He is skeptical about the bankers' offer to compensate them for their losses.

“Apparently, by offering a swap, the affected banks are trying to shift their losses to the Central Bank. It is difficult to say how it will be technically structured, given the lack of the Central Bank's ability to conduct transactions in foreign currency. Perhaps we are talking about compensation for losses in rubles, so that banks can later buy foreign currency for them and close their losses or obligations to customers. But from the point of view of risk management, what happened is a miscalculation of the financial institutions themselves, ”the analyst notes.

The Central Bank did not see a threat to foreign exchange trading due to sanctions against NSD

The initiative is understandable and logical, says Alexei Timofeev, president of the National Association of Stock Market Participants (NAUFOR). “Banks should find mechanisms that will help offset this effect not so much now, due to sanctions against NSD, but in the future, in case sanctions pressure increases,” he believes.

Banks have suffered, but it’s an open question whether it is necessary and possible to help them, says Sofya Donets, chief economist for Russia and the CIS at Renaissance Capital investment company: “Due to sanctions and infrastructure disruption, there is a lot of hung money on all sides.”

According to the analyst, swap deals to compensate banks for losses are a good tool, since they are not irrevocable funds. “But, on the other hand, it is necessary that this be technically possible - the Central Bank also has little choice in which currency to conduct operations. There is no analogue how to implement this without other associated risks,” explains Donets. The second scenario with payments at the expense of NSD, according to her, also has a limitation - the depository, as a settlement institution, without additional financial support from outside, simply cannot find money for compensation.

Negative rates are not for banks

As follows from the ADB letter, Russian banks are also asking the Central Bank to intervene in the process of setting rates on the money market. Market participants, in particular, propose to restrict NCC's ability to introduce negative interest rates on foreign currency balances held by credit institutions. The NCC is also part of the Moscow Exchange group; its accounts account for the currency used by Russian residents.

The Central Bank saw sanctions risks for the Russian currency accounting center

The increase in banks' expenses to maintain balances in the NCC will "automatically" cause an increase in the cost of services for their clients, the ADB letter says. A representative of the Moscow Exchange told RBC that the NCC has not introduced and does not plan to introduce negative rates, but its tariff model provides for a fee for holding currency. It is levied only from credit institutions that hold "euro and dollars in volumes that significantly exceed those required to participate in exchange trading," RBC's interlocutor said.

Earlier, the Bank of Russia proposed to expand the right of banks to apply negative rates on foreign currency deposits of legal entities, and credit institutions, in turn, began to introduce commissions on individuals' accounts in foreign currency. However, amendments to the legislation on negative rates are still being developed, and the Central Bank has already urged banks not to abuse commissions for private clients.

Commissions for currency accounts with NSD and the NCC were announced at the beginning of April, but many people simply did not notice this at the time, recalls Polevoy. He calls the emergence of negative rates in the market natural and sees no point in adjusting the conditions for banks.

“The emphasis on the devaluation of the financial system is set by the changed conditions and sanctions risks, safe foreign exchange assets are not enough, therefore, the authorities will try to get rid of all the excess currency that is not required for foreign trade and permitted financial transactions, and banks are now broadcasting this to their customers. Those who continue to believe in the security of the currency and the opportunity to earn money on it (if the ruble starts to weaken) must put up with negative rates and commissions,” Polevoy concludes.