Realizing the full benefits of single CSD entails
creative destruction of inefficient, risky, and outdated features of
Moldova’s capital market infrastructure
Interviu with Volodymyr Tulin, IMF Resident
Representative in Moldova
- Mr. Volodymyr Tulin,
why it was needed to launch a new
securities depository when there was in place already (the National
Securities Depository)?
Modernization of
Moldova’s securities settlement landscape required a comprehensive
overhaul of the whole system. Given the institutional gaps and the need
to spearhead the reform, the incremental changes to the existing
structures were not an option.
With regard to the
National Securities Depository (NSD), despite having some good design
features, it turned out to be a significant source of weakness for
Moldova’s capital market. It faced general business risks due to funding
constraints, it lacked a comprehensive risk-management framework.
Importantly, many
efforts failed to realize its role as a central depository that would
shore up integrity of the corporate securities registration system. Even
though NSD was licensed under the Law on Securities Markets to keep a
register of corporate securities, no issuer had transferred its share
registry from amongst the near dozen registrars.
Over years NSD did not
succeed to implement electronic connection between its system and the
systems of brokers and registrars. Any transfer of securities from
brokers and registrars to NSD, and vice versa, has been conducted
manually on paper. This generated risks and significantly limited the
market liquidity and efficiency.
Secure, efficient, and
well-regulated payment and clearing systems for the settlement of
financial transactions where counterparty risks are effectively
controlled and managed is an important pre-condition for a healthy
financial system and its development. The primary objective of the CSD
is to reduce risk, such as securities theft, and improve efficiency, for
example reduction in errors and delays. As such risks are mitigated,
investors should gain trust in the safety of Moldova’s capital market
infrastructure. This would allow to channel a greater pool of financial
resources into long-term productive use, be it private companies or
government long-term investments.
One of the utmost
advantages of the CSD is that it creates secured links between market
participants. Financial instruments are transferred instantaneously and
securely with the new infrastructure. In addition, the CSD makes
possible setting up connections with CSDs form other countries. On the
one hand, foreign investors, will be able to invest in Moldova directly,
being located outside the country. On the other hand, Moldovan companies
will be able to trade their securities outside the country. This is what
the CSD can provide, and market participants should benefit of the new
opportunities to promote financial instruments as an effective way to
attract and provide investments.
-
What will remain
from the old infrastructure of the capital market, Stock Exchange,
the old Depository, the independent registrars and how they will
react with the new depository?
Realizing the full
benefits of single CSD entails, what I would call, “creative
destruction” of inefficient, risky, and outdated features of Moldova’s
capital market infrastructure. In case of registrars, this includes a
nonnegotiable requirement for all registrars to submit to CSD but also
responsibility for CSD to take over securities registers. The ongoing
transfer process is complex as it also aims at confirming the integrity
and legality of the securities records and envisages steps to address
discrepancies.
Main functions of the
CSD also subsume initial registration of securities and management of
securities settlement system, which are the activities that used to be
performed by the registrars and NSD, respectively. The Book Entry System
which provided these operations for government securities has already
been incorporated into the CSD. Despite such a comprehensive set of
functions, CSD is not intended to monopolize capital market
infrastructure. It is required to provide transparent, fair and open
access for all legal persons that intend to become its participants. In
case of the existing entities, the new framework entitles them to be
licensed to engage in capital market activity, such as to open and hold
securities accounts with the CSD on its own behalf or on behalf of
securities holders.
Allocation or sharing of
responsibilities between regulators need to respect their mandates and
competencies. In case of financial market infrastructure, the
fundamental objective is to embrace and apply consistently best
principles of managing market risk. Regulatory fragmentation between NBM
and NCFM was a source of weakness for effective oversight and
development of financial market infrastructure. Scope remains to deepen
regulatory cooperation and explore forward-looking approaches to
financial sector supervision.
-
How it will be
ensured the correctness of the new Depository, given the risks of
political influence, including political influence on NBM? (as CSD
is, sort of, under NBM's umbrella)
Financial market infrastructure, including
CSD, should be subject to appropriate and effective regulation,
supervision, and oversight, such as by a central bank, market regulator,
and other relevant authorities. And the regulators should have the
powers and resources to carry out effectively their responsibilities.
So, in the case of Moldova, NBM has been a natural choice to regulate
and supervise CSD and also to champion its establishment. But CSD has a
stand-alone governance framework, so its efficient governance does not
rest on the NBM alone. For example, the Supervisory Board of the CSD has
members nominated by Ministry of Finance, NCFM, and a member nominated
by market participants. All members of the Board are required to act in
the interest of the Central Depositary and in no way represent the
interests of the institutions or authorities that have appointed them.
-
NBM is exercising
the surveillance of the banking system and is interested in its
development. Banking system has always been a privileged segment of
Moldova's financial market. So, could it eventually happen now that
capital market, while being under NBM's tutorship, would be
disadvantaged over the banking system? That is, capital market could
be put under unequal conditions of competition with the banking
system. Just an example - income from bank deposits was not subject
to taxation, unlike the income from shares...
The financial sector
oversight architecture should pursue robust frameworks across all
sectors, especially when it comes to risks to financial stability. It is
important to keep in check the regulatory arbitrage between all segments
of the financial system.
Moldova’s regulatory
reforms of the past few years have aimed at fixing a number of
deep-routed deficiencies. As a matter of fact, inadequate financial
market supervisory framework and regulatory fragmentation had played a
role in enabling the banking fraud. But I would not describe the
objective of ongoing reforms as an overhaul of supervisory architecture
or a change in financial supervisory model. When it comes to the core
capital market activities, NCFM remains the supervisory authority.
The question of income taxation does not formally belong to the domain
of financial sector oversight, as these instruments are not under the
purview of regulators, but belong to the domain of fiscal authorities.
To be fair though on policy linkages, globally it remains a current
debate how to best reconfigure the tax system to ensure fair financial
sector contribution to meet the fiscal costs associated with financial
sector crisis, and how to align this with ongoing regulatory reforms, as
both go to the core of the difficulties faced in dealing with financial
system failures. For a country like Moldova, capital income taxation is
a question that needs to be seen primarily in the context of seeking an
efficient and equitable income tax model while also keeping in mind
financing long-term development needs.Thank you
very much for the interview. |
