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Fitch Ratings - Moscow - 29 August 2019.Fitch Ratings has upgraded Central Counterparty National Clearing Centre's (NCC) Long-Term Foreign Currency (FC) Issuer Default Rating (IDR) by one notch to 'BBB'. The agency has also affirmed NCC's Viability rating (VR) at 'bbb' and Long-Term Local-Currency (LC) IDR at 'BBB'. The Outlooks are Stable. A full list of rating actions is at the end of this rating action commentary.

NCC is a key operating subsidiary of the Moscow Exchange Group (MOEX), which is the largest exchange in Russia. NCC is a central clearing counterparty on foreign exchange, securities, repo, derivatives and commodities markets. In its role as an intermediary between market participants, NCC acts as a counterparty for each trade and is ultimately responsible for the performance of trading obligations in case of the failure of one or more of the clearing participants.

Key Rating Drivers

The upgrade of the Long-Term FC IDR and upward revision of the Support Rating Floor (SRF) reflect an improvement of Russia's financial flexibility, and therefore stronger ability to provide support to NCC, as reflected by the upgrade of the Russian sovereign rating earlier in August.

Fitch views the propensity of the sovereign to provide support to NCC as high given its important role in ensuring the functioning of local financial markets and its unique infrastructure. A failure of NCC to perform its functions could lead to serious confidence-related issues and have a material negative impact on the whole Russian financial system.

The affirmation of the VR reflects NCC's exceptionally strong credit profile in the context of the Russian market, based on the entity's intrinsic strength. NCC has a high resilience to potential losses due to strong risk management and controls, the largely short-term nature of its risk exposures, and robust solvency, which is further protected by extra buffers and a loss cap (with any excess loss to be shared between market participants). The VR also reflects NCC's strong liquidity and robust performance.

Fitch believes that NCC's intrinsic strength would likely correlate with the Russian operating environment and sovereign credit profile, as the company is largely exposed to the local economy and counterparty exposures might be vulnerable to an economic stress. However, such risks are reasonably mitigated by NCC's risk framework.

During 2018-1H19, NCC faced three unrelated operating loss cases. The first case related to litigation after a workout of a defaulted counterparty in 2015. NCC lost the initial arbitrage and created a RUB0.9 billion provision in 2018, but subsequently won an appeal in the Supreme Court and fully recovered the provision in 1H19. The second case that ended in a RUB0.8 billion expense in 1H18 relates to an operational error that occurred as result of manual adjustments made when closing a defaulted participant position. The third one, which may cost up to RUB2.4 billion, subject to potential insurance compensation, relates to grain market contracts, as NCC uncovered a shortage of grains in a few qualified elevators, which were supposed to be stored as collateral. In its 1H19 IFRS accounts, NCC recognised RUB2.4 billion of other operating expenses in relation to this case.

Although these expenses are not very significant relative to NCC's income and equity, it shows that the risk management framework, although advanced, is not free from occasional errors and slippages. Positively, NCC promptly made the necessary adjustments to its systems/processes to prevent similar risks arising in the future.

Generally NCC's asset structure is conservative, with clearing assets representing 76% of total assets at end1H19. These are mirrored by respective liabilities and the risk is managed through robust initial/variation margining. The remainder is composed of liquid assets, where NCC's investment policy is conservative, permitting holdings in cash, placements in highly-rated banks and investments in short-term bonds rated 'BB+' and above.

NCC's Fitch Core Capital (FCC) ratio was estimated at 180% at end-1H19, underpinned by low weights of clearing-related assets (equity/assets ratio was 2%). Regulatory capital requirements are also met with significant headroom with a N1ccp ratio of 149.4% at end-1H19, compared with the 100% minimum requirement. Moreover, the default waterfall mechanism (procedure for allocating losses in case of counterparty failures) further protects NCC's solvency by capping its losses. Under this framework, NCC's loss on counterparty defaults is limited to RUB10.1 billion (15% of FCC) with the excess loss to be covered by collective default funds (RUB7.2 billion) and the Moscow Exchange contribution to the default funds (up to RUB5 billion), available upon request. According to NCC's clearing rules, any remaining loss is shared among market participants.

NCC has no commercial debt, and its liabilities consist primarily of interest-free counterparty trading accounts. Almost all assets are highly liquid and fully covered customer accounts.

NCC's 'F2' Short-Term IDR reflects sovereign support (in line with the sovereign's Short-Term IDR F2) in case of need. The risk of the sovereign paying its direct obligations ahead of providing support to NCC is limited, in our view, and there should be no impediments to the prompt flow of funds to NCC.

RATING SENSITIVITIES

Rating actions on the IDRs and SRF of NCC will likely mirror those on Russia's sovereign ratings.

Relaxation of risk controls, repetitive or prolonged IT system outages and more regular losses relating to operational failures or capital deterioration could put pressure on NCC's VR.

https://www.fitchratings.com/site/pr/10087698

 

Fitch Ratings-Moscow/London-11 February 2019: Fitch Ratings has affirmed  Central Counterparty National Clearing Centre's (NCC) Long-Term Foreign-Currency (FC) Issuer Default Rating (IDR) at 'BBB-' with Positive Outlook. The agency has also affirmed NCC's Viability Rating (VR) at 'bbb' and Long-Tern Local-Currency (LC) IDR at 'BBB' with Stable Outlook. A full list of rating actions is at the end of this rating action commentary.

 

NCC is a key operating subsidiary of the Moscow Exchange Group (MOEX), which is the largest exchange in Russia. NCC is a central clearing counterparty on foreign exchange, securities, repo, derivatives and commodities markets. In its role as an intermediary between market participants, NCC acts as a counterparty for each trade and is ultimately responsible for the performance of trading obligations in case of the failure of one or more clearing participants.

 

KEY RATING DRIVERS

VR

The affirmation of NCC's VR reflects its exceptionally strong credit profile in the context of the Russia market, based on the entity's intrinsic strength. NCC is resilient to potential losses due to strong risk management and controls, the largely short-term nature of its risk exposures, and robust solvency, which is further protected by extra buffers and a loss cap (with any excess loss to be shared between market participants). The VR also reflects NCC's strong liquidity and robust performance.

 

NCC's VR is one notch above the Russian sovereign rating (BBB-/Positive), reflecting the view that NCC would probably retain its capacity to service its obligations even in case of quite severe sovereign and macroeconomic stress due to its sound risk management. Fitch would expect NCC to strengthen collateral requirements in case of heightened market stress. At the same time, NCC's credit profile is closely correlated with the domestic operating environment and with the sovereign credit profile.

 

Credit risk is well-managed and is represented primarily by counterparty exposures, mostly to local banks and brokers. NCC mitigates credit risks with prudent collateral management in respect to both initial and variation margins. Credit risk management is further reinforced by sound close-out netting and cross-default procedures.

 

In 1H18 NCC reported RUB1.7 billion as other operating expenses (3% of the Fitch Core Capital (FCC) at end-1H18 or 20% of pre-tax income for 1H18), which was a combination of a RUB0.9 billion provision on a legal case and a RUB0.8 billion loss due to an operational error that occurred as result of manual adjustments done during a defaulter's position closing in 1H18. The legal case provision was related to an arbitrage court decision on NCC's default management procedure in 2015 against a failed brokerage company. Fitch understands that in late 2018 NCC successfully appealed the court's decision and the company has good prospects of recovering the full RUB0.9 billion provision, subject to the decision of the supreme court.

 

NCC does not extend any uncollateralised exposures to market participants. At end-2018, NCC's collateral levels substantially exceeded the potential replacement costs that could arise from counterparty defaults.

 

NCC's investment policy is quite conservative, permitting holdings of cash, placements in highly-rated banks and investments in short-term (up to 1.5-year duration) bonds rated 'BB+' and above. At end-2018 approximately 72% of bank placements and 88% of securities portfolio represented investment-grade risk. Placements in Russian commercial banks (primarily state/foreign owned) were equal to 2x FCC and holdings of Russian bank, corporate and sovereign securities comprised a further 3.5x of FCC. These represent potential risk in case of extreme stress scenarios in Russia, although Fitch believes management would take action to significantly reduce these exposures in case of a sharp deterioration in the operating environment.

 

The FCC ratio was a sound 22% at end-1H18. The default waterfall (procedure for allocating losses in case of counterparty failures) further protects NCC's solvency by capping its losses. Under this framework, NCC's loss on counterparty defaults is limited to RUB9.5 billion (15% of FCC) with the excess loss to be covered by collective default funds (RUB7.2 billion) and the Moscow Exchange contribution to the default funds (up to RUB5 billion), available upon request. According to NCC's clearing rules, any remaining loss is shared among market participants.

 

NCC has no debt, and its liabilities consist primarily of interest-free counterparty trading accounts. Almost all assets are very liquid and fully cover customer accounts.

 

IDRs, SUPPORT RATING FLOOR AND SUPPORT RATING

The Long-Term LC IDR is equalised with NCC's VR. The Long-Term FC IDR of 'BBB-' is constrained by Russia's Country Ceiling. The Long-Term FC IDR is driven by the VR, but also underpinned at this level by potential sovereign support, as reflected in the Support Rating Floor (SRF) of 'BBB-', in line with the sovereign rating.

 

Fitch views the propensity of the sovereign to provide support to NCC as high given its important role in ensuring the functioning of local financial markets and its unique infrastructure. A failure of NCC to perform its functions could lead to serious confidence-related issues and have a material negative impact on the whole Russian financial system.

 

RATING SENSITIVITIES

NCC's Long-Term FC IDR would be upgraded if Russia's sovereign rating and Country Ceiling were upgraded, bringing the sovereign rating in line with the VR. The VR and Long-Term LC IDR are unlikely to be upgraded in the event of a sovereign upgrade, as a result of which they would become equalised with the sovereign rating. Relaxation of risk controls, repetitive or prolonged IT system outages and more regular losses relating to operational failures or capital deterioration could put pressure on NCC's VR.

 

The rating actions are as follows:

 

Long-Term Foreign-Currency IDR: affirmed at 'BBB-'; Outlook Positive

Long-Term Local-Currency IDR: affirmed at 'BBB'; Outlook Stable

Short-Term Foreign-Currency IDR: affirmed at 'F3'

Support Rating: affirmed at '2'

Support Rating Floor affirmed at 'BBB-'

Viability Rating: affirmed at 'bbb'

 

In a press-release issued October  25,2018  Analytical Credit Rating Agency (hereinafter – ACRA)   stated that it affirmed  the credit rating of CCP NCC (hereinafter – NCC, or the Organization) at AAA(RU), outlook Stable.  

As it is said in the press-release, the credit rating of CCP NCC is based on its strong and stable business profile, exceptional liquidity position and high capital adequacy, with the latter compensating for the risk profile. NCC is a systemically important central counterparty according to the methodology of the Bank of Russia.

As a subsidiary of Moscow Exchange Group, NCC performs functions of a clearing organization and central counterparty on the Russian financial market. Since the end of 2017, NCC has been operating as a non-bank credit institution – central counterparty.

Key rating assessment factors

Strong business profile, which is reflected in NCC’s exclusive role as a clearing organization and central counterparty ensuring the majority of transactions in the key segments of the Russian financial market. ACRA notes high corporate governance and risk management standards implemented at the Organization enabling it to perform activities with the minimum accepted risk relative to the scope of transactions.

High capital adequacy: capital adequacy ratio of central counterparty (N1cc) amounted to 141.8% as of September 1, 2018. This allows to cover risks associated with the functions of central counterparty, as well as risks of potential impairment of NCC’s own balance sheet assets. The factor assessment is supported by the profitability indicator (33.8% at the end of 2017) calculated by ACRA coupled with a low operating expenses to operating income ratio (5.5% over the last three years).

Counterparty risk of NCC is mitigated by virtue of rigid admission criteria for participants and strict margining policy (with prompt marked-to-market reevaluations). The structure of central counterparty protection levels combined with a set of measures to be taken in case of default of clearing participants, both provided by the Organization, have a positive impact on ACRA’s assessment of NCC’s risk profile.

The assessment of NCC’s risk profile is constrained by a significant amount of assets exposed to market risk (over 300% of core capital), as well as by the operational risk which occurred in 2018.

Liquidity position is assessed as strong given the specifics of NCC’s operations. Liquidity ratio of central counterparty (N4cc) significantly exceeds the established minimum.

Key assumptions

  • NCC retains the role of a systemically important clearing organization and central counterparty in Russia;
  • No material financial obligations (debt);
  • Excessive liquidity position is maintained;
  • Use of NCC's resources for supporting other companies within Moscow Exchange Group is not expected.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the
12 to 18-month horizon.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating of CCP NCC was first published by ACRA on November 1, 2016. The credit rating and its outlook are expected to be revised within one year following the rating action date (October 23, 2018).

The assigned credit rating is based on the data provided by CCP NCC, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited and CCP NCC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by CCP NCC in its financial report have been discovered.

ACRA provided additional services to CCP NCC. No conflicts of interest were discovered in the course of credit rating assignment.

 

Analytical Credit Rating Agency (ACRA)  affirms the credit rating of NCC  Clearing Bank at AAA(RU), outlook Stable, according to the ACRA  information uploaded on its website on the 24th of October 2017. 

As it is  mentioned in the ACRA report, the credit rating of NCC Clearing Bank is based on bank’s strong and stable business profile, exceptional liquidity position and high capital adequacy, with the latter compensating for the risk profile. The rating is  additionally  supported by NCC’s critical systemic importance for the Russian financial market.

ACRA  notes high corporate governance and risk management standards implemented at NCC Clearing Bank enabling it to perform activities with the minimum accepted risk relative to the scope of transactions. Based on its assessment,  ACRA  expects  that change of  the NCC Clearing Bank’s status from a bank into a central counterparty in form of a non-banking credit institution by the end of 2017 will not result in deterioration of standalone creditworthiness of the Bank, while the quality of regulatory control will stay the same. The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

Alexey Khavin, Chairman of the NCC Board says: “Assignment to NCC Clearing Bank  for the second time the highest  ACRA credit rating is an independent and qualified recognition of our persistent efforts aimed  at improving risk management framework of the organization,  which plays a key role of central counterparty in the Russian financial market. It is for us also an additional conformation that we have created a correct model of risk management and clearing, whiсh are persistently being developed, soaking up  best international practices, and providing extra comfort to our clients – clearing members and  grounds for their  confidence in  the market infrastructure supreme  reliability”. 

ACRA assigned   NCC Clearing Bank  credit rating for the first time in October 31.2016. Fitch also assigned  NCC Clearing Bank  its ratings, two of which : Long term Issuer Default Rating local-currency at «BBB» and Viability rating at bbb, both one notch above Russian sovereign rating (BBB-).

 Editors’ notes:

NCC Clearing Bank , member of Moscow Exchange Group, was established in 2006. NCC renders clearing services and acts as central counterparty in the financial market.  

Since November 2009, NCC has been the member of the European Association of Clearing Houses – Central Counterparties (EACH), and since September 2011 the member of the Global Association of Central Counterparties – CCP12.

 

As of   October 1, 2017, the bank’s owned capital and dedicated capital of CCP amount to 58,2 bln roubles.

 

 

 

Fitch Ratings-Moscow/London-24 February 2016: Fitch Ratings has affirmed National Clearing Centre's (NCC) Long-term foreign currency (FC) Issuer Default Rating (IDR) at 'BBB-', Long-term local currency (LC) IDR at 'BBB' and Viability Rating (VR) at 'bbb'. The LC IDR and the VR are one notch above the FC IDR and the Russian sovereign rating of 'BBB-'. The Outlooks on the Long-term IDRs are Negative. A full list of rating actions is at the end of this comment.

 

NCC is a key operating subsidiary of the Moscow Exchange Group (MOEX), which is the largest exchange in Russia. NCC is a central clearing counterparty (CCP) on foreign exchange (FX), securities, REPO, derivatives and commodities markets. In its role as an intermediary between market participants, NCC acts as a counterparty for each trade and is ultimately responsible for the performance of trading obligations in case of the failure of one or more clearing participants.

 

KEY RATING DRIVERS

VR, LC IDR AND NATIONAL RATING

The affirmation of the LC IDR reflects NCC's exceptionally strong credit profile in the context of the local market, based on its intrinsic strength, as reflected in its 'bbb' VR. The latter is driven by NCC's high resilience to potential losses due to strong risk management and controls, the largely short-term nature of its risk exposures, and robust solvency, which is further protected by extra buffers and a loss cap (with any excess loss to be shared among market participants). The VR also reflects strong liquidity, its countercyclical and very cheap funding base, and continued robust performance.

 

The Negative Outlook on the LC IDR reflects that on the Russian sovereign rating, as Fitch believes that NCC's credit profile is correlated with the domestic operating environment. Therefore the agency would most likely maintain a one-notch difference between NCC's LC IDR and the sovereign rating if Russia was downgraded.

 

Credit risk is moderate and is represented primarily by counterparty exposures, mostly to local banks and brokers. Their credit profiles have been pressured by the weaker operating environment (as reflected in our negative outlook for the Russian banking sector), but NCC mitigates this risk by prudent collateral management with respect to both upfront initial margins and daily mark-to-market adjustments. To protect itself from the tail risk of significant volatility, NCC can additionally increase collateral requirements in stress events (like the market turbulence in December 2014). Credit risk management is further reinforced by the sound close-out netting and cross default procedures.

 

NCC does not extend any uncollateralised exposures to market participants. At end-2015, NCC's collateral levels substantially exceeded the potential replacement costs that could arise from counterparty defaults. NCC did not suffer any losses from counterparty defaults during the 2008 crisis or in forced close-outs made since then, with the exception of one very small loss in 2013.

 

The investment policy is quite conservative, permitting holdings of cash, placements in highly-rated banks and investments in short-term (up to 1.5 year duration) bonds rated 'BB' and above. At end-2015, approximately 84% of the securities portfolio and 82% of bank placements had investment-grade quality. However, placements in Russian commercial banks (primarily state/foreign-owned) were a large 4.8x equity and holdings of Russian bank, corporate and sovereign securities comprised a further 2.5x equity. These represent potential risk in case of quite extreme stress scenarios in Russia, although Fitch believes management would take action to significantly reduce these exposures in case of a further deterioration in the domestic operating environment.

 

NCC's regulatory capital ratio stood flat at 13.5% at end-2015 compared to end-2014 despite robust internal capital generation (ROAE of 46% in 2015). This was mainly due to a reallocation of assets from (previously zero risk-weighted) placements in the CBR to current accounts in foreign and local banks and to a lesser extent to the securities portfolio. This was in turn driven by new CBR regulations, which increased the risk weighting of foreign-currency CBR placements and sovereign Eurobonds (from 0% to 100%) from 1 Jan 2016. Although NCC keeps liquidity primarily in highly-rated banks or assets, this nevertheless puts pressure on capitalisation, as even placements on current accounts with 'A' rated foreign banks are 20% risk weighted under local rules. At the same time, the regulatory changes on clearing counterparties introduced in 2015 excluded CCP operations (e.g. CCP repo) from the risk-weighted assets calculation.

 

Fitch estimates that the existing capital buffers could allow NCC to withstand the defaults of nearly all counterparties, unless these defaults were accompanied by unprecedentedly high intra-day market movements impairing the currently high collateralisation levels. Even under a very severe stress case (more severe than September 2008), NCC's buffers would be enough to absorb defaults of the largest nine counterparties (40% of the total exposure). The new default waterfall (i.e. procedure for allocating losses in case of counterparty failures) introduced in November 2015 further protects NCC's solvency by placing caps on losses for NCC (the combined cap for different markets is RUB6.5bn or 10% of end-2015 equity) with any excess losses to be shared among market participants. Collective loss coverage funds (funded contributions from market participants to absorb losses) totaled RUB4.5bn.

 

Robust earnings generation (RUB22.8bn net income in 2015 under local GAAP, ROE of 46%) provides an additional cushion. Although net interest income comprises about 75% of NCC's gross revenues, operating costs are still over 4x covered by clearing and settlement commissions, which ensures earnings stability regardless of interest rate swings.

 

NCC has no debt, and its liabilities consist primarily of interest-free accounts of trading counterparties (mainly used for pledging of collateral). Customer balances have proved to be countercyclical, as market participants prefer to trade more through NCC than with each other directly in times of stress. Customer funding increased 3.6x during 2014 and was stable throughout 2015. NCC's liquidity cushion is exceptionally strong, at RUB1.1trn as of end-2015 (of which about 80% was in foreign currency), covering over 100% of customer funds.

 

Operational risks (mostly stemming from MOEX) are moderate, as the group has been working on improving IT systems, which is reflected in an increased availability ratio and reduced frequency and duration of IT disruptions. The group also has prudent business continuity planning, which improves resilience to disaster and sudden blackouts.

 

The affirmation of NCC's National Ratings at 'AAA(rus)' reflects Fitch's view that the entity remains among the strongest credits in Russia.

 

NCC'S FC LONG-TERM IDR, SUPPORT RATING, SUPPORT RATING FLOOR

NCC's Long-term foreign currency IDR of 'BBB-' is constrained by Russia's Country Ceiling. The foreign currency IDR is driven by the VR, but also underpinned at this level by potential sovereign support, as reflected in the Support Rating Floor (SRF) of 'BBB-', in line with the sovereign rating.

 

Fitch views the propensity of the sovereign to provide support to NCC as high given its important role in ensuring the proper functioning of local financial markets and its unique infrastructure. A failure of NCC to perform its functions could lead to serious confidence-related issues and have a material negative impact on the whole Russian financial system.

 

In October 2013, NCC was granted the status of a qualified CCP by the Central Bank of Russia (CBR), a designation which recognises NCC's special role and confirms its compliance with certain, quite stringent, risk-management requirements. In future, this status may result in a special legal/regulatory regime and/or supervision for NCC.

 

Although there is no track record of support, as NCC has never needed it, support mechanisms have been put in place by CBR, including unlimited USD/RUB swap lines, a collateralised liquidity facility, direct repo line and certain other instruments that should protect NCC from the impact of counterparty defaults. At the same time, during very severe stress NCC may be considered by the authorities as a possible tool to support market participants, as was the case in December 2014, when it transferred significant liquidity to a few state banks, although the provided support did not require any breach on NCC's credit risk limits/policies.

 

RATING SENSITIVITIES

IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

The Negative Outlook on NCC's Long-term IDRs reflects the potential for the ratings to be downgraded if Russia's sovereign ratings are downgraded and the Country Ceiling is lowered. A revision of the Outlook to Stable would require the same action on the sovereign ratings.

 

VR, NATIONAL RATING

Continued deterioration in Russia's economic environment, losses due to insufficient collateralisation, repetitive or prolonged IT-system outages, frequent/substantial utilisation of CBR liquidity facilities or a significant decrease in loss absorption capacity could put downward pressure on NCC's VR, potentially resulting in its LC IDR being downgraded to the level of its FC IDR.

 

The rating actions are as follows:

 

Long-term foreign currency IDR: affirmed at 'BBB-'; Outlook Negative

Long-term local currency IDR: affirmed at 'BBB'; Outlook Negative

Short-term IDR: affirmed at 'F3'

Support Rating: affirmed at '2'

Support Rating Floor affirmed at 'BBB-'

Viability Rating: affirmed at 'bbb'

National Long-term rating: affirmed at 'AAA(rus)'; Outlook Stable