February 27, 2017 | Cbonds
|Fitch Ratings has affirmed National Clearing Centre's (NCC) Long-Term Foreign Currency (FC) Issuer Default Rating at 'BBB-', Long-Term Local Currency (LC) IDR at 'BBB' and Viability Rating 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 Stable. 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
The affirmation of NCC's LC IDR and VR reflects an exceptionally strong credit profile in the context of the Russia 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, robust performance as well as a counter-cyclical and an inexpensive funding base.
Fitch rates NCC's VR and LC IDR above the Russian sovereign rating of 'BBB-' as the agency believes NCC would probably retain its capacity to service its obligations in roubles even in case of a sovereign default due to its sound risk management. Further Fitch expects NCC to toughen collateral requirements in case of increased market stress. At the same time, NCC's credit profile is closely correlated with the domestic operating environment and Fitch therefore caps the rating at one notch above the sovereign.
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. This is typically done using statistical value-at-risk (VAR)-like methods, but to protect itself from tail risk arising from market turbulence (as in December 2014), NCC can manually increase collateral requirements. Credit risk management is further reinforced by sound close-out netting and cross-default procedures.
NCC does not extend any uncollateralised exposures to market participants. At end-2016, NCC's collateral levels substantially exceeded the potential replacement costs that could arise from counterparty defaults. With the exception of one small loss in 2013, NCC has not suffered any losses from counterparty defaults either during the 2008 crisis or in forced close-outs made since then.
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-2016, approximately 84% of the securities portfolio and 70% of bank placements represented investment-grade risk. Placements in Russian commercial banks (primarily state/foreign owned) were equal to 70% of total equity and holdings of Russian bank, corporate and sovereign securities comprised a further 3.6x of equity. 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 sharp deterioration of the operating environment.
NCC's regulatory capital ratio was a sound 19.4% at end-2016. Fitch estimates that existing capital buffers would allow NCC to withstand the default of nearly all counterparties unless these defaults were accompanied by unprecedentedly high daily market movements impairing the currently sound collateralisation.
The default waterfall (procedure for allocating losses in case of counterparty failures) further protects NCC's solvency by capping losses for NCC. Under this framework, NCC's loss on counterparty defaults is limited to RUB9.5bn (17% of equity at end-2016) with the excess loss to be covered by collective default funds (RUB3.7bn) and the Moscow Exchange contribution to the default funds (up to RUB5bn), available upon request. According to NCC's clearing rules, any remaining loss is to be shared among market participants. Sound earnings generation (RUB21bn net income in 2016 under local GAAP, ROAE of 35%) provides an additional cushion.
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.
Fitch believes CBR is preparing to introduce from 1 January 2018 a new regulatory regime for CCPs with specific capital and liquidity requirements to better reflect the nature of their operations. Fitch estimates that based on end-2016 figures NCC would comfortably comply with these requirements.
NCC's Long-Term FC IDR of 'BBB-' is constrained by Russia's Country Ceiling. The 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.
NCC's IDRs and VR would be downgraded if Russia's sovereign ratings are downgraded and the Country Ceiling is revised lower. 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 the FC IDR.
The rating actions are as follows:
Long-Term Foreign Currency IDR: affirmed at 'BBB-'; Outlook Stable
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'
Company: National Clearing Centre
|Full company name||Bank National Clearing Centre (Joint-stock company)|
|Country of risk||Russia|
|Country of registration||Russia|