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"A series of well-known banks have started to use the link" - Jan Willems, Head of Global Markets, Clearstream Banking Luxembourg

June 03, 2019 | Cbonds

On 27 May 2019, Clearstream, the international central securities depository (ICSD) of Deutsche Börse Group, connected the Ukrainian market to its network and made Ukrainian government securities eligible in its system. Cbonds asked Clearstream to comment on this issue and Jan Willems, Head of Global Markets, Clearstream Banking Luxembourg, kindly answered the questions.
On May 27, Clearstream launched a “link” to Ukraine. Please tell us what "link" launch gives international investors? 
International investors will be able to transfer positions they hold in UAH-denominated government bonds from local custodian banks to Clearstream, through the safekeeping account Clearstream is holding at the National Bank of Ukraine. Once an investor is holding UAH government bonds in Clearstream, he can sell and buy them to and from other international investors holding UAH government bonds in Clearstream, creating a functional secondary markets in these instruments among non-Ukraine counterparts.

Are international investors interested in Ukrainian market? 
From day 1 after the launch, a series of well-known banks have started to use the link, and others are testing the link at this moment.

Can a non-resident buy UAH-government bonds without opening an account in a Ukrainian bank? 
Indeed, non-residents can hold UAH bonds in Clearstream without the need for a local account, as long as they buy these bonds from another Clearstream counterpart. There is a disclosure mechanism in place with the National Bank of Ukraine to keep track of the bondholders profile.

How are UAH-government bonds redeemed? Are funds credited in UAH to the investor’s account or are they automatically converted into the currency? 
Investors holding UAH-denominated bonds in Clearstream will receive income from coupons and final redemptions in Clearstream in UAH. They can wire these proceeds back to the Ukraine market, or they can request Clearstream to perform an FX on their behalf.

The process of launching the “link” took several years. What caused such a long period of preparation for the launch? 
There are various reasons. On the one hand the Ukraine capital markets shows some inherent complexities, with, until recently, rigid capital controls, so many of the local hurdles needed to be overcome. On the other hand, European regulation, and more specifically CSDR (Central Securites Depository Regulation) enforces detailed framework on provider and network choice and maintenance. The link also involves two partners, the NBU and our local agent, Citibank, acting as cash correspondent and account operator, making the set-up on sophisticated , but by consequence more complex to set-up. Clearstream, as AA-rated market infrastructure, is all about providing the most secure settlement and safekeeping environment, and this was well understood by our local stakeholders.

The National Bank of Ukraine expects that by the end of 2019, the secondary market of government bonds will be concentrated on international trading platforms. Do you share this opinion? 
Indeed, for non-resident investors at least, with the opening of the link we will see a shift from trading locally for non-residents to trading via international trading platforms and settling in an ICSD. We have seen this trends in many other emerging markets, and it is beneficial, since it increases the overall stock of non-residents and creates a healthy eco-system between liquidity in Clearstream and liquidity locally. Both settlement locations function hand in hand and are not competing nor mutually exclusive.

How did the launch of “links” affect the debt markets of such countries as Armenia, Georgia and Kazakhstan?
With the launch of the Ukraine link, we have noticed as well that institutional investors started to inquiry about our other links, so in the slipstream we may see new momentum in these links as well. Clearstream provides now for these four markets a “single window”, with a standardised process, and that is appreciated by the investment community. They can focus on their investment policy, and “outsource” the operational complexity and potential local counterparty and local custody risk to us.

At the time being, are only domestic government bonds available in Clearstream? If so, when can we expect the availability of municipal and corporate bonds in Clearstream? 
Clearstream’s approach for Armenia, Georgia, Kazakhstan and now Ukraine is a scalable one under the “AGIL” principle . AGIL stands for Accelerated Gradual Implementation of Links. We will always start with the most popular instrument, being local government bonds, and when volumes rise, we investigate the possibility to add additional asset classes to the link. Our link with Georgia is a prime example, we started first with GEL-denominated government bonds only, since early this year we have added a series of high-grade GEL denominated corporate bonds as well. Assuming the link with Ukraine develops in the same healthy way as our link with Georgia, then we can foresee a similar extension of asset classes on the link.

Company: Clearstream Banking S.A.

Full company nameClearstream Banking S.A.
Country of riskLuxembourg
Country of registrationLuxembourg
IndustryFinancial institutions

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