Account Segregation at a CSD level has been a long-standing topic in the post-trade environment since 2008, when asset protection and transparency came to the fore of regulatory requirements.
Strate recently interviewed Aleksander Nervik, the Head of Investor & Issuer Services at Norwegian CSD, VPS to discuss the account structure used at VPS, as well as his views on the benefits of account segregation.
Q. Please describe VPS’ account structure.
A. All local legal entities and citizens are required to hold accounts at the CSD level for public equity companies. They need to appoint at local account operator with a license to operate the account in VPS (the CSD). They can also hold any other securities through omnibus accounts/ nominee / custodians, although that’s not normal as it is most practical for investors to hold any securities holdings on the same accounts.
When companies register in VPS, they are no longer required to hold an electronic shareholder register anymore, as that’s the role of the CSD of Norway, making VPS the legal share owner register. The direct holdings at CSD level are protected by law and the assets are protected at a CSD level.
Q. Are there any restrictions for foreigners to hold segregated accounts at the CSD?
A. There is no restrictions for foreign investors. They are however required by tax law to get a Norwegian ID, should they want to hold securities on accounts at a CSD level, which is the requirement for Norwegians as well. As in many other markets, foreigners hold securities mostly through custody chains, omnibus or nominee accounts.
Q. With the share register held at CSD level, and the CSD running a share ownership register model, what are the benefits?
A. By holding the legal share register and having the issuers and most investors directly in our systems, we require all investors to record a cash account (any bank account) at their securities accounts so that the paying agents can distribute benefits directly to the investors through the CSD. This means that there are no intermediaries, resulting in very little delays, and the account operators do not have to do anything. This is very cost effective and secure. It enables an efficient, standardised and secure cash distribution. Everyone gets paid at the same time – every time.
Q. What value-added services can be developed as a result?
A. An online service to Issuers can be developed so that they can access their shareholder register at any time, look at who is trading what shares and see sellers and buyers, as well as run various reports. Due to the high-quality register, the portal also enables the creation of other value-added solutions for general meetings, share saving schemes, or electronic communications with investors, as examples. This reduces costs for many companies and enables transparency for any local ownership.
An online safe and secure self-service interface for holders of accounts at the CSD level can also be created, which will enable them to look at their personal data, accounts, holdings, transactions, etc. A secure electronic mailbox can be incorporated to receive notifications and enable them to send instructions in voluntary corporate events and general meetings. This solution is cost-efficient for all participants, as there is no need for IT development. It will also enable the CSD to process events safely and efficiently in a standardised manner for all participants. This enables transparency for any direct holder, giving them full insight to their securities holdings and it enables investors to get information so as to exercise their rights.
The CSD can then offer tax reporting services, as it has all the data. In Norway, tax reporting is done on behalf of the market by the CSD, who has a team of highly skilled securities professionals to ensure correct reporting takes place every year. We delivered 99,96 % correct reporting last year and have a great collaboration with the local tax authorities, who are happy because they get the data from the CSD in a format that is ready to be processed and they know it’s correct. This enables centralised tax processing with high-quality reporting, ensuring correct tax revenues are processed. Local tax authorities favour the end investor accounts structure due to this and they do not experience the same quality from the custodian/ nominee tax reporting side.
An extended service for corporate actions can also be offered.
Q. In conclusion, what are the benefits of this model for your market?
A. At a high level, the benefits are that:
- The assets are protected at a CSD level
- There are huge operational benefits, as well as risk and cost reduction for the market, as CSD can build value-added services that are centralised and standardised.
- There is transparency for issuers and investors.
- Tax reporting is offered at the CSD level.
- The centralised shareowner register is of high quality.