Moldova & IMF IMF Activities Publications Press Releases

Limba romana - May 28, 2019

Realizing the full benefits of single CSD entails creative destruction of inefficient, risky, and outdated features of Moldova’s capital market infrastructure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.

  • How can the launch of the Central Securities Depository (CSD) change/impact the financial market in general and capital market in particular? 

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. 

  • Will there be a continuation of the project of bringing the whole process of regulation of capital market under NBM surveillance?

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.