Fitch Affirms National Clearing Centre's FC IDR at 'BBB-' & LC IDR at 'BBB'
NCC is a key operating subsidiary of the Moscow Exchange Group (MOEX), which is the largest exchange by far 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: NCC'S VR, LC IDR AND NATIONAL RATING
The affirmation of the LC IDR at 'BBB', one notch above the Russia's sovereign rating of 'BBB-', reflects NCC's exceptionally strong credit profile in the context of the local market, based on its intrinsic strength, as reflected in the affirmation of its VR at 'bbb'. The latter is driven by NCC's strong risk-management and controls, the largely short-term nature of its risk exposures, ample liquidity, countercyclical funding base, continued robust performance and strong resilience to potential losses.
The Negative Outlook on the LC IDR reflects that on the Russian sovereign rating, as Fitch believes that NCC's credit profile is nevertheless 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 in case Russia is downgraded.
The weaker Russian economy and financial markets, driven by the sharp fall in oil prices, the imposition of western sanctions and the rouble devaluation, as well as reduced investor appetite for Russian assets/business, have had less of an impact on NCC's credit profile than on most other Russian entities. NCC has benefited in the current environment from increased business volumes and significant liquidity inflows.
NCC's liquidity cushion is exceptionally strong at RUB1.2trn as of end-2014 (of which about 80% was in foreign currency), covering 96% of customer funds. The company 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 by 3.6x during 2014, and balances also increased significantly during the 2008 crisis.
Credit risk is moderate and is represented primarily by counterparty risk, which is mitigated by prudent collateral management both in respect to upfront initial margins and daily mark-to-market adjustments. The ability to additionally increase collateral requirements in case of significant market volatility (used occasionally in stress events, including the recent market turbulence in December 2014) further mitigates risks. At end-2014, NCCs collateral levels substantially exceeded the potential replacement costs that could arise from counterparty defaults. Furthermore, NCC has discontinued any uncollateralised trading and closed the small blank limits previously available to some investment grade names.
Counterparty risks have been further reduced by legislative and regulatory improvements. The changes adopted in 2014 allowed NCC to introduce an efficient bankruptcy close-out and cross-default procedure across all markets. This was previously possible only between securities, repo and derivatives markets, but excluded FX trading. NCC did not suffer any losses from counterparty defaults during 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. NCC plans to further tighten the policy, raising the securities investment threshold to 'BB' by mid-2015, and is considering greater holdings of highly-rated foreign securities. At end-2014, placements in Russian commercial banks (primarily state/foreign-owned) were a large 5x equity and holdings of Russian securities comprised a further 2.3x equity. These represent potentially significant risks 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 decreased to 13.5% at end-2014 from 21.7% at end-2013 due to significant inflows of funding and a corresponding increase in assets. Although NCC places liquidity primarily in highly-rated banks or assets, this pressures capitalisation, as even placements on current accounts with 'A' rated banks are 20% risk-weighted under local rules. Fitch understands that some regulatory changes on clearing counterparties may be introduced in 2015, which would reduce the pressure on NCC's regulatory capitalisation.
Resilience to potential counterparty defaults remains strong. Fitch estimates that the existing capital buffer could allow NCC to comfortably withstand a stress more severe than that of September 2008. Specifically, Fitch estimates that NCC could withstand the defaults of its 40 largest counterparties without requiring capital support, unless these defaults were accompanied by unprecedentedly high intra-day market movements. Collective loss coverage funds totaling RUB3.2bn and robust earnings generation (RUB11.3bn net income in 2014 under local GAAP, ROE of 34%) provide an additional cushion against potential stresses. The new default waterfall (i.e. procedure for allocating losses in case of counterparty failures), expected to be introduced in 2H15, should further protect NCC's solvency, as it would place a loss cap on NCC in such instances, with any losses beyond the cap to be shared among market participants.
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 entity remains among the strongest credits in Russia.
KEY RATING DRIVERS: NCC'S Foreign-Currency 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 is driven by the VR, but also underpinned at this level by potential sovereign support, as reflected in the Support Rating Floor (SRF) at 'BBB-', in line with the sovereign rating.
Fitch's 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 central counterparty 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 impact of counterparty defaults.
RATING SENSITIVITIES
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 further lowered. A revision of the Outlook to Stable would require the same action on the sovereign ratings.
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.
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
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