convergence in the Hungarian securities settlement system
Hungary has come closer
to EU accession by making great strides in its payment and securities settlement
systems. This is good news for foreign portfolio investors, since broker risk
has been significantly reduced. Prior to September 3, 1999 banks made the majority
of their interbank (bank is final beneficiary) payments using a paper-based
account management service of the Hungarian Central Bank (NBH). As far as commercial
payments not related to securities between clients of banks, the GIRO (Interbank
Clearing System) was and is still used today. The GIRO is a "next-day"
system: payment instructions submitted today are only executed with value tomorrow.
Going from a "next
day" to a "real time"payment system
The VIBER system (Real-Time Gross Settlement System) is now open for interbank
transfers and from July 1, 2000 clients have the choice of using VIBER or GIRO
for their commercial payments. Complementing the VIBER system, KELER (Hungarian
Clearing House and Depository) enabled real DVP (delivery vs. payment) settlement
at the same time the VIBER system was launched, even if the two counterparties
are not Hungarian brokers. Prior to September 3, simultaneous exchange of cash
and securities by KELER only occurred on stock exchange transactions between
the two Hungarian brokers and on OTC government security transactions between
Hungarian banks and Hungarian brokers.
Under the old system,
significant broker risk
Before VIBER and before real DVP, the custodian of foreign investors had to
make payments on behalf of their clients via the GIRO, meaning payments were
initiated on settlement date minus 1 with value settlement date and securities
were not received until settlement date. On sales, the custodian had to pre-deliver
the securities on settlement date minus 1 (due to settlement regulations used
to prevent stock exchange failures) to the Hungarian broker's account and receive
payment only on settlement date plus 1. The reason for the late payment was
that KELER conducted DVP only between the 2 brokers transacting on the stock
exchange, debiting and crediting the securities and cash on settlement date.
But after being credited, the selling broker had to instruct KELER to transfer
the sale proceeds to the foreign investor's account with the Hungarian custodian
via the GIRO, being a "next day" system. This broker risk caused many
foreign investors to shy away from the Hungarian capital markets.
DVP not only on the stock
exchange but also on trades with foreign investors
Today, with VIBER and the KELER real DVP settlement system, cash and securities
can be controlled and exchanged simultaneously whether the trade is between
a Hungarian broker and a Hungarian bank or between a Hungarian broker/bank and
a foreign investor. KELER only holds the cash account of Hungarian brokers,
while Hungarian banks have their accounts at the NBH. When KELER has a real
DVP transaction to settle, but one or both counterparties hold their cash account
at the NBH, KELER can initiate debits and credits on the accounts at the NBH
at the same time that the securities accounts in KELER are debited and credited.
KELER sends such instructions via SWIFT to the NBH.
Hungary is one of 3 countries
in Europe to have such a real time payment system linked to the security settlement
system. Other countries may have real time payment systems, but only France,
Switzerland and Hungary have the 2 systems linked.
The VIBER is also compatible
with the TARGET payment system used in making payments between EURO member states.
Once Hungary joins the European monetary union, the two systems will be linked.
Clean commercial payments
From July 1, the VIBER will be open to clients of banks, regardless whether
there is a securities transaction behind the payment or not. Although the 42
Hungarian banks vary greatly in payment volumes, liquidity management and IT
priorities, all have declared their readiness to receive VIBER payments from
that date. KELER, as the cash account holder of the Hungarian brokers, will
also participate. Such clean payments will be especially beneficial to Hungarian
private investors buying securities via Hungarian brokers, but who don't insist
on KELER real DVP settlement. Hungarian brokers reserve KELER real DVP settlement
normally for foreign investors and Hungarian institutional investors, as it
is more costly and administrative. From July 1, brokers are expected to transfer
sale proceeds to their Hungarian clients via VIBER, so that the clients, who
hold their current accounts at banks, will be credited on settlement date and
not settlement date plus 1, as is now the case.
As far as the loss of float,
this will affect KELER, rather than the brokers, since KELER debited the brokers'
cash accounts on the GIRO payment initiation date and not on the actual payment
date (value date).
As far as commercial payments
between clients of banks are concerned, the GIRO system will probably maintain
its popularity over the VIBER, due to the higher cost of a VIBER payment. Hungarian
custodian banks usually give a discount on VIBER payments to foreign investors,
since foreign investors insist on DVP settlement if there is an existing mechanism
Converting from physical
to dematerialised securities
Dematerialisation of securities has also come a long way. For over a year, all
newly issued government paper has been issued in dematerialized form. The government
also intends to convert existing physical bonds that have not yet matured into
dematerialized form. Prior to dematerialisation, government securities were
printed in the form of one global certificate that was immobilized in the vaults
As far as shares, the switch
from physical to dematerialized will take longer as the 6 million pieces of
shares held in KELER must first be destroyed.
Shortening the settlement
Currently equity transactions settle on the stock exchange on Trade Date (T)
plus 5. KELER would like to move to the EU standard of T plus 3. As the first
step in this process, KELER will no longer require the pre-delivery on T plus
4 (settlement date minus 1) of shares to be sold. Instead, KELER will require
the shares to be blocked in favor of the selling broker's account only on T
plus 5. This will enable back-to-back trades, whereby the foreign broker can
buy shares OTC from his client and sell them immediately on the exchange via
a Hungarian Broker on the same value date.
KELER will help to prevent
stock exchange failures in the event the selling broker will not have the securities
by T plus 5, by establishing an automatic securities borrowing system.
Further Foreign Currency
Although the Hungarian Forint (HUF) is still not freely convertible and the
crawling peg (pegged to the EUR) is still in place, the NBH is looking more
friendly towards foreign capital outflow. From July 1, 2000, Hungarians will
be permitted to convert their HUF into foreign currency in order to purchase
investment funds run by foreign asset managers investing in foreign securities.
Up till now, Hungarians could only purchase foreign securities or Hungarian
funds denominated in HUF investing in foreign securities. The foreign investment
funds are sure to be popular amongst private investors who lack the know-how
to invest directly into foreign securities.
From April, 2000, in line
with lower domestic inflation, the NBH has further decreased the monthly HUF
devaluation against the EUR to 0.3%, or 3.6% p.a. This will keep foreign investors'
interested in Hungarian government bonds, due to the yield differential between
their own domestic market and the Hungarian market. Many speculate that the
NBH will due away with the crawling peg in the medium term, following Poland's
Head of Custody Services
HypoVereinsbank Hungária Rt.