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Page last updated
February 15, 2003

 

 

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EU convergence in the Hungarian securities settlement system

www.hypovereinsbank.de

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 for it.

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 of KELER.

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 period
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 liberalisation
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 recent example.

Adrienne Darvas
Head of Custody Services
HypoVereinsbank Hungária Rt.

 


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