Czech Republic
06 March 2019
As a growing entity in CEE, the Czech Republic is rapidly standardising its capabilities but it receives fierce competition from surrounding CEE countries
Image: Shutterstock
The Czech Republic has welcomed the growth and standardisations of its asset services, rising up as a financial hub since the end of communist rule in the 1990s.
It is now an established market, with the ability for more growth and technological innovation, but it faces competition from other Central Eastern Europe (CEE) countries.
As Tomáš Vácha, senior relationship manager of custody at Ceskoslovenska obchodni banka (CSOB), states: “Asset services in the Czech Republic are quite standardised, but perhaps still not as developed as in some of the other countries in the CEE, like Austria or Poland with a much higher number of equities and related corporate actions. This is mainly driven by the fact that the local market has a fairly low amount of equities to invest in, because local companies prefer financing themselves through debt.”
Vácha indicates this has both historical as well as economical reasons. He says: “The stock market did not exist for a period of more than 40 years during the communist era and although the Prague Stock Exchange has put a lot of effort into educating the local market and issuers in the past few decades, initial public offerings (IPOs) are still quite rare in the market.”
Vácha adds: “The economical reason is that especially in the past few years, with a huge excess of liquidity in the economy, interest rates were extremely low, so it was much easier and cheaper to get the money than when going through an IPO process.”
“However, when comparing the Czech market to the rest of our neighbours in the CEE, we still are positioned better than Slovakia, with almost no equity market.”
So, how could technology, for one, help the Czech Republic standardise its asset servicing capabilities further, and continue competing with other CEE countries?
Technology
The Czech Republic’s automation and robotics may indeed grow, through application programming interfaces and distributed ledger technology, as we move toward the next decade—provided it is underpinned by innovation and efficiency.
As Martin Jericha, country manager of Czech Republic at Broadridge, states: “There’s definitely sustained interest in fintech innovation, and we’ve witnessed a particular focus on application programming interfaces.”
Michael Wood, senior product manager at Broadridge, says: “Technology such as Blockchain is seen as likely to play a role in the Czech Republic, in order to drive efficiency and service quality, and while pilots so far have mostly focused on proxy vote processing, extending beyond this into other types of corporate action is a realistic goal.”
He adds: “In operations, in particular, the technology focus is shifting significantly towards the use of machine learning/artificial intelligence (AI) to replace currently manual processes.”
“In the Czech Republic, firms are again increasingly willing to look beyond their own walls and partner with fintech innovation leaders to create solutions across a network of firms and capitalise on synergies and efficiencies that cannot be realised alone.”
Vácha indicates: “We [CSOB], as one of the local largest custodians, definitely see opportunities in automation, machine learning and AI as this is generally one of the hottest topics for our bank in all areas of our business and we at CSOB believe this indeed is where the whole banking industry is or should be heading.”
He adds: “We definitely are trying to utilise these opportunities where and when possible. In the securities services industry, this mainly applies to clearing and settlement, with asset servicing still requiring a certain level of manual intervention.”
Progression
Vàcha claims the Czech Republic is seeing continuous standardisation, as the local market bodies are trying to harmonise the asset servicing with the rest of the world, particularly the EU.
He says: “This is driven mainly by the local custodians, the local Capital Market Association, the Central Bank and the Ministry of Finance, however, the progress is sometimes slowed down by the local issuers who do not see this as one of the priorities.”
On 3 September 2018, the European Commission published implementing regulations that govern how the Czech Republic should transpose the requirements of the amended Shareholder Rights Directive into national law.
The deadline set for this transposition is September 2020.
Les Turner, vice president of global proxy at Broadridge, says this will “drive significant change in market practice for the management by intermediaries of the proxy voting process, and to a lesser extent, that for corporate actions”.
“The Czech parliament published its draft amendment in 2018 which already provides some idea of how this will be implemented in practice and our prediction is that the corporate governance workflow will increase levels of voting, largely as a result of the introduction new obligations on institutional investors and also the increases in transparency outlined below.”
Turner also affirms “the corporate governance workflow will lower transaction costs driven by efficiencies gained through ‘machine readable electronic messages’ that form the backbone of the obligations on issuers and intermediaries”.
He adds: “More emphasis on transparency of intermediary fees for this service may also be a factor here.”
CSD Prague also opened a direct account with Euroclear Bank SA/NV and initiated the corresponding settlement link in December 2017. The account allows the central securities depository to access a wider range of services and to have access to many additional foreign markets, according to Euroclear.
Euroclear Bank provides settlement and related securities services for cross-border transactions involving equities, derivatives and investment funds.
Looking to the future
As far as meeting regulations go, Vácha indicates: “Unlike asset servicing, clearing and settlement are moving closer to the rest of the European markets, with the new EU regulation, the Central Securities Depositories Regulation (CSDR), at a much higher pace”.
He adds: “The local central securities depository (CSD) decided to link the CSDR related changes together with the rollout of the central counterparties in the local market. This will more or less copy the Austrian model.”
“Although the Czech Republic is not a TARGET2-Securities market and still sticks to its national currency, the Czech Crown (CZK), the local market is now also preparing for delivery versus payment settlement of local securities in euros, in central bank money, via a link of the local CSD to TARGET2.”
Vácha concludes: “There still will be a substantial portion of manual workaround connected with asset servicing, which means that local providers will still play an important role especially in this part of securities services within the Czech Republic.”
It is now an established market, with the ability for more growth and technological innovation, but it faces competition from other Central Eastern Europe (CEE) countries.
As Tomáš Vácha, senior relationship manager of custody at Ceskoslovenska obchodni banka (CSOB), states: “Asset services in the Czech Republic are quite standardised, but perhaps still not as developed as in some of the other countries in the CEE, like Austria or Poland with a much higher number of equities and related corporate actions. This is mainly driven by the fact that the local market has a fairly low amount of equities to invest in, because local companies prefer financing themselves through debt.”
Vácha indicates this has both historical as well as economical reasons. He says: “The stock market did not exist for a period of more than 40 years during the communist era and although the Prague Stock Exchange has put a lot of effort into educating the local market and issuers in the past few decades, initial public offerings (IPOs) are still quite rare in the market.”
Vácha adds: “The economical reason is that especially in the past few years, with a huge excess of liquidity in the economy, interest rates were extremely low, so it was much easier and cheaper to get the money than when going through an IPO process.”
“However, when comparing the Czech market to the rest of our neighbours in the CEE, we still are positioned better than Slovakia, with almost no equity market.”
So, how could technology, for one, help the Czech Republic standardise its asset servicing capabilities further, and continue competing with other CEE countries?
Technology
The Czech Republic’s automation and robotics may indeed grow, through application programming interfaces and distributed ledger technology, as we move toward the next decade—provided it is underpinned by innovation and efficiency.
As Martin Jericha, country manager of Czech Republic at Broadridge, states: “There’s definitely sustained interest in fintech innovation, and we’ve witnessed a particular focus on application programming interfaces.”
Michael Wood, senior product manager at Broadridge, says: “Technology such as Blockchain is seen as likely to play a role in the Czech Republic, in order to drive efficiency and service quality, and while pilots so far have mostly focused on proxy vote processing, extending beyond this into other types of corporate action is a realistic goal.”
He adds: “In operations, in particular, the technology focus is shifting significantly towards the use of machine learning/artificial intelligence (AI) to replace currently manual processes.”
“In the Czech Republic, firms are again increasingly willing to look beyond their own walls and partner with fintech innovation leaders to create solutions across a network of firms and capitalise on synergies and efficiencies that cannot be realised alone.”
Vácha indicates: “We [CSOB], as one of the local largest custodians, definitely see opportunities in automation, machine learning and AI as this is generally one of the hottest topics for our bank in all areas of our business and we at CSOB believe this indeed is where the whole banking industry is or should be heading.”
He adds: “We definitely are trying to utilise these opportunities where and when possible. In the securities services industry, this mainly applies to clearing and settlement, with asset servicing still requiring a certain level of manual intervention.”
Progression
Vàcha claims the Czech Republic is seeing continuous standardisation, as the local market bodies are trying to harmonise the asset servicing with the rest of the world, particularly the EU.
He says: “This is driven mainly by the local custodians, the local Capital Market Association, the Central Bank and the Ministry of Finance, however, the progress is sometimes slowed down by the local issuers who do not see this as one of the priorities.”
On 3 September 2018, the European Commission published implementing regulations that govern how the Czech Republic should transpose the requirements of the amended Shareholder Rights Directive into national law.
The deadline set for this transposition is September 2020.
Les Turner, vice president of global proxy at Broadridge, says this will “drive significant change in market practice for the management by intermediaries of the proxy voting process, and to a lesser extent, that for corporate actions”.
“The Czech parliament published its draft amendment in 2018 which already provides some idea of how this will be implemented in practice and our prediction is that the corporate governance workflow will increase levels of voting, largely as a result of the introduction new obligations on institutional investors and also the increases in transparency outlined below.”
Turner also affirms “the corporate governance workflow will lower transaction costs driven by efficiencies gained through ‘machine readable electronic messages’ that form the backbone of the obligations on issuers and intermediaries”.
He adds: “More emphasis on transparency of intermediary fees for this service may also be a factor here.”
CSD Prague also opened a direct account with Euroclear Bank SA/NV and initiated the corresponding settlement link in December 2017. The account allows the central securities depository to access a wider range of services and to have access to many additional foreign markets, according to Euroclear.
Euroclear Bank provides settlement and related securities services for cross-border transactions involving equities, derivatives and investment funds.
Looking to the future
As far as meeting regulations go, Vácha indicates: “Unlike asset servicing, clearing and settlement are moving closer to the rest of the European markets, with the new EU regulation, the Central Securities Depositories Regulation (CSDR), at a much higher pace”.
He adds: “The local central securities depository (CSD) decided to link the CSDR related changes together with the rollout of the central counterparties in the local market. This will more or less copy the Austrian model.”
“Although the Czech Republic is not a TARGET2-Securities market and still sticks to its national currency, the Czech Crown (CZK), the local market is now also preparing for delivery versus payment settlement of local securities in euros, in central bank money, via a link of the local CSD to TARGET2.”
Vácha concludes: “There still will be a substantial portion of manual workaround connected with asset servicing, which means that local providers will still play an important role especially in this part of securities services within the Czech Republic.”
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