Strategic Risk Management
NCC’s strategic goals are defined as a part of Moscow Exchange Group’s Strategy approved by NCC’s Supervisory Board.
Strategic risk is defined by NCC as the risk of failure to achieve its strategic goals or adverse changes in performance results caused by wrong decisions made in course of managing NCC, including in course of development, approval and implementation of the Company’s development strategy, improper execution of the decisions made, and the failure of NCC’s management bodies to take into account changes in external factors. Therefore, the efficient management of strategic risks is a key to success in achieving the strategic goals while implementing the strategy.
The strategic risk management framework considers risks arising in the process of NCC’s activity while combining the functions of a credit institution, clearing house, central counterparty, and commodity delivery operator.
Legal Risk Management
NCC’s legal risk management is arranged on the basis of the Company’s operation specifics already noted above in this Report. A special focus is placed on the legal risk mitigation measures in course of NCC’s performance of the central counterparty functions. NCC’s legal risk factors are common to all types of activities, therefore, in order to arrange the legal risk management process, the Company has built a comprehensive legal risk management framework with account of all lines of its business.
NCC manages its legal risk in accordance with the Regulation ‘On Organization of Legal Risk Management Framework in the Company’ approved by resolution of NCC’s Supervisory Board on 02.10.2019 (Minutes No.7), which takes into account the requirements of the Bank of Russia for legal risk management set forth in Bank of Russia Regulation No. 575-P, 30.12.2016, ‘On the Requirements for Risk Management, Rules for Risk Management Arrangement, Clearing Collateral, Placing Property, and Creating Assets of a Central Counterparty, as well as Entities with Which a Central Counterparty is Entitled to Open Trading and Clearing Accounts, and the Methodology for measuring the Central Counterparty’s Dedicated Capital’, Ordinance No. 3624-U dated 15.04.2015 ‘On the Requirements for the Risk and Capital Management System of Credit Institution and Banking Group’, and Letter No. 92-T dated 30.06.2005 ‘On Arranging Management of legal risk and reputation risk at Credit institutions and Banking Groups’.
The legal risk management process implies the distribution of powers between different levels of NCC’s management bodies (including the Supervisory Board, Risk Committee of NCC’s Supervisory Board, Executive Board, CEO), and NCC’s structural divisions and employees. At the same time, the system of division of powers between NCC’s structural divisions and employees, while identifying, assessing and managing the legal risk, is implemented on the basis of COSO internal control concept according to the three-lines-of-defense model.
In accordance with the internal administrative document, NCC has appointed the Legal Affairs Officer responsible for legal risk management and arrangement of legal risk mitigation efforts. The Legal Affairs Officer directly reports to the Chair of NCC Executive Board and his/her activity is independent of the Legal Department and the subdivisions exercising transactions (trades) associated with legal risk assumption.
The Legal Affairs Officer arranges monitoring of the legislation of the Russian Federation on an ongoing basis, prepares overviews of amendments made to the legislation of the Russian Federation, regulations of the Russian Federation, judicial practices and draft regulations of the Russian Federation on the issues related to NCC’s activities. Such overviews are distributed among all concerned structural divisions of NCC. The heads of the concerned structural divisions ensure that relevant amendments are promptly made to NCC’s internal documents to reflect the amendments made to the legislation of the Russian Federation.
To mitigate the legal risk, NCC has developed the standard forms of agreements and other internal documents and established the procedures for approval of any non-standard agreements, transactions and other trades, other than standard ones, by NCC’s Legal Department.
In accordance with its internal documents, NCC collects and analyzes information on the legal risk events and monitors the legal risk. On a quarterly basis, the Legal Affairs Officer drafts and submits legal risk reports to NCC’s Executive Board for review and approval thereof. Such legal risk reports are generated on the basis of the legal risk level assessment indicators introduced by the Regulation on arrangement of legal risk management at NCC and contains the following information: the estimated level of legal risk, results of the legal risk level assessment in dynamics; and the ratio of the legal risk levels to the limits set.
In 2020, the indices of the legal risk assessment level were remaining within the limits set by the resolution of NCC’s Executive Board. During the reporting period, closer attention was paid to analysis of claims of clearing members and counterparties and to forming of its legal position on the lawsuits against NCC admitted for consideration by courts, and participation in court proceedings arising from such lawsuits. Risk mitigation measures were promptly taken in relation to each legal risk event, including any lawsuits and claims filed by clients and counterparties against NCC.
In 2020, there were 4 claims against NCC from clients and counterparties and 4 property-related lawsuits against NCC admitted by courts for consideration (in 2019 — 6 claims and 2 property-related lawsuits against NCC). No payments by NCC were adjudicated by judicial bodies in 2020.
Regulatory (Compliance) Risk Management
The regulatory (compliance) risk is the risk of losses arising from NCC’s failure to comply with the legislation of the Russian Federation, NCC’s internal documents, and as a result of applied sanctions and (or) other retaliation measures on the part of supervisory authorities.
The specifics of regulatory risk as applied to the NCC’s activities as a clearing house, central counterparty, and commodity delivery operator lies in the possibility that the Company might bear any expenses (losses) as a result of non-compliance with Federal Law No. 7-FZ dated 07.02.2011 ‘On Clearing, Clearing Activities and the Central Counterparty’, regulations issued by the Bank of Russia, NCC’s Articles of Association, and internal documents related to the above activities.