Interview with Fernando Yáñez, DCV’s general manager.

Revista Inversiones, El Mercurio,  April, 2017

An unknown vault in the center of Santiago kept, for years, the physical backup of shares and bonds directly traded in the Chilean securities market. At its peak, in 1998, it accumulated more than 6,000,000 papers backing up some type of financial asset, recording its holder, as well as the person entitled to the income arising thereof. Due to technological progress, physical backup of these documents has become increasingly unnecessary: due to market dematerialization, the vault maintains less paper, and its custodian role has been taken over by modern datacenters located outside the city.

The almost forgotten vault belongs to Depósito Central de Valores (DCV), perhaps the less known player of the local securities market, in charge of the custody of shares and bonds. An essential role, for example, for a share not to be sold twice, and now faces new growth opportunities, especially upon the approval of the new Productivity Law. “The Law expanded the pathway201”, states Fernando Yáñez, DCV’s General Manager, who explains that legal changes will allow for the institution –owned, among others, by banks, Pension Fund Administrators and the Stock Exchange of Santiago- to expand the number of businesses where they participate.

An example of this is the Electronic Pledge Registry, an agreement for the pledge of securities as collateral in favor of third parties. Technology now permits the granting pledges in DCV through electronic notices, saving time and money: the process went from a 12-day average to a few seconds, and the cost reduced by $100,000 per pledge . “It is an area in which growth surpasses 2 digits each month” states Yáñez.

In fact, DCV’s general business is growing: the US$ 28.4 million in revenues it generated in 2016, represents an 11.2% growth compared to 2015. Profits of US$ 3.5 million increased by over 18.5%.

However, the most important step DCV has taken pursuing growth, relates to one of the most significant changes in Chilean fixed income in the past years: its internationalization.

In fact, for this long-awaited dream of the market to materialize, the institution played a key role, working with Euroclear to provide foreign investors with the safety to invest in Chilean fixed income, and also to allow for Chilean paper to be used as collateral.

“In order to do so, Euroclear had to open an account with us, as we also did with them” states Yáñez. “We are sort of a correspondent in terms of banking technology”.

DCV is aware that the internationalization of the local bond market provides an opportunity even bigger than the debt issuance itself. “We are custodians for international players:  providing a good service will allow for all of their investments abroad to be channeled through DCV”, states Yáñez. “Undoubtedly, the opportunities for growth seem to be abroad”.

However, he states that this growth would take place by convincing major customers, and not by purchasing other operators, since it is a highly consolidated sector.

Our hope is for some of those clients to arrive through the Latin-American Integrated Market platform (MILA), despite the fact that the latter, over its more than 6 years’ operation, has failed to capture the attention of investors: total operations as from 2011 up to this date barely surpass US$ 455 million, equal to about 5 days of operations of the Santiago Stock Exchange. Other projects, such as the one that allowed for US shares to be traded in the local stock exchange, have not captured interest either.

Notwithstanding, DCV and its counterparties in the region are working in order to increase interest in such alternatives, improving on the deficiencies in the settlement model and risk schemes, one of the main obstacles that investors have had to face.

Several years ago, DCV was criticized for the low number of opened accounts in the system, which belonged principally to institutions and brokers, causing problems due to a misuse of shares. “The lack of client accounts leads to the misuse of securities from third parties, since the actual owner never knows what is going on”, explains a former senior official of the Superintendence of Securities and Insurance, who requested anonymity.

Yáñez states that they assumed this criticism: “We made efforts for accounts to be broad based, and we lowered the opening cost to 0”, he states.

THE BITCOIN LESSONS

This pursuit for growth has been supported by a key component of DCV’s current operations: technology. In fact, the replacement of the vault located at Huérfanos by datacenters is not only a modernization plan, but the manner in which the business is currently conducted. 

“DCV must be very strong in the technology area”, states Yáñez. “We are in the value chain of a transaction in the stock exchange. Hence, we must be reliable and secure”.

And perhaps one of the most significant changes in this matter is the one introduced by the blockchain. This technology came to the world along with the bitcoin, and its purpose is recording all transfers of securities in a digital book, which cannot be modified. Hence, operations can be followed up and notarized.

“The blockchain has had a powerful irruption in the financial industry. We are aware of it, and we are working on the possibility of being part of those changes”, explains Javier Jara, DCV’s Business and Legal Manager.

For this purpose, the institution is working in several fronts. The first one is its recent incorporation to a group of global peers, dedicated to the study of cases where blockchain technology is used in securities depository operations.

Additionally, the Company decided to create a unit further committed to studying the latter and other technologies. “We decided to invest our efforts in research and development, with people and resources, in order to get a better vision”, explains Jara.

This, in addition to the logical preoccupation for cyber security, especially considering that US$ 330 billion in securities are held in custody, among shares, corporate and fiscal bonds, financial brokerage, mutual and investment fund quotas and recognition bonds of the pension system.