Securities Services: Viewpoint: Upcoming changes in the CSD landscape
Placed at the ‘top tier’ of the securities holding chain, central securities depositories (CSDs) provide market participants with a central point for depositing all kinds of financial instruments, and they have not escaped the ambitious reform agenda of policy makers.
The final text of the EU Regulation on ‘improving securities settlement in the EU and on CSDs’ (CSDR), is expected to be adopted by the end of 2013, and fits into wider efforts to put in place an effective set of common rules for systemically relevant financial market infrastructures, complementing MiFID for trading venues, and EMIR for CCPs and trade repositories.
The main objectives of the CSDR are twofold. The primary focus is to ensure the continued resilience of CSDs, reflected for instance in detailed provisions on their risk management and in the very strict conditions applying to those CSDs offering cash accounts and credit to their participants, allowing for settlement in commercial bank money, in addition to settlement in central bank money. Many of these rules are directly inspired by global standards (the CPSS-IOSCO Principles for financial market infrastructures), but other requirements go beyond internationally agreed principles, such as restrictions on the type of entities in which CSDs can hold a participation, or provisions on credit and liquidity risk.
Apart from the safety objective, the CSDR will also, for the first time, lead to a significant harmonisation of relevant rules and requirements for CSDs in Europe. The impact of such harmonisation will not be limited to CSDs but will have much wider effects on market participants, not least as it opens up room for increased cross-border competition in a sector which, with the exception of the two International CSDs, Euroclear and Clearstream, still largely operates within national borders.
Probably most important from the perspective of market participants is the shortening of settlement cycles across Europe to T+2. Today, apart from in Germany and a couple of other markets, T+3 is still the rule for most transactions executed on regulated markets.
The T+2 obligation will apply to most financial instruments traded on organised trading venues, but is not expected to apply to purely bilateral OTC transactions. While CSDs themselves already settle shorter cycles, some market players, including the buy-side, will have to adjust their back office processes for T+2 settlement.
In addition, the CSDR will also introduce harmonised rules for the management of settlement fails – transactions that do not settle on the intended settlement date. Every CSD will have to charge penalty fees to market participants that do not settle on time, and in some cases a buy-in procedure will be triggered, usually by the CCP (the buy-in mechanism for non-CCP cleared transactions remains to be confirmed).
Finally, harmonised rules for CSDs will create the conditions for more competition and choice for market participants. On the one hand, the regulation provides all EU CSDs with a passport that will allow them, once authorised, to offer their services in other member states. On the other hand, issuers will be given an explicit right to issue their securities in any EU CSD of their choice. While both provisions are, in fact, two sides of the same coin, the practical relevance of these provisions will very much depend on a further harmonisation of national corporate and other laws that are still an important barrier to any real cross-border issuance of shares.
Mathias Papenfuß is chairman of the European Central Securities Depositories Association (ECSDA)