The Central Securities Depositories Regulation (CSDR)

The Central  Securities Depositories Regulation (CSDR)

September 3, 2018

Background

The Central Securities Depositories Regulation (CSDR) is one of the key regulations adopted in the aftermath of the financial crisis. CSDR is part of the wider EU regulatory reforms, including the European Market Infrastructure Regulation (EMIR) and Markets in Financial Instruments Directive II (MiFID II), which between them, cover the entire securities and capital markets structure, with a view to improving the functioning and stability of the financial markets.

Overview

CSDR introduces new measures for the authorisation and supervision of EU Central Security Depositories (CSDs) and sets out to create a common set of prudential, organisational, and conduct of business standards at a European level. A large part of CSDR is designed to support the achievement of the objectives of Target2Securities (T2S) system by the introduction of a securities settlement discipline regime. This harmonises operational aspects of securities settlement, including the provision of shorter settlement periods; mandatory buy-ins; and cash penalties, to prevent and address settlement fails. The new rules also stipulate that CSDs will need to apply for authorisation from their national competent authorities.

Scope

The CSDR applies to all European CSDs and to all market operators in the context of securities settlement. Trading parties, central counterparties (CCPs), Clearing & settlement agents (which are members of the CCPs and CSDs) and trading venues will also be impacted and will have to directly comply with some of the measures, in particular the introduction of mandatory buy-in regime and cash penalties for settlement failures. It should be noted that members of the European System of Central Banks and other national or public bodies that perform similar services, which would otherwise qualify as CSDs are exempt from certain requirements under the CSDR, including those relating to authorisation.

Key Objectives

  • To harmonise the different rules applicable to the CSDs in Europe
  • To establish a level playing field among these CSDs
  • To increase the safety of securities settlement and the settlement infrastructures in the EU
  • To increase the efficiency of security settlement through introducing a true market for the operations of national CSDs
  • To increase safety of CSDs through applying high prudential requirements in line with international standards
  • To create an integrated market for securities settlement with no distinction between national and cross-border securities transactions

Key Impacts

  • Article 3- Book-entry form: Any issuer established in the EU that issues or has issued transferable securities which are admitted to trading or traded on trading venues, is required to arrange for such securities to be represented in book-entry form;
  • Article 5- T+2 settlement cycle which brings all CSDs onto a harmonised model for completing settlement for on-exchange trades two days following the transaction date;
  • Articles 6 and 7 set out a new settlement discipline regime. CSDs are obliged to implement a penalty mechanism for settlement fails which will serve as a deterrent for participants (such as Pershing) and their clients that cause settlement fails along with a mandatory buy-in process on any financial instrument which has not been delivered within a set period of the intended settlement date. ESMA has drafted technical standards on settlement discipline to establish the parameters for the calculation of cash penalties for settlement fails;
  • Article 9 provides for internalised settlement reporting, whereby a settlement “internaliser” must report, to the competent authorities of their place of establishment, on a quarterly basis, the aggregated volume and value of all securities transactions that they settle outside securities settlement system. ESMA has drafted technical standards to establish the forms, templates and procedures for the reporting and the transmission to the relevant competent authorities. This would apply, for example where two Pershing client firms trade (on behalf of their underlying clients) between themselves;
  • Article 38 places an obligation on CSDs and their direct participants to offer their clients the choice between omnibus segregation and individual client segregation and to inform them of the costs and risks associated with each option;
  • Article 38 also requires CSDs and their participants to publicly disclose the levels of protection and the costs associated with the different levels of segregation.

Implementation Timeline

The regulation entered into force across all member states on 17 September 2014, although a number of provisions apply at a later date. Key dates include:

March 2017: Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) on CSD Requirements published in the official journal and entered into force 20 days later (except for settlement discipline related obligations).

September 2017: CSDs must have applied for and submitted applications for authorisation to their national competent authorities.

March 2018: Final guidelines on how to report internalised settlement published by ESMA.

May 2018: RTS concerning CSDR Settlement Disciplines published.

Q4:18/Q1:19: CSDs and their participants must comply with the new CSDR requirements detailed in the RTS upon receipt of their authorisation approval from their national competent authority.

10 March 2019: RTS on Internalised Settlement apply.

12 July 2019: First Internalised Settlement report due to the national competent authority.

Q3:20: Entry into force of the settlement discipline rules (two years after publication in the OJ)

1 January 2023: Certified securities to be transferred into book-entry form for transferable securities issued after that date (1 January 2025 for all transferable securities).

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