The Central Securities Depositories Regulation (CSDR)

The Central  Securities Depositories Regulation (CSDR)

May 4, 2020

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 and 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

Phase 1 – Omnibus/Segregated Accounts

 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. 

Phase 2 – Internalised Settlement Reporting

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. 

Internalised settlement reporting applies to both direct and indirect participants of CSDs. In simple terms an internalised settlement is where two clients trade with each other but as they share the same settlement account, no instruction is actually sent to the CSD.

Phase 3 – Settlement Discipline Regime (SDR)

The CSDR rules on the settlement discipline regime introduce a number of measures to prevent settlement fails by ensuring that all transaction details are provided to facilitate settlement, as well as further incentivising timely settlement by cash penalty fines and buy-ins. In addition, CSDs are required to provide functionality to participants to ensure harmonisation and automation of settlement processes across all European Economic Area markets to improve settlement efficiency.

The go live date for the SDR has been delayed until 1 February 2021.

Other requirements

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.

Future Implementation Timeline

1 February 2021: Entry into force of the settlement discipline regime.

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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