The Central Securities Depositories Regulation (CSDR)

The Central  Securities Depositories Regulation (CSDR)

January 13, 2022

In November 2021, the EU have agreed to make changes to CSDR to allow for the postponement of the controversial Mandatory Buy-in (MBI) requirements of the Settlement Discipline Regime (SDR). The announcement that the UK will not implement SDR signaled a further divergence in rule making between the EU and the UK.

Explore our insights and what this might mean for your firm.

Recent Developments

In late November 2021, we welcomed the positive news that the Mandatory Buy-in (MBI) requirements of CSDR will be delayed and no longer apply on 1 February 2022. This is the result of over 12 months of lobbying and engagement with ESMA and the European Commission from various industry bodies.

While there is still lack of clarity around how the MBI requirement will apply in the future, the current understanding is that CSDR will be reviewed by the EU and that any revised MBI requirement that emerges from that review is unlikely to apply until 2024 at the earliest.

It is important to note that the cash penalty requirements of CSDR will still apply from 1 February 2022.

Overview

The Central Securities Depositories Regulation (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.

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 and 2 – Omnibus/Segregated Accounts and Internalised Settlement Reporting

Phase 1, where providers are required to offer the option of individual segregated accounts, and Phase 2, the requirement to report internally settled trades have both been implemented. The list of authorised CSDs for CSDR can be found here.

Phase 3 – Settlement Discipline Regime (SDR)

The SDR introduces 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 November 2021, the EU agreed to make changes to the SDR in order to allow for the postponement of the mandatory buy-in requirements. 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.

Other Future 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 (electronically). Any new security must be issued in book-entry form by January 2023, and all securities must be in book-entry form by January 2025.

Linda Gibson, Director of Regulatory Change (December 2021)

Despite being plagued by delays and doubt, CSDR will be a key focus for financial services firms in 2022. It’s much more than just another piece of regulation, impacting all parties in the settlement chain in transactions across European securities. The UK announced that it will not implement the SDR, but in scope transactions are those that are settled on an EU CSD, irrespective of where they are traded. This is an aspect that may catch some firms out if the line of stock is traded on a UK venue and settled on Euroclear, for instance.

CSDR must be viewed as a significant operational and infrastructure change and although compliance will come at a cost, the necessary overhaul of front, middle and back office operational processes should be viewed as an opportunity for firms to reduce risk and eliminate endemic inefficiencies in the post-trade operating model.

*Note ESMA in a letter to the Commissioner for Financial Services dated 20 May 2021 proposes that CSDR should be amended in order to ensure T2S (which currently entirely out of scope of CSDR) is included.

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