General FAQs about CSDR

September 13, 2018

The following FAQs will attempt to clarify some of the key issues surrounding the Central Securities Depository Regulation (CSDR).

 

General

Segregated Accounts

Internalised Settlement Reporting

Settlement Discipline Regime

 


General

What is the Central Securities Depository Regulation (CSDR)?

CSDR introduces new measures for the authorisation and supervision of the European Union (EU) Central Security Depositaries (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 facilitates the objectives of Target2-Securities (T2S) regulation by the introduction of a securities 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.

What are the key objectives of CSDR?

  • Introduce rules and safeguards in the event of CSD insolvency;
  • Standardises CSD regulations across all of Europe;
  • Provides greater transparency and more open access in the market; and
  • Improve settlement timeframes and reduce the number of fails.

What are the key CSDR themes?

  • The offering of omnibus and segregated accounts;
  • The requirement to report internalised settlement; and
  • The introduction of the settlement discipline regime.

 


Segregated Accounts

What are the types of segregation of accounts under CSDR?

Article 38(5) of CSDR requires firms to offer their clients the choice between omnibus client segregation in an Omnibus Client Segregated Account (OSA) and individual client segregation in an Individual Client Segregated Account (ISA). Account segregation is offered at the custody level as opposed to at the clearance level.

This requirement requires CSDs to maintain records and accounts that enable a participant to hold, in their books, securities separately from other participants and from any proprietary assets the CSD itself may hold.

CSD participants need to be ready to offer their clients a choice of segregated or omnibus accounts as and when each CSD is re-authorised under CSDR (expected in Q1/Q2 2019).

What is an Omnibus Account?

An OSA is used to hold the securities of a number of clients on a collective basis.

What is an Individual Account?

An ISA is used to hold the securities of a single client and therefore the client’s securities are held separately from the securities of other clients and the firm’s own proprietary securities.

What benefits does account segregation bring to clients?

The general industry perception is that individually segregated accounts do not offer any further asset protection over omnibus accounts. This is largely due to the existing client asset protection regime that already provides a level of protection to securities held in an omnibus account. In the event of CSDs insolvency, it is not expected that the investor’s entitlement to their securities at the CSD would be affected regardless of whether the securities are held in ISAs or OSAs.

What should CSD participant firms be doing to prepare?

In general, CSD participant firms should be reviewing the impact of all the CSDR requirements on them and communicating on all CSDR themes that are relevant to their clients.

With regards to segregated accounts:

  • Firms should be discussing the risks associated with choosing a segregated or omnibus account;
  • Firms should work out now what they plan to offer to their clients and how they will make this offering available, so that the options will be ready for communication to clients as soon as the CSDs receive their re-authorisations;
  • Firms should be in a position to offer their investors the choice between OSA and ISA once each EU CSD becomes re-authorised under CSDR, expected Q1/Q2:2019; and
  • Under Article 38(6) of CSDR firms are required to publically disclose the levels of protection associated with the different levels of segregation that they provide in respect of securities that they hold directly for clients with EU CSDs and to inform their clients of the costs and risks associated with the different levels of protection. Firms should also be preparing these disclosures.

When will this be available to firms?

The regulation states that all CSDs must apply for a universal CSD licence to operate and undergo a re-authorisation process to operate under the new CSDR regime. EU member state CSDs had six months to submit their authorisation files with their respective national competent authorities (NCAs) following the publication in the EU Official Journal (OJ) of the official set of Regulatory Technical Standards (RTS), published on 10 March 2017. Application files were submitted to the NCAs in September 2017, with authorisations still pending.

Expected CSD authorisation dates:

  • CREST: Q1:2019
  • Clearstream and Euroclear: Q2:2019

Are firms likely to impose higher costs for holding a segregated account?

Article 38 (6) states that CSDs and their participants should offer their services on reasonable commercial terms. There are no prescribed costs detailed in CSDR itself. In general, the costs are higher for maintaining an ISA over an OSA due to the increased operational complexity and the costs associated with setting up and maintaining an ISA. Each CSD and its participants are required to disclose the costs associated with the different levels of protection associated with an ISA and an OSA.

 


Internalised Settlement Reporting

What is internalised settlement reporting?

Internalised settlement reporting requirements apply to transactions that are settled internally i.e. outside of a securities settlement systems.

What is the impact to financial services firms?

Firms will be required to report the volume and value of all securities transactions that were settled internally on a quarterly basis to our local competent authorities.

When is the first reporting period?

The first internalised settlement report, that is due to the local competent authorities on 12 July 2019, will contain details of transactions that were settled internally from 1 March 2019 to 30 June 2019 inclusive.

The European Securities and Markets Authority (ESMA) has drafted technical standards to establish the forms, templates and procedures for the reporting and transmission of this information to the local competent authorities.

 


Settlement Discipline Regime

What is the Settlement Discipline Regime?

This introduces standardised penalty fees for failing transactions and forced mandatory buy-ins within a certain time period after the intended settlement date (SD+4). Trading members are to be responsible for triggering a buy-in for non-Central Counter Party (CCP) cleared transactions (with the CCP responsible for executing the buy-in for CCP cleared transactions). The new regime reduces the time for mandatory buy-ins from SD+5 to SD+4 for CCP's.

How does the Settlement Discipline work?

  • The Settlement Discipline will be non-profit making for the CSD’s as all credits and debits will be passed, on a trade by trade basis to the clearing participants i.e.  

    Debits: Will be passed onto the failing clearing participant
    Credits: Will be passed onto the clearing participant affected

  • The CSD will apply a net debit or credit to the clearing participant on a monthly basis, along with a gross file to enable reconciliation
  • Firms should conduct a reconciliation to ensure that all debits and credits are allocated

What is the impact of the new settlement discipline?

The new discipline intends to improve a firm’s settlement efficiency. The onus will be on firms to put in their settlement instructions and to match these settlements in good time. In addition, as part of T2S (Target2-Securities) firms were able to do manual partial settlements; part of the new settlement discipline is to move firms to auto-partial settlements, in an attempt to improve settlement efficiency.

What is the timeline for the new settlement discipline?

This is due two years after the publication in the official journal. The current expected date is September 2020.

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