Update on the Central Securities Depositories Regulation (CSDR)
Implementation of CSDR, the European regulation covering central securities depositories, is a major step.
Implementation of CSDR, the European regulation covering central securities depositories, is a major step within the roll-out of the much wider-ranging post-market harmonisation in Europe initiated over 15 years ago in the wake of the publication of the 2 Giovaninni reports. Published on 28th August, 2014 and progressively applied from 17th September, 2014 onwards, the text includes a broad range of provisions to be implemented through to 2025. SGSS’ expertise has been and will continue to be solicited throughout the process, which can be summarised in simple terms as a call for greater efficiency and security.
Greater efficiency is discernible through the harmonisation of settlement-delivery cycles in Europe, combined with the end of physical securities and free competition between CSDs.
Settlement-delivery now takes place 2 days after the trading date for securities traded on a trading venue. Scheduled for 1st January, 2015 at the latest or during the 6 months prior to an outsourced T2S-type project, most European markets adopted T+2 from 6th October, 2014 onwards, led by an AFTI working group backed by technical proposals from SGSS experts. The specifications schedule drafted by AFTI was transmitted to other European post-market associations and various European working groups such as the T2S Task Force on T+2, which included input from SGSS.
A standard maximum 2-day settlement cycle will ultimately mean the end of the physical circulation of securities. Under CSDR, this will effectively take place in 2025 for all securities eligible for central depositary processing.
In order to ensure greater market efficiency, CSDR also introduces the principle of free competition between CSDs, which can now deploy all of their activities within the European Economic Area, which will also make it possible for an issuer to choose an issuance venue and thus the CSD in charge of this particular market.
As greater efficiency also incurs a higher risk of flaws, CSDR also aims to increase security within the general framework of central depositary operations and ensure smooth transaction clearing. This regulatory framework defines the central depositary and details its role and obligations, notably in terms of governance and risk hedging. Although these provisions are being applied immediately, both newly-established and operational CSDs are nonetheless required to obtain the necessary authorisation from the national regulator to continue these activities. So far, few active CSDs have already obtained such authorisation. The major markets are still in the process of granting authorisations. Through a knock-on effect, CSDs that have obtained the necessary authorisation are obliged to impose a series of requirements on participants, such as daily position-matching, or offer clients the possibility of opening segregated accounts with the central depositary if they wish to do so, as long as they accept to pay the costs.
Furthermore, CSDR implements strict disciplinary measures to ensure that securities settlement-delivery by a central depositary is cleared on the date initially agreed by all parties involved. These disciplinary measures involve a 2-stage process. The first stage involves daily penalties for late delivery. The second stage is applied if settlement is still pending despite the penalties.
The second stage
The second stage involves an enforced buy-in procedure to enable the non-defaulting party to receive their securities. In this case, the costs incurred are charged to the defaulting party. These measures will come into effect in September 2020 and are the subject of regular technical discussions with the regulators, as well as between the various supervisory bodies and organisations within the industry in which SGSS is actively participating. They include a successive number of working groups within the ECB, such as the comme T2S Task Force on CSDR, and their counterparts within associations like the EBF and the AFME.
The settlement disciplinary regime’s enforcement measures are supplemented by pure surveillance measures covering transactions that are cleared outside central depositary accounts, i.e. via inter-account transfers on custodian ledgers. This type of settlement must be reported quarterly, the first being due no later than 12th July, 2019. Here too, SGSS has been heavily involved beyond the workgroups themselves, intervening on this issue within the EBF and the AFME, and has also been involved in standardising associated notifications, notably via ISO 20022 - Securities SEG - CSDR.
Since the start of T+2 delivery cycle harmonisation in Europe through to the implementation of settlement disciplinary measures, SGSS’ expertise has always been clearly recognised and solicited. SGSS’ continuous involvement since the beginning of the CSDR project has enabled the Group to respond to its clients’ questions and requirements within the framework of the implementation of these regulations and their multifaceted implications.