Explanatory Memorandum to COM(2022)120 - Amendment of Regulation 909/2014 as regards a number of provisions for third-country central securities depositories - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2022)120 - Amendment of Regulation 909/2014 as regards a number of provisions for third-country central securities depositories. |
|---|---|
| source | COM(2022)120  |
| date | 16-03-2022 |
1. CONTEXT OF THE PROPOSAL
Reasons for and objectives of the proposal
Central Securities Depositories (CSDs) operate the infrastructure that enables securities settlement, i.e. the completion of a securities transaction through the transfer of cash or securities, or both 1 . CSDs play a crucial role in the primary market by centralising the initial recording of newly issued securities (“notary service”). They also maintain securities accounts that record the number of securities held by whom, and record each change in the holding of those securities (“central maintenance service”). In addition, some CSDs provide ancillary services, 2 including banking services.
CSDs play an essential role in the financing of the economy through their role in the issuance of securities and by allowing securities transactions to be completed. CSDs also play an important role in the implementation of monetary policy by central banks. For instance, eligible collateral for central bank monetary operations, especially in the Euro area, flows through securities settlement systems operated by CSDs. Today, 26 CSDs are authorised in the EU. In 2019, EU securities settlement systems handled more than 420 million delivery instructions worth over EUR 53 trillion of securities and representing a total turnover of over EUR 1 120 trillion 3 .
The 2014 Regulation on improving securities settlement in the European Union and on central securities depositories (CSDR) sought to improve the safety and efficiency of settlement as well as provide a set of common requirements for CSDs across the EU. While CSDs were resilient, including in the 2008 financial crisis, and were subject to regulation under national law and international standards, they were not regulated consistently across the European Union (EU). This led to differences in their safety and raised level playing field concerns. Regulating CSDs was also important to complete the regulatory framework of the trading and post-trading market infrastructures, following the Market in Financial Instruments Directive (Directive 2004/39/EC 4 ), which addressed trading venues, and the European Markets Infrastructure Regulation (Regulation (EU) No 648/2012 5 ), which addressed CCPs and trade repositories. Moreover, a consistent regulatory approach to settlement systems and settlement processes was important to complement and facilitate Target2-Securities (T2S) 6 . CSDR was also the EU’s response to the call of the Financial Stability Board (FSB), on 20 October 2010 7 , for a revision and enhancement of standards to ensure more robust financial market infrastructures. 8
CSDs are financial institutions of systemic importance for financial markets, hence it is essential that their framework remains fit for purpose. Regular review of CSDR is warranted to ensure it continues to achieve its objectives while making, where possible, the framework more proportionate, and effective. The review of CSDR is a key action in the 2020 Capital Markets Union (CMU) Action Plan 9 for the development of a more efficient post-trading landscape in the EU. Resilient and efficient markets for settlement in the EU should better integrate the post-trading infrastructure landscape and increase the competitiveness of EU CSDs and EU financial markets in general.
Article 75 of CSDR required the Commission to review and prepare a report assessing the implementation of the Regulation and the way forward for its review by 19 September 2019. The European Parliament, in its resolution on further development of the Capital Markets Union, 10 also invited the Commission to review the settlement discipline 11 regime under CSDR in view of Brexit and the Covid-19 crisis. To this end, a targeted consultation 12 took place between 8 December 2020 and 2 February 2021. On 1 July 2021, the Commission adopted a report. 13 It concluded that in broad terms CSDR is achieving its original objectives to enhance the efficiency of settlement in the EU and the soundness of CSDs. For most areas, significant changes to CSDR were considered premature considering the recent application of requirements. Nevertheless, the report identified areas where further action may be necessary to achieve CSDR’s objectives in a more proportionate, effective and efficient manner.
Given the need to eliminate disproportionate costs and burdens and to simplify rules without putting financial stability at risk, the CSDR review was included in the 2021 Commission Regulatory Fitness and Performance programme (REFIT) 14 .
Consistency with existing policy provisions in the policy area
CSDR is related to several pieces of EU legislation, including the Settlement Finality Directive, 15 MiFID and MiFIR as well as for those CSDs that have been authorised under CSDR to provide banking-type ancillary services, the Capital Requirements Regulation, 16 the Capital Requirements Directive 17 and the Bank Recovery and Resolution Directive 18 .
The proposals to amend CSDR are in line with the Commission’s plan for a CMU 19 . The aim of CMU is to enable capital to flow across the EU to the benefit of consumers, investors and companies. The Covid-19 crisis has made it more urgent to deliver on CMU as market-based financing is an essential component for the European economy’s return to long-term growth and to finance the EU’s environmental and digital transitions. Safe and efficient post-trade arrangements are an essential element of robust capital markets. The proposed legislative changes would contribute to the development of a more efficient post-trading landscape in the EU.
CSDR is also closely related to the Digital Finance Package 20 . It is particularly related to the proposal for a Regulation on a pilot regime for market infrastructures based on distributed ledger technology 21 (DLT). Under that Regulation, DLT settlement systems and DLT trading and settlement systems may be exempted from complying with certain provisions of CSDR subject to certain conditions with a view to stimulating innovation in this area, while safeguarding investor protection, market integrity and financial stability. The political agreement on that proposal also introduced the possibility to postpone the CSDR rules on mandatory buy-ins, to allow more in-depth reflections as part of the CSDR review. 22 Furthermore, CSDR is related to the proposal for Regulation on digital operational resilience of the financial sector 23 that aims to ensure that all participants in the financial system, including CSDs, have the necessary safeguards in place to mitigate cyber-attacks and related ICT risks.
Market infrastructures, including CSDs, were also part of the Commission communication on “The European economic and financial system: fostering openness, strength and resilience”. 24 This Communication sets out how the EU can reinforce its open strategic autonomy in the macro-economic and financial fields by, in particular but not only, further developing EU financial market infrastructures and increasing their resilience. A strong EU settlement system as regulated by CSDR is thus an important element contributing to EU’s open strategic autonomy in the field of financial markets infrastructure.
Finally, this proposal is consistent with work ongoing at the international level in the framework of the FSB aiming to, among others, achieve a consistent application of the Principles for Financial Markets Infrastructure (PFMIs) developed by the Committee on Payments and Markets Infrastructure (CPMI) and the International Organisation of Securities Commissions (IOSCO).
Consistency with other Union policies
This initiative should be viewed within the context of the broader Commission agenda to make the EU markets more competitive and resilient as represented by the CMU, digital finance and open strategic autonomy initiatives. Safe and efficient post-trade arrangements are an essential element of robust capital markets. A fully functioning and integrated market for capital will allow the EU’s economy to grow in a sustainable way and be more competitive, in line with the strategic priority of the Commission for an Economy that Works for People, focused on creating the right conditions for job creation, growth and investment.
The initiative in question has no direct and/or identifiable impacts leading to significant harm or affecting the consistency with the climate-neutrality objectives and the obligations arising out of the European Climate Law 25 .
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The legal basis for this proposal is Article 114 of the Treaty of the Functioning of the European Union (TFEU), which is the legal basis for CSDR. The analysis carried out as part of the Impact Assessment report identifies that elements of CSDR need to be amended to eliminate disproportionate costs and compliance burdens and to simplify rules without putting at risk financial stability to improve the Regulation’s efficiency and facilitate the integration of the market for securities settlement in the European Union.
• Subsidiarity (for non-exclusive competence)
The objectives of CSDR, namely to lay down uniform requirements for the settlement of financial instruments in the EU, rules on the organisation and conduct of CSDs and to promote safe, efficient and smooth settlement, cannot be sufficiently achieved by the Member States alone, as the co-legislators acknowledged in 2014 when adopting CSDR.
Today, Member States and national supervisors cannot solve on their own the challenges arising from the burdensome and unclear CSDR requirements or the risks resulting from diverging national supervisory practices. They also cannot address on their own the risk to the EU financial stability that the lack of information on the activities of third-country CSDs could pose. As such, the objectives of this initiative cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale of actions, be better achieved at EU level in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on the European Union.
• Proportionality
The proposal aims to ensure that the objectives of CSDR are met in a more proportionate, effective and efficient manner. This should translate into simpler or reduced requirements aiming to reduce the administrative burden of the Regulation on stakeholders, in particular CSDs, without endangering investor protection, market integrity and financial stability. By reviewing the supervisory arrangements for CSDs (in particular those operating cross-border as well as those that are parts of groups of CSDs), the proposal addresses the challenges observed in achieving supervisory convergence. Furthermore, the recalibration of certain requirements in relation to the passporting process, the provision of banking-type ancillary services and settlement discipline, addresses the concerns raised by stakeholders, including the European Securities and Markets Authority (ESMA), while safeguarding the objectives of CSDR. The proposal does not go beyond what is necessary to achieve these objectives, taking into account the need to monitor and to mitigate any risks the operations of CSDs, operating from within and outside of the EU, may raise for financial stability. The proportionality of the preferred policy options is further assessed in Chapter 6 of the accompanying Impact Assessment.
• Choice of the instrument
CSDR is a Regulation and thus it needs to be amended by a legal instrument of the same nature.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
An evaluation of CSDR assessed to what extent specific policy requirements in CSDR have met their objectives and in particular whether these requirements have done so in an efficient and effective way, while at the same time being coherent, relevant and providing EU added-value. The findings of the evaluation are presented in Annex 5 of the Impact Assessment.
Given that some of the core requirements of CSDR have only recently become applicable or are not applicable yet, the assessment was not a full evaluation.
The evaluation nevertheless concluded:
·Effectiveness and efficiency: While the volume of settled trades increased since the entry into force of CSDR, cross-border transactions remained stable. In several areas, e.g. passporting, significant barriers exist and preliminary findings suggested that actions to reduce disproportionate compliance burden and to improve cross-border activity could be undertaken. Improvements could also be sought in the areas of banking services, as access to banking-type ancillary services is limited which in turn inhibits settlement in foreign currencies, and of supervisory arrangements, both impacting the possibilities or opportunities for CSDs to offer services cross-border.
·Relevance: The objectives of CSDR to increase the safety and efficiency of the EU settlement market and to ensure a level playing field for CSD services remain relevant.
·Coherence: CSDR is aligned with international efforts to ensure the stability and safety of post-trade infrastructures. CSDR is coherent with other pieces of EU legislation and policy initiatives.
·EU added value: CSDR covered a gap that existed in legislation by introducing a new framework aiming to address, in a uniform process at EU level, the lack of a harmonised approach towards the EU’s settlement markets and in addressing the related systemic risks.
Due to the need to simplify targeted areas of CSDR and make them more proportionate, as evidenced by the contributions to the targeted consultation on CSDR and by the Commission's review of the Regulation, the review of CSDR is a REFIT initiative.
• Stakeholder consultations
The Commission has consulted stakeholders throughout the process of preparing this proposal. In particular:
·a targeted consultation 26 between 8 December 2020 and 2 February 2021;
·consultation on an inception impact assessment 27 between 8 March 2021 and 5 April 2021;
·two Member States’ Experts Group meetings (22 September 2020 and 15 July 2021) to which the European Central Bank (ECB), ESMA and the secretariat of European Parliament Economic and Monetary Affairs committee were also invited.
Generally, the objectives of CSDR to enhance the efficiency of settlement in the EU and ensure the soundness of CSDs were supported. Related core requirements were seen to be achieving these objectives, and delivering on the EU’s international commitments for regulatory reform. However, stakeholders, including Member State representatives, highlighted a number of areas where CSDR requirements could be adjusted without compromising its overall objectives in order to: (i) simplify and increase the efficiency of the requirements; and (ii) reduce disproportionate costs and burdens.
The proposal takes this stakeholder feedback into account, as well as the feedback received through meetings with a broad range of stakeholders and EU authorities and institutions. It introduces targeted amendments to CSDR aimed at:
(a)minimising barriers to cross-border settlement by simplifying and clarifying burdensome passporting requirements, improving cooperation between supervisors and facilitating access to banking-type ancillary services to facilitate settlement in foreign currencies;
(b)better calibrating the application of some requirements (e.g. on settlement discipline, banking-type ancillary services) to reduce administrative burden and compliance costs without endangering financial stability;
(c)ensuring that authorities in the EU have adequate powers and information to monitor risks in relation to both EU and third-country CSDs, including by enhancing their supervisory cooperation.
• Collection and use of expertise
In preparing this proposal the Commission relied on external expertise:
–Reports by ESMA: ESMA submitted four reports in 2020 and 2021 to the Commission on internalised settlement, 28 the cross-border provision of services by CSDs and the handling of applications to provide notary and central maintenance services cross-border, 29 the provision of banking-type ancillary services 30 and the use of FinTech by CSDs. 31 Such reports also took into account answers to ESMA surveys from national authorities, CSDs and participants. The Commission also considered the bi-annual ESMA Reports on trends, risks and vulnerabilities 32 in the financial infrastructure and services sectors;
–Targeted input from the European System of Central Banks (ESCB) to the CSDR consultation, including an anonymised and consolidated outcome of a survey conducted among CSDs.
This input has been complemented with, at times confidential, quantitative and qualitative input from financial markets participants.
• Impact assessment
The Commission conducted an impact assessment of relevant policy alternatives. Policy options were identified based on the following five drivers: (i) burdensome and unclear passporting requirements, (ii) insufficient coordination and cooperation between authorities, (iii) restrictive requirements for the provision of banking services related to settlement in foreign currencies, (iv) unclear and complicated requirements for settlement discipline and (v) insufficient information about the activities of third-country CSDs in the EU. The policy options were assessed against the specific objectives of minimising barriers to cross-border settlement, reducing administrative burden and compliance costs without endangering financial stability and ensuring adequate powers and information to monitor risks.
The Impact Assessment received a positive opinion with comments of the Regulatory Scrutiny Board on 29 October 2021 which made the following main recommendations for improvements:
·Clarify the interplay between the revised CSDR and the Communication on “The European economic and financial system: fostering openness, strength and resilience”;
·Explain better why passporting, a practice successfully used in many other areas of financial law, does not seem to work in this segment;
·Explain the analysis that led to the introduction of mandatory buy-ins as an element of the settlement discipline regime in 2014 and how the Commission’s assessment has changed since then;
·Clarify which policy options are complementary and which are mutually exclusive.
The requested clarifications were added in the relevant sections of the Impact Assessment, i.e., regarding the Communication on open strategic autonomy in section 1.4.2, examples of burdensome passporting requirements faced by CSDs which hinder the provision of services cross-border in Annex 6, an explanation of the origin of mandatory buy-ins in Section 2.2.2 and a clarification as to the complementary or mutually exclusive nature of the policy options in Section 6.
Based on the assessment and comparison of all policy options, the Impact Assessment concluded on the following preferred policy options:
·Simplify the CSDR passporting process by removing the possibility for the host supervisors to refuse the passport, and by replacing it with a notification from the home supervisors to the host supervisors. The preferred policy option minimises barriers to cross-border settlement and reduces the administrative burden and compliance costs. Other policy options assessed were reducing the scope of the passporting requirements to equity securities or clarifying the role and powers of competent authorities and requirements related to national laws. However, both would only partially meet the objectives.
·Enhance the cooperation between national supervisors by establishing colleges of supervisors to facilitate CSDs’ access to markets other than that of their authorisation and ensure financial stability by providing supervisors with more powers to monitor risks. Other options considered included enhancing the existing CSDR rules for cooperation arrangements and introducing more supervision of CSDs at EU level. However, colleges attain the right balance between achieving the objectives while reflecting the fact that supervisory responsibility remains with the CSDs’ home Member State.
·Facilitate CSDs’ access to banking-type ancillary services by allowing CSDs with a banking license to offer such services to other CSDs and reviewing the thresholds below which CSDs may use a commercial bank. Another option considered was the removal of restrictions for the provision of banking-type ancillary services to CSDs, however that was disregarded as potentially increasing significantly the risks to financial stability.
·A combination of clarifying various elements related to settlement discipline (e.g. scope) and modifying the timeline for the implementation of mandatory buy-ins 33 (“two-step approach”) is the most effective and efficient option. The implementation of mandatory buy-ins will be dependent on the evolution of settlement efficiency in the EU. First, the gathered evidence suggests that cash penalties will incentivise improvements in settlement efficiency, without endangering stability and liquidity across markets and financial instruments. Second, after cash penalties have applied, it can then be assessed how to best apply the mandatory buy-in in light of the evolution of settlement efficiency. The option to suspend the framework in its entirety was disregarded as settlement fails in the EU remain consistently higher than in other major financial markets.
·Introduce an end date for the grandfathering clause for EU and third-country CSDs 34 and a notification requirement for third-country CSDs. The information received would allow the Commission to prioritise its assessment of equivalence of third-country CSD frameworks, as the granting of equivalence by the Commission is a condition for the recognition by ESMA of third-country CSDs that wish to offer notary and central maintenance services in relation to financial instruments constituted under the law of a Member State. The combination of these measures will therefore ensure that authorities have adequate powers and timely information to monitor risks in line with the evolution of market needs. Nonetheless, the proposed amendments do not affect the equivalence and recognition processes already applicable under CSDR; therefore, third-countries and potential applicant third-country CSDs remain invited to submit their requests for equivalence and applications for recognition respectively under the current CSDR requirements. Another option considered was to enhance the regime for third-country CSDs that provide services for financial instruments constituted under the law of a Member State by, for e.g., requiring recognition by ESMA for the provision of settlement services or by increasing ESMA’s supervisory powers, but that was considered at this point premature and disproportionate.
·The overall package of options will have a positive effect on the post-trading landscape in the EU by enabling a more proportionate regulation of CSDs, enhancing the efficiency of securities settlement and thus contributing to the competitiveness of the EU financial markets.
• Regulatory fitness and simplification
The overall approach is to propose measures which are necessary in the interest of market integration and financial stability while reducing the regulatory and compliance burden for market participants. This is in line with the Commission's Better Regulation Agenda. The options retained have a positive effect, ensuring more proportionate regulation of CSDs and enhancing the competitiveness of the EU settlement market as a whole.
CSDs would benefit from reduced costs when operating in the EU, notably due to a reduction of barriers to cross-border settlement stemming from (i) the establishment of colleges and (ii) the simplification of the current passporting procedure. In particular, easing the burdens associated with the passporting requirements would simplify and accelerate the process. The simplified passporting process, which includes a notification to host competent authorities rather than an approval by them, is expected to reduce the costs by up to 75%, which would generate a one-off saving, on average, of EUR 585 000 per CSD. The introduction of colleges would also benefit EU CSDs due to the legal certainty resulting from the enhancement of supervisory convergence. Furthermore, the introduction of colleges and of an end date to the grandfathering clause would enhance financial stability with regard to EU CSDs and third-country CSDs.
Simplification of the requirements to access banking-type ancillary services by CSDs, which is required in order to settle in foreign currencies, would also increase competition in this domain. In this regard, a review of the threshold below which CSDs can use for such services credit institutions could enable CSDs to develop further their services to domestic investors and cross-border. It is estimated that EUR 16 billion of additional settlement in foreign currencies could be expected on an annual basis as a result of the proposed changes.
The simplification of the passporting procedure, the creation of mandatory colleges and the increased provision of banking services related to settlement in foreign currencies will increase competition between CSDs in the EU, thereby benefitting investors and issuers, SMEs included. Overall, issuers, in particular innovative start-ups and SMEs, and investors would have more choice in terms of financing arrangements and would benefit from the increased competition, a greater choice in issuance, risk diversification and currency diversification in their cross-border investments, thereby contributing to a deepening of the CMU.
Finally, the proposed changes to the settlement discipline regime would ensure a more proportionate approach to the treatment of settlement fails, while ensuring that levels of settlement efficiency continue to improve in the EU to the benefit of investors and the EU economy as a whole. The two-step approach in particular should alleviate the most negative impacts related to liquidity, where application of the relevant requirements is not justified. This should indirectly positively impact SMEs, whose securities are less liquid.
Digitalisation and the impact of new technologies on post-trade services have not been addressed in in this initiative as they have been deemed out of scope. The targeted consultation supporting this initiative indicated that stakeholders prefer to gather experiences in applying the DLT pilot regime Regulation before any changes to the CSDR are contemplated. ESMA in its report on the use of Fintech by CSDs, also did not support extensive amendments to CSDR at this point in time to facilitate the use of technological innovation by CSDs, but rather suggested to wait for the experiences of the EU pilot regime. It was hence decided that any fundamental changes to CSDR to realise the full potential of technology will be postponed until lessons can be drawn from the implementation of the DLT pilot regime Regulation.
• Fundamental rights
The EU is committed to high standards of protection of fundamental rights and is signatory to a broad set of conventions on human rights. In this context, the proposal is not likely to have a direct impact on these rights, as listed in the main United Nations conventions on human rights, the Charter of Fundamental Rights of the European Union which is an integral part of the EU Treaties, and the European Convention on Human Rights.
4. BUDGETARY IMPLICATIONS
The proposal will have no implications for the budget of the Union.
ESMA would mainly be impacted by the participation to colleges, the development or update of 5 technical standards and the management of the process for the notification by third-country CSDs of their EU activities. The latter would however be a small one-off cost. The simplification of the passporting procedure would nevertheless alleviate ESMA’s costs as the passporting requirements would be simpler and clearer. Furthermore, a clear determination of transactions falling within the scope of the settlement discipline regime would also lessen the administrative burden on ESMA related to replying to Q&As. Moreover, the adaptation in the periodicity of the reports that ESMA is required to submit to the Commission will further reduce the administrative burden imposed on the Authority. ESMA would also benefit from some of the preferred policy options which would strengthen the supervisory environment, in particular the notification process for third-country CSDs.
The proposed tasks for ESMA will therefore not require the establishment of additional posts and can be carried out with existing resources. The same is also true for the EBA that will be required to develop one technical standard determining the threshold below which CSDs may use credit institutions for the provision of banking-type ancillary services.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The proposal includes a requirement that the Commission reports to the European Parliament and to the Council on the application of CSDR in its entirety, with a focus on its effectiveness and efficiency in meeting its objectives (i.e. improve the efficiency and safety of EU settlement markets). When doing so, the Commission should consider all aspects of CSDR, including whether there are other substantive barriers to competition in relation to the services subject to this Regulation which should be addressed, the need to apply further measures to improve settlement efficiency and the potential need for further measures to limit the impact on taxpayers of the failure of CSDs.
In principle, this evaluation should take place within five years after the entry into force of these amendments. Input would also be required from ESMA as well as national authorities and central banks. Statistical data for the analysis should be sought primarily from ESMA.
• Detailed explanation of the specific provisions of the proposal
Contents
- 5.2.1 Definitions
- 5.2.2 Settlement discipline regime
- 5.2.4 Passporting regime and corporate or similar law of the Member State under which the securities are constituted
- 5.2.5 Colleges of supervisors
- 5.2.6 Third-country CSDs and end of the grandfathering clause
- 5.2.7 Banking-type ancillary services
- 5.2.8 Organisational requirements and links
- 5.2.9 ESMA reports
Article 1(1) introduces a definition of the notion of group of undertakings, in line with the definition in Regulation (EU) No 2019/2033.
Article 1(2) introduces amendments to the settlement discipline regime.
In point (a), amendments to Article 7(2) of CSDR provide that in situations where a settlement fail is caused by factors not attributable to the participants to the transaction or where a transaction does not involve two trading parties, such settlement fail is not subject to the penalty mechanism. It also specifies that cash penalties should be calculated either until the end of the buy-in process if the Commission has adopted the relevant implementing act or until the actual settlement date, whichever is earlier.
Point (b) introduces a new paragraph 2a according to which the Commission may adopt an implementing act, according with the examination procedure set out in Regulation (EU) No 182/2011, deciding to apply mandatory buy-ins to certain financial instruments or categories of transactions mandatory buy-ins should apply. The Commission may take that decision where it considers that those measures constitute a proportionate means to address the level of settlement fails in the Union and that, based on the number and volume of settlement fails, certain conditions set out in that provision are met.
In point (c), the amendment to Article 7(3) of CSDR specifies when, the buy-in process shall be initiated where the Commission has adopted an implementing act pursuant to Article 7(2a) and that the extension period for financial instruments traded on an SME growth market is calculated on the basis of calendar days.
Point (d) introduces a new paragraph 3a in Article 7 of CSDR to explain how the pass-on mechanism will work. A pass-on mechanism will prevent a cascade of failed settlements each requiring a separate buy-in process by allowing each participant in the transaction chain to pass-on a buy-in notification to the failing participant such that only one buy-in is necessary to resolve the whole chain of transactions. This pass-on mechanism can then be replicated contractually between the participants and their clients until the ultimate buyers and sellers.
Point (e) amends Article 7 i of CSDR providing that in situations where a settlement fail is caused by factors not attributable to the participants to the transaction or where a transaction does not involve two trading parties, such settlement fail is not subject to the mandatory buy-in mechanism.
Point (f) amends Article 7(6) of CSDR introducing symmetry of payments between the buyer and the seller in case the economic terms of the transaction at execution of the buy-in differ from the original transaction. The objective is to ensure that the buy-in restores the parties to the transaction to the same economic position had the original transaction taken place.
Point (g), amends Article 7(11) of CSDR clarifying that the exemption to the settlement discipline requirements for CCPs only applies when the CCP interposes itself between counterparties. It also clarifies that if CCPs incur losses from the application of mandatory buy-ins, they may establish in their rules a mechanism to cover such losses.
Point (h) introduces a new 13a in Article 7 of CSDR which confers to the Commission the power to suspend the buy-in mechanism for specific categories of financial instruments where necessary to avoid or address a serious threat to financial stability or to the orderly functioning of financial markets in the Union. This new paragraph 13a sets out the procedure that should be followed by the Commission for such a suspension, i.e. following a recommendation by ESMA after consulting the ESCB and the ESRB. It also specifies that such a suspension shall be valid for a maximum period of six months, renewable by periods of three months for a maximum total period of 12 months from the beginning of the suspension.
In point (i), amendments to Article 7(14) of CSDR clarify that the delegated act of the Commission specifying the parameters for the calculation of a deterrent and proportionate level of the cash penalties shall take into account the effects of negative interest rates.
Point (j) introduces a new paragraph 14a in Article 7 of CSDR empowering the Commission to specify the situations where a settlement fail should be considered as being caused by factors not attributable to the participants and where a transaction does not involve two trading parties, as per the amendments introduced in paragraphs 2 and 4 of Article 7.
Point (k), amends Article 7(15) of CSDR introducing a new date by which ESMA shall submit regulatory technical standards specifying those aspects of the settlement discipline regime listed in that same paragraph. This change of the date should allow ESMA to revise the regulatory technical standards to take into account the changes made to CSDR following this review and make any necessary amendments with a view to clarify the requirements set out in such regulatory technical standards, such as the conditions under which participants may execute their own buy-ins.
5.2.3 Cooperation between competent authorities and relevant authorities, review and evaluation and recovery and orderly wind-down strategies.
Article 1(3) amends paragraphs (b) and (c) of Article 12 of CSDR with a view to clarify that where a CSD does not carry out settlement activity before the beginning of the authorisation process, the criteria determining which relevant authorities should be involved in that process shall take into account the anticipated settlement activity.
Point (b) of Article 1 i amends Article 17 i of CSDR on the consultation of relevant authorities by competent authorities regarding the authorisation process for a CSD. In point (e) Article 1(6), introduces equivalent amendments to Article 22(6) of CSDR, on the consultation of relevant authorities by competent authorities regarding the review and evaluation process. The changes in Articles 17 i and 22(6) of CSDR introduce a process whereby the consulted authorities may issue a reasoned opinion within three months of the receipt of the information by the competent authority. In case of negative opinion by one of the relevant authorities consulted, the competent authority shall address such negative opinion in a reasoned decision, which may again be subject to a negative opinion from the consulted authorities. If the competent authority disagrees with that negative opinion it will inform those authorities that objected and the latter may refer the matter to ESMA. If the matter is not resolved within 30 days after such referral, the competent authority shall take the final decision on the review and evaluation and provide a detailed explanation of its decision in writing to the relevant authorities.
Point (c) of Article 1 i inserts a new paragraph (7a) in Article 17 of CSDR to introduce new requirements for competent authorities to share information with other authorities, notably relevant authorities.
Article 1(5) amends Article 20(5) of CSDR, clarifying that the procedures that the CSD must have in place in the event of a withdrawal of authorisation shall include the transfer of issuance accounts and records maintained for the provision of core services referred to in points 1 and 2 of Section A of the Annex.
Article 1(6) amend paragraphs 1, 4 and 7 of Article 22 of CSDR with a view to change the periodicity of the review and evaluation process, from a yearly basis to every two years. In addition, it amends paragraphs 2 and 3 of Article 22 of CSDR in order to clarify how CSDs should prepare to face scenarios that may potentially prevent them from being able to provide their critical operations and services as a going concern. The requirement to draw resolution plans is removed since it is deemed unclear and no Union resolution regime on the basis of which a resolution plan could be drafted currently exists. Instead, the revised paragraph 2 requires CSDs to prepare and submit to the competent authority appropriate plans for their recovery or orderly wind-down. The revised paragraph 3 specifies the minimum content of the plans referred to in paragraph 2 as well as the periodicity for the review and update of such plans (at least every two years). It also clarifies that such plans shall have regard to the size, systemic importance, nature, scale and complexity of the activities of the CSD concerned and any relevant recovery or resolution plan established in accordance with the BRRD. The changes to paragraph 3 do not affect the requirement for competent authorities to inform ESMA where a resolution plan is established and maintained for a CSD. This can be the case due to national legislation or the requirement to comply with other pieces of EU legislation such as the BRRD.
Point (c) of Article 1(6) amends Article 22(11) of CSDR by introducing a new date by which ESMA shall submit draft regulatory technical standards to the Commission to specify standard forms, templates and procedures for the review and evaluation. This change of the date should allow ESMA to adapt, where necessary, the regulatory technical standards to the changes made to CSDR following this initiative.
Finally, Article 1(18) amends Article 55 of CSDR in order to extend the deadline within which relevant authorities and competent authorities can issue a reasoned opinion on the authorisation to provide banking-type ancillary from one months to two months. Indeed, the one-month deadline is too short for the issuance of such an opinion.
5.2.4 Passporting regime and corporate or similar law of the Member State under which the securities are constituted
Article 1(15) amends the second subparagraph of Article 49(1) of CSDR with a view to clarify that the corporate or similar law of the Member State under which the securities are constituted and which shall continue to apply in the context of cross-border issuances of securities includes both: (i) the corporate or similar law of the Member State where the issuer is established and (ii) where different, the governing corporate or similar law under which the securities are issued. This covers notably the case of bonds issued by an issuer located in one Member State but contractually subject to the law of another Member State. Article 1(15) also amends the third subparagraph of Article 49(3) of CSDR to include a requirement for Member States to update the list of relevant provisions on a regular basis.
Article 1 i amends Article 23 of CSDR in order to clarify the following aspects of the passporting process.
First, it adapts the cross-reference to the second subparagraph of Article 49(1), in paragraphs (2) and (3) of Article 23, such that a CSD wishing to provide notary or central maintenance services in relation to financial instruments constituted under the law of another Member State shall take into account both the law of the Member State where the issuer is established and, where different, the governing corporate or similar law under which the securities are issued.
Second, it amends Article 23(2) of CSDR to allow new CSDs to proceed with a passporting request in parallel with an authorisation application, so that they may start their cross-border activity from the date of authorisation by their home competent authority provided that at least one month has passed from the date of the communication of the passporting request by the home competent authority to the host competent authority.
Third, it amends Article 23(3), point (e) of CSDR to clarify that a CSD requesting a passport should always provide an assessment of the measures it intends to take to allow its users to comply with the national law referred to in Article 49(1).
Fourth, it amends Article 23 i of CSDR, to shorten the period of time under which a home competent authority shall communicate the passporting request to the host competent authority.
Fifth, it amends Article 23(6) removing the possibility for a host competent authority to refuse a passporting request. Under the revised provision, the CSD may start providing services after one month from the date of the communication of the passporting request by the home competent authority to the host competent authority, or earlier if agreed upon by the host competent authority.
Article 1(9) introduces Article 24a in CSDR as part of a new Section 4a in Title III on the cooperation of authorities through colleges, requiring the establishment of colleges of supervisors in two cases:
(a)where a CSD is subject to the passporting procedure of Article 23(3) to i, i.e. the so-called “passporting college”; or
(b)where a CSD is part of a corporate group comprising two or more CSDs authorised in at least two Member States, i.e. the so-called “group-level college”.
Where a CSD subject to the passporting procedure of Article 23(3) to i is also part of a corporate group that comprises at least another CSD, it should be possible to establish only one college for that CSD rather than two separate colleges (i.e. a separate passporting college and a separate group-level college), to ensure synergies and avoid unnecessary administrative burden on the authorities involved.
The establishment of only one college should also be possible where the other CSDs within the group are subject to the passporting procedure, to avoid a situation where there are multiple passporting colleges and a separate group-level college for CSDs that are part of the same group and which, in many cases, have common procedures, share resources, assessments of the measures they have put in place to ensure compliance with host Member State laws where they provide services cross-border etc. Nonetheless, where those other CSDs within the group are also subject to the passporting procedure, the establishment of just one college for the whole group shall be possible only with the agreement of those CSDs’ competent authorities.
In addition, Article 24a establishes the rules on the determination of the chair especially for the group-level college, the composition of the colleges and their tasks to ensure a coherent supervisory approach across the EU. ESMA is empowered to develop draft regulatory technical standards specifying the practical arrangements for the operation of colleges.
Finally, amendments are introduced throughout the Regulation to ensure that colleges are informed of important decisions taken in respect of CSDs (i.e. amendments to Article 22 i, paragraphs i, (5) and i of Article 23, paragraphs (1) and (5) of Article 24, paragraphs (1) and (2) of Article 60 of CSDR.)
Article 1(10) amends Article 25 of CSDR which sets out the framework for third-country CSDs. Point (a) introduces a requirement for CSDs that intend to provide settlement services in relation to financial instruments constituted under the law of a Member State to submit a notification to ESMA, thereby addressing the lack of information in this regard at both national and EU level. Point (c) empowers ESMA to draft regulatory technical standards to specify the information that the third-country CSD shall provide to ESMA in that notification, specifies that such information shall be limited to what is strictly necessary and provides a list of examples.
Point (b) of Article 1(10) amends the fifth subparagraph of Article 25(6) specifying that ESMA shall inform the third-country CSD applying for recognition to provide notary or central maintenance services in writing with a fully reasoned decision whether the recognition has been granted or refused within six months from the latter date between the submission of a complete application and the adoption of an equivalence decision by the Commission.
Article 1(23) amends Article 69 i of CSDR by introducing an end-date to the grandfathering clause for both EU and third-country CSDs. More specifically, point (a) amends Article 69 i by setting out that the end-date for the grandfathering clause for EU CSDs that shall be the one year from the entry into force of this Regulation. Point (b) introduces a new paragraph 4a which sets out an end-date to the grandfathering clause for third-country CSDs, which shall be three years from the entry into force of this Regulation due to the equivalence and recognition processes. In addition, third-country CSDs benefitting from the grandfathering clause shall be required to submit a notification to ESMA when offering notary and central maintenance services in relation to financial instruments constituted under the law of a Member State to address the lack of information in this regard both at national and at EU level. Point (b) empowers ESMA to draft regulatory technical standards to specify the information that the third-country CSD shall provide to ESMA in that notification and specifies that such information shall be limited to what is strictly necessary and provides a list of examples. Similarly, a notification requirement is also introduced for those third-country CSDs that offered settlement services before the entry into force of this Regulation.
First, Article 1(13) amends Article 40(2) of CSDR and point (a) of Article 1(17) amends point (b) of Article 54(2) of CSDR in order to introduce the possibility for CSDs authorised to provide banking-type ancillary services to provide such services to CSDs that have not obtained this authorisation and which, therefore, cannot settle in specific currencies above certain amounts where they do not have access to the relevant central bank.
Point (b) of Article 1(17) amends the introductory wording of paragraph 4, thereby enabling CSDs to seek the provision of banking-type ancillary services not only from designated credit institutions but also from other CSDs that have been authorised to provide such services pursuant to Article 54(3), whether those CSDs are part of the same corporate group or not. In this regard, point (b) of Article 1(17) deletes point (c) of Article 54 i of CSDR, thereby eliminating the prohibition that designated credit institutions cannot offer core CSD services.
Second, point (c) of Article 1(17) amends Article 54(5) of CSDR which provided a specific threshold in CSDR under which CSDs could use a credit institution for banking services. In order to adequately calibrate this threshold and with a view of managing financial risks, point (d) of Article 1(17) introduces a mandate for the EBA, in cooperation with the ESCB and ESMA, to develop draft regulatory technical standards, to be adopted by the Commission, setting an appropriate threshold below which banking-type ancillary services can be provided by credit institutions, including relevant risk management and prudential standards, mitigating potential risks from amending the threshold.
Finally, Article 1(19) amends Article 59 i of CSDR to ensure adequate prudential requirements, ensuring consistency with other applicable legislation or making more explicit certain requirements to ensure supervisory consistency or specify a number of smaller issues in the area of risk management. To that effect point (a):
(a)amends point (c) of Article 59 i making it explicit and bringing it in line with the existing regulatory standards that for the liquidity stress scenario qualifying liquid resources should be maintained instead of liquid resources and the stress scenario should consider the largest two participants instead of only the largest one.
(b)amends point (d) of Article 59 i clarifying that qualifying liquid resources should be maintained for the relevant currencies instead of for all currencies.
(c)amends points (e) of Article 59 i, clarifying that in case prearranged funding arrangements are used, these should be highly reliable. It also makes explicit that when similar arrangements to committed arrangements are used these should be held against the same standard of highly reliable and held with only creditworthy credit institutions.
(d)amends point (i) of Article 59 i clarifying that a CSD can convert into cash, instead of ‘liquidate’, any collateral provided by the defaulting client, and that, where non-committed arrangements are used, a CSD should be able to establish that any associated potential risks have been identified and mitigated. The objective is to allow uncommitted arrangements on the condition that a comprehensive framework is in place.
(e)inserts a new point (k) in Article 59 i to make more explicit that CSDs should cover relevant risks in their risk management and prudential frameworks, including relevant netting arrangements. This should ensure that credit and liquidity risks in relation to netting arrangements are properly managed by CSDs. This requirement should be further clarified in the existing RTS developed by the EBA in accordance with Article 59(5).
Point (a) of Article 1 i inserts a new subparagraph in Article 17(2) of CSDR in order to allow a competent authority, where an applicant CSD does not comply with all requirements of CSDR at the time of application but can be reasonably assumed that it will do so when it will actually launch its activities, to grant the authorisation to that CSD subject to the condition that the CSD has all necessary arrangements in place to comply with CSDR when it actually launches its activities.
Article 1(11) inserts a new paragraph 3a in article 27 of CSDR in order to clarify the meaning of the term ‘independent member of the management body’ in the context of that article.
Article 1(12) amends paragraph 3 of Article 28 of CSDR in order to clarify and ensure the consistency of interpretation of the notion of ‘service level’, by adding a list of examples of the topics that it should cover.
Article 1(32) amends Article 36 of CSDR with a view to clarify that CSDs should not only reduce the risks associated with the safekeeping and settlement of transactions in securities, but should seek to minimise them. The term ‘reduce’ is therefore replaced by ‘minimise’.
Article 1(16) amends Article 52(1) of CSDR in order to ensure that a receiving CSD will not unnecessarily delay the operation of an authorised link. The receiving CSD should therefore be required to implement the link within 12 months.
Article 1(24) introduces changes to Article 74 of CSDR in order to better adapt the periodicity of the reports that ESMA shall submit to the Commission.