What is CSDR?
CSDR refers to the European regulation on improving securities settlement in the EU and on its central securities depositories. It aims to:
- Increase the safety and efficiency of securities settlement and settlement infrastructures in the EU
- Harmonize the way CSDs across EU operate
- Enhance the legal and operational conditions for cross-border settlement
CSDR affects market participants directly since it provides for harmonisation of certain aspects of the settlement cycle and covers, among others, a new and very wide-ranging settlement discipline. It also indirectly impacts CSD participants as a result of the requirements imposed on CSDs themselves.
What are the CSDR main provisions?
CSDR provides for:
- Shorter settlement periods
- Settlement discipline measures (mandatory cash penalties and ‘buy-ins’ for settlement fails)
- An obligation regarding dematerialisation for most securities
- Strict prudential and conduct of business rules for CSDs
- Strict access rights to CSD services
- Increased prudential and supervisory requirements for CSDs and other institutions providing banking services ancillary to securities settlement
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When will CSDR provisions be implemented?
Under CSDR, each European CSD, including the ICSDs, needed to apply to their local competent authority for reauthorisation by the end of September 2017. The competent authorities have 30 days to assess the completeness of the application. CSDs are re-authorised up to 6 months after their application was deemed complete by their competent regulatory authority.
Areas of impact - as soon as a CSD is re-authorised (earliest possible date: Q1 2018)
Record keeping and reconciliation
According to article 29, a CSD shall maintain, for a period of at least 10 years, all its records on the services and activities, so as to enable the competent authority to monitor the compliance with the requirements under this regulation.
- CSD participants must reconcile their records with the information received from the CSD on a daily basis.
- A CSD may need to suspend an ISIN for settlement in case of unresolved reconciliation error. While we expect this situation to be exceptional, market participants need to be prepared when impacted by such suspension.
In addition, ESMA has published the relevant technical standards (article 18 and article 53-58), which include:
- Transactions/settlement instructions records that a CSD needs to maintain, including:
- Type of settlement instructions: free of payment (FOP), versus payment (DVP and RVP) and payment free of delivery (PFOD)
- Type of transaction (purchases and sales, collateral, SLAB, repo and other)
- All market participants will have to systematically provide these transactions details. It will require new operational processes for many financial institutions, in order to avoid huge impacts on reporting and on settlement penalties and buy-ins.
Protection of securities of participants and those of their participants depending on client access to markets
Article 38 places new obligations on a CSD’s participants (such as BNP Paribas Securities Services for our clients in an agent bank model or for a client itself in an account operator model) in order to
- Offer their clients at least the choice between omnibus segregation and individual client segregation
- And inform them of the costs, level of protection and risks associated with each option
According to Article 45, CSDs have obligations to monitor operational risks that may be posed by key participants. They are therefore required to identify their key participants and, potentially, the underlying clients of those key participants.
Areas of impact - as of July 2019:
Internalised Settlement Reporting
Article 9 requires the settlement “internaliser” to 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.
Source: Association for Financial Markets in Europe. AFME response on internalised reporting: here
Impacts applicable two years after publication of the technical standards (currently estimated as of Q1 2018)
Settlement discipline regime
CSDR requires participants to settle their transactions on intended settlement date and requires CSDs to take measures to:
- Encourage the timely settlement of transactions by its participants
- Monitor settlement fails and provide regular reporting to the competent authorities
- Prevent and address settlement fails through mandatory cash penalties and buy-in mechanism
From a practical point of view, it means a mandatory settlement regime across a wide range of securities.
CSDs will implement a penalty mechanism for settlement fails which will serve as a deterrent for participants that cause settlement fails. Cash penalties will be calculated on a daily basis. The calculation will be done, for each business day a transaction fails to settle after its intended settlement date, up to the moment of the actual settlement date or until the end of the buy-in process.
CSDR imposes a mandatory buy-in process on any financial instrument which has not been delivered within a set period of the intended settlement date. This period depends on the asset type and liquidity of the relevant financial instrument i.e. up to four days for liquid securities, seven days for illiquid securities and up to fifteen days for transactions on SME growth markets.
CSDs will not have an active role in the buy-in execution. The exclusive responsibility for buy-ins remains at the trading level and with the trading parties or the central counterparties (CCPs) in case of cleared trades. The CSD will report buy-ins based on information received from the relevant trading venue or CCPs.
BNP Paribas is closely monitoring the CSD re-authorisation with the European CSDs and participating to the main market associations in all the countries impacted by the regulation. Our local experts are analysing the main features of the regulation and adapting our services to minimise the impacts on our clients.
We will be able to provide you with additional insights once the ESMA guidelines on internalised settlement and the final version of the Technical Standards on Settlement Discipline are published (not before Q1 2018).
This paper describes the main features of CSDR and the impact on our clients as we see them in November 2017. It reflects our general interpretation of the regulation, and should not be relied on as a compliance, or formal implementation.
Central Securities Depositories Regulation (CSDR) - regulation memo