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Enhancing safety of European financial markets: common rules for Central Securities Depositories (CSDs) and securities settlement
As part of its work in creating a more transparent and stable financial system, the European Commission Services have this week launched a consultation on Central Securities Depositories (CSDs) and on the harmonisation of certain aspects of securities settlement in the European Union.
The purpose of this consultation is to gather input from all stakeholders in order to inform the legislative proposals due in June 2011. The deadline for replies is 1 March 2011.
CSDs are systemically important infrastructures in modern securities markets. They perform crucial services that allow at a minimum the registration, safekeeping, settlement of securities in exchange for cash and efficient processing of securities transactions in financial markets. While securities markets traditionally relied on the physical exchange of paper, CSDs now assume a critical role to guarantee a safe and efficient transfer of securities that exist to a large extent only in book entry form. In many ways, they are a central point of reference for an entire market. Given the systemic importance of CSDs, there is a strong need for an appropriate regulatory framework for CSDs.
The initiative is an important part of the Commission's agenda to enhance the safety and soundness of the financial system. Together with the proposal for a Regulation on "OTC derivatives, central counterparties and trade repositories" (EMIR) adopted by the European Commission on 15th September 2010 and the Markets in Financial Instruments Directive (MiFID, currently under review), it will form a framework in which systemically important securities infrastructures (trading venues, central counterparties, trade repositories and central securities depositories) are subject to common rules on a European level.
This need for an appropriate regulatory framework for CSDs is agreed internationally. In its meeting of 20 October 2010, the Financial Stability Board re-iterated the call for updated standards for more robust core market infrastructures and asked for the revision and enhancement of existing standards for financial market infrastructures. Recommendations have been adopted by Central Banks and Securities Regulators both at global1 and at European2 level. While these rules are important, they remain of a high-level and non binding nature.
Due to an increase in cross border investment over the last years, the European Commission considers that the time has come to install a common and binding regulatory framework for CSDs on a European level.
Historically, securities markets in the European Union have developed along national lines. In 2001 and 2003, a High-level expert group chaired by Prof. Giovannini identified 15 barriers to an efficient market for services that are rendered after a trade has taken place (post trading) in the European Union. The report pointed out a number of barriers that render the provision of cross-border post trading services (whether performed by CSDs or other market participants) more costly and less safe than domestic transactions. These barriers have not yet been fully removed. In order to increase the safety and efficiency of the internal market for securities transactions, the European Commission intends to introduce harmonisation of key aspects of securities settlement.
Key elements of the consultation:Common regulatory framework for CSDs. CSDs in the European Union should operate under a common regulatory framework that ensures the robustness of their operation. Such a framework should include common definitions of CSD services, common rules on authorisation on ongoing supervision of CSDs, high prudential standards for CSDs and rules on access and interoperability. The Consultation seeks stakeholders' comments on the proper design of such a common regulatory structure.
Harmonisation of key aspects of securities settlement. The consultation also asks what measures could be taken to address concerns relating to the well-functioning of securities settlement. It seeks stakeholders' input on how to improve settlement discipline, i.e. that a transaction actually settles on the intended settlement date. This question is linked to the Proposal for a short selling regulation adopted by the Commission of 15 September 2010 which already foresees specific measures arising from patterns that factor in late settlement into a trading strategy. Another important aspect of the consultation concerns the harmonisation of settlement periods, i.e. the time between the conclusion of a transaction and settlement. Currently, European securities markets do not follow a common settlement period (e.g. for equities, regulated markets either settle two days or three days after trade (T+2 or T+3)).
The Commission will analyse the responses to the Consultation and bring forward an appropriate legislative proposal in the Summer of 2011.
1 : Cf. the CPSS/IOSCO Recommendations for Securities Settlement Systems of November 2001, currently under review.
2 : Cf. the ESCB/CESR Recommendations for Securities Settlement Systems in the European Union of May 2009.