30 May 2022 – Vanessa Galhardo-Galhetas

A CSD is a Central Securities Depository or a legal person that operates a securities settlement system and delivers services such as recording of securities in a book-entry system, providing and maintaining securities accounts and operating a securities settlement system. The CSD is part of the post-trade flow in the transactions of securities and ensures the delivery of securities to the buyer against the delivery of cash to the seller.

 CSD’s are regulated by Regulation (EU) No 909/2014, of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories (“CSDR”). CSD’s play a central role in the EU’s capital markets and financial system. Transactions settled by EU Central Securities Depositories in 2019 reached around €1,120 trillion.

Their key role in the financial system was recently illustrated in the context of EU sanctions against Russia. On 25 February 2022, the EU agreed that the holding of accounts of Russian clients by EU Central Securities Depositories was prohibited, highlighting the important role of CDS’s in the EU’s financial system.

Regulatory Framework

Regulation (EU) No 909/2014 provides that CSD’s are required to obtain an authorization from the competent authority in the Member State where it is established, before commencing activities. The authorization shall specify the services that are authorized to be provided. When extending activities, an authorization shall be needed for any additional core service or ancillary services permitted under, but not explicitly listed in section B of the CSDR. A notification is sufficient for other cases.

The European Commission has proposed simpler rules to make settlement in EU financial markets safer and more efficient

On 16^th March 2022, as part of its “2020 Capital Markets Union Action Plan”, the European Commission has published a proposal for a Regulation amending Regulation (EU) No 909/2014 as regards settlement discipline, cross-border provision of services, supervisory cooperation, provision of banking-type ancillary services and requirements for third-country central securities depositories.

Some noteworthy proposed changes are :

• Settlement discipline: a ‘two-step approach’ is introduced, under which mandatory buy-ins could become applicable if and when the penalties regime alone does not improve settlement fails in the European Union.
• Banking type ancillary services: conditions under which CSD’s can access banking services are adjusted, enabling them to offer settlement services for a broader range of currencies and offering businesses the opportunity to obtain financing from a larger pool of investors, including cross-border
• Passporting regime: the proposal simplifies passporting for CSD’s, through which they can operate across the EU with one single license. This has the potential advantage of reducing costs and duplicative procedures.
• Improved oversight of third-country CSD’s: the proposal ensures that supervisors have better information about the activities of third-country Central Securities Depositories in the EU. 

Next steps

The proposal will be submitted to the European Parliament and the Council for their consideration and adoption.