In this new blog series, I’ll explore what Central Securities Depositories Regulation (CSDR) means to institutions and discuss its potential impacts and challenges.
Remember ‘slow and steady wins the race’? When it comes to financial regulation, that idea’s dead in the water. Gone are the days of gradual regulation. Welcome to the world of post-trade reporting in overlapping motion: before one regulation is even endorsed, another is introduced in parallel.
How did we get here?
Like its earlier cousins EMIR and SFTR, CSDR plays a pivotal role for post-trade harmonisation in the European Union (EU), with 2020 due to herald the implementation of a number of key standards.
Following the financial crisis of 2007 – 2008, the European Commission made it clear that no financial product and no market should remain without appropriate regulation and effective supervision. Although CSDs performed well during the crisis and were regulated extremely tightly under domestic law and international standards – particularly under the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMIs) – they were not regulated consistently across the EU. This need for a consistent regulatory approach to settlement systems and settlement processes was made even more pressing by the development of the Euro system’s Target-2-Securities (T2S) project. As a result, CSDR will impact financial market operations far and wide. And in addition to CSDs themselves, CSDR will impact wider financial market infrastructures, including clearing houses and trading venues.
What exactly are CSDs?
Central Securities Depositories (CSDs) are systemically important financial market infrastructures that support the issuance, safekeeping and settlement of securities. Central counterparties (CCPs) and CSDs are both part of the post-trade infrastructure but perform different roles.
- CCPs play a key role in managing counterparty credit risk, intervening between the trading layer (on the stock exchange, another trading platform or over-the-counter) and the settlement layer, on the basis that they act as buyer to every seller and as a seller to every buyer.
- CSDs, on the other hand, play a key role in operational risk, intervening at the final layer when ownership of the securities is transferred.
- In most Member States, there is only one CSD. Here in the UK, the CSD is Euroclear UK & Ireland Limited, which owns and operates CREST.
What does CSD regulation entail – and what are the timelines?
Like many post trade regulations before it, CSDR is one of many key regulations adopted in the aftermath of the financial crisis. The objective is to increase the safety and efficiency of securities settlement and the settlement infrastructures in the EU, to harmonise the different rules applicable to Central Securities Depositories (CSDs) in Europe and to establish an enhanced level playing field among these CSDs.
Apart from regulating EU CSDs, CSDR includes a number of elements that aim at harmonising EU practices related to immobilisation/dematerialisation of securities, the settlement cycle (T+2 now implemented in almost all EU countries) and measures around settlement discipline aiming at improving the settlement efficiency.
Where will the key impacts fall and what are the challenges?
CSDR will impact two main participants: EU member state CSDs and CSD customers themselves.
Implications for EU member state CSDs:
– new operating licence
– organisational requirements
– prudential requirements
Implications for CSD customers – new settlement discipline regime:
– T+2 settlement cycle
Implications for CSD customers – wider requirements:
– new account segregation rules
– daily reconciliation processes
– book of entry form of securities
– using LEI codes
Over the course of this blog series, we will look to explore the key challenges, obstacles and opportunities that CSDR presents, including:
– booking models
– settlements fails
– data obligations and their internal/external reporting requirements (for both CSDs and banks)
– collateral/liquidity risk/credit risk impacts and mitigations
– governance and risk assessments
– future state SFTR, CSDR – and what’s next on the horizon
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Note: This opinion piece was first published by Catalyst prior to the Sionic merger