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ECSDA comments on securities financing

After releasing a first paper in April, ECSDA issued a second paper on securities financing transactions (SFTs) in November commenting on the draft standards of the European Securities Markets Authority (ESMA) for SFT reporting.

The paper argues for a recognition of the specificities of CSD securities lending and borrowing services, and it suggests clarifications on reporting fields aimed at identifying the place of settlement and the counterparties involved, irrespective of whether SFTs settle in a CSD.

CSDs ask for more clarity on asset segregation rules

Since late 2015, contradictory regulatory messages have been issued on the extent to which CSD participants are expected to offer segregated accounts to their clients at CSD level. The European Securities Markets Authority (ESMA) has been working on this issue throughout 2016. ECSDA took part in several discussions on the issue, including by publishing a response to the ESMA call for evidence on segregation and custody services on 23 September.

CSDs are particularly concerned about overlapping and inconsistent requirements between the CSD Regulation and asset management legislation (AIFMD and UCITS). Up to now, asset management legislation was not deemed to apply to CSDs and a change of approach could have considerable detrimental consequences for cross-border CSD links, without any real benefits in terms of investor protection.

ECSDA therefore continues to defend the view that CSD services already authorised under the CSDR should be subject to AIFMD or UCITS rules.

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CSDs continue to consider Fintech developments

Throughout 2016, the impact of distributed ledger technology (DLT) on CSD settlement continued to be a hot topic. ECSDA members debated the issue on several occasions and, on 2 September, the association issued a short paper on DLT in response to an ESMA consultation.

The paper considers the importance of sound governance and oversight to allow DLT-based solutions to improve the way securities markets operate without endangering financial stability. It remarks that new types of market players using DLT will not always “fit” within the definitions of existing EU regulations such as the CSDR and EMIR and it insists that the performance of regulated services should abide by existing regulatory requirements.

Release of 2015 CSD data

On 29 August, ECSDA released the 2015 CSD Factbook, offering an up-to-date overview of the CSD landscape in Europe. The latest facts and figures show a steady increase in the value of securities held on CSD accounts since 2011 and a relatively stable number of securities deliveries compared to 2014.

In 2015, European CSDs collectively processed around 473 million delivery instructions. This number excludes MKK, the Turkish CSD, which alone processed 171 million instructions. In terms of value, these delivery instructions represented over EUR 1.15 quadrillion, slightly below 2014 settlement volumes.

The Factbook further includes information on CSDs’ corporate structures, client base and services.

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An updated overview of CSD links

On 29 July, ECSDA issued an updated version of its overview of CSD links, including a new matrix highlighting interconnections among ECSDA members.

Based on data collected in the first half of 2016, it appears that only 4 of the 41 ECSDA members have no links at all with other CSDs. Another 4 CSDs have no “outbound links” to other CSDs, but they allow foreign CSDs to access their domestic market (so-called “inbound links”). The remaining 33 CSDs have at least one link with another European CSD.

If we set aside the three CSDs which maintain an unusually high number of links (Euroclear Bank, Clearstream Banking Luxembourg and SIX SIS), European CSDs have on average 7 links to other CSDs. The number is even higher for CSDs established in the EU (8.5 links on average).

The majority of CSD links (44%) are direct links whereby a CSD is a direct participant in another CSD. Indirect links (whereby assets are held via an intermediary acting as sub-custodian) and relayed links (whereby assets are held via a “middle” CSD) account for 32% and 24% of the total number of links respectively.

Around 2/3 of CSD links allow for settlement on a delivery versus payment basis, meaning that not only securities but also cash transfers are possible through the link. Finally, 51% of CSD links are used on a daily basis by market participants.

Special report on the registration of securities holders

On 19 July, ECSDA published a special report on the registration of securities holders. The report describes existing registration requirements for shares and debt instruments in 38 European markets. It highlights the lack of harmonisation around the process of recording ownership in securities across Europe.

Among the key findings, it shows that registration is mandatory for shares in roughly half of the markets surveyed, whereas it is only mandatory for debt instruments in around 1/3 of the markets. Bearer securities, which do not require the maintenance of a register, are still commonplace. The below chart shows the proportion of registered securities across European markets, based on the market value of all of securities held at the CSD:

ECSDA’s research also shows that the link between registration and settlement is not the same in every market. Where beneficial owner accounts are maintained at the CSD, the register tends to be a direct reflection of CSD accounts, which means that the register is updated on a daily (or even intraday) basis to reflect the changes in CSD records following a securities transfer between accounts at the CSD. In other markets, the register is maintained separately from CSD accounts and may only be updated on an ad hoc basis, typically at the request of the issuer.

The report also looks at the role played by CSDs in the maintenance of the register. In more than half of European markets, the CSD acts as the sole or primary registrar, as illustrated in the following chart:

In other cases, either the CSD updates the register jointly with its participants (banks maintaining accounts on behalf of investors), or it does not play any direct role in updating the register.

Finally, the information items contained in the register are not harmonised and the report provides further details on the most frequently requested data.