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 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.


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.


Guidelines on CSD participant defaults

In June, ECSDA commented on the draft ESMA guidelines on CSD participant default rules and procedures. These supervisory guidelines will help national regulators ensure compliance with the relevant provisions of the CSD Regulation.

ECSDA insisted that CSDs should not have to implement different rules on participant defaults than other operators of financial market infrastructures, such as payment and clearing systems. We also recommended that the guidelines should clearly distinguish between non-bank CSDs and CSDs authorised to provide banking type ancillary services. Finally, we pointed out that some of the “minimum requirements” specified in the guidelines may occasionally conflict with national law, which could prevent some CSDs from implementing the guidelines in full.

The final version of the ESMA guidelines is expected to be published in 2017.


CSDs and the future Eurosystem infrastructure

In 2015, the Eurosystem had announced its desire to improve the financial market infrastructure by the year 2020. One way to make the existing infrastructure more efficient would be for the Eurosystem to explore potential technical synergies between the TARGET2 (T2) payment system and the TARGET2-Securities (T2S) platform.

In April 2016, ECSDA took part in the first consultation on the future infrastructure for real-time gross settlement (RTGS) and issued a short response to outline three aspects worth considering from a CSD perspective, i.e.:

  • the need to assess the legal implications of further technical consolidation between T2 and T2S, as well as the impact on existing governance structures;
  • the importance of maintaining T2 and T2S as clearly distinct services, irrespective of any technical consolidation;
  • the need to address any concentration risk that would result from the consolidation of the T2 and T2S platforms.

ECSDA participates in the debate on the Capital Markets Union

In January, ECSDA responded to the Call for evidence of the European Commission on the EU regulatory framework for financial services. This large scale consultation was an opportunity for the industry to define priorities for the Capital Markets Union project (CMU), an action plan aimed at supporting growth and financial integration within the EU market.

ECSDA’s contribution included several suggestions for improving the quality of law-making in relation to post trade services. In particular, we recommended that:

  1. The European Commission should reconsider its approach on impact assessments to add a stronger focus on the impact of legislative proposals on economic growth and job creation.
  2. The “Level 1” and “Level 2” processes should be reviewed to avoid unnecessary technical details in binding legislation and to support more consistency between both levels.
  3. Law-makers should avoid overlapping requirements and the inconsistent use of terminology across sectorial pieces of EU law. The notions of “custody” and “safekeeping”, for example, appear in several pieces of EU law without always being clearly defined, which results in legal uncertainty as regards the applicability of AIFMD requirements to CSDs.
  4. The EU legislator should avoid imposing requirements on unregulated entities (such as transfer agents and registrars) indirectly via regulated entities (CSDs), especially when the regulated entities do not have the means to force third parties to comply with the applicable EU rules.
  5. Finally, EU law should allow for more calibration of the requirements as regards smaller and less systemically important infrastructures.

Some of the comments made by ECSDA were supported by several other respondents and were analysed in detail by the EU institutions.