Following an intervention by the European Central Bank’s TARGET2-Securities (T2S) team, the Central Securities Depositories Regulation is now being accorded a high priority in the European Council, according to an analysis of the regulation by the International Capital Market Association (ICMA).
The European Parliament’s Economic and Monetary Affairs (ECON) Committee voted on a package of amendments to the proposed CSDR on Feb. 4 2013. In the Council, little progress has been made, since the CSDR was not originally a priority for the Irish Presidency. The Irish Presidency (of the European Union) now intends to hold Council Working Groups in the later part of its Presidency.
ICMA’s quarterly report for the second quarter of 2013 highlights the key points of the European Central Securities Depositories Regulation (CSDR) in the European Parliament and Council and analyzes potential difficulties ahead. The CSDR sets the conditions for competition in the EU in securities settlement services. For the first time, it gives authorized settlement houses an EU-wide “passport” to offer services across the EU, so long as they are adequately capitalized and comply with safety rules.
The CSDR, which is expected to take effect in 2014, also harmonizes the settlement cycle to a maximum of two days following the trading day. It also provides for penalties on banks and brokers that fail to settle trades on time.
“While it may be desirable that agreement in Council will be reached before Lithuania assumes the EU Presidency on July 1 2013, this cannot be guaranteed. It seems that the CSDR is critical for the timely completion of the T2S project for a number of reasons, including the fact that the regulation includes provisions relating to the outsourcing of settlement to a public sector institution,” says ICMA.
The Eurosystem is developing T2S with the aim of delivering a single settlement engine for Europe. “It adds that, in this context, the ECB strongly supports the proposed regulation, which will enhance the legal and operational conditions for cross-border settlement in the EU in general and in T2S in particular. In this respect, the ECB recommends that the proposed Regulation, and the corresponding implementing acts, be adopted prior to the launch of T2S planned for June 2015,” says ICMA.
The ECB welcomes the exemption made for situations where a CSD outsources certain of its operations to public entities, ICMA notes, provided that an appropriate legal, regulatory and operational framework governs this arrangement, which takes into account that such outsourcing may result in significant benefits for the economy, contributes to the performance of the CSD. “The ECB notes that this exemption would cover the current T2S project undertaken by the Eurosystem.”
A potentially difficult question, which will arise in Council discussions on CSDR relates to the access and interoperability provisions in CSDR, says ICMA. “While the EU-wide “passport” is relatively uncontroversial, the provisions enabling competition between CSDs may be difficult to settle, particularly given the connection to the policy question of how best to deal with the ICSD structure.
The ECON Committee of the European Parliament has adopted the report from Raporteur Kay Swinburne as amended. It provides three alternatives for the ICSDs (and the small number of domestic CSDs which provide ancillary banking services): they can designate a panel of one or more banks that are not part of the group to provide banking services; they can continue to provide banking services in the settlement house, or from a separately capitalized entity in the same group.
It remains to be seen whether this approach, which was the fruit of a compromise in the Parliament, will find favor with the Council, says ICMA. In the case of a compromise, this approach to the question will nonetheless require changes to existing practices, says ICMA. “Further changes to existing practices will be needed, most obviously in relation to the settlement cycle and settlement discipline.”