Let’s start by untangling a couple acronyms. Could you explain the difference between SDR and CSDR?
SDR, the Settlement Discipline Regime, is actually encompassed within CSDR, the Central Securities Depository Regulation. It is based on Articles 6 and 7 of the Regulation as it currently stands.
CSDR is a regulation that established rules for CSDs in many respects from 2014. Articles 6 and 7, the Settlement Discipline Regime, however, were implemented on 1st February this year, apart from the buy-in regime, which has been delayed for further review by the European Commission.
Had there been any direct impact on behaviour before 1st February in anticipation of penalties?
To be honest, the details of the regulations were seen as quite complicated and cumbersome in some respects. The market was actually trying to clarify the details as far as possible. Meanwhile, CSDs have collectively created a taskforce to prepare a handbook that ensures we have common rules and regulations.
For several years, we’ve tried to educate market participants about the importance of being prepared as far as possible before the penalty regime came into force. Once the 1st of February came, the market to some extent was ready to try and limit settlement failures to avoid penalties.
Obviously there were teething problems, but the market is now getting used to dealing with this new regulation. The threat of penalties was in itself a good incentive to make the changes necessary to reduce settlement failures.
If you put aside SDR, which as you’ve pointed out is a small part of the overall regulation, what are the other aspects of CSDR that you expect to have a significant impact on the industry?
A lot of things have been impacted by CSDR, leaving aside the Settlement Discipline Regime. As I said, CSDR has been with us since 2014. At that time in Europe, we had a settlement period of T+3. CSDR mandated a move to T+2. The regulation also mandated a move to book entry securities, which is very important, given the existence of physical securities in some markets.
There were also questions related to a level playing field among CSDs. The aim was to open up that layer to competition, for which T2S is the tool. So, there is competition among CSDs in the European Union because of CSDR.
There are also questions related to supervision. Part of the regulators’ intention was to harmonise as far as possible supervision of CSDs among the different national competent authorities as well as procedure to receive a CSD licence in order to establish a level playing field. As ESMA puts it, the aim of CSDR is to harmonise certain aspects of the settlement cycle and settlement discipline and to provide a set of common requirements for CSDs operating securities settlement systems across the EU.
We had to go through a complicated procedure to receive this licence. And the regulation mandated that every year we have to review this licence to ensure that we comply with articles and the full set of procedures and rules established by CSDR.
I would say this has resulted in a number of improvements, but at the same time, as I said, CSDR is complicated and has been recognised as such by the authorities in some areas. We are now in the process of refining it through the CSDR Refit initiative.
And the impetus or the motivation for the Refit came from the market or from the regulators or both?
The proposal came from the regulators in March, but the market had been requesting certain changes.
You’re not a regulator, but in your view, are the consequences of CSDR so far what the regulators wanted the consequences to be?
Well, it is difficult to achieve 100% of the goals you have in mind, to be honest. I recognise that some of these goals have been achieved by this regulation; some others, less so. The regulators see the Refit as a way to achieve those goals not fully achieved with CSDR in its current form. This is not specific to CSDR, however. I would say it’s normal with any complicated set of regulations dealing with as many issues as CSDR.
If we think back to the original nine recommendations of the G30 in the late 1980s, the idea of competition amongst central depositories was quite foreign. What’s changed? Is it T2S that enables competition or requires competition amongst CSDs? What’s the benefit of competition amongst central utilities?
We could talk for hours about this. Before the Euro was created, many considered CSDs as utilities with a monopoly in each jurisdiction. When the euro was created, every country in the eurozone had a CSD. To combine these into one single CSD was not really feasible because most of them were private CSDs, some belonging to listed groups. The idea was that if CSDs were allowed to compete openly, then market forces sooner or later would reduce the number.
I wouldn’t say that reducing settlement time frames to T+2, which CSDR also did, was related directly to competition. T+2 was an attempt to reduce risks within the period between trading and settlement.
There used to be a very clear distinction between ICSDs and CSDs. Does that still exist? There were different operating models; the only thing that in common was that they had CSD in the title.
That’s another complicated question. Before the turn of the century, ICSDs were completely different animals from CSDs, but once Euroclear Bank bought Sicovam, the French CSD, and Deutsche Börse bought Cedel, now Clearstream, that began to change.
From then on, ICSDs were part of commercial groups that also included CSDs. With the comingling of ICSDs and CSDs, it was not really possible to maintain that they were separate animals. There are of course recognised differences, but the CSDR regulation is designed to apply to both. One specific example is in the provision of banking services.
So, taking all that into account, if you look five years out, assuming the Refit goes ahead and the regulation is enforced, what do you see as the landscape for CSDs across Europe?
Five years is quite a long way out, given the speed of changes we are facing in the economy and society. I think the Refit will definitely improve CSDR, but I don’t expect that it will bring a revolution in this business in the next five years. I expect the business to evolve towards greater harmonisation and more products inspired by the ECB’s actions. This is particularly so for European union CSDs, especially those in the Eurozone.
Beyond that, you never know what new technologies will bring, especially DLT, blockchain and crypto assets. From my perspective, these will be key technologies in the future, but possibly because I’m getting older and more conservative, I would say we’re not going to see a revolution in the next five years. Taking a longer-term perspective, say five to 10 years, their impact is likely to be felt more greatly, but you never know. As I say, I may be being too conservative.