Frequently Asked Questions - European Central Securities Depositories Regulation
The following information is based on Clearstream Banking’s own interpretations, shared here to support Clearstream Banking customers with their understanding of a specific EU regulation. This information does not constitute - nor is it intended to act as – any form of formal legal advice.
What is the European Central Securities Depositories Regulation (CSDR)?
The CSDR is one of the key regulations adopted in the aftermath of the financial crisis. Its objectives are 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.
What is the application scope of the CSDR?
The regulation applies to all CSDs in the EU, along with those of Iceland, Liechtenstein and Norway (as and when incorporated into the European Economic Treaty). Switzerland is also to be subject to certain CSDR provisions via bilateral agreement. No CSD grandfathering process is foreseen (whereby previously agreed rules and standards would apply); therefore, all CSDs will need to undergo an authorisation process to operate under the new regime.
The CSDR also introduces measures (in its Title II) that impact the entire market and the wider financial market infrastructures, including clearing houses and trading venues.
How does the CSDR impact Clearstream Banking customers?
The harmonisation and level playing field objectives of CSDR, coupled with TARGET2-Securities (T2S) should make cross-border settlement processing and safekeeping more efficient, secure and in the longer term hopefully less costly for Clearstream Banking customers. Regarding asset security, customer on-boarding frameworks and risk management protocols are addressed whereby CSDR requires CSDs to provide fair and open access to their services while being sure that their customers do not expose one another to undue risk.
CSD customers can expect to be directly impacted in several areas, notably by a new settlement discipline regime (Articles 6 and 7) and requirements for “internalised settlement” transactions (Article 9). The technical standards relating to the settlement discipline regime are subject to final review and adoption by the European Commission, expected in the coming months.
As currently drafted, the settlement discipline regime will introduce – among other features - penalty fees for failing transactions and forced mandatory buy-ins within a certain time period after the intended settlement date. Trading members are to be responsible for triggering a buy-in for non-Central Counterparty Clearing House (CCP)-cleared transactions (with the CCP responsible for executing the buy-in for CCP-cleared transactions).
Internalised settlement reporting requirements apply to CSD customers’ transactions that are settled outside securities settlement systems. As currently drafted in the CSDR, customers will have to report the volume and value of all such securities transactions on a quarterly basis to their local competent authorities.
Other CSDR areas directly impacting Clearstream Banking customers include:
- Book-entry form: Any issuer established in the EU that issues or has issued transferable securities which are admitted to trading or traded on trading venues, is required to arrange for such securities to be represented in book-entry form (Article 3);
- T+2 settlement cycle: Bringing all CSDs onto a harmonised model for completing settlement for on-exchange trades two days following the transaction date (Article 5);
- An obligation to (Article 38):
- Offer their own clients the choice between omnibus client segregation and individual client segregation;
- Inform their clients of the costs and risks associated with each option;
- Publicly disclose the levels of protection and the costs associated with the different levels of segregation.
- Use of Legal Entity Identifiers (LEIs): The European Securities and Markets Authority (ESMA) requires CSDs to use LEIs to help harmonise data collection and reporting across the value chain. Clearstream's sister CSD, LuxCSD's LEI service team can help customers both in obtaining LEIs for the first time and maintaining LEIs previously issued through LuxCSD.
How does the CSDR impact Clearstream Banking?
One way the CSDR is designed to achieve its objectives is by requiring all CSDs to apply for a universal CSD licence to operate. The licence sets out performance and operational criteria all CSDs must fulfil such as enhanced governance, capital requirements and transparency requirements.
In addition, key CSDR measures for CSDs include:
- The shortening of the settlement cycle to a T+2 settlement cycle;
- Certified securities to be transferred into book-entry form (from 1 January 2023 for transferable securities issued after that date and from 1 January 2025 for all transferable securities.)
- A harmonised set of rules for the authorisation, operation and governance of CSDs;
- A standardised set of rules for the provision of CSD services, including banking services to support settlement, subject to more stringent capital requirements for CSDs.
With regards to Clearstream Banking’s banking services, Clearstream Banking’s current CSD model of allowing banking services as well as CSD services from the same legal entity, the so-called “1+2 model”, has been endorsed to continue under the Regulation.
By preserving the integrated model for CSDs providing banking services, regulators have validated the efficient structure already used by CSDs such as Clearstream Banking, though with higher levels of capital for CSDs engaged in banking activities than for those who are not.
How does the CSDR impact the process for harmonised settlement under TARGET2-Securities (T2S)?
The main impact of the CSDR on the European harmonised settlement platform, TARGET2-Securities (T2S) will be related to record keeping, the new settlement discipline regime and buy-in procedures.
The European Central Bank has set-up an ad-hoc CSDR Task Force at the T2S Steering Group level to analyse the CSD-R requirements impacting T2S functionalities and to help ensure the timely and effective compliance of the T2S CSDs with CSDR.
The scope of the Task Force is broad with final recommendations and any subsequent technical change requests for the T2S platform expected shortly. One issue to be determined is the extent to which the CSDR settlement discipline requirements can be directly embedded into the T2S platform rather than building up a third-party entity for this purpose.
How does the CSDR impact wider market infrastructure and institutions?
In addition to CSDs, the CSDR will impact the operations of financial market infrastructures and trading venues. As currently drafted, the settlement discipline regime will introduce – among other features - penalty fees for failing transactions and forced mandatory buy-ins within a certain time period after the intended settlement date.
Trading parties will be responsible for triggering a buy-in for non-CCP-cleared transactions (with the CCP responsible for this for CCP-cleared transactions). However, details of this new regime are still subject to final adoption by the European Commission, due in the coming months.
What is the process and status of Clearstream Banking’s application for a CSDR licence?
In keeping with the deadline, Clearstream's CSDs filed their applications to their National Competent Authorities (NCAs) at the end of September 2017 to apply for the relevant CSDR operating licences.
The CSDR licence application process involved Clearstream Banking AG applying to the local regulators in Germany (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)/Deutsche Bundesbank (BuBa) and Clearstream Banking S.A. and LuxCSD applying to the local regulators in Luxembourg (Commission de Surveillance du Secteur Financier (CSSF)/Banque centrale du Luxembourg (BcL)).
In addition, an application was also filed by Clearstream Banking S.A. for the Bridge, which qualifies as an “interoperable link” as per the definition provided in the Regulation (Article 19).
The three Clearstream CSDs have since received initial feedback from their relevant local regulators and continue to remain in close dialogue with them throughout the remainder of the CSDR authorisation process.
While Clearstream’s CSDs continue to implement all measures to comply with CSDR, all of our existing operations continue to operate as normal under the current applicable legal and regulatory frameworks.
What are the next steps in the authorisation process?
From the moment the application is considered to be complete, the competent authority will share the information included in the application, to the designated relevant authorities, who will examine the application of the CSD. Each relevant authority is expected to inform the competent authority of its views within 3 months of the receipt of the information by the competent authority.
Authorisation is expected to be granted within 6 months from the submission of a complete application.
The following graphic provides a more detailed (indicative) timeline.
Where can I find more information?
For further information, please see our below attached Briefing Paper, Spotlight (for an executive summary) and video series with Clearstream's Co-CEO Phil Brown.
Clearstream Banking customers may also contact their Relationship Officer.
For further information, Clearstream Banking customers may contact their Relationship Officer.