While the European Commission is satisfied that the Central Securities Depositories Regulation (CSDR) is broadly achieving its objectives and that substantive changes are not necessary right now, it has proposed some targeted changes with a view to reducing red tape and promoting cross-border activity and competition. This briefing looks at these proposals, and at the approaching January 2023 implementation date for Article 3 of the existing CSDR.
The Commission’s Proposals
The Commission was tasked with preparing a report on how the CSDR is functioning by mid-2019, and a review of the CSDR was a key deliverable under the Commission’s 2020 Capital Markets Union Action Plan.
The Commission eventually published its Report in July 2021, following a short consultation. That Report concluded that the CSDR was broadly achieving its objectives and that wide-ranging changes would be premature, but suggested some areas in which targeted changes could be made.
That Report also formed the basis of the Commission’s recent targeted proposals (and those proposals also took account of ESMA’s CSDR-related reports on internalised settlement (November 2020), the cross-border provision of services by central securities depositories (CSDs) and the handling of applications to provide notary and central maintenance services cross-border (November 2020), the provision of banking-type ancillary services under CSDR (July 2021) and the use of FinTech by CSDs (August 2021)).
Commenting on the Commission’s recent proposals, Mairéad McGuinness, European Commissioner for Financial Stability, Financial Services and Capital Markets Union observed that:
“…by reducing red tape for Central Securities Depositories that want to expand their activities cross-border, we are creating a truly single market for securities settlement in the EU, and promoting competition in the market. This contributes to our ultimate goal of building up the Capital Markets Union.”
A high-level overview of the Commission’s proposals is below. The shape of these proposals may change slightly as they are considered by the EU Council and the European Parliament in the coming months (and we will issue further updates as the proposals progress).
It is important to remember that the CSDR is closely linked with a number of other EU initiatives, most notably the Capital Markets Union and the Digital Finance Package. The Commission’s CSDR proposals have been made in the context of the overall policy aims of facilitating capital flows, stimulating innovation, and further developing the EU’s financial market infrastructures, but the Commission decided not to address digitalisation and the impact of new technologies on post-trade services in those proposals. That decision was taken in light of feedback received from stakeholders that they would prefer to see how the proposal for a pilot regime for market infrastructures based on distributed ledger technology (DLT) works in practice first. This aligns with ESMA’s proposals regarding the use of FinTech by CSDs – changes in that area are unlikely to be proposed before EU authorities and stakeholders amass practical experience of the DLT pilot regime (which is close to be finalised, with the European Parliament publishing the most recent text of that proposal on 30 March 2022).
High-Level Overview of Commission Proposals
|Summary of Commission Proposal|
|Passporting||Simplifying the current passporting framework with a view to boosting competition, reducing passporting costs, and increasing cross-border activity.
At the moment, if an EU CSD wants to passport its services into another EU Member State, more input is required of the host Member State competent authority (CA) than is the case under passporting provisions in other EU financial services legislation.
The Commission has proposed that shorter time-frames apply to planned passporting, that only a notification will be needed to the CA in the host Member State, and that the host Member State CA will not be able to refuse the passport.
The Commission expects these proposals to reduce the initial costs to a CSD of passporting into another EU Member State by up to 75%.
|Cooperation||Establishment of colleges of supervisors.
Following feedback that cooperation between CAs is not standardised, and that supervisory convergence levels vary considerably, the Commission has proposed the establishment of colleges of supervisors (primarily for information-sharing purposes) where a CSD is passporting into other EU Member States and is part of a corporate group comprising two or more CSDs authorised in at least two Member States.
Under the proposals, the home Member State CA will maintain supervisory powers, but would take greater account of the other CAs participating in the relevant college.
This will be particularly relevant where a CSD is part of a larger group which includes one or more other CSDs to whom it outsources key functions – the Commission noted that the supervisory approaches of CAs still focus on individual CSDs in those circumstances.
|Banking-type ancillary services||Facilitate access.
The Commission proposes to:
|Settlement Discipline||Clarify aspects of the settlement discipline framework.
The reporting requirements for settlement fails, and the cash penalties regime, are proceeding as planned (with effect from 1 February 2022).
The application of the mandatory buy-in regime was delayed (informally, following industry lobbing and a December 2021 ‘no action’ letter from ESMA).
Under the Commission’s new proposals, mandatory buy-ins will not apply for the time being, but will not be removed from the settlement discipline framework. Instead, the Commission will have an option to re-introduce mandatory buy-ins via an implementing act in certain circumstances (for example, if the rate of settlement failures does not improve, and if settlement efficiency does not reach “appropriate levels”).
It is not yet clear how this proposal will be received in practice. AFME has queried how the Commission will assess whether “appropriate levels” of settlement efficiency have been reached, and still believes that mandatory buy-ins risk undermining “the attractiveness and competitiveness of EU capital markets”.
The Commission has also proposed a pass-on mechanism whereby the only addressee of the claim will be the original failing participant. Each participant in the transaction chain will pass-on a buy-in notification to the failing participant such that only one buy-in is necessary to resolve the whole chain of transactions.
|Grandfathering||End-dates to be included.
The Commission has proposed the inclusion of end-dates for the grandfathering provisions from which EU and third-country CSDs have benefitted since the CSDR came into force.
Under the proposals, grandfathering will end for EU CSDs one year from the entry into force of the amended CSDR. For third country CSDs, grandfathering will end three years after the amended CSDR comes into force.
Article 3 of the CSDR – Countdown to January 2023
Article 3 of the existing CSDR will require issuers of securities which are admitted to trading or traded on trading venues in the EEA to arrange for such securities to be represented in book-entry form. Under the CSDR, this requirement must be applied to any new securities from January 2023 and to existing securities from January 2025.
The representation of the securities in book-entry form may be achieved “subsequent to a direct issuance in dematerialised form” or by immobilisation through a CSD. Accordingly, this requirement will only be relevant to issuers whose securities not are already held through a CSD (Euroclear Bank or Clearstream Banking Luxembourg) and will be of most relevance to transactions where noteholders hold definitive paper certificates.
As the 2023 implementation date fast approaches, some key questions which arise for issuers include:
- Will there be any change to Irish company law as a result of Article 3?
- Will the 2025 deadline be brought forward for Irish issuers?
- What steps must issuers take to ensure compliance with this requirement?
It remains to be seen whether any changes will be made to the Irish Companies Act 2014 to reflect Article 3 of the CSDR, and there is no market consensus yet on whether “direct issuance in dematerialised form” requires issuers to engage with a CSD or whether issuers can rely on the existence of an electronic register maintained by a third party agent when issuing non-certificated securities. We expect to see further developments in this regard over the course of 2022, and will keep our clients and contacts updated on both Article 3 (with a particular focus on the questions listed above), and the progress of the Commission’s proposed targeted changes to the CSDR.