Storm-7 Consulting Central Securities Depositories Training Course (2018)

The CSDR Operational Framework – PART I

TRAINING COURSE CSDR 2018

OUTLINE ▪ The Central Securities Depositories Regulation (CSDR) Operational Framework.

▪ Measures to Prevent Settlement Fails and Measures to Address Settlement Fails.

▪ Central Securities Depositories (CSDs).

▪ Supervision of CSDs. ▪ Access to and between CSDs and Market Infrastructures.

▪ The Operations of CDSs in Host Member States.

▪ Third Countries.

▪ Provision of Banking-type Ancillary Services for CSD Participants.

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Section 1: The Central Securities Depositories Regulation (CSDR) Operational Framework (Securities Settlement, Settlement Periods, Settlement Discipline, Settlement Internalisers).

Section 2: Measures to Prevent Settlement Fails and Measures to Address Settlement Fails (Automated Matching, Partial Settlement, Hold and Release Mechanism, Cash Penalties Mechanism, Buy-In Process).

Section 3: Central Securities Depositories (CSDs) (Authorisation and Supervision, Competent Authorities, Emergency Situations, Authorisation of CSDs, Withdrawal of Authorisation).

Section 4: Supervision of CSDs. Section 5: Access to and between CSDs and Market Infrastructures.

Section 6: The Operations of CDSs in Host Member States.

Section 7: Third Countries.

Section 8: Provision of Banking-type Ancillary Services for CSD Participants.

The Central Securities Depositories Regulation (CSDR) Operational Framework SECTION 1 6

CSDR and CSDs Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012 (Central Securities Depositories Regulation) (CSDR).

The CSDR sets out uniform requirements for the settlement of Financial Instruments in the Union, and rules on the organisation and conduct of Central Securities Depositories (CSDs) in order to promote safe, efficient and smooth settlement throughout the European Union (EU).

A CSD is defined as a “legal person that operates a Securities Settlement System (Settlement Service) AND provides at least one other Core Service.

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CSDR ANNEX SECTION A Core Services Core Service

Description

Notary Service

Initial recording of securities in a book-entry system.

Central Maintenance Service Providing and maintaining securities at the top tier level.

Settlement Service

Operating a securities settlement system.

Third-Country (TC) CSD (TCCSD) is defined as a legal entity established in a third country that provides a similar service to the CSD Core Service (Settlement Service) AND performs at least one other CSD Core Service.

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CSDR ANNEX SECTION C Ancillary Services These are Banking-Type Ancillary Services directly related to Core Services or Ancillary Services listed in CSDR ANNEX Section A or B.

Core Service

Description

Cash Accounts and Deposits

Providing cash accounts to, and accepting deposits from, Participants in a SSS and holders of securities accounts (within the meaning of Point 1 of Annex I to Directive 2013/36/EU).

Cash Credit for Reimbursement

Providing cash credit for reimbursement no later than the following business day, cash lending to pre-finance corporate actions and lending securities to holders of securities accounts (within the meaning of Point 2 of Annex I to Directive 2013/36/EU).

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CSDR ANNEX SECTION C Ancillary Services (cont) Core Service

Description

Payment Services

Payment services involving processing of cash and foreign exchange transactions (within the meaning of Point 4 of Annex I to Directive 2013/36/EU).

Guarantees and Commitments

Guarantees and Commitments related to securities lending and borrowing (within the meaning of Point 6 of Annex I to Directive 2013/36/EU).

Treasury Activities

Treasury Activities involving foreign exchange and Transferable Securities related to managing Participants’ long balances (within the meaning of Points 7(b) and (e) of Annex I to Directive 2013/36/EU).

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European Central Securities Depositories Association Full Members No.

Name

Country

Website

1.

OeKB CSD

Austria

www.oekb-csd.at

2.

Euroclear Bank

Belgium

www.euroclear.com

3.

Euroclear Belgium

Belgium

www.euroclear.com

4.

Central Depository AD (CDAD)

Bulgaria

www.csd-bg.bg

5.

Central Depository & Clearing Company Inc. (SKDD)

Croatia

www.skdd.hr

6.

Cyprus Stock Exchange (CSE)

Cyprus

www.cse.com.cy

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European Central Securities Depositories Association Full Members No.

Name

Country

Website

7.

Central Securities Depository Prague (CSD Prague)

Czech Republic

www.centralnidepozitar.cz

8.

VP Securities

Denmark

www.vp.dk

9.

Euroclear Finland

Finland

www.euroclear.com

10.

Euroclear France

France

www.euroclear.com

11.

Clearstream Banking AG

Germany

www.clearstream.com

12.

ATHEXCSD

Greece

www.athexgroup.gr/athexcsd

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European Central Securities Depositories Association Full Members No.

Name

Country

Website

13.

KELER Ltd

Hungary

www.keler.hu

14.

Monte Titoli

Italy

www.montetitoli.it

15.

Nasdaq CSD SE

Latvia

www.nasdaqbaltic.com

16.

Clearstream International

Luxembourg

www.clearstream.com

17.

LuxCSD

Luxembourg

www.luxcsd.com

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European Central Securities Depositories Association Full Members No.

Name

Country

Website

18.

Malta Stock Exchange (MSE)

Malta

www.borzamalta.com.mt

19.

Central Securities Depository and Clearing Company of Montenegro (CSD&CC – Montenegro)

Montenegro www.cda.me

20.

Euroclear Nederland

Netherlands www.euroclear.com

21.

The Norwegian Central Securities Depository (VPS)

Norway

www.vps.no

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European Central Securities Depositories Association Full Members No.

Name

Country

Website

22.

The Central Securities Depository of Poland Poland (KDPW)

www.kdpw.eu

23.

Interbolsa

Portugal

www.interbolsa.pt

24.

Depozitarul Central

Romania

www.roclear.eu

25.

Central Securities Depository and Clearing House (CR HoV)

Serbia

www.crhov.rs

26.

Central Securities Depository of the Slovak Republic (CDCP SR)

Slovakia

www.cdcp.sk

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European Central Securities Depositories Association Full Members No.

Name

Country

Website

27.

KDD Central Securities Clearing Corporation (KDD)

Slovenia

www.kdd.si

28.

Iberclear

Spain

www.iberclear.es

29.

Euroclear Sweden

Sweden

www.euroclear.com

30.

SIX SIS Ltd

Switzerland

www.six-sis.com

31.

Central Securities Depository of Turkey (MKK)

Turkey

www.mkk.com.tr

32.

Euroclear UK & Ireland

United Kingdom

www.euroclear.com

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Securities Settlement Any Issuer established in the Union that issues or has issued Transferable Securities (TS) which are admitted to trading, or traded on Trading Venues, shall arrange for such securities to be represented in Book Entry Form (BEF) as Immobilisation to a direct issuance in dematerialised form.

Transferable Securities means transferable securities as defined in point (44) of Article 4(1) of Directive 2014/65/EU. 17

Securities Settlement (cont) This means those classes of securities which are negotiable on the capital market, with the exception of instruments of payment, such as: (a) shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares; (b) bonds or other forms of securitised debt, including depositary receipts in respect of such securities; (c) any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures; 18

Securities Settlement (cont) Immobilisation means the act of concentrating the location of physical securities in a CSD in a way that enables subsequent transfers to be made by book entry.

Dematerialised Form means the fact that Financial Instruments exist only as book entry records.

Where a transaction in TS takes place on a Trading Venue the relevant securities shall be recorded in BEF in a CSD on or before the intended settlement date, UNLESS they have already been so recorded.

Intended Settlement Date means the date that is entered into the Securities Settlement System (SSS) as the settlement dated and on which the parties to a securities transaction agree that settlement is to take place.

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Securities Settlement (cont) SSS means a formal arrangement: (1) between three or more participants, without counting a possible settlement agent, a possible central counterparty (CCP), a possible clearing house or a possible indirect participant, with common rules and standardised arrangements for the execution of transfer orders between the participants; (2) governed by the law of a Member State chosen by the participants; the participants may, however, only choose the law of a Member State in which at least one of them has its head office; and (3) designated, without prejudice to other more stringent condition of general application laid down by national law, as a system and notified to the Commission by the Member State whose law is applicable, after that Member State is satisfied as to the adequacy of the rules of the system.

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Securities Settlement (cont) CCP means an entity which is interposed between the institutions in a system and which acts as the exclusive counterparty of these institutions with regard to their transfer orders.

Settlement Agent means an entity providing to institutions an/or a CCP participating in systems, settlement accounts through which transfer orders within such systems are settled and, as the case may be, extending credit to those institutions and/or CCPs for settlement purposes.

Clearing House means an entity responsible for the calculation of the net positions of institutions, a possible CCP and/or a possible Settlement Agent.

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Securities Settlement (cont) Participant means an institution, a Settlement Agent, or a Clearing House.

CCP,

a

Indirect Participant means a credit institution (as defined in the first indent of Article 1 of Directive 77/780/EEC, including the institutions set out in the list in Article 2(2)), with a contractual relationship with an institution participating in a system executing transfer orders, which enables the credit institution to pass transfer orders through the system.

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Securities Settlement (cont) Transfer Order means: (1) any instruction by a participant to place at the disposal of the recipient an amount of money by means of a book entry on the accounts of a credit institution, a central bank, or Settlement Agent, or any instruction which results in the assumption or discharge of a payment obligation as defined by the rules of the system; (2) an instruction by a participant to transfer the title to, or interest in, a security or securities by means of a book entry on a register or otherwise.

Where TS are transferred following a Financial Collateral Arrangement (FCoA) those securities shall be recorded in BEF in a CSD on or before the intended settlement date, UNLESS they have already been so recorded.

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Securities Settlement (cont) FCoA means a Title Transfer Financial Collateral Arrangement (TTFCoA) or a Security Financial Collateral Arrangement (SFCoA) whether or not these are covered by a master agreement or general terms and conditions.

TTFCoA means an arrangement, including repurchase agreements, under which a collateral provider transfers full ownership of financial collateral to a collateral taker for the purpose of securing or otherwise covering the performance of relevant financial obligations.

SFCOA means an arrangement under which a collateral provider provides financial collateral by way of security in favour of, or to, a collateral taker, and where the full ownership of the financial collateral remains with the collateral provider when the security right is established.

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Securities Fails Historically, settlement fails have been shown to occur episodically, concentrated in certain periods of time or in certain Financial Instruments.

Therefore, fails are often driven by market conditions. When settlement chains are long they are vulnerable to disruption, since a single fail can break the chain.

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Securities Fails (cont) Examples of conditions that may lead to fails: (1) when macroeconomic news is released; (2) when there is high demand to borrow a Financial Instrument; (3) when the cost of borrowing a Financial Instrument is high; (4) miscommunication of buyer and seller; (5) operational problems;

(6) seller is unable to deliver because of a failure to receive the same securities in settlement of an unrelated purchase; (7) a market participant may sell a security it does not own and have insufficient incentive to borrow it to make delivery (e.g. naked short selling).

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Securities Fails (cont) Andy Hill from ICMA (Quarterly Report, 6 April 2017) comments: The regulatory initiative is a key component of the CSDR’s framework for settlement discipline, as outlined in Article 7 of the 2014 CSDR, alongside the requirement for CSDs and CCPs to monitor and report participants that consistently systematically fail transactions (“name and shame”), and a mandatory buy-in regime. The objective of the cash penalties regime is to create a standardized, harmonized penalty regime across the EU to be applied in the event of settlement fails.

The regulatory initiative is a key component of the CSDR’s framework for settlement discipline, as outlined in Article 7 of the 2014 CSDR, alongside the requirement for CSDs and CCPs to monitor and report participants that consistently systematically fail transactions (“name and shame”), and a mandatory buy-in regime. The objective of the cash penalties regime is to create a standardized, harmonized penalty regime across the EU to be applied in the event of settlement fails.

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Securities Fails (cont) European Central Bank (ECB) (2011) report into settlement fails: The disclosure policy on fails varies across the EU in terms of which authority receives the reports and how often. In some cases NCBs, the securities regulators and/or the boards of the SSSs are the recipients of fails reports, while in other cases only the individual participants concerned or the user groups are informed of such failures. In a limited number of cases the general public may also be informed via publication of fails statistics. The disclosure frequency may be per settlement cycle, periodic (e.g. daily/monthly/yearly) or ad hoc‌ It is very difficult to draw comparable conclusions with respect to average fail rates, given that EU SSSs do not apply a uniform methodology.

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Settlement Periods Any participant in a SSS that settles in that system on its own account or on behalf of a third party transactions in: (1) TS; (2) Money-Market Instruments (MMIs); (3) Units in Collective Investment Undertakings (UCITS); and (4) Emission Allowances (EAs);

must settle such transactions on the intended settlement date.

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Settlement Periods (cont) For any of these types of transactions which are executed on Trading Venues, the intended settlement date shall be no later than the second business day after the trading takes place (T+2).

This requirement does not apply to: (1) transactions which are privately negotiated but executed on a Trading Venue; (2) transactions which are executed bilaterally but reported to a Trading Venue; (3) to the first transaction where the TS are subject to initial recording in BEF. 30

Settlement Discipline The Regulatory Technical Standards (RTS) on a Settlement Discipline Regime (SDR) will come into force on 13th September 2020.

These set out measures to prevent settlement fails, as well as measures to address these fails. These predominantly include cash penalty mechanisms for each day securities settlement fails, and a mandatory Buy-in process to ensure the securities are delivered to the “buyer�.

These measures present a substantial implementation challenge, in particular to firms with significant transaction volumes and a high settlement fail rate, due to the potential impact on Profit & Loss (P&L).

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SDR Standing Group An SDR Standing Group (SDRSG) has been set up by the Bank of England, Financial Conduct Authority, and Central Bank of Ireland in order to bring industry together to help identify the keys risks and issues involved.

Composed of a representative body of infrastructure providers and market participants, it will help coordinate efforts ensure that the market works together effectively to deliver a smooth, timely implementation of the regime.

The work of the group has been structured to examine the regime from the perspective of the three layers of infrastructure responsible for administering the regime. This work is led by a trading venues taskforce, a central clearing taskforce, and a settlement taskforce.

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SDR Standing Group (cont) These taskforces are headed by sponsors from the LSE, LCH, and EUI, with a remit to draw widely on all available knowledge and insight to inform their work. The Standing Group is also seeking to actively coordinate with other SDR initiatives in the EU. The initial work of the Standing Group is focused on the following five key features of the SDR: •

Prevention of settlement fails;

•

Penalties;

•

Mandatory buy-ins;

•

Cash compensation; and

•

Reporting.

The Standing Group meets at the offices of EUI on a six-weekly basis and is chaired by the Bank of England.

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Settlement Internalisers Settlement Internaliser is defined to mean any institution (including one authorised under Directive 2013/36/EU or Directive 2014/65/EU), which executes transfer orders on behalf of clients or on its own account, OTHER THAN through a SSS. Settlement Internalisers are required to report to the Competent Authorities (CAs) of their place of establishment, on a quarterly basis, the aggregated volume and value of all securities transactions that they settle outside SSS. CAs are required to, without delay, transmit information received to ESMA and to inform ESMA of any potential risk arising from settlement activity.

ESMA, in close cooperation with the members of the ESCB, MAY develop draft RTS that further specify the content of such reporting, as well as draft Implementing Technical Standards (ITS) to establish the standard forms, templates and procedures for the reporting and transmission of information.

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Measures to Prevent Settlement Fails and Measures to Address Settlement Fails SECTION 2 35

Automated Matching Matching is the confirmation and affirmation of a trade between two parties, which includes economic information such as trade date, settlement date, stock quantity or price.

Industry participants usually sent confirmations via fax when trading volumes are low, and counterparties would affirm via the phone or fax.

A shift to shorter settlement cycles in Europe is driving securities market participants to ditch the fax and match trades automatically, in an attempt to reduce operational and counterparty risk.

In the T+2 CSDR environment, automated marching means trades are far less likely to fail.

The shortening of settlement cycles puts pressure on back offices that are continuing to manually process a trade, potentially leading to higher costs owing to operational overheads and potential settlement failures.

It takes a lot of investment for firms in order to be able to adopt matching technology, so many of the lower-tier firms do not really have incentives to connect to these platforms.

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Partial Settlement Partial settlement is an important feature of the settlement process to mitigate liquidity risk.

It allows the settlement of part of a trade in case of a shortage of securities on the intended settlement date and, therefore, reduces the value at risk of failure.

This process can be complementary to the shaping which splits settlement instructions into lower quantities.

The purpose of partial settlement is to settle part of a settlement instruction when full settlement is not possible due to lack of securities.

The residual part of the settlement instruction may settle at a later stage, either on the intended settlement date or after, as part of the settlement fails management procedure.

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Partial Settlement (cont) As a result, partial settlement is an essential function to reduce fails.

Markets where it is allowed are expected to have higher settlement rate than those markets that do not allow it.

There are different models for partial settlement. One model is fully automated partial settlement (e.g. Hong Kong) where the settlement system automatically splits the instructions and settles part of the trade.

Another model is where the authorisation of both parties is required, or sometimes the authorisation of the CSD, as well as specific instructions that need to be sent.

Partial settlement will be included as part of the TARGET2-Securities (T2S) securities settlement engine, where an indicator will allow participants to flag instructions to automatically make securities eligible for partial settlement.

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Hold and Release Mechanism This is a process via which a CSD or instructing party may block a pending settlement instruction from settlement, or remove a block on a pending settlement instruction.

Customers will be able to unilaterally prevent settlement by setting a Hold flag on an instruction such that it will participate in the matching process, but will not be presented for settlement.

Customers will be able to release held instructions to settlement processing at their own discretion.

This is particularly relevant when omnibus accounts are used with no segregation of cash or securities positions per underlying customer.

Without having to reinstruct, customers will be able to release a held instruction by resetting its Hold flag.

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Buy-in Process The Buy-in process typically takes the form of a contractual right of the purchaser of securities, and a means by which to secure delivery of those securities from a third-party in the instance that the original selling counterparty is unable to make delivery.

The objective of the Buy-in process is to restore the parties to a transaction to the economic position they would have been in had the original transaction settled.

In this way, failing chains of linked transactions can be resolved by using a pass-on mechanism and a single Buy-in that is initiated and executed at the end of the chain.

Buy-ins are not intended to be a penalty mechanism, however the bought-in party will often incur an economic loss owing to the ‘Buy-in premium’, which is the difference between the Buy-in price and the current market ‘fair value’.

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Buy-in Process (cont) One of the difficulties relating to Buy-ins is that they may sometimes be difficult to execute owing to prevailing market conditions (e.g. illiquid securities).

Evans, R., Geczy, C, Musto, D., and Reed, A. (2009). Failure is an option: Impediments to short selling and options prices, Review of Financial Studies, 22, 1955-1980.

This research study found that out of a total of 69,063 failed transactions of a market maker in 1998-1999, only 86 were bought in.

Boni, L. (2006). Strategic delivery failures in U.S. equity markets, Journal of Financial Markets, 9, 1-26.

Argues that one reason why buy-ins are rare is that firms are unwilling to earn a reputation for forcing delivery in the hope that other firms will be equally lenient towards them when they fail to deliver.

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Buy-in Process (cont) Putnins, T. J. (2009). Naked short sales and fails to deliver: An overview of clearing and settlement procedures for stock traders in the US. Multilateral netting in NCS includes not only trades that are due to settle that day but also existing open positions such as FTRs. The algorithm that determines which long positions will receive stocks, allocates shares to the oldest positions first, within a priority group. This means that on any day in which the number of normal priority trades due to settle exceeds the number of FTRs, all existing FTRs will be passed on to the more recent long positions due to settle that day. Given the earlier finding that FTDs represent approximately 1-5% of daily traded volume, it is only in rare circumstances or in very infrequently traded stocks that a participant would be left with an FTR for long enough to go through the Buy-in process.

Under the CSDR the Buy-in process is no longer a right available to a party, it has now become a mandatory obligation.

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Buy-in Process (cont) Andy Hill from ICMA (Quarterly Report, 6 April 2017) comments: From an overall market liquidity perspective, the very low penalty charges are again unlikely to make much impact, and pale into insignificance when compared to the expected market impacts of the parallel mandatory buy-in regime.

A common recommendation from ICMA’s membership is that a more dynamic and appropriately calibrated penalty regime would be far more effective in terms of supporting settlement efficiency, while negating the need for a mandatory buy-in regime and the negative consequences of that for bond market liquidity.

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Buy-in Process (cont) David Hiscock from ICMA (Quarterly Report, 6 April 2017) comments: Based on ongoing discussion and consultation with our members, particularly those active in the cash and repo/ lending markets, the general view is that a standardized, harmonized penalty system for fails, implemented by the CSDs, has the potential to improve settlement efficiency, while also supporting repo market, and hence cash market, efficiency and liquidity. Meanwhile, it remains clear that the projected mandatory buy-in regime will pose a substantive threat to both bond and repo market functioning and liquidity, particularly for credit and less liquid segments of the fixed income market.

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Measures to Prevent Settlement Fails Trading Venues are required to establish procedures that enable the confirmation of relevant details of transactions in Financial Instruments on the date when the transaction has been executed.

Investment Firms that are authorised under the revised Markets in Financial Instruments Directive (2014/65/EU) (MiFID II) are required to take measures to limit the number of settlement fails.

These measures must at least consist of arrangements between the Investment Firm and its Professional Clients to ensure the prompt communication of an allocation of securities to the transaction, conformation of that allocation and confirmation of the acceptance or rejection of terms in good time before the intended settlement date.

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Measures to Prevent Settlement Fails (cont) Core Service

Description

Authorised Firms

Entities which are required to be authorised or regulated to operate in the financial markets. The list below shall be understood as including all authorised entities carrying out the characteristic activities of the entities mentioned: entities authorised by a Member State under a Directive, entities authorised or regulated by a Member State without reference to a Directive, and entities authorised or regulated by a third country: (cont next slide)

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Measures to Prevent Settlement Fails (cont) Core Service

Description

Authorised Firms (cont)

Entities which are required to be authorised or regulated to operate in the financial markets (cont): (a) (b) (c) (d) (e) (f) (g) (h) (i)

Credit institutions; Investment firms; Other authorised or regulated financial institutions; Insurance companies; Collective investment schemes and management companies of such schemes; Pension funds and management companies of such funds; Commodity and commodity derivatives dealers; Locals; Other institutional investors.

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Measures to Prevent Settlement Fails (cont) Core Description Service Large Large undertakings meeting two of the following Undertakin size requirements on a company basis: gs — balance sheet total: EUR 20 000 000 — net turnover: EUR 40 000 000 — own funds: EUR 2 000 000

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Measures to Prevent Settlement Fails (cont) Core Service

Description

National and National and regional governments, including public bodies Regional that manage public debt at national or regional level, Governments Central Banks, international and supranational institutions such as the World Bank, the IMF, the ECB, the EIB and other similar international organisations.

Institutional Investors

Other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions.

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Measures to Prevent Settlement Fails (cont) The European Securities and Markets Authority (ESMA), in close cooperation with the members of the European System of Central Banks (ESCB), is required to issue guidelines on the standardised procedures and messaging protocols to be used for complying with the measures to prevent settlement fails.

For each SSS it operates, a CSD is required to establish procedures that facilitate the settlement of transactions in Financial Instruments on the intended settlement date with a minimum exposure of its participants to counterparty and liquidity risks and a low rate of settlement fails.

A CSD is required to promote early settlement on the intended settlement date through appropriate mechanisms.

For each SSS it operates, a CSD is required to put in place measures to encourage and incentivise the timely settlement of transactions by its participants.

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Measures to Prevent Settlement Fails (cont) A CSD must require participants to settle their transactions on the intended settlement date.

ESMA, in close cooperation with the members of the ESCB, is required to develop RTS to specify: (1)

the measures to be taken by Investment Firms to limit the number of settlement fails;

(2)

the procedures to facilitate the settlement of transactions in Financial Instruments on the intended settlement date, with a minimum exposure of participants to counterparty and liquidity risks and a low rate of settlement fails;

(3)

the details of the measures to encourage and incentivise the timely settlement of transactions.

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Measures to Address Settlement Fails For each SSS that it operates, a CSD is required to establish a system that monitors settlement fails of transactions in Financial Instruments.

Prior to establishing such system, a CSD is required to consult the relevant Trading Venues and CCPs in respect of which it provides settlement services.

It is required to provide regular reports to the CA and Relevant Authorities (RAs), as to the number and details of settlement fails, and any other relevant information, including the measures envisaged by CSDs and their participants to improve settlement efficiency.

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Measures to Address Settlement Fails These reports are required to be made public by CSDs in aggregated and anonymised form on an annual basis.

CAs are required to share with ESMA any relevant information on settlement fails.

For each SSS that it operates, a CSD is required to establish procedures that facilitate settlement of transactions in Financial Instruments that are not settled on the intended settlement date.

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Settlement Fails Penalty Mechanism Such settlement procedures must provide for a penalty mechanism which will serve as an effective deterrent for participants that cause settlement fails.

The penalty mechanism must include cash penalties for market participants that cause settlement fails (Failing Participants).

Cash penalties are required to be calculated on a daily basis for each business day that a transaction fails to be settled after its intended settlement date, UNTIL the end of a buy-in process, BUT NO LONGER THAN THE ACTUAL SETTLEMENT DATE.

THE CASH PENALTIES MUST NOT BE CONFIGURED AS A REVENUE SOURCE FOR THE CSD. 54

Settlement Fails Penalty Mechanism Without prejudice to any penalty mechanism, or the right to bilaterally cancel the transaction, where a Failing Participant does not deliver the Financial Instruments to the Receiving Participant within 4 business days AFTER the intended settlement date (Extension Period), a buy-in process should be initiated where those Financial Instruments are available for settlement and delivered to the Receiving Participant within an appropriate timeframe.

Where the transaction relates to a Financial Instrument traded on a Small and Medium-Sized Enterprise (SME) Growth Market, the Extension Period is 15 days, UNLESS the SME Growth Market decides to apply a shorter period.

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Settlement Fails Penalty Mechanism (cont) Buy-in Process Exemptions Exemptions

Description

Smooth and Orderly Functioning of Financial Markets

Based on asset type and liquidity of the Financial Instruments, the extension period may be increased from four business days up to a MAXIMUM of seven business days, where a shorter Extension Period would affect the smooth and orderly functioning of the financial markets concerned.

Several Transactions

For operations composed of several transactions, including securities repurchase or lending agreements, the buy-in process shall not apply where the timeframe of those operations is sufficiently short and renders the buyin process ineffective.

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Settlement Fails Penalty Mechanism (cont) Buy-in Process Exemptions (cont) These exemptions are not applicable to transactions for shares where those transactions are cleared by a CCP. Where the price of shares agreed at the time of the trade is higher than the price paid for the execution of the Buy-in, the corresponding difference must be paid to the Receiving Participant by the Failing Participant no later than on the second business day after the Financial Instruments have been delivered following Buy-in.

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Buy-In Failure If a Buy-in fails, or is not possible, the Receiving Participant can choose to be paid cash compensation or to defer the execution of the buy-in to an appropriate later date (Deferral Period). If the relevant Financial Instruments are not delivered to the Receiving Participant at the end of the Deferral Period, cash compensation must be paid.

Cash compensation must be paid to the Receiving Participant no later that on the second business day after the end of either the Buy-in process or the Deferral Period, where the Deferral Period was chosen.

The Failing Participant must reimburse the entity that executes the Buy-in for all amounts paid, including any execution fees resulting from the Buy-in. Such fees must be disclosed to the Participants.

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Suspensions CSDs, CCPs and Trading Venues are required to establish procedures that enable them to suspend (in consultation with their respective CAs) any Participant that fails to consistently and systematically to deliver the Financial Instruments on the intended settlement date.

They are also required to disclose to the public the identity of the Participant, only after giving the Participant the opportunity to submit its observations and provided that the CAs of the CSDs, CCPs and Trading Venues, and of the Participant, have been informed.

CSDs, CCPs, and Trading Venues are also required to notify, without delay, the respective CAs of the suspension of a Participant. The CA is required to immediately notify the RAs of the suspension of a Participant.

Public disclosure of suspensions must not contain ‘Personal Data’ (as originally defined under the Data Protection Directive (95/46/EC), but now the General Data Protection Regulation (GDPR)).

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Transaction Requirements Type A Transactions: For transactions cleared by a CCP, the CCP is the entity that executes the Buy-in.

Type B Transactions: For transactions not cleared by a CCP, but executed on a Trading Venue, the Trading Venue shall include in its internal rules an obligation for members and its participants to apply any measures to address settlement fails.

For all transactions, other than Type A and Type B Transactions, CSDs are required to include in their internal rules an obligation for their participants to be subject to the measures to address settlement fails.

60

Transaction Requirements (cont) A CSD is also required to provide the necessary settlement information to CCPs and Trading Venues in order to enable them to fulfil their obligations in relation to the Transaction Requirements.

CSDs may monitor the execution of Buy-ins with respect to multiple settlement instructions, on the same Financial Instruments and with the same day of expiry of the execution period, with the aim of minimising the number of Buy-ins to be executed and the overall impact on the prices of the relevant Financial Instruments.

61

Measures to Address Settlement Fails – Exemptions The measures to address settlement fails do not apply to: (1) Failing Participants which are CCPs; (2) Failing Participants which have insolvency proceedings opened up against them; (3) the situation where the principal venue for the trading of shares is located in a third country.

62

Further Delegated Acts and Draft RTS The Commission is empowered to adopt delegated acts to specify parameters for the calculation of a deterrent and proportionate level of cash penalties based on asset type and liquidity of the financial instrument, and type of transaction, that shall ensure a high degree of settlement discipline, and the smooth and orderly functioning of the financial markets concerned.

ESMA, in close cooperation with the ESCB, is required to develop draft RTS. 63

Further Delegated Acts and Draft RTS Exemptions

Description

Settlement Fail Monitoring The details of the system monitoring System settlement fails and the reports on settlement fails.

Collection and Redistribution of Cash Penalties

The processes for collection and redistribution of cash penalties and any other possible proceeds from such penalties.

Buy-in Process

The details of operation of the appropriate Buy-in process, including appropriate timeframes to deliver the Financial Instruments following the Buy-in process. Such time-frames must be calibrated taking into account the asset type and liquidity of the Financial Instruments.

64

Further Delegated Acts and Draft RTS (cont) Exemptions

Description

Prolonged Extension Period

The circumstances under which the Extension Period could be prolonged according to asset type and liquidity of the Financial Instruments.

Ineffective Buy-ins

The type of operations and their specific timeframes that renders Buy-ins ineffective.

Cash Compensation

A methodology for the calculation of the cash compensation.

Consistent and Systematic The conditions under which a Participant is Failure deemed consistently and systematically to fail to deliver the Financial Instruments.

Settlement Information

The necessary settlement information.

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Central Securities Depositories (CSDs) SECTION 3 66

Authorisation and Supervision A CSD is required to be authorised and supervised by the Competent Authority (CA) of its home Member State (MSCA).

Authorisation of CSDs Any legal person that falls within the definition of a CSD shall obtain an authorisation from the CA of the Member State where it is established BEFORE commencing activities.

A CSD is required at all times to comply with the conditions necessary for authorisation.

67

Authorisation of CSDs (cont) A CSD, as well as its independent auditors, shall, without undue delay, inform the CA of any substantive changes affecting the compliance with the conditions for authorisation.

Such authorisation shall specify the Core Services undertaken by a CSD as well as the Non-Banking-Type Ancillary Services permitted under Section B of the CSDR Annex, which the CSD is authorised to provide.

Services provided by CSDs that contribute to enhancing the safety, efficiency and transparency of the securities markets, which may include but are not restricted to Section B CSDR Annex Services.

68

CSDR ANNEX SECTION B Ancillary Services CSDR ANNEX SECTION B Services are those relating to Non-BankingType Ancillary Services of CSDs that do not entail credit or liquidity risks.

Exemptions

Non-Banking-Type Ancillary Services of CSDs that do not entail credit or liquidity risks

Settlement Service

Services related to the settlement service, such as: (1) organising a securities lending mechanism, as agent among participants of SSS;

(2) providing collateral management services, as agent for participants in a SSS; (3) settlement matching, instruction routing, trade confirmation, trade verification.

69

CSDR ANNEX SECTION B Ancillary Services (cont) Exemptions Notary and Central Maintenance Services

Non-Banking-Type Ancillary Services of CSDs that do not entail credit or liquidity risks Services related to the notary and central maintenance services, such as: (1) services related to shareholders’ registers; (2) supporting the processing of corporate actions, including tax, general meetings, and information services; (3) new issue services, including allocation and management of ISIN codes and similar codes; (4) instruction routing and processing, fee collection and processing and related reporting.

70

CSDR ANNEX SECTION B Ancillary Services (cont) Exemptions

Non-Banking-Type Ancillary Services of CSDs that do not entail credit or liquidity risks

Ancillary Services

Establishing CSD links, providing, maintaining or operating securities accounts in relation to the settlement service, collateral management, other ancillary services.

Other Services

Any other services, such as: (1) providing general collateral management services as agent; (2) providing regulatory reporting; (3) providing information, data and statistics to market/census bureaus, or other governmental or inter-governmental entities; (4) providing Information Technology (IT) services.

71

CSD Authorisation under the CSDR Article

Description

17

Procedure for granting authorisation.

18

Effects of the authorisation.

19

Extension and outsourcing of activities and services.

20

Withdrawal of authorisation.

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Withdrawal of authorisation The CA of the home Member State of a CSD must withdraw authorisation in any of the following circumstances: (1)

the CSD has not made use of the authorisation during 12 months, expressly renounces the authorisation, or has provided no services or performed no activity during the preceding 6 months;

(2)

the CSD has obtained the authorisation by making false statements, or by any other unlawful means;

(3)

the CSD no longer complies with the conditions under which authorisation was granted and has not taken the remedial actions requested by the CA within a set time-frame;

(4)

the CSD has seriously or systematically infringed the requirements set out in the CSDR, or where applicable, MiFID II or Regulation (EU) No 600/2014 (MiFIR).

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Withdrawal of authorisation (cont) As soon as a CA becomes aware of one of the above circumstances, the CA is required to immediately consult the RAs and, where applicable, the MiFID II CA, on the necessity to withdraw the authorisation.

ESMA and any RA, and, where applicable, the MiFID II CA, MAY AT ANY TIME, request that the CA of the home Member State examines whether the CSD still complies with the conditions under which the authorisation was granted.

The CA may limit the withdrawal of authorisation to a particular service, activity, or Financial Instrument.

A CSD is required to establish and maintain adequate procedures to ensure timely and orderly settlement and transfer of the assets of clients and participants to another CSD in the event of a withdrawal of authorisation.

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Competent Authorities Each Member State is required to designate the CA for carrying out the duties under the CSDR for the authorisation and supervision of CSDs established in its territory and inform ESMA accordingly.

Where a Member State designates more than one CA, it shall determine their respective roles and shall designate a single authority to be responsible for cooperation with other Member States’ CAs, the RAs, ESMA, and EBA. MSCAs must have the supervisory and investigatory powers necessary for the exercise of their functions.

75

Competent Authorities (cont) There are three authorities that are to be involved in the authorisation and supervision of CSDs: (1) the authority responsible for the oversight of the SSS operated by the CSD in the Member State whose law applies to that SSS; (2) the central banks in the Union issuing the most relevant currencies in which settlement takes place; (3) the central bank in the Union in whose books the cash leg of a SSS operated by the CSD is settled (where relevant).

76

Exchange of Information CAs, RAs, and ESMA, are required to, on request and without undue delay, provide one another with the information required for the purposes of carrying out their duties under the CSDR. CAs, RAs, ESMA, and other bodies or natural or legal persons receiving confidential information in the exercise of their duties must only use it only in the course of their duties.

77

Cooperation between Authorities CAs, RAs, and ESMA, are required to cooperate closely, including by exchanging all relevant information for the application of the CSDR. Where appropriate, such cooperation shall include other public authorities and bodies, in particular those established or appointed under Directive 2003/87/EC (a scheme for greenhouse emission allowance trading).

In order to ensure consistent, efficient and effective supervisory practices within the Union, including cooperation between CAs and RAs in the different assessments necessary for the application of the CSDR, ESMA, MAY, in close cooperation with the members of the ESCB, issue guidelines addressed to CAs. The CAs shall, in the exercise of their general duties, consider the potential impact of their decisions on the stability of the financial system in all other Member States concerned, in particular in any Emergency Situations, based on the available information.

78

Emergency Situations CAs and RAs shall immediately inform ESMA, the European Systemic Risk Board (ESRB) and each other, of any Emergency Situation relating to a CSD, including: (1)

of any developments in financial markets, which may have an adverse effect on market liquidity;

(2)

of any developments in financial markets, which may have an adverse effect on the stability of a currency in which settlement takes place;

(3)

of any developments in financial markets, which may have an adverse effect on the integrity of monetary policy;

(4) of any developments in financial markets, which may have an adverse effect on the stability of the financial system;

in any one of the Member States where the CSD or one of its participants are established.

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Supervision of CSDs SECTION 4 80

Supervision of CSDs The CA is required, at least on an annual basis, to review the arrangements, strategies, processes and mechanisms implemented by a CSD with respect to compliance with the CSDR, and evaluate the risks to which the CSD is, or might be, exposed, or which it creates for the smooth functioning of securities markets.

The CA must require the CSD to submit to the CA an adequate recovery plan to ensure continuity of its critical operations.

The CA must ensure that an adequate resolution plan is established and maintained for each CSD, so as to ensure continuity of at least its core functions, having regard to the size, systemic importance, nature, scale, and complexity of the activities of the CSD, and any relevant resolution plan established in accordance with Directive 2014/59/EU. The CA must establish the frequency and depth of the review and evaluation, having regard to the size, systemic importance, nature, scale and complexity of the activities of the CSD. 81

Supervision of CSDs (cont) The review and evaluation must be updated at least on an annual basis.

The CA is required to subject the CSD to on-site inspections.

When performing the review and evaluation, the CA shall, at an early stage, consult the RAs, in particular concerning the functioning of the SSS operated by the CSD, and where applicable, the MiFID III CA. The CA shall regularly, and at least once a year, inform the RAs, and where applicable the MiFID II CA, of the results, including any remedial actions or penalties, of the review and evaluation.

When performing the review and evaluation, the CAs shall supply one another with all relevant information that is likely to facilitate their tasks.

The CA must require a CSD that does not meet the requirements for the CSDR, to take at an early stage the necessary actions or steps to address the situation.

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Supervision of CSDs (cont) ESMA shall, in close cooperation with the members of the ESCB, develop draft RTS to specify: (1) the information that the CSD is to provide to the CA for the purposes of the review and evaluation; (2) the information that the CA is to supply to the RAs; (3) the information that the CAs are to supply one another.

ESMA shall, in close cooperation with the members of the ESCB, develop draft ITS to determine standard forms, templates and procedures for the provision of information.

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Access to and between CSDs and Market Infrastructures SECTION 5 84

Access to and between CSDs and Market Infrastructures A CCP and a Trading Venue are required to provide transaction feeds on a non-discriminatory and transparent basis to a CSD upon request by the CSD, and may charge a reasonable commercial fee for such transaction feeds to the requesting CSD on a cost-plus basis, UNLESS otherwise agreed by both parties.

A CSD is required to provide access to its SSSs on a nondiscriminatory and transparent basis to a CCP or a Trading Venue, and may charge a reasonable commercial fee for such access on a cost-plus basis, UNLESS otherwise agreed by both parties.

When a party submits a request for access to another party, such request shall be treated promptly and a response to the requesting party shall be provided within three months.

85

Denial of Access The receiving party shall DENY ACCESS only where such access would affect the smooth and orderly functioning of the financial markets or cause systemic risk.

It shall not deny a request on the grounds of loss of market share.

A party that refuses access shall provide the requesting party with full written reasons for such refusal based on a comprehensive risk assessment.

86

Refusal - Right of Complaint In the case of a refusal, the requesting party has the right to complain to the CA of the party that has refused access.

The CA of the receiving party and the RA shall duly examine the complaint by assessing the reasons for refusal and shall provide the requesting party with a reasoned reply.

The CA of the receiving party shall consult the CA of the requesting party and the RA on its assessment of the complaint.

Where any of the authorities of the requesting party disagrees with the assessment provided, any of them may refer the matter to ESMA (which may act in accordance with its powers under Article 19 of Regulation (EU) No 1095/2010).

Where the refusal by a party to grant access is deemed to be unjustified, the responsible CA shall issue an order requiring that party to grant access to its services within three months.

87

ESMA Draft RTS (Risk Assessment and Reasons for Refusal) and Draft ITS (Forms and Templates) ESMA, in close cooperation with the members of the ESCB, is required to develop draft RTS to specify the risks to be taken into account by CSDs when carrying out a comprehensive risk assessment, and by CAs when assessing the reasons for refusal, and the elements of the procedure.

ESMA, in close cooperation with the members of the ESCB, is required to develop draft ITS to establish standard forms and templates relating to requests for access.

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The Operations of CDSs in Host Member States SECTION 6 89

Freedom to Provide Services in another Member State An authorised CSD may provide services listed in the CSDR Annex within the territory of the Union, including through setting up a branch, as long as those services are covered by the authorisation granted.

An authorised CSD that intends to provide: (1)

Notary Service (Core Service); and

(2)

Central Maintenance Service (Core Service);

in relation to Financial Instruments constituted under the law of another Member State, or to set up a branch in another Member State shall be subject to submission of the CSD Operational Information.

90

Freedom to Provide Services in another Member State (cont) Any such CSD wishing to provide such services for the first time, or to change the range of those services shall communicate the CSD Operational Information to the CA of the Home Member State.

CSD Operational Information Area

Information Requirement

Host Member State

The Member State in which the CSD intends to operate.

Programme of Operations

A programme of operations stating in particular the services which the CSD intends to provide.

Currencies

The currency or currencies that the CSD intends to process.

Branch Information

Where there is a branch, the organisational structure of the branch and the names of those responsible for the management of the branch.

Necessary Measures Laws

An assessment of the measures the CSD intends to take to allow its users to comply with the Necessary Measures Laws (where relevant).

91

Freedom to Provide Services in another Member State (cont) Within three months from the receipt of information, the CA of the home Member State will communicate that information to the CA of the host Member State UNLESS, by taking into account the provision of services envisaged, it has reasons to doubt the adequacy of the administrative structure of the financial situation of the CSD wishing to provide its services.

The CA of the host Member State must without delay inform the RAs of that Member State of any communication received.

Where the CA of the home Member State decides not to communicate all the information to the CA of the host Member State, it shall give reasons for its refusal to the CSD concerned within three months of receiving all the information, and it will inform the CA of the host Member State of its decision.

Where information is shared in response to such request the CA of the host Member State shall not issue the communication of information.

92

Freedom to Provide Services in another Member State (cont) The CSD may start providing the services in the host Member State under the following conditions: (1)

on receipt of a communication from the CA in the host Member State acknowledging receipt by the CA of the communication and, where relevant, approving the assessment of the CSD;

(2)

in the absence of any receipt of communication, after three months from the date of transmission of the communication.

In the event of a change in any of the information communicated, a CSD shall give written notice of that change to the CA of the home Member State at least one month before implementing the change.

The CA of the host Member State shall also be informed of that change without delay by the CA of the home Member State.

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Third Countries SECTION 7 94

Third Countries TCCSDs may provide services referred to in the CSDR Annex within the territory of the Union, including setting up a branch.

A TCCSD that intends to provide the Core Services in relation to Financial Instruments constituted under the law of a Member State, or to set up a branch in a Member State, shall be subject to the TCCSD Recognition Procedure.

Where a TCCSD has been recognised, it may provide Core Services within the territory of the Union, including by setting up a branch.

95

ESMA Draft RTS (Application for Recognition) ESMA, in close cooperation with the members of the ESCB, is required to develop draft RTS to specify the information that the applicant CSD is to provide to ESMA in its application for recognition.

ESMA was required to submit such draft RTS to the Commission by 18th June 2015.

96

Article 48 CSDR (Links) A CSD established and authorised in the Union may maintain or establish a link with a TCCSD in accordance with Article 48 CSDR. Before establishing a CSD link, and on an ongoing basis once the CSD link has been established, all CSDs are required to identify, assess, monitor, and manage all potential sources of risk for themselves and for their Participants arising from the CSD link, and take appropriate measures to mitigate them.

CSDs that intend to establish links are required to submit an application for authorisation to the CA of the requesting CSD (as required under Point (e) of Article 19(1)), or notify the RAs of the requesting CSD (as required under Article 19(5)) A link must provide adequate protection to the linked CSDs and their Participants, in particular as regards possible credits taken by CSDs and the concentration and liquidity risks as a result of the link arrangement.

97

Article 48 CSDR (Links) (cont) A link must be supported by an appropriate contractual arrangement that sets out the respective rights and obligations of the linked CSDs, and where necessary, of the CSD’s Participants.

A contractual arrangement with cross-jurisdictional implications shall provide for an unambiguous choice of law that govern each aspects of the link’s operations.

In the event of a provision transfer of securities between linked CSDs, retransfer of securities prior to the first transfer becoming final SHALL BE PROHIBITED. A CSD that uses an indirect link or an intermediary to operate a CSD link with another CSD shall measure, monitor, and manage the additional risks arising from the use of that indirect link or intermediary, and take appropriate measures to mitigate them.

Linked CSDs are required to have robust reconciliation procedures to ensure that their respective records are accurate.

Links between CSDs shall permit Delivery-versus-payment (DVP) settlement of transactions between Participants in linked CSDs, where practical and feasible.

98

Article 48 CSDR (Links) (cont) DVP means a securities settlement mechanism which links a transfer of securities with a transfer of cash in a way that the delivery of the securities occurs, IF AND ONLY IF, the corresponding transfer of cash occurs, and vice versa.

Detailed reasons for any CSD link NOT ALLOWING FOR DVP SETTLEMENT must be notified to the RAs and CAs.

Interoperable SSSs and CSDs, which use a common settlement infrastructure shall establish identical moments of: (1)

entry of Transfer Orders into the system;

(2)

irrevocability of Transfer Orders.

The SSSs and CSDs shall use equivalent rules concerning the movement of finality of transfers of securities and cash.

By 18th September 2019, all interoperable links between CSDs operating in Member States shall be, where applicable, DVP-settlement supporting links.

99

ESMA Draft RTS (Link Arrangements) ESMA, in close cooperation with the members of the ESCB, is required to develop draft RTS to specify the conditions under which each type of link arrangement provides for adequate protection of the linked CSDs and of their Participants, in particular where a CSD intends to participate in the SSS operated by another CSD. The draft RTS should also cover the monitoring and managing of additional risks arising from the use of intermediaries, the reconciliation methods, the cases where DVP settlement through CSD links is practical and feasible, and the methods of assessment.

100

TCCSD Recognition Procedure ESMA may recognise a TCCSD that has applied for recognition to provide Core Services where all the TCCSD Recognition Procedure Conditions are met.

TCCSD Recognition Procedure Conditions Condition

Requirement

Commission Decision

The Commission has adopted a decision in accordance with the Article 23(9) Commission Decision Requirements.

Effective Authorisation, Supervision and The TCCSD is subject to effective authorisation, supervision and oversight, OR if Oversight the SSS is operated by a central bank, oversight, ensuring FULL COMPLIANCE with the prudential requirements applicable in that TC. Cooperation Arrangements

Cooperation Arrangements between ESMA and the RAs in that TC (Responsible Third Country Authorities) (RTCAs) have been established in accordance with the Article 23(10) TC Cooperation Arrangements Requirements.

Necessary Measures Laws

The TCCSD takes the necessary measures to allow its users to comply with the relevant national law of the Member State in which the TCCSD intends to provide CSD services (including the law referred to in the second subparagraph of Article 49(1)), and the adequacy of those measures has been confirmed by the CAs of the Member State in which the TCCSD intends to provide CSD services (where relevant).

101

TCCSD Consulting Authorities When assessing whether the TCCSD Recognition Procedure Conditions have been met, ESMA is required to consult: (1) the CAs of the Member States in which the TCCSD intends to provide CSD services, in particular, on how the TCCSD intends to comply with the Necessary Measures Requirement;

(2) the RAs; (3) the responsible TC Authorities (TCAs) entrusted with the authorisation, supervision, and oversight of CSDs. 102

TCCSD Application Procedure The TCCSD shall submit its application for recognition to ESMA.

The applicant CSD shall provide ESMA with all information deemed to be necessary for its recognition.

Within 30 working days from the receipt of application, ESMA shall assess whether the application is complete. If the application is not complete, ESMA shall set a time limit by which the applicant CSD has to provide additional information.

The CAs of the Member States in which the TCCSD intends to provide CSD services shall assess the compliance of the TCCSD with the Necessary Measures Laws and inform ESMA with a fully reasoned decision whether the compliance is met or not within three months from the receipt of all necessary information from ESMA. Within six months from the submission of a complete application, ESMA shall inform the applicant CSD in writing with a fully reasoned decision whether the recognition has been granted or refused.

103

TCCSD Review The CAs of the Member States in which the duly recognised TCCSD provides services, in close cooperation with ESMA, may request the responsible TCAs to: (1)

report periodically on the TCCSD’s activities in those host Member States, including for the purpose of collecting statistics;

(2)

communicate, within an appropriate time-frame, the identity of the issuers and participants in the SSSs operated by the TCCSD which provides services in that host Member State and any other relevant information concerning the activities of that TCCSD in the host Member State.

ESMA, after consulting with the TCCSD Consulting Authorities, must review the recognition of the TCCSD in the event of extensions by that CSD in the Union of its services using the TCCSD Recognition Procedure.

ESMA is required to withdraw the recognition of that CSD where the TCCSD Recognition Procedure Conditions are no longer met, OR in the case of the application of any of the Withdrawal of Authorisation requirements under Article 20 CSDR. 104

Article 49(1) CSDR Article 49(1) First Subparagraph: An Issuer shall have the right to arrange for its securities admitted to trading on Regulated Markets (RMs) or Multilateral Trading Facilities (MTFs) or traded on Trading Venues to be recorded in any CSD established in any Member State, subject to compliance by that CSD with conditions referred to in Article 23.

Article 49(1) Second Subparagraph: Without prejudice to the issuer’s right referred to in the first subparagraph, the corporate or similar law of the Member State under which the securities are constituted shall continue to apply.

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Article 23(9) Commission Decision The Commission may adopt implementing acts to determine that: (1) the legal and supervisory arrangements of a TC ensure that CSDs authorised in that TC comply with legally binding requirements which are in effect equivalent to the requirements set out in the CSDR; (2) that those CSDs are subject to effective supervision, oversight and enforcement in that TC on an ongoing basis; and (3) that the legal framework of that C provides an effective equivalent system for the recognition of CSDs authorised under TC legal regimes.

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Article 23(9) Commission Decision (cont) Such implementing acts are required to be adopted in accordance with the Examination Procedure set out in Article 68(2) CSDR, i.e. Article 5 of Regulation (EU) No 182/2011 shall apply.

In making the determination the Commission may also consider whether the legal and supervisory arrangements of a TC reflect the internationally agreed CPSS-IOSCO standards, in so far as the latter do not conflict with the requirements set out in the CSDR.

Article 23(10) TC Cooperation Arrangements ESMA is required to establish Cooperation Arrangements with the responsible TCAs whose legal and supervisory frameworks have been recognised as equivalent under the CSDR,

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Provision of Bankingtype Ancillary Services for CSD Participants SECTION 8 108

Authorisation and Designation to provide Banking-Type Ancillary Services (BTAS) A CSD is NOT ALLOWED to provide any banking-type ancillary services (BTAS) (CSDR Annex C) UNLESS it has obtained an additional authorisation to provide such services.

A CSD that intends to settle the cash leg of all or part of its SSS or otherwise wishes to provide any BTAS must be authorised: (1)

to offer such services itself;

(2)

to designate for that purpose one or more Credit Institutions authorised in accordance with Article 8 of Directive 2013/36/EU. 109

BTAS provided by CSD Where a CSD seeks to provide any type of BTAS from within the same legal entity as the legal entity operating the SSS, authorisation shall be granted only where the BTAS Entity Authorisation Conditions are met.

BTAS Entity Authorisation Conditions Condition

Requirement

Authorised Credit Institution

The CSD is authorised as a Credit Institution as provided for in Article 8 of Directive 2013/36/EU.

Prudential and Supervisory Requirements

The CSD meets the Prudential Requirements (CSDR Articles 59(1), (3), and (4)) and the Supervisory Requirements (CSDR Article 60).

CSDR Authorised Activities

The Credit Institution authorisation is used only to provide the BTAS referred to in CSDR Annex Section C, and not to carry out any other activities.

110

BTAS provided by CSD (cont) BTAS Entity Authorisation Conditions (cont) Condition

Requirement

Additional Capital Surcharge

The CSD is subject to an additional capital surcharge that reflects the risks, including credit and liquidity risks, resulting from the provision of intra-day credit, inter alia, to the Participants in a SSS, or other users of CSD services.

Intra-day Liquidity Risk

The CSD reports, at least monthly, to the CA and annually, as a part of its public disclosure on the extent and management of intra-day liquidity risk.

Reporting Adequate Recovery Plan

The CSD has submitted to the CA an adequate recovery plan to ensure continuity of its critical operations, including in situations where liquidity or credit risk crystallises as a result of the provision of BTAS.

In the case of conflicting provisions (set out in the CSDR, Regulation (EU) No 575/2013, and Directive 2013/36/EU) a CSD shall comply with the stricter requirements on prudential supervision.

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BTAS provided by Credit Institution(s) Where a CSD seeks to designate a Credit Institution to provide any BTAS from within a separate legal entity which may be part of the same group of undertakings ultimately controlled by the same parent undertaking or not, authorisation shall be granted only where the BTAS Credit Institution Authorisation Conditions are met.

BTAS Credit Institution Authorisation Conditions Condition

Requirement

Authorised Credit Institution The separate legal entity is authorised as a Credit Institution as provided for in Article 8 of Directive 2013/36/EU. Prudential and Supervisory The separate legal entity meets the Prudential Requirements Requirements (CSDR Articles 59(1), (3), and (4)) and the Supervisory Requirements (CSDR Article 60).

CSDR Annex Section A Core The separate legal entity does not itself carry out any Services of the Core Services referred to in CSDR Annex Section A.

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BTAS provided by Credit Institution(s) (cont) BTAS Credit Institution Authorisation Conditions (cont) Condition

Requirement

CSDR Authorised Activities

The authorisation is used only to provide BTAS referred to in CSDR Annex Section C, and not to carry out any other activities.

The separate legal entity is subject to an additional capital surcharge that reflects the risks, including credit and liquidity risks, resulting from the provision of intra-day credit, inter alia, to the participants in a SSS system or other users of CSD services.

The separate legal entity reports, at least monthly, to the CA and annually, as a part of its public disclosure on the extent and management of intra-day liquidity risk.

The separate legal entity has submitted to the CA an adequate recovery plan to ensure continuity of its critical operations, including in situations where liquidity or credit risk crystallises as a result of the provision of BTAS from within a separate legal entity.

Additional Capital Surcharge

Intra-day Liquidity Risk

Reporting Adequate Recovery Plan

113

BTAS provided by Credit Institution(s) (cont) These requirements WILL NOT APPLY to Credit Institutions that offer to settle the cash payments for part of the CSD’s SSS, IF the total value of such cash settlement through accounts opened with those Credit Institutions, calculated over a one-year period, is LESS THAN ONE PER CENT OF THE TOTAL VALUE OF ALL SECURITIES TRANSACTIONS AGAINST CASH SETTLED IN THE BOOKS OF THE CSD, and does not exceed a maximum of EUR 2.5 billion per year.

The CA is required to monitor at least once per year that the threshold is respected and report its findings to ESMA. Where the CA determines that the threshold has been exceeded, it shall require the CSD concerned to seek authorisation under the BTAS Credit Institution Authorisation Conditions.

114

BTAS provided by Credit Institution(s) (cont) The CSD is then required to submit its application within six months.

The CA may require a CSD to designate more than one Credit Institution, or to designate a Credit Institution in addition to providing services itself, where it considers that the exposure of one Credit Institution to the concentration of risks (under CSDR Article 59(3) and (4)) is not sufficiently mitigated.

The designated Credit Institutions shall be considered to be Settlement Agents.

A CSD authorised to provide any BTAS and a Credit Institution designated by a CSD, shall at all times comply with the conditions necessary for authorisation and shall, without delay, notify the CAs of any substantive changes affecting the conditions for authorisation.

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EBA Draft RTS (Additional Risk Based Capital Surcharge) EBA, in close cooperation with ESMA and the members of the ESCB, is required to develop draft RTS to determine the additional risk based capital surcharge.

Additional CSDR Requirements relating to BTAS Article

Description 55

Procedure for granting and refusing authorisation to provide BTAS.

56

Extension of the BTAS.

57

Withdrawal of authorisation.

58

CSD Register.

59

Prudential requirements applicable to Credit Institutions or CSDs authorised to provide BTAS.

60

Supervision of designated Credit Institutions and CSDs authorised to provide BTAS.

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THE END

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ABOUT STORM-7 CONSULTING Storm-7 Consulting are a financial consultancy company that provides premier financial intelligence and knowledge to leading financial institutions around the world. We deliver premium quality conferences on cutting-edge legal and financial issues, and strive to provide access to crucial insight by leading experts on the latest complex regulatory developments.

Address: Level 24/25, The Shard 32 London Bridge Street London SE1 9SG Tel:

UK + 44 (0)20 7846 0076

Email:

client.services@storm-7.com

ABOUT THE PRESENTER Rodrigo Zepeda is Co-Founder and Managing Director of Storm-7 Consulting. He is an expert consultant who specialises in derivatives and financial services law, regulation, and compliance. He holds a LLB degree, a LLM Masters degree in International and Comparative Business Law, and has passed the New York Bar Examination. He was an Associate (ACSI) of the Chartered Institute for Securities & Investment from 2004 to 2014 and is now a Chartered Member (MCSI). He is a Reviewer for the Journal of Financial Regulation and Compliance and has also published widely in leading industry journals such as the Capco Institute's Journal of Financial Transformation, the Journal of International Banking Law and Regulation, as well as e-books on derivatives law. Noted publications include "Optimizing Risk Allocation for CCPs under the European Market Infrastructure Regulation"; "The ISDA Master Agreement 2012: A Missed Opportunity"; "The ISDA Master Agreement: The Derivatives Risk Management Tool of the 21st Century?"; "To EU, or not to EU: that is the AIFMD question“; and “The Industrialization Blueprint: Re-Engineering the Future of Banking and Financial Services.”

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The CSDR Operational Framework – PART I

TRAINING COURSE CSDR 2018