The European Union (EU) has agreed the regulatory safeguards and structure for central securities depositories (CSD) after years of post-crash wrangling over how to strengthen financial markets.
The CSDR regulation will mean depositories will face an additional capital surcharge for the provision of collateral and other banking services to financial market participants, but the latter activities won’t be banned outright as was originally feared when the first draft proposals were released by the EU last summer. Custodian banks face extra ‘cost of business’ expenses too under the new regime.
A requirement for CSDs, such as Euroclear and Clearstream, to operate a mandatory 'buy-in' of trades that fail to settle and then deliver them to the non-defaulting counterparty is part of the stipulations, as is the need to shorten the settlement timeframe to T+2, a move widely anticipated.
The common authorisation, supervision and regulatory framework of the CSDR is designed to improve the securities settlement process in Europe and fits in with many other post-crash initiatives such as the TARGET 2 Securities (T2S) settlement platform and EMIR: the European Market Infrastructure Regulation. Centralised repositories, clearing, common legal entity identifiers (LEIs) and other such moves are all designed to try to lessen the threat of another crash like 2008 and make unwinding trades in future much easier, with more transparency and accountability all round, but the law of unintended consequences applies, of course, and many are worried about potential adverse impacts on the repo markets and elsewhere.
Pricing the capital surcharge that CSDs are facing and what the banks who provide them with services can therefore charge, has been left undetermined by the EU. This crucial information is not likely to be forthcoming until next year and much debate and lobbying no doubt lies ahead before the European Securities and Markets Authority (ESMA) makes its pronouncement.
Commenting on the CSDR final draft agreement Michel Barnier, the EU commissioner responsible for the reforms - who earlier this month unveiled the underfunded ‘single banking union’ EU resolution framework - welcomed the latest move. "Settlement is very important for securities markets and the financing of our economy. The numbers speak for themselves: in the EU, transactions worth over one quadrillion euro were settled by CSDs in last two years. I hope that the remaining technical work can be finalised as soon as possible under the EU Greek Presidency so that these new rules can be formally adopted by the [national] co-legislators … the agreement will ensure that settlement is carried out in a safer and more efficient manner.”
By Neil Ainger