ESMA responds to European Commission鈥檚 Review of CSDR
08 June 2021
EU securities market regulator calls for reform of T2S supervision framework and third-country CSD recognition regime
Image: stock.adobe.com/BillionPhotos.com
The European Securities and Markets Authority (ESMA) has responded to the European Commission鈥檚 review of the Central Securities Depository Regulation (CSDR).
This recommends amendments to the regulation in a number of areas, including arrangements for the supervision of T2S and to the third-country CSD recognition regime.
T2S is the central settlement platform for EU securities settlement operated by the Eurosystem and launched through a phased release from 2015.
At the forefront of its recommendations, ESMA highlights a need to strengthen the capacity of T2S CSDs to manage risks that derive from outsourcing settlement activities to the T2S platform.
ESMA notes in its letter that T2S is currently monitored under a 鈥渓ight approach鈥�, through provisions defined in the Principles for Financial Market Infrastructures (PFMIs) in the ECB Oversight Framework, and not through provisions directly embedded in CSDR.
Given the centrality of T2S to settlement operations across EU member states, ESMA believes it is 鈥渘ot appropriate鈥� to exclude such a systemically-important settlement platform completely from the scope of CSDR.
Commenting on its rationale, an ESMA spokesperson tells SFT: 鈥淲hereas T2S is a systemically important common platform, providing settlement services in central bank money for the majority of EEA CSDs, it is currently entirely out of scope of CSDR. Clarifying the status of T2S under CSDR would ensure that T2S is subject to a legally-binding framework, instead of a subset of the PFMIs.鈥�
Reflecting on ESMA鈥檚 proposals to the European Commission, Tony Freeman, an industry consultant specialising in post-trade and middle office, indicates that a number of the recommendations in the ESMA letter are appropriate and well intentioned. 鈥淚t is illogical to have oversight of T2S, as a systemically-important settlement platform, excluded from the scope of CSDR,鈥� he says.
The ESMA letter also advises that CSDR should be amended to enable better cooperation between key participants involved in oversight of T2S settlement activities 鈥� specifically, national regulators, along with the European Central Bank as lead overseer of the T2S platform, and ESMA in providing a 鈥渟upervisory convergence鈥� role, ensuring cooperation and consistency in financial supervision across EU Member States.
鈥淐SDR should provide for a cooperative arrangement in respect of the supervision/oversight of T2S, with clear roles for the participating authorities (competent authorities of CSDs that outsource services to T2S, central banks, the ECB as lead overseer, and ESMA with a supervisory convergence role),鈥� said an ESMA spokesperson. 鈥淭his cooperative arrangement would replace the existing voluntary one and would include the same authorities as those that are currently represented. It could take the form of a college of supervisors under Article 21 of Regulation (EU) No 1095/2010 (ESMA Regulation).鈥�
Third-country CSDs
With Europe鈥檚 financial services industry still adjusting to the impact of Brexit, ESMA has called for the recognition regime for 鈥渢hird-country CSDs鈥� (TC-CSDs) to be extended, requiring third-country CSDs to notify ESMA of all services that they provide in the European Economic Area (EEA).
This provision relates to the activities of non-EU CSDs that provide services into the EEA.
It notes that, under current arrangements, there is no information available on the activities of TC-CSDs, either at EEA level or at national level to regulatory authorities, unless this is provided on a voluntary basis by those CSDs.
Significantly, the current TC-CSD recognition regime does not cover the provision of settlement services in the EEA. Rather, it only applies to two out of the three CSDR core services, specifically notary and central maintenance activities.
As a result, 鈥渢he provision of settlement services remains invisible to the EEA supervisors,鈥� says ESMA. This only allows for 鈥渁 very late and partial view of the activities of TC-CSDs in the EEA鈥� and creates 鈥渁n unlevel playing field鈥� between third-country CSDs and EEA CSDs.
To address this point, ESMA indicates that the TC-CSD recognition regime should be extended to cover settlement services alongside notary and central maintenance services.
Tony Freeman observes that ESMA鈥檚 recommendations related to the TC-CSD recognition regime appear, at least in part, to be triggered by Brexit. ESMA has called for changes to CSDR to promote a level playing field between TC-CSDs and EEA CSDs, along with more detailed reporting requirements that will provide the market authorities with greater transparency over the activities of TC-CSDs with activities in the EEA.
With regard to Brexit, an ESMA spokesperson told SFT: 鈥淕iven the UK has already announced a departure from the EEA with respect to settlement discipline, the EEA should have the means to control settlement activity in respect of EEA financial instruments performed by the UK CSD.鈥�
Settlement discipline
Perhaps surprisingly, there was little mention in the ESMA letter of its views on the CSDR settlement discipline regime, particularly the mandatory buy-in component, which is timetabled for February 2022 and has been subject to intensive industry scrutiny.
The reason for this omission is unclear. Does this imply that the settlement discipline provisions of CSDR (including mandatory buy-ins) do not require further amendment prior to implementation? Or is ESMA engaged with the European Commission in review of these mandatory buy-in provisions through other channels?
鈥淭his is a topic with political implications, whereas ESMA鈥檚 role is of a technical nature,鈥� responded an ESMA spokesperson. 鈥淲e are discussing the technical aspects related to the application of settlement discipline under CSDR with the CSD competent authorities and with the European Commission on an ongoing basis.鈥�
Freeman recommends two changes to mandatory buy-in provisions under CSDR that he believes will make them more acceptable to the industry. One is the inclusion of optionality, providing greater flexibility to policymakers in EU member states regarding how the regulation is implemented at member state level. A second is the inclusion of thresholds, dictating that mandatory buy-ins will not apply to securities transactions below a specified de minimis amount 鈥� for example 鈧�500 or below.
It is noteworthy that the settlement discipline regime in CSDR has been included as Level 1 text (ie 鈥楤asic Acts鈥�), whereas, for Freeman, it would have been more appropriate to include this as Level 2 or Level 3 measures (e.g. delegating acts, implementing acts). 鈥淭his would allow financial supervisors to calibrate the rules to reflect market conditions and avoid unintended consequences,鈥� he says.
ESMA鈥檚 recommendations to the European Commission are likely to form part of an important test case regarding how Level 1 regulations and directives can be amended after implementation. Potentially, this will establish a framework that may be applied for future review of Level 1 text.
Prior to this submission, forwarded to the European Commission on 20 May, ESMA has already provided input to the Commission through two reports, one on CSD cross-border services and the other on internalised settlement, which were published in November 2020.
In coming months, it will provide additional recommendations in two further reports, one relating to technical innovation by CSDs and a second on banking-type ancillary services.
This recommends amendments to the regulation in a number of areas, including arrangements for the supervision of T2S and to the third-country CSD recognition regime.
T2S is the central settlement platform for EU securities settlement operated by the Eurosystem and launched through a phased release from 2015.
At the forefront of its recommendations, ESMA highlights a need to strengthen the capacity of T2S CSDs to manage risks that derive from outsourcing settlement activities to the T2S platform.
ESMA notes in its letter that T2S is currently monitored under a 鈥渓ight approach鈥�, through provisions defined in the Principles for Financial Market Infrastructures (PFMIs) in the ECB Oversight Framework, and not through provisions directly embedded in CSDR.
Given the centrality of T2S to settlement operations across EU member states, ESMA believes it is 鈥渘ot appropriate鈥� to exclude such a systemically-important settlement platform completely from the scope of CSDR.
Commenting on its rationale, an ESMA spokesperson tells SFT: 鈥淲hereas T2S is a systemically important common platform, providing settlement services in central bank money for the majority of EEA CSDs, it is currently entirely out of scope of CSDR. Clarifying the status of T2S under CSDR would ensure that T2S is subject to a legally-binding framework, instead of a subset of the PFMIs.鈥�
Reflecting on ESMA鈥檚 proposals to the European Commission, Tony Freeman, an industry consultant specialising in post-trade and middle office, indicates that a number of the recommendations in the ESMA letter are appropriate and well intentioned. 鈥淚t is illogical to have oversight of T2S, as a systemically-important settlement platform, excluded from the scope of CSDR,鈥� he says.
The ESMA letter also advises that CSDR should be amended to enable better cooperation between key participants involved in oversight of T2S settlement activities 鈥� specifically, national regulators, along with the European Central Bank as lead overseer of the T2S platform, and ESMA in providing a 鈥渟upervisory convergence鈥� role, ensuring cooperation and consistency in financial supervision across EU Member States.
鈥淐SDR should provide for a cooperative arrangement in respect of the supervision/oversight of T2S, with clear roles for the participating authorities (competent authorities of CSDs that outsource services to T2S, central banks, the ECB as lead overseer, and ESMA with a supervisory convergence role),鈥� said an ESMA spokesperson. 鈥淭his cooperative arrangement would replace the existing voluntary one and would include the same authorities as those that are currently represented. It could take the form of a college of supervisors under Article 21 of Regulation (EU) No 1095/2010 (ESMA Regulation).鈥�
Third-country CSDs
With Europe鈥檚 financial services industry still adjusting to the impact of Brexit, ESMA has called for the recognition regime for 鈥渢hird-country CSDs鈥� (TC-CSDs) to be extended, requiring third-country CSDs to notify ESMA of all services that they provide in the European Economic Area (EEA).
This provision relates to the activities of non-EU CSDs that provide services into the EEA.
It notes that, under current arrangements, there is no information available on the activities of TC-CSDs, either at EEA level or at national level to regulatory authorities, unless this is provided on a voluntary basis by those CSDs.
Significantly, the current TC-CSD recognition regime does not cover the provision of settlement services in the EEA. Rather, it only applies to two out of the three CSDR core services, specifically notary and central maintenance activities.
As a result, 鈥渢he provision of settlement services remains invisible to the EEA supervisors,鈥� says ESMA. This only allows for 鈥渁 very late and partial view of the activities of TC-CSDs in the EEA鈥� and creates 鈥渁n unlevel playing field鈥� between third-country CSDs and EEA CSDs.
To address this point, ESMA indicates that the TC-CSD recognition regime should be extended to cover settlement services alongside notary and central maintenance services.
Tony Freeman observes that ESMA鈥檚 recommendations related to the TC-CSD recognition regime appear, at least in part, to be triggered by Brexit. ESMA has called for changes to CSDR to promote a level playing field between TC-CSDs and EEA CSDs, along with more detailed reporting requirements that will provide the market authorities with greater transparency over the activities of TC-CSDs with activities in the EEA.
With regard to Brexit, an ESMA spokesperson told SFT: 鈥淕iven the UK has already announced a departure from the EEA with respect to settlement discipline, the EEA should have the means to control settlement activity in respect of EEA financial instruments performed by the UK CSD.鈥�
Settlement discipline
Perhaps surprisingly, there was little mention in the ESMA letter of its views on the CSDR settlement discipline regime, particularly the mandatory buy-in component, which is timetabled for February 2022 and has been subject to intensive industry scrutiny.
The reason for this omission is unclear. Does this imply that the settlement discipline provisions of CSDR (including mandatory buy-ins) do not require further amendment prior to implementation? Or is ESMA engaged with the European Commission in review of these mandatory buy-in provisions through other channels?
鈥淭his is a topic with political implications, whereas ESMA鈥檚 role is of a technical nature,鈥� responded an ESMA spokesperson. 鈥淲e are discussing the technical aspects related to the application of settlement discipline under CSDR with the CSD competent authorities and with the European Commission on an ongoing basis.鈥�
Freeman recommends two changes to mandatory buy-in provisions under CSDR that he believes will make them more acceptable to the industry. One is the inclusion of optionality, providing greater flexibility to policymakers in EU member states regarding how the regulation is implemented at member state level. A second is the inclusion of thresholds, dictating that mandatory buy-ins will not apply to securities transactions below a specified de minimis amount 鈥� for example 鈧�500 or below.
It is noteworthy that the settlement discipline regime in CSDR has been included as Level 1 text (ie 鈥楤asic Acts鈥�), whereas, for Freeman, it would have been more appropriate to include this as Level 2 or Level 3 measures (e.g. delegating acts, implementing acts). 鈥淭his would allow financial supervisors to calibrate the rules to reflect market conditions and avoid unintended consequences,鈥� he says.
ESMA鈥檚 recommendations to the European Commission are likely to form part of an important test case regarding how Level 1 regulations and directives can be amended after implementation. Potentially, this will establish a framework that may be applied for future review of Level 1 text.
Prior to this submission, forwarded to the European Commission on 20 May, ESMA has already provided input to the Commission through two reports, one on CSD cross-border services and the other on internalised settlement, which were published in November 2020.
In coming months, it will provide additional recommendations in two further reports, one relating to technical innovation by CSDs and a second on banking-type ancillary services.
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