Brussels, 07/03/2012 (Agence Europe) - EU Internal Market Commissioner Michel Barnier unveiled draft legislation (a draft regulation) on Wednesday 7 March to harmonise the work of the two dozen central securities depositories (CSD) in Europe. The legislation is the last part of the current batch of financial market regulations, along with the updating of the MiFID directive on financial instruments and the draft regulation on derivatives (see below).
CSDs are mainly active post-market in clearing and settling securities. A European Commission official said that they ensure that people get what they've paid for and that the person who has sold a security gets paid for it. The official said that when the World Trade Center in New York was attacked in September 2001, which closed down Wall Street, 500 members of staff at the DTCC in the United States worked day and night to ensure that some three hundred billion dollars-worth of transactions were settled within three days so that the money markets could re-open in the United States the very next week. The European official said that this showed the importance of CSDs. Barnier suggests that €920 trillion worth of securities were traded in Europe in 2010. CSDs also provide banking services, such as daily loans. Each member state has at least one CSD to settle securities traded under its legal system. There are two international CSDs, Euroclear and Clearstream, that settle securities traded under the rules of the country where an investor is registered. Theses two CSDs cover 80% of all securities settled in the EU.
Barnier says the aim of the draft legislation is to make the clearing and settlement of securities more secure so that buyers and sellers receive their securities and/or money on time and without risk. The new rules say that CSDs must settle and deliver securities within two days of transaction. Harmonising settlement deadlines will make the market more efficient and reduce the risk of deals not being respected.
Due to the importance of CSDs to financial stability, they will be subject to EU prudential rules, but will continue to be supervised by the member states. The European Securities and Market Authority (ESMA) will only serve to coordinate supervisors in host and other countries. When they provide banking services, CSDs will have to ensure legal separation of banking and clearing/settlement. When securities are issued in any currency other than the US dollar, CSDs provide loans and therefore expose themselves (and the financial system) to great risk because the amounts processed each day can reach €80 billion for international CSDs, says Barnier.
The commissioner says he wants to ensure a genuine internal market in clearing and settlement, wanting a more open system. CSDs will be given European “passports” if they meet EU prudential requirements, which will enable them to ply their trade anywhere in the EU, but investors will be free to use any CSD they like. The Commission hopes that greater competition will lead to the emergence of new CSDs.
The European CSD Association (ECSDA) welcomes the draft legislation: “The proposal has the potential to speed-up harmonisation of post-trade processes in Europe, thus helping to make cross-border securities transactions less complex, less risky and less costly. In some cases the regulation could make it more difficult for CSDs to establish links with other CSDs, in contradiction to the spirit of the TARGET2-Securities project of the Eurosystem.” “ECSDA thinks that financial stability can be enhanced by tight regulation of the limited credit function of some CSDs and by the adoption of an effective resolution regime for market infrastructure”, said ECSDA Secretary General Soraya Belghazi in a press release. (MB/transl.fl)