COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT REPORT Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Regulation (EU) No 909/2014 as regards settlement discipline, cross-border provision of services, supervisory cooperation, provision of banking-type ancillary services and requirements for third-country central securities depositories

EN EN
EUROPEAN
COMMISSION
Brussels, 16.3.2022
SWD(2022) 75 final
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT REPORT
Accompanying the document
Proposal for a
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
amending Regulation (EU) No 909/2014 as regards settlement discipline, cross-border
provision of services, supervisory cooperation, provision of banking-type ancillary
services and requirements for third-country central securities depositories
{COM(2022) 120 final} - {SEC(2022) 160 final} - {SWD(2022) 76 final}
Offentligt
KOM (2022) 0120 - SWD-dokument
Europaudvalget 2022
1
Table of contents
GLOSSARY ................................................................................................................................................... 3
1. INTRODUCTION: POLITICAL AND LEGAL CONTEXT............................................................... 6
1.1. INTRODUCTION ................................................................................................................................ 6
1.2. BACKGROUND .................................................................................................................................. 8
1.3. CSDS IN THE EUROPEAN UNION................................................................................................. 11
1.4. LEGAL AND POLITICAL CONTEXT............................................................................................. 16
2. PROBLEM DEFINITION .................................................................................................................. 21
2.1. METHODOLOGY.............................................................................................................................. 21
2.2. WHAT ARE THE PROBLEMS? ....................................................................................................... 23
2.3. WHAT ARE THE PROBLEM DRIVERS? ....................................................................................... 30
2.4. HOW WILL THE PROBLEM EVOLVE?......................................................................................... 38
3. WHY SHOULD THE EU ACT? ........................................................................................................ 40
3.1. LEGAL BASIS ................................................................................................................................... 40
3.2. SUBSIDIARITY: NECESSITY OF EU ACTION ............................................................................. 40
3.3. SUBSIDIARITY: ADDED VALUE OF EU ACTION ...................................................................... 40
4. OBJECTIVES: WHAT IS TO BE ACHIEVED? ............................................................................... 41
4.1. GENERAL OBJECTIVES.................................................................................................................. 41
4.2. SPECIFIC OBJECTIVES ................................................................................................................... 42
5. WHAT ARE THE AVAILABLE POLICY OPTIONS? .................................................................... 43
5.1. WHAT IS THE BASELINE FROM WHICH OPTIONS ARE ASSESSED?.................................... 43
5.2. DESCRIPTION OF THE POLICY OPTIONS................................................................................... 47
5.3. OPTIONS DISCARDED AT AN EARLY STAGE ........................................................................... 49
6. WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? ........................................................... 50
6.1. IMPACT OF THE POLICY OPTIONS REGARDING PASSPORTING REQUIREMENTS.......... 50
6.2. IMPACT OF THE POLICY OPTIONS REGARDING COOPERATION BETWEEN
AUTHORITIES .................................................................................................................................. 53
6.3. IMPACT OF THE POLICY OPTIONS REGARDING PROVISION OF BANKING
SERVICES RELATED TO SETTLEMENT IN FOREIGN CURRENCIES..................................... 57
6.4. IMPACT OF THE POLICY OPTIONS REGARDING SETTLEMENT DISCIPLINE.................... 59
6.5. IMPACT OF THE POLICY OPTIONS REGARDING THIRD-COUNTRY CSDS......................... 64
7. HOW DO THE OPTIONS COMPARE?............................................................................................ 67
8. PREFERRED PACKAGE .................................................................................................................. 69
8.1. SUMMARY OF PREFERRED AGGREGATED OPTIONS............................................................. 69
8.2. COMBINED IMPACTS OF THE PACKAGE................................................................................... 70
8.3. REFIT (SIMPLIFICATION AND IMPROVED EFFICIENCY)....................................................... 72
9. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?.................................. 73
ANNEX 1: PROCEDURAL INFORMATION............................................................................................ 75
ANNEX 2: STAKEHOLDER CONSULTATION....................................................................................... 77
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ANNEX 3: WHO IS AFFECTED AND HOW? .......................................................................................... 80
ANNEX 4: ANALYTICAL METHODS ..................................................................................................... 93
ANNEX 5: EVALUATION ......................................................................................................................... 95
ANNEX 6: DETAILED DESCRIPTION OF IDENTIFIED PROBLEM AREAS.................................... 123
ANNEX 7: ANALYSIS OF ALL THE OPTIONS .................................................................................... 136
ANNEX 8: GRAPHS AND FIGURES ...................................................................................................... 151
ANNEX 9: DESCRIPTION OF THE BUY-IN PROCESS ....................................................................... 154
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GLOSSARY
Term or acronym Meaning or definition
Book-entry settlement A mechanism that enables market participants to transfer assets (e.g., securities)
without the physical movement of paper documents or certificates.
Buy-In A purchase of shares by a broker after a seller has failed to deliver similar shares,
the original seller being charged any difference in cost.
CMU Capital Markets Union
Central bank money Designates the case where a Securities Settlement System settles its cash leg on
cash accounts opened in the books of a central bank.
Central counterparty
(CCP)
An entity that interposes itself, in one or more markets, between the counterparties
to the contracts traded, becoming the buyer to every seller and the seller to every
buyer and thereby guaranteeing the performance of open contracts.
Collateral An asset or third-party commitment that is used by the collateral provider to secure
an obligation to the collateral taker. Collateral arrangements may take different legal
forms; collateral may be obtained using the method of title transfer or pledge.
College of supervisors A supervisory college is a permanent structure comprising various authorities
interested in the activities of a financial participant. The framework applicable to
colleges of supervisors is enshrined in the founding Regulations for the European
Supervisory Authorities.
Commercial bank
money
Designates the case where a Securities Settlement System settles its cash leg on
cash accounts that are not opened in the books of a central bank but on the books of
a banking institution.
Corporate action A corporate action is an event initiated by a public company that brings or could
bring an actual change to the securities—equity or debt—issued by the company,
such as stock splits, mergers, dividend payments. The role of the CSD is to inform
CSD participants holding the respective share or bond in custody about the
upcoming corporate action.
Custodian or
custodian bank
An entity, often a credit institution, which acts as "account provider" and provides
securities custody services to its customers, i.e. holding and administration of
securities owned by a third party.
CSD Central Securities Depository. A legal person that operates a securities settlement
system and provides at least a notary service or a central maintenance service.
CSDR Regulation (EU) No 909/2014 of the European Parliament and of the Council on
improving securities settlement in the EU and on central securities depositories
CPMI The Committee on Payments and Market Infrastructures (CPMI) is an international
standard setter that promotes, monitors and makes recommendations about the
safety and efficiency of payment, clearing, settlement and related arrangements,
thereby supporting financial stability and the wider economy. The CPMI also serves
as a forum for central bank cooperation in related oversight, policy and operational
matters, including the provision of central bank services.
Distributed ledger
technology (DLT)
Distributed ledger is used to describe a decentralised dataset architecture which
allows the keeping and sharing of records in a synchronised way, while ensuring
their integrity through the use of consensus-based validation protocols and
cryptographic signatures.
4
DVP Delivery versus payment. A securities settlement mechanism which links a transfer
of securities with a transfer of cash in a way that the delivery of securities occurs if
and only if the corresponding transfer of cash occurs and vice versa.
EBA European Banking Authority
ECB European Central Bank
ECSDA European Central Securities Depositories Association
EFAMA European Fund and Asset Management Association
EEA European Economic Area
ESCB European System of Central Banks
ESMA European Securities and Market Authority
Eurobond Originally the term Eurobond was reserved to bonds that were issued in currencies
different from the currency of incorporation of the issuer. Currently, Eurobonds are
issued in a limited number of jurisdictions (e.g. England and Wales, US), leading to
numerous situations where the law of issuance is different from the law of the
issuer.
FSB The Financial Stability Board (FSB) is an international body that monitors and
makes recommendations about the global financial system. It promotes international
financial stability; it does so by coordinating national financial authorities and
international standard-setting bodies as they work toward developing strong
regulatory, supervisory and other financial sector policies. It fosters a level playing
field by encouraging coherent implementation of these policies across sectors and
jurisdictions. Policies developed in the pursuit of these objectives are implemented
by jurisdictions and national authorities.
ICMA International Capital Market Association
International Central
Securities Depository
(ICSD)
A central securities depository (CSD) that settles domestic and international
securities transactions and typically offers additional services such as securities
lending and collateral management. ICSDs are usually run on direct or indirect
(through correspondent banks) links to local CSDs.
IOSCO The International Organization of Securities Commissions (IOSCO) is an
association of organizations that regulate the world's securities and futures markets.
Members are typically primary securities and/or futures regulators in a national
jurisdiction or the main financial regulator from each country. Its mandate is to:
 Develop, implement, and promote high standards of regulation to enhance
investor protection and reduce systemic risk
 Share information with exchanges and assist them with technical and
operational issues
 Establish standards toward monitoring global investment transactions
across borders and markets
ISD Intended Settlement Date. Means the date that is entered into the securities
settlement system as the settlement date and on which the parties to a securities
transaction agree that settlement is to take place.
Links Direct link: an account opened by an investor CSD in the books of an issuer CSD in
order to facilitate the transfer of securities from participants in the issuer CSD to
participants in the investor CSD (see also Investor CSD).
Indirect link: a link between two CSDs through a non-CSD intermediary.
Operated direct link: a direct link between two CSDs where a third party, typically
a custodian bank, operates the account in the issuer CSD on behalf of the investor
CSD.
5
Relayed link: a contractual and technical arrangement that allows issuer and investor
CSDs to hold and transfer securities through an account with a third CSD ("middle
CSD"), which acts as an intermediary.
Standard link: a link where the investor CSD is treated as a normal participant to the
issuer CSD.
Customised link: a link where the investor CSD benefits from a special access.
Interoperable link: A set of arrangements/procedures that allows participants in
different systems to conduct and settle payment or securities transactions across
systems while continuing to operate only in their own respective system.
Interoperability generally works as an improvement of classical links.
Pass-on mechanism A ‘pass-on’ mechanism allows each party in the transaction chain to pass-on a buy-
in notification to the party failing to them, until it reaches the original fail. A single
buy-in is executed by the initiating party, and the cash differentials between each
original transaction and the buy-in price is settled between each of the parties in the
chain.
Primary market A section of the capital market where financial instruments, stocks and bonds, are
issued/ sold/ floated for the first time by companies, governments or public
institutions. After issuance these instruments are traded in the secondary market.
Security A fungible financial instrument that holds some type of monetary value. It
represents an ownership position in a publicly-traded corporation via stock (equity);
a creditor relationship by owning an entity’s bond; or rights to ownership
represented by an option.
Securities account at
the top tier level
The CSDs find themselves at the top of the securities chain, i.e. all holdings in a
given financial instrument, whether by an individual or a financial institution, are
ultimately kept in a securities account at the CSD.
Securities Settlement
System
A system which allows the transfer of securities, either free of payment (FOP) or
against payment (delivery versus payment).
Settlement The completion of a securities transaction where it is concluded with the aim of
discharging the obligations of the parties to that transaction through the transfer of
cash or securities, or both.
Settlement failure The inability of a participant to a Securities Settlement System to meet its
settlement obligations in the Securities Settlement System. This inability may be
temporary or permanent.
Systemic risk The risk that the inability of one participant to meet its obligations in a system will
cause other participants to be unable to meet their obligations when they become
due, potentially with spill over effects (e.g. significant liquidity or credit problems)
threatening the stability of or confidence in the financial system. That inability to
meet obligations can be caused by operational or financial problems.
Trade repository (TR) Trade repositories (TRs) centrally collect and maintain the records of derivatives
under Regulation EU No 648/2012 (EMIR). TRs also centrally collect and maintain
records of securities financing transactions (SFTs) under Regulation No 2015/2365,
on transparency of securities financing transactions and of reuse and amending
EMIR (SFTR).
T2S Target2 Securities. The Eurosystem's single technical platform enabling CSDs and
national central banks to provide core, borderless and neutral securities settlement
services in central bank money in Europe.
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1. INTRODUCTION: POLITICAL AND LEGAL CONTEXT
1.1. Introduction
Regulation (EU) No 909/2014 of the European Parliament and of the Council on
improving securities settlement in the European Union and on central securities
depositories1
(CSDR) is one of the key regulations adopted after the 2008 financial crisis.
While central securities depositories (CSDs) were resilient, including during the 2008
financial crisis, they were not regulated consistently across the European Union (EU).
This led to differences in their safety and raised level playing field concerns. Regulating
CSDs was also important to complete the regulatory framework of the trading and post-
trading market infrastructures, following the Market in Financial Instruments Directive
(Directive 2004/39/EC2
), which addressed trading venues, and the European Markets
Infrastructure Regulation (Regulation (EU) No 648/20123
), which addressed central
counterparties (CCPs) and trade repositories. Moreover, a consistent regulatory approach
to settlement systems and settlement processes was important to complement and
facilitate the Target2-Securities (T2S)4
project launched by the Eurosystem. CSDR was
also the EU’s response to the call of the Financial Stability Board (FSB), on 20 October
2010,5
for a revision and enhancement of existing standards to ensure more robust
financial market infrastructures, taking into account the global standards.6
CSDs are financial institutions of systemic importance for financial markets, hence it
is essential that their framework remains fit for purpose
CSDs play a crucial role in the primary market, by centralising the initial recording of
newly issued securities (‘notary service’). They operate the infrastructure (‘securities
settlement systems’) that enables the completion of a securities transaction (‘settlement’).
They also maintain securities accounts that record how many securities have been issued
by whom and each change in ownership (‘central maintenance service’). Over EUR 53
trillion worth of securities were held in EU securities settlement systems at the end of
2019, handling over 420 million delivery instructions for a total of turnover of over EUR
1 120 trillion.7
CSDs are essential for the financing of the economy. Apart from their role
in the issuance process, securities collateral posted by companies, banks and other
institutions to raise funds flows through securities settlement systems operated by CSDs.
1
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, OJ L 257, 28.8.2014, p. 1–72.
2
Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in
financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC
of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, OJ L 145,
30.4.2004. MiFID was in force until 2 January 2018. Today, it is partly recast with MiFID2 (Directive
2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial
instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, OJ L 173, 12.6.2014) and
partly replaced with MiFIR (Regulation (EU) No 600/2014 of the European Parliament and of the Council
of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012, OJ L
173, 12.6.2014).
3
Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC
derivatives, central counterparties and trade repositories, OJ L 201, 27.7.2012.
4
https://www.ecb.europa.eu/paym/target/t2s/html/index.en.html.
5
https://www.fsb.org/wp-content/uploads/pr_101020.pdf.
6
https://www.bis.org/cpmi/publ/d101.htm.
7
European Central Bank Securities Holdings Statistics Database,
https://sdw.ecb.europa.eu/browse.do?node=9691130 (accessed on 29.04.2021).
7
CSDs are also integral for the implementation of monetary policy as they settle securities
in central bank monetary policy operations.
Seven years after its adoption, a review of CSDR is needed to ensure it achieves its
objectives while making, where possible, the framework clearer, less costly and future
proof.
CSDR has uniform requirements for the settlement of financial instruments and rules on
the organisation and conduct of CSDs to promote safe, efficient and smooth settlement.
Specifically, CSDR introduced: shorter settlement periods; settlement discipline
measures (settlement fails reporting, mandatory cash penalties and ‘buy-ins’ for
settlement fails); strict organisational, conduct of business and prudential requirements
for CSDs; increased prudential and supervisory requirements for CSDs and other
institutions providing banking services that support securities settlement; and a passport
system allowing authorised CSDs to provide their services across the EU.
CSDR entered into force in September 2014; however, most of the requirements did not
immediately become applicable, as CSDR empowered the Commission to adopt
secondary legislation specifying the technical practicalities, leading to a phased-in
schedule of certain core requirements. Certain rules, including in particular on settlement
discipline, have not yet entered into force.
Article 75 of CSDR requires the Commission to review and prepare a general report on a
wide range of issues by 19 September 2019. Article 81(2c) of the European Securities
and Markets Authority (ESMA) Regulation8
also requires the Commission to assess the
potential supervision of third-country CSDs by ESMA. From September 2020 to August
2021, the Commission undertook an assessment of the rules in place to prepare a report.
This included a targeted consultation with more than 90 contributions from a range of
stakeholders, as well as reports required under Article 74 of CSDR from ESMA, in
cooperation with the European Banking Authority (EBA) and national authorities.
On 1 July 2021, the Commission adopted the CSDR review report.9
The report
concluded that, in broad terms, CSDR achieves its original objectives to enhance the
efficiency of settlement in the EU and the soundness of CSDs. In some areas, targeted
changes could improve CSDR’s efficiency and effectiveness. Other provisions have been
shown to meet their objective, or changes would be premature considering the relatively
recent application of requirements.
The Commission has assessed the extent to which specific policy requirements in CSDR
have met their objectives in an efficient and effective way, while at the same time being
coherent, relevant and providing EU added-value. This is supported by an evaluation
examining the effectiveness and efficiency of CSDR in specific areas. That evaluation
was performed back-to-back with the impact assessment and fed into the problem
definition of the impact assessment and is presented in Annex 6.
8
Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010
establishing a European Supervisory Authority (European Securities and Markets Authority), amending
Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC, OJ L 331, 15.12.2010.
9
Report from the Commission to the European Parliament and the Council under Article 75 of 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, COM (2021) 348 final.
8
The evaluation indicates that CSDR may impose in specific areas disproportionate
costs and burdens and that certain requirements may be simplified to achieve its
objectives more efficiently.
The CSDR review is a key action in the 2020 Capital Markets Union Action Plan10
for the development of a more efficient post-trading landscape in the EU. Resilient and
efficient markets for settlement in the EU should remove barriers to cross-border
settlement, ensure adequate powers to monitor risks and reduce administrative burden
and compliance costs. As such, the costs of securities transactions should fall and trust in
the securities transactions be enhanced, contributing to a better financing of the economy.
Finally, the consequences of Brexit as well as areas where the review of requirements is
necessary to ensure the return to long-term growth of the EU economy following the
crisis resulting from the Covid-19 pandemic are also considered in the analysis.
This impact assessment report concludes that further action is necessary to address the
following issues: (1) burdensome and unclear passporting requirements; (2) insufficient
coordination and cooperation between authorities; (3) restrictive requirements for the
provision of banking services related to settlement; (4) complicated and unclear
requirements for settlement discipline; and (5) insufficient reporting for third-country
CSDs. This will ensure that CSDR’s objectives are achieved in a more proportionate,
efficient and effective manner. This impact assessment report considers the costs and
benefits of different policy options and provides comprehensive evidence that a
reduction of costs and burdens can be achieved hand-in-hand with a simplification
of CSDR, without compromising financial stability.
1.2. Background
1.2.1. Post-trade services
A crucial element of safe and efficient capital markets is the safety and efficiency of the
post-trade arrangements for securities transactions. Though largely invisible to investors,
these ensure that after the trade has been carried out the buyer receives securities and the
seller is paid. These services that are performed after a trade are commonly referred to as
post-trade services. They typically include:11
 clearing, which guarantees performance by making the CCPs buyer to every
seller and seller to every buyer;
 settlement, which allows the discharge of the obligation of the parties to the
transaction and the transfer of cash or securities, or both;
 asset servicing which allows the processing and exercise of rights tied to a
security over its lifetime;
 post-trade reporting of individual transactions and/ or positions of nominated
participants.
Post-trade services are an integral part of the value chain (see Figure I), as they ensure
that a securities transaction is completed, including the transfer of legal ownership of a
security from one party to another, and transferring cash as payment. Post-trade services
10
Communication from the Commission to the European Parliament, the Council, the European Economic
and Social Committee and the Committee of the Regions, ‘A Capital Markets Union for people and
businesses – New Action Plan’, COM (2020) 590. See Action 13.
11
European Post-Trade Forum Report, 15 May 2017, p. 117; https://ec.europa.eu/info/publications/170515-
eptf-report_en .
9
are provided by financial market infrastructures, i.e. Central Counterparties and CSDs,
trade repositories, as well as by banks (including custodians).
Figure I12: Securities industries value chain
Safe and efficient post-trading systems are essential for trust in the financial system,
allowing investments to flow into the real economy, increasing competition and thereby
further fostering a stronger and more resilient financial system.
1.2.2. Securities settlement
CSDR defines13
settlement as the completion of a securities transaction after it is
concluded with the aim of discharging the obligations of the parties to that
transaction through the transfer of cash or securities, or both. Timely settlement is
important as it allows market participants to make contingent plans, contributing to the
depth and liquidity of the financial markets and to their smooth functioning. The
exchange of cash and securities is normally carried out in a Securities Settlement System
(SSS) operated by a CSD. In a CSD, the buyer’s and seller’s transactions are matched,
verifying the ability of the seller to deliver the securities and the ability of the buyer to
pay; after that the transaction is settled discharging the parties from their obligations.
However, if both the buyer and the seller of securities have accounts at the same bank,
the transaction can also be settled by an internal transfer between those accounts. In such
a case, the bank is acting as a settlement internaliser14
, which executes transfer orders
on behalf of clients or on its own account other than through a securities settlement
system.15
1.2.3. The role of CSDs
The three ‘core’ services under CSDR are:
 the ‘settlement service’: the operation of a securities settlement system, through
which securities are delivered or are exchanged between buyer and sellers;
 the ‘notary service’: initial recording of securities in a book-entry system;16
 the ‘central maintenance service’ – maintaining securities accounts at the top
tier level.17
12
European Post-Trade Forum Report, (see note 11), p. 117;
13
Article 2(7) of CSDR.
14
Article 2(11) of CSDR.
15
A firm internalises settlement if it receives an instruction from a client and transfers securities from one
securities account to another in its books rather than forward it to another intermediary or a CSD.
16
A mechanism that enables firms to transfer assets (e.g. securities) without physically moving paper
documents or certificates. Bank for International Settlement, Committee on Payments and Market
Infrastructures – Glossary, https://www.bis.org/cpmi/glossary_030301.pdf .
10
CSDR defines18
a CSD as a legal person that operates a securities settlement system19
(i.e. settlement service) and provides at least one other core service (i.e. notary service or
central maintenance service).
As concerns settlement, CSDs hold securities centrally in dematerialised form, i.e.
electronically, to speed up settlement. The exchange of cash and securities is normally
carried out electronically (although physical delivery is also still used if securities are
held in physical form), using a procedure known as Delivery versus Payment (DvP). DvP
ensures that neither party can end up with both the securities and the cash, and the other
party with nothing. CSDs operating nationally will often have links with other CSDs to
allow cross-border settlement and custody20
facilities. Cross-border securities settlement
is sometimes complex, involving at least two CSDs and multiple intermediaries.21
CSDs also play a crucial role in the initial recording of newly issued securities (notary
function). This generally occurs at the same time as the issuance by the issuer. These
securities, once created, are usually recorded and deposited in a single CSD, the issuer
CSD. This service is essential as it ensures that there are not more securities circulating
than there were actually issued and entered in the account.
Finally, CSDs ensure the maintenance of securities accounts that record how many
securities have been issued by whom and each change in who holds those securities.
These securities accounts are closely linked to the key mission of CSDs, which is to
ensure through their position at the top of the holding chain22
that no more securities are
settled than securities were actually issued.
CSDs also play a crucial role for the financing of the economy. Apart from the
issuance process, securities collateral posted by companies, banks and other institutions
flows through securities settlement systems operated by CSDs. CSDs also play an
essential role for the implementation of monetary policy by central banks as they
settle securities in central bank monetary policy operations
In addition to their core services, some CSDs provide ancillary services,23
e.g.
collateral management services, maintaining shareholder registers or supporting
corporate actions,24
that contribute to enhancing the safety, efficiency and transparency
of securities markets, without exposing them to credit or liquidity risk. CSDR also allows
CSDs to provide banking-type ancillary services25
related to core or ancillary services,
i.e. providing cash accounts and accepting deposits from participants to a securities
17
This allows CSDs to track all holdings, i.e. who owns it, in a given financial instrument, whether by an
individual or a financial institution, are ultimately kept in a securities account at the CSD (ECSDA).
18
Article 2(1) of CSDR.
19
Settlement service listed in point 3 of Annex A is the operation of a securities settlement system, through
which securities are initially delivered or are subsequently exchanged between buyer and sellers (via
participants to the SSS).
20
A custodian bank holds the securities on behalf of the investor and carries out instructions on their behalf.
21
“Post-trade explained – The role of post-trade services in the financial sector”, Association for Financial
Markets in Europe, February 2015.
22
All tradeable securities are held on the books of various intermediaries, between the ultimate owner and the
CSD, creating a security holding chain.
23
For a non-exhaustive of ancillary services provided by CSD’s list see Annex – Section B of CSDR.
24
A corporate action is an event initiated by a public company that brings or could bring an actual change to
the securities—equity or debt—issued by the company, such as stock splits, mergers, dividend payments.
The role of the CSD is to inform CSD participants holding the respective share or bond in custody about
the upcoming corporate action.
25
For an exhaustive list see Annex – Section C of CSDR.
11
settlement system, providing cash credit, guarantees and commitments or payment
services.
1.3. CSDs in the European Union
1.3.1. Market structure slowly evolving
Historically, CSDs were established along national lines to provide a local venue for the
issuance and settlement of securities. Today, this fragmentation remains with 26
CSDs currently authorised in the EU under Article 16 of CSDR.26
Nevertheless, the
EU market structure is slowly evolving; end-2010 there were over 30 CSDs (including
two International Central Securities Depositories (ICSDs)) operating in the EU.27
Most
recently, in March 2021, the settlement of Irish securities migrated from UK CREST28
to
Euroclear Bank Belgium. The migration, following the UK’s decision to leave the EU,
transferred the settlement of trading activity on Euronext Dublin to a CSD located in the
EU. In contrast, the US market is more concentrated and specialised29
with 2 CSDs.
Included in the 26 CSDs are two ICSDs: Clearstream Banking in Luxembourg and
Euroclear Bank in Belgium.30
ICSDs settle trades in international and domestic
securities, usually through direct and indirect links with agents in domestic markets.
Originally, ICSDs focused on settling securities transactions denominated in other
currencies from where the issuer is based and CSDs focused on national markets. Today,
the settlement activities of ICSDs and CSDs are more similar.31
CSDs operate different business models, depending on the core and ancillary services
they provide. To settle trades in international and domestic currencies, ICSDs are
authorised to provide ancillary banking services. The type of instruments a CSD serves
does not influence its business model. All but one EU CSD settle equities transactions
and all EU CSDs settle corporate debt. A significant majority of CSDs settle
government debt.32
EU CSDs have a variety of corporate structures and ownership
models. Only the Croatian, Cypriot and Maltese CSDs are majority owned by the
national government, while in Hungary the central bank is the majority owner. In the
case of other EU CSDs shareholders include stock exchanges, banks, national
governments, central banks and other private institutions.33
26
ESMA CSD Register, https://www.esma.europa.eu/sites/default/files/library/esma70-155-
11635_csds_register_-_art_21.pdf, ESMA70-155-11635. Nb. in addition 6 CSDs are operated by Central
Banks and are exempted from the authorisation and supervision requirements under CSDR according to
Article 1(4) of CSDR and one CSD is a public body charged with or intervening in the management of the
public debt and is exempted from the authorisation and supervision requirements under CSDR according to
Article 1(4) of CSDR.
27
Commission Staff Working Document, “Impact Assessment accompanying the proposal for a regulation on
improving securities settlement in the European Union and on Central Securities Depositories (CSDs)”,
SWD (2012) 22 final.
28
The UK CSD operated by Euroclear UK & Ireland.
29
In the US corporate bonds and equities are cleared through the Depository Trust and Clearing Corporation
(DTCC) while government securities and related entities are processed through the Federal Reserve
System.
30
International CSDs were established to serve the Eurobond market – that is, bonds issued by corporate
issuers for international investors, typically in a non-domestic currency.
31
See ECDA FAQ: Frequently Asked Questions - ECSDA.
32
‘European CSD industry factbook, 2018 – 2019 Update’, ECSDA 2020, https://ecsda.eu/wp-
content/uploads/2021/01/2019_European_CSD_Industry_Factbook.pdf.
33
Ibid, Table 3: Members organised by majority shareholder type – 2019.
12
Although specific data for EU CSDs is not available, there are indications34
that EU
market infrastructures have enjoyed stable conditions, although less favourable than their
global counterparts. Market infrastructure providers (exchanges, CCPs, CSDs) globally
recovered quickly from the financial crisis with revenues growing 4% annually (2007 –
2012) and then accelerating to 10% post-crisis (2012-1017). EU providers however took
longer to recover post-crisis with revenues rising only 1% over the same period.35
1.3.2. Size of the market
EU CSDs serve a large securities market.36
End-2019, EU securities were traded on
430 trading venues,37
including 135 regulated markets, 223 multilateral trading facilities
and 72 organised trading facilities. As of end-2019, 28 000 equity and equity-like
instruments were available for trading in the EEA, accounting for annual trading volumes
of EUR 27 trillion.38
Over 170 000 bonds were available for trading in the EEA. Annual
bond trading volumes amounted to EUR 101 trillion.39
EU CSDs serve the growing EU capital market by handling increasing amounts of
trading. In 2019, EU securities settlement systems handled more than 420 million
delivery instructions worth over EUR 53 trillion of securities and representing a total
turnover of over EUR 1 120 trillion.40
In 2014, when CSDR was adopted, EUR 43.5
trillion worth of securities were held in EU securities settlement systems, which handled
over 330 million delivery instructions for a total of turnover of over EUR 850 trillion.
This is a growth of 22% in value of securities held, 27% in number of delivery
instructions and 32% in turnover in the period between 2014 and 2019.
Despite the large number of CSDs operating in the EU, in 2019 the three41 largest
CSDs held over 60% of all securities held in EU CSDs. This is however rather a
reflection of the size and liquidity of certain EU national financial markets,42
rather than
issues connected to market structure.43
34
Oliver Wyman, ‘Global market infrastructure – How MI providers can achieve breakthrough growth’,
2018.
35
Based on data for trading venues, CCPs, CSDs, inter-dealer brokers and technology providers the Europe
and Middle-East Region. ‘Capital market infrastructure: An industry reinventing itself’, McKinsey &
Company, 2017.
36
Data based on ‘EU securities markets 2020’, ESMA Annual Statistical Report, ESMA-50-165-1355, 18
November 2020, https://www.esma.europa.eu/press-news/esma-news/esma-publishes-first-overview-size-
and-structure-eu-securities-markets.
37
A trading venue includes Regulated Markets, Multilateral Trading Facilities and Organised Trading
Facilities.
38
Data based on ‘EU securities markets 2020, ESMA Annual Statistical Report (see note 36), p.15 & p.24.
39
Ibid.
40
Data generated through the Securities Trading, Clearing and Settlement Statistics Database, European
Central Bank, https://sdw.ecb.europa.eu/browse.do?node=9691131.
41
Euroclear Bank Belgium (28%), Clearstream Banking Frankfurt (18%), Clearstream Banking Luxembourg
(15%).
42
In 2018 securities trading (debt and equity) on French, German, Italian and Spanish exchanges represented
app. 88% of EU-27 total. Source: European Central Bank, Statistical Data Warehouse, Securities Trading,
Clearing and Settlement, Securities Exchange – Trading Statistics.
43
In the same period, the value of securities held by the UK CSD (Euroclear UK and Ireland) rose from
EUR 6 215 billion in 2015 to EUR 6 406 billion in 2019 (3% increase), while the value of delivery
instructions rose from EUR 272 087 billion to EUR 357 184 billion respectively (31% increase –
‘Securities trading, clearing and settlement statistics’, European Central Bank, September 2020). In the US,
the value of securities held by the two CSDs (DTC and Fedwire Securities Service) rose from
EUR 100 739 billion in 2015 to EUR 130 366 billion in 2019 (29% increase), the number of delivery
instructions processed increased from 362 663 000 (2015) to 672 887 000 (2019) (86% increase) for a
13
1.3.3. Main forces driving market evolution
In addition to regulatory changes aimed at facilitating cross-border activity, there are
economies of scale and scope, driving both consolidation of different types of post-trade
services and competition among EU CSDs and the different services they offer.
(a) Consolidation of the sector
First, there is a strong complementary relationship between the various components of
securities settlement. Economies of scope may be achieved by integrating along the value
chain of securities transaction, i.e. by combining trading, clearing and settlement into one
conglomerate. Consolidation between CCPs, CSDs, and stock exchanges has created EU
financial market infrastructure conglomerates, e.g. the formation of Clearstream
through the merger of Cedel International and Deutsche Boerse in 2012. With the
acquisition of the Norwegian and Danish CSDs in 2019 and 2020 respectively, Euronext
has also strengthened its presence in the CSD space. This was followed in 2020 with the
acquisition of Borsa Italiana (the Italian stock exchange), MTS, where most of Italy’s
sovereign debt is traded, as well as the major multi-asset clearing house, CC&G.
Economies of scope could also be obtained through horizontal synergies. In 2009
Euroclear brought the Belgian, Dutch and French domestic CSDs onto a single platform,
under a harmonised framework, but as separate legal entities. Nasdaq has also
consolidated the three Baltic CSDs (Estonia, Lithuania and Latvia) in 2017 and the
Icelandic CSD into a single legal entity in 2020. A number of integrated post-trade
services groups operate in the EU post-trade market, i.e. Euroclear (bringing together the
ICSD Euroclear Bank and national CSDs in Belgium, Finland, France, Ireland, the
Netherlands, Sweden and the United Kingdom), Euronext (bringing together national
CSDs in Portugal, Denmark, Norway and Italy), Deutsche Boerse (operating the ICSD
Clearstream Luxembourg, the German CSD and LuxCSD) and Nasdaq CSD (following
the merger of the regional CSDs for Lithuania, Latvia, Estonia and Iceland).
(b) Emerging technological innovation
The rise of new record-keeping technologies also has the potential to alter the
landscape. In post-trade, distributed ledger technology44
(DLT) is currently considered
the most promising to simplify processes, reduce costs, and increase efficiency and
security45
. This will potentially lead to lower costs and faster settlement, transform how
securities are held and recorded46
and challenge incumbent settlement systems.
Most of the realised projects so far point to the potential for financial
infrastructures to move towards real-time settlement, flatter structures, continuous
value of EUR 355 trillion in 2015 to EUR 401 trillion in 2019 (13% increase) (based on data from the
Bank for International Settlement, Red Book Statistics, Payment and financial market infrastructures). The
data shows that in 2019, there was generally increased settlement activity, explained by loose monetary
conditions, low interest rates and new trading techniques.
44
Distributed ledger describes a decentralised dataset architecture which allows the keeping and sharing of
records in a synchronized way, while ensuring their integrity through the use of consensus-based validation
protocols and cryptographic signatures.
45
Benos, Evangelos & Garratt, Rod & Gurrola Perez, Pedro, ‘The economics of distributed ledger
technology for securities settlement’ (2019). Ledger. 4. 10.5195/ledger.2019.144.
46
In 2015 an estimated EUR 17-24 billion was spent annually on trade processing globally; Bech, J.
Hancock, T. Rice & A. Wadsworth, ‘On the future of securities settlement’, Bank for International
Settlement, BIS Quarterly Review, March 2020.
14
operations and global reach.47
This is reflected48
in the growing application of DLT in
post-trade processes, i.e. issuance and settlement of shares and bonds, data recording or
the use of tokens to represent shares. Currently, applying DLT to post-trade processes has
the greatest potential with respect to DvP, automation of risk management, settlement
and the development of currency-substitutes as means of payment.49
(c) Provision of cross border services by CSDs
Fostering competition, greater interoperability and better connectivity among CSDs
were some of the main policy objectives of CSDR. Nevertheless, data collected by
ESMA does not reflect this.50
EU CSDs’ cross-border activity, i.e. the CSD services
provided in host Member States can be measured by (1) the use of CSD links established
between EU CSDs; (2) the measurement of the services provided to participants and
issuers from host Member States; and (3) T2S activity.
First, a link allows a CSD to give its clients access to securities recorded and settled in
another CSD. The number of links and the volumes handled by established connections
measure the cross-border provision of settlement services by CSDs. In this regard,
established connections are handling increasing volumes, suggesting growing cross-
border activity through this channel. The value of settlement instructions settled through
links with other EU CSDs increased from EUR 109 trillion in 2017 to EUR 160 trillion
in 2019,51
a growth of 47%. The total number of settlement instructions through links
almost doubled between 2017 (23 278 314 instructions) and 2019 (38 984 805
instructions). 52
The growth in the use of links outpaced the growth in settlement
instructions by EU CSDs (32% and 28% in 2014 and 2019 respectively).
However, the number of CSD links53
has remained stable since 2017. Excluding the
ICSDs which both have a very high number of links (31 for Clearstream Banking, 25 for
Euroclear Bank), the average number of links per CSD is 5 links with other EU CSDs
between 2017- 2020.54
At the same time, the total number of links for all CSDs,
including links with ICSDs, increased by 14% between 2017 (121 links) and 2020 (138
links). Excluding ICSDs, the number of links rose by 28% from 64 to 82 links.55
The
increasing traffic through links shows that such connections serve the development of
cross-border settlement, but the limited increase of CSD links demonstrates that barriers
to cross-border activities remain.
Second, another measure of use of cross-border services are the type of CSD services,
including notary and central maintenance services, provided to participants and
issuers from other Member States.
47
Shabsigh, G., Khiaonarong, T. Leinonen H., ‘Distributed ledger technology experiments in payments and
settlements”, International Monetary Fund, June 2020.
48
See ‘The use of DLT in post-trade processes’, Annex 1, Advisory Groups on Market Infrastructures for
Securities and Collateral and for Payments, European Central Bank, April 2021.
49
Ibid.
50
ESMA Report to the European Commission, ‘Cross-border services and handling of applications under
Article 23 of CSDR’, ESMA70-156-3569, 05 November 2020.
51
Ibid.
52
Ibid, para. 25.
53
According to CSDR Art. 2(1)(29) a link is “…an arrangement between CSDs whereby one CSD becomes a
participant in the securities settlement system of another CSD, in order to facilitate the transfer of
securities from participants of the latter CSD to the participants of the former CSD, or an arrangement
whereby a CSD accesses another CSD indirectly via an intermediary…”.
54
ESMA Report on cross-border services (see note 50), para. 15
55
Ibid, para 14.
15
In 2019, the share of central maintenance and settlement services provided to participants
from other Member States by EU CSDs was 37%;56
a slight increase compared to 2018.
However, settlement activity shows that only 6 CSDs provide settlement services to more
than 75% of participants from other Member States, while two-thirds of EU CSDs settle
less than 50% of instructions for participants from other Member States (in value of
instructions settled). A similar concentration is noted for notary and central maintenance
services provided in relation to financial instruments issued by issuers from other
Member States with 3 CSDs (including the two ICSDs) providing more than 80% of their
services to issuers from other Member States, while most EU CSDs do not provide or
dedicate less than 5% of their notary and central maintenance activity to securities issued
by issuers from other Member States.57
Figure II: Member States in which
activities of CSDs from other Member
States are of substantial importance
Figure III: Central maintenance services
provided to participants from other
Member States
Source: Report to the European Commission: cross-border services and handling of applications under
Article 23 of CSDR, ESMA70-156-356, 5 November 2020, par. 40.
CSDs can provide all types of services, including of notary and central maintenance
services, to participants and issuers from other Member States. In that case, a CSD may
become of ‘substantial importance for the functioning of the securities markets and the
protection of the investors’58
in the host Member State which allows to estimate the
progression of cross border services. There was a slight increase in the number of
Member States in which the activities of CSDs from other Member States are of
substantial importance and to this date, in 19 Member States there is no substantial
56
Of the value of financial instruments centrally maintained in securities accounts by the CSD for
participants and other holders of securities accounts from other Member States.
57
ESMA Report on cross-border services (see note 50), paras. 41 and 43.
58
Commission Delegated Regulation (EU) 2017/389 of 11 November 2016 supplementing Regulation (EU)
No 909/2014 of the European Parliament and of the Council as regards the parameters for the calculation
of cash penalties for settlement fails and the operations of CSDs in host Member States, OJ L 65,
10.3.2017, specifies the criteria to be considered in order to determine whether a CSD is of substantial
importance for the functioning of the securities markets and the protection of investors in the host Member
States concerned.
16
activity from CSDs from other Member States (Figure II). In line with this trend, there
has been a slight increase in the share of EU CSDs providing central maintenance (Figure
III) and settlement services59
to participants in other Member States.
Third, Target2-Securities (T2S), launched in 2015, aimed to address fragmented
securities settlement in the EU and the resulting complex cross-border settlement. It
offers delivery versus payment settlement in central bank money. It also provides
harmonised and commoditised securities settlement to CSDs and applies a single set of
rules, standards and prices to all participants. T2S facilitates cross-border settlement,
resulting in increased integration of Europe’s financial markets infrastructure by:
 simplifying the purchase of securities in other EU countries;
 reducing costs of cross-border settlement;
 increasing competition among providers of post-trade services;
 pooling collateral and liquidity;
 reducing settlement risk by using central bank money for transactions on T2S.
It connects 21 CSDs60
from 18 Member States and Switzerland. It offers settlement in
Euro and Danish Krone and processes 687 476 securities transactions worth EUR 672.53
billion per day.61
T2S has also helped encourage harmonisation of market practices and
competition in the EU.
1.4. Legal and political context
1.4.1. Legal context: Central Securities Depositories Regulation
CSDR is one of the key regulations adopted by the EU following the financial crisis of
2008 to ensure that securities settlement is safe, stable and efficient. It entered into
force on 17 September 2014.62
CSDR provides a set of common requirements for CSDs across the EU by introducing:
 shorter settlement periods;
 cash penalties and other deterrents for settlement fails;
 strict authorisation, organisational, conduct of business and prudential
requirements for CSDs;
 a passport procedure allowing authorised CSDs to provide services across the EU;
 increased prudential and supervisory requirements for CSDs and other institutions
providing banking services that support securities settlement;
 increased cooperation requirements for authorities across Member States with
respect to CSDs providing their services in relation to financial instruments
constituted under the law of a Member State other than that of their authorisation
and to CSDs establishing a branch in another Member State.
59
See para 41, ESMA Report on cross-border services, ESMA70-156-3569, 05 November 2020.
60
In case of Belgium (Euroclear Belgium and National Bank of Belgium Securities Settlement System) and
France (Euroclear France and ID2S) more than one CSD participates to T2S. For a list of CSDs
participating to T2S see:
https://www.ecb.europa.eu/paym/target/t2s/profuse/shared/pdf/List_of_CSDs_connected_to_T2S.pdf.
61
Eurosystem T2S Annual Report 2020.
62
CSDR was incorporated in the EEA Agreement with Council Decision (EU) 2019/134 of 21 January 2019
on the position to be adopted, on behalf of the European Union, within the EEA Joint Committee,
concerning the amendment of Annex IX (Financial Services) to the EEA Agreement, OJ L 25, 29.1.2019.
17
The CSDR legal framework also includes Level 263
and Level 3 measures (e.g. ESMA
guidelines and Q&As).
CSDs may also be subject to other EU legislation depending on their status, e.g. CSDs
operating with a banking license are also subject to the relevant banking legislation.
Moreover, they may have to comply with certain national laws in the Member State in
which they are incorporated, e.g. securities, corporate or civil law. As securities
settlement systems, CSDs qualify as systems under the Settlement Finality Directive64
and are therefore subject to the applicable national transposing laws.
Finally, CSDs should also consider the International Principles for financial market
infrastructures65
issued by the Committee on Payments and Market Infrastructures
(CPMI)66
, the International Organization of Securities Commissions (IOSCO)67
and the
FSB68
.
1.4.2. Political context: Capital Markets Union (CMU), Brexit, Recovery post Covid-19
The Commission launched its follow-up CMU Action Plan to create a single market for
capital across the EU. The aim is to increase investment and savings flowing throughout
the EU, benefitting citizens, investors and companies, regardless of where they are
located. A fully functioning and integrated market for capital will allow the EU economy
to grow in a sustainable way and be more competitive.
63
Commission Delegated Regulation (EU) 2017/389 (see note 58); Commission Delegated Regulation (EU)
2017/390 of 11 November 2016 supplementing Regulation (EU) No 909/2014 of the European Parliament
and of the Council with regard to regulatory technical standards on certain prudential requirements for
central securities depositories and designated credit institutions offering banking-type ancillary services,
OJ L 65, 10.3.2017; Commission Delegated Regulation (EU) 2017/392 of 11 November 2016
supplementing Regulation (EU) No 909/2014 of the European Parliament and of the Council with regard to
regulatory technical standards on authorisation, supervisory and operational requirements for central
securities depositories, OJ L 65, 10.3.2017, Commission Implementing Regulation (EU) 2017/394 of 11
November 2016 laying down implementing technical standards with regard to standard forms, templates
and procedures for authorisation, review and evaluation of central securities depositories, for the
cooperation between authorities of the home Member State and the host Member State, for the consultation
of authorities involved in the authorisation to provide banking-type ancillary services, for access involving
central securities depositories, and with regard to the format of the records to be maintained by central
securities depositories in accordance with Regulation (EU) No 909/2014 of the European Parliament and of
the Council, OJ L 65, 10.3.2017; Commission Delegated Regulation (EU) 2018/1229 of 25 May 2018
supplementing Regulation (EU) No 909/2014 of the European Parliament and of the Council with regard to
regulatory technical standards on settlement discipline, OJ L 230, 13.9.2018, (‘RTS on settlement
discipline’); Commission Delegated Regulation (EU) 2017/391 of 11 November 2016 supplementing
Regulation (EU) No 909/2014 of the European Parliament and of the Council with regard to regulatory
technical standards further specifying the content of the reporting on internalised settlements, OJ L 65,
10.3.2017; Commission Implementing Regulation (EU) 2017/393 of 11 November 2016 laying down
implementing technical standards with regard to the templates and procedures for the reporting and
transmission of information on internalised settlements in accordance with Regulation (EU) No 909/2014
of the European Parliament and of the Council, OJ L 65, 10.3.2017.
64
Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality
in payment and securities settlement systems, OJ L 166, 11.6.1998.
65
https://www.iosco.org/about/?subsection=cpmi_iosco.
66
Committee on Payments and Market Infrastructures (CPMI) of the BIS sets international standards to
promote, monitor and recommend about safety and efficiency of payment, clearing, settlement and related
arrangements. See: https://www.bis.org/cpmi/about/overview.htm .
67
International Organization of Securities Commissions (IOSCO) is an association of organizations that
regulate the world’s securities and futures markets. See: https://www.iosco.org
68
Financial Stability Board (FSB) is an international body, operating in the framework of the G20, that
monitors and makes recommendations about the global financial system. See: https://www.fsb.org/about/
18
The 2020 CMU Action Plan69
and the 2021 Commission Work Programme
announced the Commission’s intention to come forward with a legislative proposal to
amend CSDR to improve its efficiency and effectiveness (CSDR REFIT) and contribute
to the development of a more efficient post-trading landscape in the EU. This follows
from the work of the High Level Forum for the CMU70
that, amongst others, made
recommendations to facilitate the emergence of a common EU CSD market. Resilient
and efficient markets for settlement in the EU should remove barriers to cross-border
settlement, ensure adequate powers to monitor risks and reduce administrative burden
and compliance costs. As such, costs of securities transactions should fall, and trust in
securities transactions rise, contributing to a better financing of the economy.
More generally, any forthcoming EU legislative proposal, including on CSDR, will have
to take into account, where necessary, the consequences of Brexit as well as to identify
how to contribute to the return to long-term growth of the EU following the crisis
resulting from the Covid-19 pandemic and to finance the EU’s environmental and
digital transitions.
Regarding Brexit, on 25 November 2020, the Commission adopted an equivalence
decision determining that, until 30 June 2021, the regulatory and supervisory framework
applicable to CSDs established in the UK is equivalent in accordance with CSDR. On 11
December 2020,71
ESMA announced that Euroclear UK & Ireland Limited, the UK CSD,
would be recognised as a third-country CSD. ESMA’s recognition decision applied
from 1 January until 30 June 2021. The aim was to give EU issuers, and in particular
Irish issuers that used that CSD, sufficient time to transfer their securities to an EU CSD,
a project which was completed on 15 March 2021.72
From its side, the UK introduced a
transitional regime73 under which certain non-UK CSDs can offer CSD services until
they are permanently recognised under the UK CSDR. As of 30 April 2021, 15 non-UK
CSDs that have notified the Bank of England that they will offer CSD services in the UK
under the transitional regime.74
In addition, the UK Treasury75
announced that the UK
will not implement the CSDR settlement discipline regime.
As concerns the Covid-19 crisis, post-trade infrastructures, and CSDs in particular, have
remained resilient and continue to provide their services. Nevertheless, due to the impact
of the Covid-19 pandemic on the implementation of regulatory projects and IT deliveries
by CSDs and their participants, ESMA proposed postponing the date of entry into force
69
Commission Communication ‘A Capital Markets Union for people and businesses – New Action Plan’ (see
note 10).
70
Final report of the High Level Forum on the Capital Markets Union - A new vision for Europe’s capital
markets |European Commission (europa.eu): https://ec.europa.eu/info/files/200610-cmu-high-level-forum-
final-report_en.
71
ESMA to recognise Euroclear UK & Ireland Limited (EUI) after Brexit transition period (europa.eu)
https://www.esma.europa.eu/press-news/esma-news/esma-recognise-euroclear-uk-ireland-limited-eui-after-
brexit-transition-period.
72
Successful migration of Issuer CSD Services for Irish Securities from Euroclear UK & Ireland to Euroclear
Bank - Euroclear: https://www.euroclear.com/newsandinsights/en/press/2021/2021-mr-07-irish-securities-
migration.html.
73
As the Settlement Finality Directive is closely linked to CSDR, it is worth noting that the UK also allows
certain EEA systems to receive temporary UK settlement finality protection under the temporary
designation regime of the Financial Markets and Insolvency until they receive ‘steady state’ designation.
74
List of third-country CSDs (bankofengland.co.uk), https://www.bankofengland.co.uk/-
/media/boe/files/financial-stability/financial-market-infrastructure-supervision/list-of-third-country-
csds.pdf?la=en&hash=824459A062CBB16DD1C8A42AD2D99A9DC36E3E31.
75
Written statements - Written questions, answers and statements - UK Parliament, https://questions-
statements.parliament.uk/written-statements/detail/2020-06-23/HCWS309 .
19
of the Regulatory Technical Standards (RTS) on settlement discipline76
until 1 February
2022.77
Stakeholders also noted that market developments during this crisis would have
been significantly worse in terms of available market liquidity if the settlement discipline
was in place. In this regard, the European Parliament, in its resolution on further
development of the Capital Markets Union,78
also invited the Commission to review
the settlement discipline regime under CSDR in view of Brexit and the Covid-19 crisis.
Finally, market infrastructures were also part of two recent packages published by the
Commission on digital finance79 and on fostering openness, strength and resilience of
the European economic and financial system.80
In September 2020, in line with the
Commission priorities to make Europe fit for the digital age and to build a future-ready
economy that works for people, the Commission published a New Digital Finance
Package,81
which included a legislative proposal on a pilot regime82
. This proposal seeks
to collect experience and to provide legal certainty and flexibility for market
participants (including CSDs) who wish to operate a DLT market infrastructure, by
establishing uniform requirements for operating these DLT systems. Under this pilot
regime trading facilities and CSDs using DLT can develop their businesses and provide a
safe environment for market participants and investors. To this end, it provides optional
exemptions to certain requirements of CSDR. The New Digital Finance Package also
includes a ‘Digital Operational Resilience Act' (DORA)83
that aims to ensure that all
participants in the financial system, including CSDs, have the necessary safeguards in
place to mitigate cyber-attacks and other risks.
Furthermore, in January 2021, as part of a broader set of actions to strengthen the EU’s
open strategic autonomy and resilience, the Commission published a communication on
‘The European economic and financial system: fostering openness, strength and
resilience.84
This Communication sets out how the EU can reinforce its open strategic
autonomy in the macroeconomic and financial fields by, inter alia, further developing EU
financial market infrastructures, including CSDs, and increasing their resilience.
In conclusion, this REFIT initiative should be viewed within the context of the broader
agenda to make the EU markets more competitive, digital and resilient as represented by
the CMU, digital and open strategic autonomy initiatives. However, developing
internationally competitive CSDs is not a direct objective of CSDR per se. The main
objectives of CSDR and this Review are to allow EU settlement markets to become
more efficient and secure. However, market players will benefit from efficient and
76
RTS on settlement discipline (see note 63).
77
ESMA proposes to further postpone CSDR settlement discipline, https://www.esma.europa.eu/press-
news/esma-news/esma-proposes-further-postpone-csdr-settlement-discipline.
78
European Parliament Resolution of 8 October 2020 on further development of the Capital Markets Union
(CMU), (2020/2036,(INI)), see para. 21.
79
https://ec.europa.eu/info/publications/200924-digital-finance-proposals_en.
80
Communication from the Commission to the European Parliament, the Council, the European Central
Bank, the European Economic and Social Committee and the Committee of the Regions, ‘The European
economic and financial system: fostering openness, strength and resilience’, COM/2021/32.
81
https://ec.europa.eu/info/publications/200924-digital-finance-proposals_en.
82
Proposal for a Regulation of the European Parliament and the Council on a pilot regime for market
infrastructures based on distributed ledger technology, COM(2020) 594.
83
Proposal for a Regulation of the European Parliament and of the Council on digital operational resilience
for the financial sector and amending Regulations (EC) No 1060/2009, (EU) No 648/2012, (EU) No
600/2014 and (EU) No 909/2014, COM(2020) 595.
84
Commission Communication, ‘The European economic and financial system: fostering openness, strength
and resilience’ (see note 80).
20
reliable settlement as well as increased competition in the EU capital market. This
may drive the emergence of internationally competitive EU post-trade service
providers.
1.4.3. Stakeholder consultation
Stakeholder consultation took different forms (see Annex 3), including:
 a Commission targeted consultation between 8 December 2020 and 2 February
202185
;
 ESMA reports - four reports in 2020 and 2021 were submitted to the
Commission on internalised settlement,86
the cross-border provision of services
by CSDs and the handling of applications to provide notary and central
maintenance services cross-border,87
the provision of banking type ancillary
services88
and the use of FinTech by CSDs.89
Such reports also took into account
answers to ESMA surveys from national authorities, CSDs and participants;
 Meetings with Member States’ Experts, where the secretariat of the Economic
and Monetary Affairs committee of the European Parliament, the ECB and
ESMA were also invited, on 22 September 2020 and 15 July 2021;
 Input from the European System of Central Banks (ESCB) to the CSDR
consultation process, including an anonymised and consolidated outcome of a
survey conducted among CSDs.
 A meeting with Members of the European Parliament on 6 September 2021;
 Bilateral meetings with stakeholders as well as confidential information received
from a wide range of stakeholders.
1.4.4. Report to the Council and the Parliament
Article 75 of CSDR required the Commission to review and prepare a general report
on the Regulation and submit it to the Parliament and the Council by 19 September
2019. Furthermore, Article 81(2c) of Regulation (EU) 2010/10 establishing a European
Supervisory Authority (European Securities and Markets Authority), required the
Commission, after consulting all relevant authorities and stakeholders, to conduct a
comprehensive assessment of the potential supervision of third-country CSDs by
ESMA exploring certain aspects, including recognition based on systemic importance,
ongoing compliance, fines and periodic penalty payments.
Taking into account that some CSDR requirements did not apply until the entry into
force of the relevant regulatory technical standards in March 2017 and that some EU
CSDs were only recently authorised under CSDR, the Commission report on CSDR was
adopted in July 2021.90
The report identifies specific areas where targeted action may be
85
Commission targeted consultation on the review of regulation on improving securities settlement in the
European Union and on central securities depositories, https://ec.europa.eu/info/consultations/finance-
2020-csdr-review_en.
86
ESMA Report to the European Commission, ‘CSDR Internalised Settlement’, 5 November 2020,
ESMA70-156-3729.
87
ESMA Report on cross-border services (see note 50).
88
ESMA Report to the European Commission, ‘Provision of banking-type ancillary services under CSDR’,
08 July 2021, ESMA70-156-4582.
89
ESMA Report to the European Commission, ‘Use of FinTech by CSDs’, 2 August 2021, ESMA70-156-
4576.
90
Report from the Commission to the European Parliament and the Council under Article 75 of Regulation
(EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities
21
necessary to ensure the fulfilment of the objectives of CSDR in a more proportionate,
efficient and effective manner. The five main areas identified are the following:
 clarifying and simplifying the burdensome requirements related to the provision
of services by CSDs domestically and cross-border;
 improving the supervisory convergence amongst authorities involved in CSDs’
supervision;
 facilitating the provision of banking-type ancillary services;
 reducing the disproportionate burdens and costs related to settlement discipline;
 enhancing the framework for third-country CSDs.
In its report, the Commission also invited ESMA to consider whether supervisory
convergence tools could be used or amendments to existing regulatory technical
standards may be required to facilitate the use of technological innovation by CSDs.
2. PROBLEM DEFINITION
2.1. Methodology
The main problems assessed in this impact assessment concern areas for which an
evaluation has been carried91
out, as well as input received from various authorities and
stakeholders (see section 1.4.3). These indicate that targeted action is necessary to ensure
fulfilment of the CSDR objectives more proportionately, efficiently and effectively.
The impact assessment considers the costs and benefits of targeted amendments to CSDR
concerning the barriers to cross-border settlement, the disproportionate compliance costs
and the insufficient insight into the activities of third-country CSDs. While the definition
of the problems is targeted, the impact assessment considers the cumulative impact of
targeted changes as presented in section 8.
A key consideration is that the application of CSDR remains work in progress. A
sufficient number of EU CSDs was authorised only recently under CSDR, the regulatory
technical standards specifying CSDR started applying only as of 2017 and certain core
CSDR requirements (including settlement discipline) are yet to enter into application.
This limits the availability of data on costs and benefits of the requirements.
First, while the full impact of CSDR is still unfolding, feedback from stakeholders and
public authorities92
indicates that CSDR has contributed to achieving its original
objectives of ensuring safety of settlement and financial stability. The impact assessment
therefore only considers targeted changes at this point in time.
Second, certain issues raised by authorities and stakeholders are not covered in this
impact assessment, because they cannot or should not at present be addressed within the
context of CSDR, e.g.:
a) stakeholders noted that CSDs are still subject to Member States’ national laws
for issues not regulated in CSDR, such as corporate or civil law matters. This
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, COM(2021) 348.
91
See Annex 6.
92
See Summary report of the targeted consultation document on the review of regulation on improving
securities settlement in the European Union and on central securities depositories (‘Summary report of the
Commission CSDR targeted consultation’),
https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/2020-
csdr-review-summary-of-responses_en.pdf.
22
may impact their ability to offer services cross-border as they may need to set up
separate operational processes and procedures to comply with the relevant host
Member States’ requirements. Nonetheless, harmonisation of the relevant
national laws goes beyond the scope of CSDR and therefore is not considered.
b) stakeholders, including the High Level Forum on the CMU, raised concerns about
CSDs’ access to central bank money93
which is subject to conditions set by the
central bank in question; e.g. in the Euro area, the ECB sets the access
conditions.94
For CSDs that want to settle in central bank money in a currency
other than that of the jurisdiction of their authorisation (or outside of the EU),
access to the respective central banks can be challenging95
and therefore limited.
Indeed, very few EU CSDs seem to have direct access to foreign central banks;
e.g. one EU CSD has locally incorporated licensed subsidiaries to obtain access to
some foreign central banks (e.g. Australian, Canadian, US), however access to
others remains impossible (e.g. Russia).96
This is particularly an issue for smaller
CSDs, due to the cost and significant time the process requires. Nonetheless, due
to the principle of central bank independence, CSDR cannot introduce obligations
on central banks to facilitate CSDs’ access to central bank money within the EU.
c) digitalisation and new technologies are transforming the EU financial system and
the way it provides financial services to EU businesses and citizens. This raised
questions of whether existing CSDR provisions ensure technology
neutrality.97
The Regulation for pilot regime for market infrastructures based on
DLT (see section 1.4.2), which allows DLT entities to be exempted under certain
conditions from complying with certain CSDR provisions, should enable all
stakeholders to gain insights into the use of DLT for market infrastructures and
the legislation to adapt to the gathered experiences. It therefore seems that any
fundamental changes to CSDR to realise the full potential of technology should
be postponed until the lessons can be drawn from the pilot regime’s
implementation. This is a view that most respondents to the targeted consultation,
as well as ESMA, share. Fintech, which is an area related to the existing CSDR
framework, is therefore outside of the scope of this impact assessment.
d) Processes for withholding tax are a barrier for efficient EEA market
infrastructures and for cross-border settlement. It was identified in the first
Giovannini Report98
and reconfirmed in the 2020 CMU Action Plan.99
However,
93
A securities trade typically results in an obligation for the seller to deliver securities and a corresponding
obligation for the buyer to deliver cash. In principle, to deliver cash, CSDR promotes settlement in central
bank money. Settling in central bank money meant the risk of the cash part of a securities transaction is
settled in a central bank account. This offers more security than commercial banks in terms of continuity of
the payment services as well as the availability of liquidity. When settlement in central bank money is not
practical or available, CSDR allows settlement under commercial bank money under strict conditions (on
settlement in commercial bank money see section 2.3.3).
94
See https://www.ecb.europa.eu/paym/coll/coll/html/SSS_links_eligibility.en.html.
95
European Post-Trade Forum Report (see note 11), p. 116; remote participation is not always allowed and
most CSDs are not authorised as banks.
96
ESMA Report ‘Provision of banking-type ancillary services under CSDR’ (see note 88), p. 16.
97
The technology neutrality principle means that legislation or policy should not prescribe technological
solutions on businesses, citizens or other stakeholders. Any product or service should be accessible through
any means, platform or operating system.
98
Cross-border clearing and settlement arrangements in the European Union - Giovannini Group – 22
November 2001: Giovannini reports, https://ec.europa.eu/info/publications/giovannini-reports_en .
23
as taxation aspects cannot be dealt with in CSDR, and as the Commission plans to
propose a legislative initiative for introducing a common, standardised, EU wide
system for withholding tax relief at source, accompanied by an exchange of
information and cooperation mechanism among tax administrations, this issue is
outside the scope of this impact assessment.
2.2. What are the problems?
For a detailed description of the identified problem areas see Annex 6.
2.2.1. Barriers to cross-border settlement
One of the main objectives of CSDR was to facilitate cross-border settlement in order to
limit the risks and costs involved. Nevertheless, most stakeholders see limited progress in
the provision of cross-border services by CSDs (see point (c) in Section 1.3.3).100
The
evaluation,101
has identified three main reasons for this: (i) burdensome passporting
process; (ii) insufficient cooperation between authorities; and (iii) restrictive
requirements for the provision of banking services related to settlement.
First, the passporting process (i.e. the special procedure under which a CSD authorised
in a Member State can provide services in relation to financial instruments constituted
under the law of another Member State), is burdensome. It requires, where relevant, the
agreement of the host national supervisor, regarding the assessment by the CSD of the
measures it intends to take to allow its users to comply with the national law referred to
in Article 49(1). This partially shifted the burden from the participants to CSDs by
requiring the latter to demonstrate that they have the relevant measures in place, rather
99
Commission Communication, ‘A Capital Markets Union for people and businesses - New Action Plan’
(see note 10), see Action 10.
100
ESMA Report on cross-border services (see note 50), p. 20.
101
See “Annex 5 – Evaluation” and ESMA Report ‘Provision of banking-type ancillary services under CSDR’
(see note 88).
24
than relying on users to directly ensure that the CSD they use allows them to comply
with the applicable national legislation, despite the fact that it is the users’ responsibility
to comply with such national legislation. The objective was to ensure that the provision
of cross-border services by a CSD would not affect the application of relevant national
laws. The unintended consequence was to make the passporting process burdensome102
,
thereby deterring CSDs from expanding their activities across borders (see sections 1.3.3,
2.2.1 and 2.3.1) or leading others to stop providing cross-border services. The fact that so
far there have been no refusals by host national supervisors shows that although
passporting is not used as tool to protect national markets, it has added a burdensome and
costly level of complexity. Simultaneously, certain third-country CSDs seem to be
exempted from these requirements (See section 2.3.5), making it is easier for them to
operate cross-border in the EU than for an EU CSD.
Second, cooperation between authorities in home and host Member States and
supervisory convergence is insufficient (see section 2.3.2). Despite the existence of
provisions enabling the use of cooperative arrangements or voluntary supervisory
colleges, there is no evidence of their extensive use (only one college of supervisors
has been set up and no information is available to ESMA on whether the other required
cooperative arrangements under CSDR have been set up). This means that the same CSD
is likely to be subject to different supervisory arrangements and requirements depending
on the Member States of operation (see also section 2.3.2).
Third, CSDR contains strict conditions for CSDs to settle a transaction in
commercial bank money (see section 2.3.3). A securities trade typically results in an
obligation for the seller to deliver securities (securities leg) and a corresponding
obligation for the buyer to deliver cash (cash leg). To ensure delivery of the cash, a CSD
may use accounts at a central bank103
or commercial bank (i.e. CSDs may open accounts
in their own books or in a commercial bank). Access to central banks depends on the
respective central bank, brings cost and therefore requires economies of scale.
Consequently, settlement in commercial bank money is sometimes the only option
available for CSDs that want to settle in currencies other than that of the jurisdiction in
which they are authorised (e.g. because the CSD does not have an account with the
central bank of the transaction’s currency). However due to the restrictive nature of the
conditions, the percentage of EEA CSDs’ settlement activity in foreign currencies
(Figure V) and the level of settlement in foreign currencies remains limited. 104
Figure V: Settlement in foreign currencies by EEA CSDs
102
Summary report of the Commission CSDR targeted consultation (see note 92).
103
CSDR, in line with international standards, gives preference to settlement in central bank money as a credit
balance at a central bank implies no credit risk since what defines a central bank is its absolute ability to
issue currency to meet its needs. CSDs in the EU in principle have access to the central bank of the
currency in their jurisdiction and can therefore settle trades in that currency in central bank money.
104
As central banks can set their own access criteria, such as an obligation to be established in the jurisdiction
of the relevant currency, this is even more pertinent for EEA CSDs considering activities outside the EEA.
25
Furthermore, as seen in Figure VI, the vast majority of CSDs settle in only one or two
foreign currencies.105
This means that issuers have a limited choice for multicurrency
issuance which prevents genuine cross-border competition (especially since issuers seek
one-stop-shop solutions)106
and the emergence of a single capital market.
Figure VI: Number of CSDs per range of yearly settlement in foreign currencies107
2.2.2. Disproportionate compliance costs
Market participants and authorities have identified targeted areas where the CSDR
compliance costs are disproportionate, because (a) legal requirements are unclear,
and/or (b) they are considered excessively burdensome, and/or (c) the costs of complying
with the rules appear to outweigh the potential benefits. Three areas have been identified
as generating disproportionate compliance costs: passporting rules; rules on the provision
of banking services related to settlement; and the settlement discipline regime.
First, the CSDR passporting rules allow CSDs to provide services for financial
instruments constituted under the law of any Members State, thus allowing CSDs to
benefit from access to a larger market and issuers to have more choice in where they
issue and hold their securities. However, the associated the legal requirements have
turned out to be unclear and burdensome (see section 2.3.1).
105
ESMA Report ‘Provision of banking-type ancillary services under CSDR’ (see note 88).
106
Euronext response to the Commission targeted consultation on CSDR:
https://www.euronext.com/it/regulation/government-affairs.
107
Report to the European Commission: provision of banking-type ancillary services under CSDR, ESMA, 8
July 2021: esma70-156-4582_report_to_the_ec_-_csdr_banking_services.pdf (europa.eu).
26
In addition, the objective difficulty to comply with the legal requirements and the
subsequent threat of potential legal action, generate costs that present an unnecessary
barrier to the development of CSD activities. A CSD reported confidentially108
that the
associated internal legal support required throughout the passporting process was
significant109
. Even if most CSDs applying for a passport to operate cross-border have
been able to obtain it, stakeholders have indicated that this process is difficult, lengthy
and demanding (see section 2.3.1).
Second, the rules around the provision of banking services create disproportionate
compliance costs for CSDs. This negatively impacts the provision of cross-border
services. The lack of alternatives to settle in commercial or central bank money could
undermine the safety of settlement, as transactions could be settled free of payment
instead of delivery versus payment, increasing risks for the market as a whole.110
For a
detailed explanation of specific problems faced and/ or risks created by CDS settling in
commercial bank money see Annex 6.
Third, certain elements of settlement discipline,111 although not yet applicable, would
potentially create disproportionate compliance costs for CSDs and market participants.
To ensure the safety of settlement, any participant in a securities settlement system
should settle its obligation on the intended settlement date (ISD); a settlement fail occurs
when a transaction does not settle on that date.112
The settlement discipline regime aims
to encourage market participants to avoid settlement fails; its two main elements are the
measures to prevent settlement fails (Article 6 of CSDR) and the measures to address
settlement fails (Article 7 of CSDR). The latter comprise two main pillars; cash penalties
and mandatory buy-ins. CSDs would be required to impose cash penalties on their
participants in case of settlement fails. If despite the cash penalties, the original seller
fails to deliver the securities, it will be subject to a mandatory buy-in. A buy-in
provides the buyer of securities with the right to buy the securities elsewhere, cancel the
original transaction and put the costs of the buy-in, as well as any price difference, with
the original seller.113
The original objective of the settlement discipline regime as contained in the 2012
Commission proposal114
was mainly to harmonise the diverse market discipline measures
across EU capital markets. Hence the proposed measures were general, with detailed
technical standards to be set in secondary legislation115
. The impact assessment could not
quantify ex ante the costs and benefits of these general settlement discipline measures
relying rather on qualitative assessments. The final set-up of the settlement discipline
regime and the associated costs and benefits, became evident to the market participants
only when the 2018 regulatory technical standard116
(RTS) was published. Furthermore,
108
Based on confidential information provided to DG FISMA services.
109
Information provided to DG FISMA services confidentially. In addition to the internal legal support, it is in
practice impossible to provide a formalised assessment per market and per type of securities in all EEA
countries without external legal advice.
110
European Post-Trade Forum Report (see note 11), p. 117.
111
Articles 6 and 7 of CSDR.
112
CSDR defines settlement fails as the non-occurrence of settlement, or partial settlement of a securities
transaction on the intended settlement date, due to the lack of securities or cash and regardless of the
underlying cause (Article 2(15) of CSDR).
113
More details regarding the buy-in process is included in Annex 9.
114
COM (2012) 73 final.
115
See the Impact Assessment supporting the 2012 CSDR proposal. See SWD92012) 22 final, Option 1.1.2:
Introduce common EU principles for settlement discipline
116
Commission Delegated Regulation (EU) 2018/1229.
27
market volatility of spring 2020 triggered reflections about the potential impact of the
regime on trading conditions or ability to fulfil certain market functions.
Although settlement discipline rules would incentivise improvements in settlement rates,
it would also create high one-off (i.e. connecting to buy-in agents, repapering existing
contracts to take account of mandatory buy-in rules) and ongoing costs (i.e. in terms of
pricing and reduced liquidity of instruments potentially at risk of being bought-in or
trades being abandoned or migrating to non-EU trading venues (see section 2.3.4)).
Evidence provided seems to show that these costs are disproportionate and would stem
both from the lack of clarity around the rules governing the process (i.e. what
transactions are in-scope or how to use buy-in agents), from the framework’s impact on
market conditions (deterioration of liquidity for some instruments, higher bid-ask
spreads) and market participants’ trading behaviour (migration of trading from
peripheral instruments to liquid instruments, doubts around the viability of the market
maker role for less liquid instruments). The costs of applying in particular the rules on
mandatory buy-in could outweigh their benefits for three main reasons:
First, the market volatility of March/April 2020 gave stakeholders the opportunity to
reflect on how the upcoming settlement discipline regime would have impacted the
market.117
In essence, mandatory buy-ins could have exacerbated the negative impacts
linked to the crisis; in particular they could have increased liquidity pressure and
increased the costs of securities at risk of being bought-in.118
This would affect negatively market makers that take on risk onto their balance sheet to
provide immediate execution to clients. They119
are an important source of liquidity and
often offer securities they do not hold,120
based on the reasonable assumption of sourcing
these securities when necessary. For securities not held on their balance sheet, or which
cannot be readily sourced, the introduction of mandatory buy-ins would impact the
ability of market makers to make markets. To adjust for the expected cost of being
bought-in, market makers will have to add a premium to their prices – which will widen
the bid-offer spread (which will in turn increase costs to end-investors) – or they may
simply not make an offer price on an enquiry thereby deteriorating market liquidity.
Although these liquidity effects are most pronounced in choices made by market makers,
all investors, even in liquid securities, could face similar trade-offs between entering into
a trade (providing liquidity), the availability of the instrument and the cost of being
bought-in. These impacts are likely to be reflected in behavioural change, rather than a
price adjustment.121
117
Summary Report of the Commission CSDR targeted consultation (see note 92).
118
More than half of respondents to the targeted consultation, all categories included, considered that the
CSDR settlement discipline regime would have had a significant negative impact on the market if it had
been in place during the market turmoil provoked by Covid-19. Summary Report of the Commission
CSDR targeted consultation (see note 92).
119
By providing a buy and sell price for securities (bid-ask spread) market makers establish liquidity and
pricing, and help end-investors to redeem funds or transact in a timely fashion in instruments for which
there may not be a counterparty with an immediate opposite intention.
120
Market makers aim to run low levels of inventory since high levels of inventories have high risk, capital
and funding costs.
121
Especially during a credit crunch, this effect could be amplified as lenders would want to have the ability to
sell holdings at short notice to raise cash liquidity and the amount they will be willing to lend will be
further reduced.
28
Periods of market stress could be exacerbated by mandatory buy-ins as participants
would have to buy back the securities that already had limited availability adding
further liquidity pressure.122
Investors would have chased a small number of available
securities, driving up prices and potentially, further driving volatility in a stressed
market. Evidence provided by one bank, showed that the application of mandatory buy-
ins to EU government bonds in the current liquidity context could have led to a 50%-
100% increase in bid-offer spreads.123
Second, the settlement discipline regime could also give rise to unintended
consequences for the competitiveness of the EU capital markets. Capital markets
outside the EU do not have a comparable settlement discipline regime.124
These markets
rather rely on industry-led measures125
, i.e. the UK announced it is not implementing the
CSDR settlement discipline regime and will rely on settlement rules set by CREST, the
UK-based CSD.126
In particular mandatory buy-ins may create an additional cost and risk
for EU-settled securities that could disadvantage EU companies. Wider spreads and less
liquidity will reduce the investment returns of pension funds, asset managers and,
ultimately, end investors, which, according to some stakeholders, could risk driving
issuance, trading and investment activity outside of the EU.127
Furthermore, application
of mandatory buy-ins could lead to a potentially loss of counterparties and liquidity for
the EU capital market.128
The potential negative impact on the attractiveness of the EU
market would be at odds with the objectives making the EU capital market more
attractive by increasing the safety of settlement.
Finally, against the above arguments, it should be noted that despite the dramatic
increase in trading (settlement instructions increased by 30% between 2015 – 2019 in EU
122
Based on responses to the Commission CSDR targeted consultation from AFME, Association of German
Banks, European Fund and Asset Management Association (EFAMA), et al.
123
Based on confidential information provided to DG FISMA services.
124
During the CSDR consultation process stakeholders referred to SHO Regulation and SEC Rule 204, which
however relates only to short-selling and the obligation that broker and dealer must close-out unresolved
equities transactions. This was introduced to discourage the market from naked short-selling. Also
examples of buy-in were given for Asian markets, in particular Singapore Exchange where any unsettled
buy-in trade is carried forward to the next business day for settlement. If the buy-in and procurement
remains unsuccessful by ISD +6, cash settlement will be initiated against the seller to provide resolution of
the sale trade. However the Singapore Exchange has a very low failure rate because of DvP and very few
trades go to buy-in.
125
For instance, the International Capital Markets Association (ICMA) provides voluntary buy-in and sell-out
rules that allow non-defaulting parties the right to enforce physical settlement of failed trades without
incurring any direct losses, while the Global Master Repurchase Agreement allows non-defaulting parties
to remedy failed repo transactions. These tools are voluntary and application is subject to contractual
agreements between trading parties. “How to survive in a mandatory buy-in world?”, ICMA, June 2018.
126
Written statement by Chancellor of the Exchequer on 23 June 2020, https://questions-
statements.parliament.uk/written-statements/detail/2020-06-23/HCWS309. In the meantime the UK will
continue to apply CREST settlement discipline rules on failed transactions (p.37):
https://www.crh.com/media/3376/crest-rules-january-2021.pdf It provides for fines on either failed bought
or sold transactions.
127
See AFME response to the Commission CSDR targeted consultation, p. 36,
https://www.afme.eu/Portals/0/DispatchFeaturedImages/AFME_CSDR_CP_Response_Final.pdf.
128
‘Who Owns the European Economy? Evolution of the Ownership of EU-Listed Companies between 1970
and 2012’, The European Savings Institute & INSEAD OEE Data Services, 2013,
https://ec.europa.eu/info/sites/default/files/file_import/1308-report-who-owns-european-
economy_en_0.pdf.
29
CSDs129
) the settlement fail rate has remained relatively stable in the EU, both as a
share of value and number of total transactions (See Annex 8, Figure II ). It
experienced a spike for both types of instruments only during March/ April 2020 from
which both have recovered (albeit more slowly in the case of equity instruments). This
indicates that in normal market circumstances settlement in the EU can be relatively
efficient. Quantitative evidence suggests that, in relative terms, the buy-in regime targets
a small proportion of the total volume of transactions but will have an impact on the
pricing and liquidity of a much larger percentage of overall transactions.130
Nevertheless, even if settlement efficiency in the EU seems to be stable or improving
slightly, fail rates in the EU still remain higher than in, e.g. the US where about 2% of all
US treasuries and mortgage backed securities transactions fail.131
Different levels of
settlement efficiency between national capital markets can partly explain the lower
overall EU settlement efficiency132
.
2.2.3. Insufficient insight into the activities of third-country CSDs
Under CSDR, third-country CSDs providing services in the EU provide insufficient
insight into their activities in relation to financial instruments constituted under the law
of a Member State, in particular when they provide services under the grandfathering
clause (see section 2.3.5). This leads to potential risks for the whole settlement
ecosystem, and in particular on EU authorities, EU CSDs and issuers.
First, EU authorities are not aware of the activities of third-country CSDs in the
EEA, a fact underlined both by ESMA and several respondents to the targeted
consultation133
. Some third-country CSDs operating in the EU are not subject to any
notification requirement (see section 2.3.5). EU authorities therefore have no information
on which services they provide, their volume or the Member States affected by them.
This means that, if needed, neither issuers nor public authorities at national and EU level
can assess the impact of these CSDs on the financial stability of the EU.
Second, certain third-country CSDs follow different rules than those EU CSDs are
subject to, and provide services in relation to the same financial instruments (see section
2.3.5). The lack of information on third-country CSDs’ activities may create a risk for
investors in those cases where the legislation governing them does not offer the same
level of protection than EU legislation would.
129
Data generated through the Securities Trading, Clearing and Settlement Statistics Database, European
Central Bank, https://sdw.ecb.europa.eu/browse.do?node=9691131.
130
Ibid.
131
K. Burne, ‘How to succeed in fixing settlement fails’, Aerial View, Bank of New York Mellon, 2020.
132
Based on confidential information provided to DG FISMA services.
133
ESMA letter to the European Commission, ‘ESMA’s Proposals regarding the Review of the CSD
Regulation (CSDR), 20 May 2021, https://www.esma.europa.eu/sites/default/files/library/esma70-156-
4519_letter_to_ec_-_csdr_review.pdf .
30
Third, the lack of information on third-country CSDs’ activities may create a risk
for investors. The Commission has not assessed the rules to which CSDs operating
under the grandfathering clause are subject, despite the fact that they provide services in
relation to the same financial instruments EU CSDs do (see section 2.3.5). The lack of
information on those CSDs’ activities may create a risk for investors where the
legislation governing them does not offer the same level of protection as EU legislation.
2.3. What are the problem drivers?
2.3.1. Burdensome and unclear passporting requirements for CSDs
A core objective of CSDR was to dismantle the barriers to cross-border settlement in
order for authorised CSDs to enjoy the freedom to provide services within the EU.
To ensure an appropriate level of safety in the provision of services by CSDs in another
Member State, CSDs are currently subject to a specific procedure in Article 23 of CSDR.
Under this article, when CSDs wish to provide notary and central maintenance services
in relation to financial instruments “constituted under the law of another EU Member
State” or to set up a branch in another Member State a specific procedure needs to be
followed, involving the approval by the host national authority. In particular, they should
communicate to the competent authority of their home Member State information
including, where relevant, an assessment of the measures the CSD intends to take to
allow its users to comply with the national law referred to in Article 49(1).
These requirement of the CSDR passporting process aimed to ensure that the relevant
pieces of national legislation would be taken into account and would still be complied
with. However, such requirements allow the host competent authority to verify this only
once, when assessing the passporting request, and not on a continuous basis.
Furthermore, the possibility to refuse the passport does not seem to have been used by
host competent authorities134
.
26 CSDs have been authorised under CSDR, out of which 15 provide cross-border
services in the EEA.135
Further to these first passporting procedures, the majority of stakeholders136
and
Members States137
now generally agree that the passporting procedure is burdensome
(one CSD even noted that it stopped providing services with respect to foreign securities
in order to avoid it138
) and some of its requirements are unclear and could result in
divergent interpretations by national authorities, thus reducing CSDs’ cross-border
activity and leading to disproportionate compliance costs (see sections 2.2.1 and
2.2.2). As underlined by one stakeholder: “the rules in CSDR Article 23 – together with
divergent application by National Competent Authorities (NCAs) of Article 23 and the
closely related Article 49.1 list – have reduced the possibility for CSDs to offer services
as Issuer CSDs for instruments issued under the law of another Member State.”139
134
ESMA Report on cross-border services (see note 50).
135
https://ecsda.eu/.
136
Summary Report of the Commission CSDR targeted consultation (see note 92).
137
Member States, based on the Member States’ Experts Group meeting held in July 2021 and September
2020 as well as the targeted consultation, also agree that the CSDR passporting requirements are unclear
and burdensome.
138
Summary Report of the Commission CSDR targeted consultation (see note 92).
139
Euronext, response to the Commission CSDR targeted consultation (see note 106), page 16.
31
The costs per passport are estimated to amount on average to ca. EUR 30 000.140
This
means that, at least theoretically, for a CSD to be able to provide services for financial
instruments constituted under the law of 26 other Member States it may be required to
pay on average about EUR 780 000.141
Similarly, internal resources in terms of the time
required to prepare an application for a passport are estimated at 1-3 months (1 FTE). 142
At least theoretically, for a CSD to be able to provide its services throughout 26 other
Member States it needs to dedicate one FTE that would have to spend between 26
and 78 months (i.e. 6.5 years).143
Once a passport is granted, the applicant CSD also has
to continue to monitor it to ensure ongoing compliance, which also entails costs. These
costs are estimated at on average ca. EUR 2 000 per passport per year.144
This means
that, at least theoretically, when the CSD has obtained a passport in 26 other Member
States it may be required to pay on average about EUR 52 000 per year.
Given, amongst others, the high cost of the passport, CSDs require a minimum amount of
activity in order to provide services cross-border. This means that cross-border services
are generally provided to larger issuances in order to make them more economically
viable, potentially limiting the access of smaller- and medium-sized companies to the
benefits of the single market.145
The costs of passporting are less significant for authorities; ranging from ca. EUR 1 000
per passport for the home national authority146
to EUR 3 000 for the host national
authority. This means that, at least theoretically, a CSD that would decide to passport in
26 Member States would generate estimated costs of ca. EUR 79 000.147
Annex 6 provides further examples of burdensome and unclear passporting requirements.
Finally, the effects of the burdensome and unclear passporting requirements are
illustrated by the figures showing the slow progression of provision of cross-border
services (see section 1.3). According to ESMA “there has been a limited progression of
the provision of CSD services on a cross-border basis within the EU since of the entry
into force since 2017 and in the context of the progressive entry into force of CSDR”.148
2.3.2. Insufficient coordination and cooperation between authorities
CSDR requires the cooperation of authorities that have an interest in the operations of
CSDs that operate domestically and cross-border. Nonetheless, the supervisory
arrangements remain fragmented and can lead to differences in the allocation and
nature of supervisory powers depending on the EU CSD concerned. This in turn
creates barriers to the cross-border provision of CSD services, perpetuates the remaining
inefficiencies in the EU settlement market and has negative impacts on the stability of
EU financial markets.
140
Commission calculations based on confidential information provided to DG FISMA services.
141
Commission calculations based on confidential information provided to DG FISMA services.
142
Commission calculations based on confidential information provided to DG FISMA services.
143
Commission calculations based on confidential information provided to DG FISMA services.
144
Commission calculations based on confidential information provided to DG FISMA services.
145
Supported by confidential provided to DG FISMA services.
146
Commission estimates based on confidential data provided by one authority to DG FISMA services. This
estimate covers only the costs of interactions between the host and home NCAs. The costs of analysing of
the passporting request by the home NCA is much higher in itself and varies depending on the complexity
of the file.
147
Commission calculations based on confidential information provided to DG FISMA services.
148
ESMA Report on cross-border services (see note 50), para. 127.
32
Notwithstanding ESMA's competence to promote supervisory convergence, the powers
of national supervisors and the requirements for CSDs are interpreted differently across
the EU resulting in a significant heterogeneity in supervisory practices, in particular as
regards CSDs that operate cross-border.
First, insufficient cooperation between home and host supervisors prevents the
creation of a single market for CSD services, as acknowledged amongst others by
ESMA and the CMU High Level Forum. CSDR does not ensure the effective
cooperation between home and host national supervisors for several reasons:
 formal cooperation of home and host authorities on a continuous basis (through
the establishment of the so-called ‘cooperation arrangements’) is required only for
CSDs that establish a branch in a host Member State or when the activities of a
CSD are of substantial importance for the functioning of the securities markets
and the protection of the investors in that host Member State. This means that only
for certain CSDs with activities in host Member States structural and ongoing
cooperation between home and host authorities is required. For other situations,
home and host authorities may cooperate on an ad hoc basis on request. CSDs of
substantial importance to different host Member States are subject to national
supervisors’ divergent interpretations as to the content of CSDs’ reporting
obligations, which can be burdensome especially for small CSDs.149
Furthermore,
due to the absence of structured cooperation between the home and host authorities
before the granting of the passport, CSDs face widely divergent interpretations of the
same requirements, as illustrated by the differences in the time and cost that each
passport requires (see Section 2.3.1).
 It is not specified what these cooperation arrangements should entail in practice.
This means that it is up to each home supervisor to decide when setting them up.
 CSDR states that when a CSD is of substantial importance for the functioning of the
securities markets and the protection of the investors in more than one host Member
State, it is up to the home Member State to decide that such cooperation
arrangements are to take the form of a college. To date only one college has been
set up (with six authorities from four Member States, without ESMA’s
participation). The experience of that home supervisor has been positive, as it serves
as good forum for discussion, information exchange and enables an exchange of
expertise, potentially even dividing tasks.
Second, CSDR does not sufficiently consider the fact that several CSDs are part of
larger groups comprising several CSDs or financial market infrastructures. CSDs in
a group may outsource key IT infrastructure components, activities and processes (e.g.
risk management, cyber security) to other group entities and major strategic, business,
risk management decisions and governance may be established (directly or indirectly) at
group level. While during the authorisation process CSDR provides for the consultation
of competent authorities from other Member States where the CSD is part of a group of
CSDs, the current supervisory and cooperation approach focuses on individual CSDs,
and not on the group or the entity which has been outsourced to. Nonetheless, decisions
made by the authority of one CSD in the group can impact the other financial market
infrastructures in the group.150
149
Based on confidential information provided to DG FISMA services.
150
Information received from the ESCB.
33
As an example to illustrate the above, Figure III in Annex 8151
includes the governance
structure of one of the biggest groups of CSDs in the EU, Euroclear. Euroclear SA is
the parent company for six domestic CSDs and an ICSD, Euroclear Bank. Three of
those domestic CSDs (Euroclear France, Belgium and the Netherlands) use a common
settlement platform (ESES) and, amongst others, use a common admission process.
While the Belgian national supervisor cooperates with the French and Dutch overseers
and market supervisors,152
this cooperation does not take place under the CSDR
framework and ESMA is not involved.
Finally, regarding domestic CSDs, there is insufficient cooperation and supervisory
convergence amongst authorities interested in CSDs’ activities. This means that their
concerns may not be sufficiently taken into account by the national authority when
making decisions. One stakeholder noted that it was not easy to get a good understanding
of the overall functioning of the CSD, the supervisory approach, the interpretation and
application of the regulatory provisions, the aspects of concern for the competent
authority, the views/opinions of the other authorities if others were involved, etc.
Furthermore, some authorisation and review and evaluation processes revealed a
different understanding and application of various requirements as well as different
readings of background documents, which may impact the consistent application of
CSDR and distort the level playing field.
Additionally, while CSDR requires national supervisors to involve other relevant
authorities, i.e. central banks, in the authorisation of CSDs, the former are not required to
inform the latter if and how their views have been considered in the outcome of the
authorisation process and if additional issues have been identified. This means that
relevant central banks may not be able to express their views on newly identified
issues or they may not know that their concerns have not been taken on board, in which
they could adopt a more rigorous oversight approach, especially in areas of concern.
2.3.3. Restrictive requirements for provision of banking services related to settlement in
foreign currencies
An important element of the functioning of CSDR is the banking services that CSDs can
offer to clients153
in addition to the core CSD services and other non-banking settlement
services.154
As noted, the provision of banking services is a prerequisite to settle in
foreign currencies, if no access to the relevant central bank is practical or available.155
Nonetheless, the requirements for the provision of banking-type services related to
settlement are restrictive, leading to both a reduction of CSDs’ cross-border activity
and to disproportionate compliance costs (see sections 2.2.1 and 2.2.2).
First, under CSDR, apart from being authorised themselves to provide banking services,
CSDs may also use a designated credit institution for such services. Nonetheless, the
conditions set out in CSDR for such institutions are very strict156
to mitigate risks to
financial stability: in addition to having to be authorised as a credit institution under the
151
https://www.euroclear.com/about/en/business/Becomingaclient/BecomingaclientESES.html.
152
National Bank of Belgium ‘Financial Market Infrastructures and Payment Services Report 2021’, p. 33.
153
Section C of the Annex of CSDR lists the banking type ancillary services that must be directly related to
the core settlement services of a CSD of which the 2 most important are providing cash accounts and
intraday credit.
154
Section B of the Annex of CSDR.
155
In addition, one of the objectives of CSDR is to promote Delivery versus Payment, to reduce risks for
participants in securities transactions.
156
Article 54(4) of CSDR.
34
applicable EU banking legislation (Capital Requirements Regulation, Capital
Requirements Directive157
) and to comply with additional prudential and liquidity
requirements under CSDR,158
designated credit institutions can only offer services in
relation to settlement. This means that there is a very limited business case for such
entities, as also evidenced by the fact that no such institutions exist to date.
Furthermore, CSDR requires that designated credit institutions do not carry out
themselves any of the core CSDR services (i.e. notary, central maintenance, settlement).
This means that CSDs that have been authorised to provide banking-type services
themselves cannot function as designated credit institutions to other CSDs (even if
they are part of the same corporate group), which greatly limits synergies and restricts
access to commercial bank money.
Second, the threshold under which a commercial bank may provide banking
services (i.e. the total value of cash settlement is less than 1% 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)159
is considered by the majority of stakeholders,
including CSDs and their association as well as a public authority, as too low for the
majority of EU CSDs to be able to compete in the settlement in foreign currencies.
CSDs without a banking license could increase their settlement activity in foreign
currencies over a 5 year horizon to ca. 5% of their total yearly settlement activity.160
As
an example, for smaller CSDs with lower turnover ratio,161
e.g. 11, the current threshold
of EUR 2.5 billion settlement per year would be reached with issuance corresponding to
EUR 229 million162
– less than half the size of a regular bond issue, leaving no
possibility to offer issuance to others in the same or other currencies in commercial bank
money or even allow the same entity to do other issuances.
2.3.4. Unclear and complicated requirements for settlement discipline
CSDR introduced rules on settlement discipline to prevent and address failures in the
settlement of securities transactions and therefore ensure the safety of settlement (see
section 2.2.2). Despite the absence of experience in applying the rules, the development
and specification of the framework in the relevant RTS has allowed all interested parties
to better understand the regime and the challenges its application could give rise to,
especially at times of crisis, e.g. the COVID-19 crisis in spring 2020.
A large majority of respondents to the Commission targeted consultation (public
authorities, CSDs, CCPs, banks, asset management companies, market makers, and their
respective associations), considered that the settlement discipline framework should be
157
Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on
prudential requirements for credit institutions and investment firms and amending Regulation (EU) No
648/2012, OJ L 176, 27.6.2013, and Directive 2013/36/EU of the European Parliament and of the Council
of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit
institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC
and 2006/49/EC, OJ L 176, 27.6.2013.
158
Articles 54(4)(e) and 54(8) of CSDR and Commission Delegated Regulation (EU) 2017/390.
159
Article 54(5) of CSDR.
160
Based on confidential information provided to DG FISMA services.
161
The asset turnover ratio measures the value of a company's sales or revenues relative to the value of its
assets. The asset turnover ratio can be used as an indicator of the efficiency with which a company is using
its assets to generate revenue. The higher the asset turnover ratio, the more efficient a company is at
generating revenue from its assets.
162
Euronext response to the Commission CSDR targeted consultation (see note 106).
35
reviewed.163
Member States took a similar position in the Member States' Experts Group
meeting in July 2021. They almost unanimously expressed concerns about the current
design of mandatory buy-ins and their influence, in particularly on trading activity,
liquidity or the competitiveness of EU capital markets. ESMA also supported a delay in
the application of the buy-in regime noting that “ESMA is aware of market participants’
serious difficulties regarding the implementation of the buy-in regime.”
Two main issues have been identified: the lack of clarity and the complexity/burden of
the settlement discipline requirements. These drivers lead to disproportionate
compliance costs, in so far as the costs of complying with the framework potentially
seem to outweigh the achievable benefits (see section 5.1.4).
First, the requirements of the settlement discipline regime are often unclear, creating
legal uncertainty, thus increasing compliance costs. This lack of clarity is also shown by
the number of Q&As received by ESMA and the Commission. Since 2017, ESMA has
frequently updated its CSDR Q&As, with currently164
seven Q&A’s related to settlement
discipline. More than 25 Q&As on settlement discipline are also currently being
assessed. The need to clarify questions related to the settlement discipline regime puts an
additional burden on market participants, but also the relevant authorities. This
uncertainty means that companies have to obtain additional legal opinions on how the
rules should be applied, to enable them to adapt existing trading and reporting
procedures. Should those rules subsequently be interpreted differently, additional costs
will be incurred to re-adapt.
The unclear requirements are primarily linked to the scope of cash penalties and
buy-in rules. One business association stated “…the different provisions of CSDR setting
out the scope of the requirements such as settlement fails reporting, cash penalties or
buy-ins are not always clear. This lack of legal certainty could potentially lead to
reducing the efficiency in securities settlement.”165
 Unclear scope of rules on cash penalties:166 A cash penalty applies for each day
that a transaction fails to be settled after its intended settlement date. Examples of
lack of clarity relate to the types of securities transactions covered and the scope
of entities concerned by cash penalties.167
As an example, the scope of
“transactions” is not defined in CSDR; however certain transactions are outside
CSD participants’ control. It is therefore unclear whether such transactions should
be within the scope of the cash penalty regime. This uncertainty generates costs
when CSDs implement the IT systems to monitor cash penalties, requires
additional legal advice and increases potential legal risks. The questions about the
interpretation of CSDR stem not only from the text of the Regulation itself but
also from the delegated acts; e.g. Commission Delegated Regulation (EU)
2017/389 states that, in certain circumstances, the calculation of penalties rates
should use the official interest rate for overnight credit charged by the central
bank issuing the settlement currency. However, in at least two Member States, it
has been reported recently that central banks do not have this official rate and
therefore the calculation of the penalties cannot fulfil this requirement.
163
Summary Report of the Commission CSDR targeted consultation (see note 92).
164
CSDR Q&As, ESMA70-156-4448, 31 March 2021,
https://www.esma.europa.eu/sites/default/files/library/esma70-708036281-2_csdr_qas_2.pdf.
165
ESCDA, response to the Commission targeted consultation on the CSDR review.
166
A cash penalty applies for each day that a transaction fails to be settled after its intended settlement date.
167
Summary Report of the Commission CSDR targeted consultation (see note 92).
36
 Unclear scope of rules on buy-ins: there is lack of clarity on a wide range of
issues, i.e. types of securities covered, scope of entities concerned, and in-scope
transactions.168
For example, while CSDR refers only to participants (i.e. failing
participant and receiving participant), multiple terms are used in Level 2 (e.g.
failing trading party, failing trading venue member, failing clearing member)
which could create difficulties of interpretation and lead to legal challenges.169
Second, the requirements of the settlement discipline regime are often complicated
and increase compliance costs. In addition to one-off costs incurred to adapt IT
systems,170
the two examples below on contractual repapering (i.e. update of existing
contracts) and the use of buy-in agents show how the actual application of the
requirements could increase costs for market participants.
Trading parties that settle transactions in-scope of mandatory buy-ins would need a
global repapering exercise.171
This would ensure that appropriate contractual
arrangements are in place between the relevant counterparties to guarantee effective
application and enforceability of the buy-in requirements, even where some parties are
located outside the EU.172
EU securities valued EUR 33.5 trillion and bonds valued at
EUR 13.2 trillion could be subject to this exercise173
showing the one-off compliance
costs it could generate. Data suggests that, on average, each firm would need to repaper
27 120 agreements, taking on average 10 months to complete.174
The scope of the
repapering is however related to and reliant on the interpretation of the scope of the rules.
Increased compliance costs result also from the requirement to use buy-in agents.175 The
concerns relate mainly to the limited number of third-party buy-in agents (currently
only one stakeholder has made substantial investments to comply with these rules and
establish themselves as buy-in agent). This adds one-off investment and ongoing costs to
trading for asset managers in terms of onboarding, connectivity, fees and collateral
requirements as well as impacting best execution and adding concentration risk176
. In
168
To the question 34 of the Commission targeted consultation on whether the scope of the buy-in regime and
the exemptions applicable should be clarified, 62 responded that they agree, while 2 being neutral and one
disagreeing.
169
AFME response to the Commission CSDR targeted consultation (see note 127) “the term participant
including references to ‘failing participant’ and ‘receiving participant’ is used inconsistently throughout
the Level 1 and Level 2 texts (…). Without a clear distinction of what provisions relate to which actor in
the ‘trade through to settlement chain’ the SDR may be, in its application, fraught with disputes and legal
challenges”.
170
“CSDR: Settlement discipline regime toolkit”, Deutsche Bank, September 2019.
171
Article 25 of the RTS on settlement discipline. According to a joint trade association letter “ […] the
implementation of the CSDR mandatory buy-in regime is a significant undertaking for the entire financial
market, not only in Europe, but globally. This involves not only extensive system developments, but also
major client outreach across multiple markets and jurisdictions to undertake contractual papering and
remediation in line with the requirements set out in Article 25 of the Commission Delegated Regulation
(EU) 2018/1229 (‘RTS’)” Joint-Trade-Association-Letter-regarding-Implementation-of-the-CSDR-
Settlement-Discipline-Regime_Final.pdf (ebf.eu)
172
Association of Global Custodians response to the Commission CSDR targeted consultation, Q. 32.1
173
Based on confidential information provided to DG FISMA services.
174
Based on confidential information provided to DG FISMA services.
175
If the settlement of a transaction fails, the receiving party of the transaction is obligated to appoint a buy-in
agent to execute a buy-in
176
BlackRock response to the Commission CSDR targeted consultation, Q. 34.1,
https://www.blackrock.com/corporate/literature/publication/ec-consultation-on-the-review-of-regulation-
on-improving-securities-settlement-in-the-european-union-and-on-central-securities-depositories-
020221.pdf.
37
addition, some stakeholders claim that the current buy-in offering may not be compatible
with the diverse needs of market participants.177
Therefore, certain market participants
(e.g., asset managers) may have to provide the buy-in agent with sufficient liquidity even
if they will use the service rarely.178
Due to the costs and risks linked to the role of buy-in
agents, some market-makers traditionally acting as buy-in agents for specific instruments
have stopped providing that service. Other concerns related to high costs,179
the potential
risk associated with abuse of a dominant position by the agents or the difficulty to
execute a buy-in for instruments with limited supply (the use of substitute instruments
has been advocated in such a case). These further drive up firms’ compliance costs.
2.3.5. Insufficient reporting for third-country CSDs
Under CSDR, certain third-country CSDs providing services for financial
instruments constituted under the law of a Member State could benefit from a
lighter regulatory regime. The insufficient reporting by third-country CSDs leads to
insufficient insight into their activities (see section 2.2.3), mainly due to two factors.
First, third-country CSDs180
that provide services in relation to financial instruments
constituted under the law of a Member State under the national laws applicable before
the adoption of CSDR can continue to do so until they have been recognised by ESMA
(the “grandfathering clause”).181
The objective of that clause was to defer application of
CSDR to provide CSDs with sufficient time to apply for recognition. However, even
though CSDR was adopted in July 2014,182
the grandfathering clause still applies and
does not have an end-date.183
This means that third-country CSDs have no incentive to
apply for recognition to ESMA. To date, no third-country CSD, other than the UK CSD,
has applied for recognition.
Under the current regime, third-country CSDs benefiting from the grandfathering clause
can indefinitely provide services in relation to financial instruments constituted under
the law of a Member State even though: (a) they do not have to comply with CSDR or
rules that have been considered as equivalent by the Commission and, (b) they have not
been recognised by ESMA - while authorised EU CSDs with which they compete have to
comply with CSDR. Third-country CSDs benefiting from the grandfathering clause are
also not under any notification requirements regarding their activities in the EU. Hence,
they are not required to provide any information to EU authorities.
Second, settlement services are outside the scope of the CSDR third-country regime.
Under CSDR,184
third-country CSDs that do not benefit from the grandfathering clause,
177
Confidential information provided to DG FISMA services. Some asset management firms claim that
because no transactions are concluded on asset managers’ own accounts, (they are all executed as an agent
for fund and client accounts), all fund and client accounts globally have to be on-boarded with the buy-in
agent even though only a fraction of these accounts may ever require a buy-in. This requires prefunding
ahead of the execution of a buy-in.
178
Confidential information provided to DG FISMA services.
179
Confidential information provided to DG FISMA services.
180
It is worth noting that both third-country CSDs and EU CSDs can benefit from the grandfathering clause.
As of May 2021, to our knowledge, CSDs of one Member State and one EEA country are still operating
under the grandfathering clause.
181
Article 69(4) of CSDR.
182
However, please note that the deadline to apply CSDR in EEA countries was 30 June 2020.
183
As an exception, in Liechtenstein the grandfathering clause for third-country CSDs providing services
therein (i.e. Six, the Swiss CSD) ends 5 years after the date of entry into force of Council Decision (EU)
2019/134.
184
Article 25 of CSDR.
38
may provide services in relation to financial instruments issued under the law of a
Member State, including through setting up a branch, only if they comply with the CSDR
third-country framework. Requirements applying to third-country CSDs differ however
depending on the type of service (notary, central maintenance, settlement) they intend
to provide. A recognition by ESMA is required for notary or central maintenance
services; a condition of this recognition is that the Commission has adopted an
equivalence decision, determining that the legal and supervisory arrangements of the
third country ensure that CSDs authorised therein comply with legally binding
requirements which are in effect equivalent to the requirements of CSDR. Settlement
services provided by third-country CSDs do not require recognition by ESMA.
Despite the fact that settlement is one of the three core services provided by CSDs, third-
country CSDs may provide settlement services for securities issued under the law of a
Member State without applying for recognition by ESMA. In that case, third-country
CSDs do not have to comply with CSDR or at least equivalent rules nor are they required
to provide any information or notification regarding their activity. They are also not
subject to any type of supervisory activity by an EU supervisor.
To conclude, third-country CSDs operating in the EU under the grandfathering clause or
providing settlement services might not comply with CSDR or equivalent rules. National
and EU authorities have very little information on the activities of these third-
country CSDs, as confirmed also by ESMA.185
2.4. How will the problem evolve?
2.4.1. Ongoing inefficiencies in the EU settlement market
The ongoing inefficiencies in the EU settlement market stem from two main problems:
barriers to cross border settlement (see section 2.2.1) and disproportionate compliance
costs (see section 2.2.2).
Under a baseline scenario, CSDR is unchanged, barriers to cross-border settlement
through: burdensome passporting requirements; insufficient coordination among
authorities; burdensome, even restrictive, requirements for the provision of banking
services; and a disproportionate settlement discipline regime would remain.
Competition among CSDs within the EU would not improve. For example, challenges
accessing banking services and in particular settling in foreign currencies would reduce
the possibility of CSDs offering multi-currency services therefore reducing their
attractiveness. Consequently, cross-border investment will remain at a lower level than
could otherwise be achieved, leading to a sub-optimal pan-EU settlement market.
The entry into application of mandatory buy-ins could further increase the costs for
CSDs, investors and market makers (see section 2.3.4). This could lead to a reduced
willingness by liquidity providers to create markets and offer prices for a security when
they do not have access to inventory or for securities which cannot be readily sourced.
Market makers will find price-setting complicated for these instruments as it is unclear
whether the trade will be subject to a mandatory buy-in. This could also lead to increased
higher bid-offer spreads for investors as market makers hedge risks related to such
difficulty to set prices of less liquid instruments. This, in particular, could affect
negatively less liquid instruments and even lead to a substantial drop of liquidity, as
market makers withdraw from making markets for these instruments.
185
ESMA letter to the Commission (see note 133).
39
The EU post-trade landscape will remain fragmented along national lines, impairing
cross-border investment due to additional costs caused by added complexity relative to
other jurisdictions, e.g. the US and the UK. Transaction costs in the EU could increase
with full entry into force of the settlement discipline regime (see section 2.2.1).
If nothing is done, it will continue to be easier to do business outside the EU than within
the EU. Participants will increasingly be attracted to issuing their securities and settling
in non-EU 27 countries as EU CSDs’ ability to offer a wide range of services including
in different currencies is limited by burdensome passporting processes and restrictive
requirements for the settlement in commercial bank money. In addition, lending market
participants may increase the amount of stock they hold back as buffer by up to 10% to
reduce the risk of buy-ins.186
This would represent a fall of EUR 398 billion in securities
available to facilitate market liquidity and banking financing activities.187
Together these impacts negatively impact the safety and efficiency of EU financial
markets, limiting the potential benefits of a larger-scale integrated EU market. They
would be to the detriment of the EU financial system as a crucial building block of CMU
would perform sub-optimally, to the detriment of EU investors and businesses.
2.4.2. Negative impacts on stability of EU financial markets
The negative impacts of CSDR on the stability of EU financial markets stem from three
main problems: barriers to cross border settlement (see section 2.2.1), insufficient insight
on third-country CSDs activities (see section 2.2.3) and disproportionate compliance
costs (see section 2.2.2).
First, cross-border settlement remains difficult, limiting competition in the EU,
hampering the development of CMU. Inability to ensure swift cross-border settlement
may restrict activity to national capital markets, which would make them more
vulnerable to country-specific asymmetric shocks that may over time endanger the
stability of the EU capital market. If nothing is done, CSDs will continue to find
providing cross-border services difficult. The level of cross-border activity will remain
reduced, limiting competition and entrenching fragmentation of EU capital markets along
national borders, potentially exposing EU capital markets to asymmetric shocks, in
particular for some shallow national markets that cannot rely on abundant liquidity.
Second, the insufficient insight into third-country CSDs’ activities could potentially
lead to financial stability risks. EU and national authorities alike currently do not have
information on most third-country CSDs activities in the EU; this means that they cannot
evaluate whether any of these CSDs are important for the EU financial stability, which in
itself creates a potential risk to financial stability. If nothing is done, this risk will persist.
Furthermore, market participants may choose to use the services of third-country CSDs
outside the transparency arrangements set by CSDR, potentially allowing for a build-up
of risk that may threaten the stability of the EU capital market.
Third, if no specialised credit institution can provide access to commercial bank money
to CSDs under the CSDR due to disproportionate compliance costs, the risk is that non-
bank CSDs may not be able to provide DvP settlement in foreign currencies to their
participants. This could lead to transactions being processed free of payment instead
of versus payment, leading to less safe markets and undermining the CSDR’s
objective of promoting DvP settlement. The decrease in foreign currency settlement at
186
Based on confidential data provided to DG FISMA services.
187
Based on confidential data provided to DG FISMA services.
40
non-bank CSDs would constitute a step backwards if it results in the settlement of these
transactions outside CSDs.188
3. WHY SHOULD THE EU ACT?
3.1. Legal basis
CSDR has a comprehensive regulatory framework for the settlement of financial
instruments in the EU as well as common rules on the organisation and conduct of CSDs
to promote safe, efficient and smooth settlement. The legal basis for CSDR was Article
114 of the Treaty on the Functioning of the European Union (TFEU) as it aimed to create
an integrated market for securities settlement with no distinction between national and
cross-border securities transactions. Considering that this initiative proposes policy
actions to allow the achievement of these objectives more effectively and efficiently,
amendments to CSDR would be adopted under the same legal basis.
3.2. Subsidiarity: Necessity of EU action
The review could amend certain provisions of CSDR, in particular to clarify and simplify
burdensome and unclear requirements, reduce administrative burden and costs, and
ensure that authorities have enough information to monitor risks. EU action should
therefore ensure that CSDR’s regulatory requirements are more effective, efficient and
proportionate, are applied uniformly, and guarantee a sound and consistent regulatory
framework for securities settlement in the EU and the operations of CSDs, both of which
are essential foundation stones for the development of CMU as well as to ensure a safe
and efficient single market for financial services.
3.3. Subsidiarity: Added value of EU action
The 2020 CMU Action Plan189
explicitly acknowledged that amending CSDR could help
develop a more integrated post-trading landscape in the EU and thus contribute to the
development of CMU. The objectives of CSDR, namely to lay down uniform
requirements for the settlement of financial instruments in the EU and rules on the
organisation and conduct of CSDs, to promote safe, efficient and smooth settlement
cannot be sufficiently achieved by the Member States alone, as the co-legislators already
acknowledged in 2014 when adopting CSDR. Similarly, today Member States and
national supervisors cannot solve on their own the challenges arising from the
burdensome and unclear CSDR requirements or the risks resulting from diverging
national supervisory practices, in particular where those stem from primary or secondary
legislation. In addition, Member States and national authorities cannot address on their
own the risk to the EU financial stability that the lack of information on the activities of
third-country CSDs may pose, as the conditions for the regime are contained in CSDR.
As such, the objectives of CSDR cannot be sufficiently achieved by the Member States
and can therefore, by reason of the scale of actions, be better achieved at EU level in
accordance with the principle of subsidiarity as set out in Article 5 of the TEU.
188
European Post-Trade Forum Report, (see note 11), p. 117.
189
Commission Communication ‘A Capital Markets Union for people and businesses – New Action Plan’ (see
note 10).
41
4. OBJECTIVES: WHAT IS TO BE ACHIEVED?
4.1. General objectives
The general objective of CSDR remains to create a safe and efficient market for the
settlement of securities transactions in the EU. This could be achieved by enhancing
cross-border competition between CSDs, improved risk monitoring for EU and non-EU
CSDs, more efficient supervisory cooperation and reduced compliance costs, where
appropriate, for post-trade service providers, market participants and competent
authorities. The benefits should however not come at the expense of the resilience and
stability of the EU financial system. In this respect, the present initiative aims to render
the application of CSDR more proportionate, effective and efficient and, by fine-tuning
certain requirements, to reduce the regulatory and compliance burden for market
participants where compliance costs outweigh benefits, but without endangering financial
stability. The initiative thus contributes to the Commission's Better Regulation Agenda
and the Regulatory Fitness and Performance (REFIT) programme.
The overarching policy objective will be achieved via the pursuit of the following
specific objectives:
 Minimise barriers to cross border settlement;
 Ensure adequate powers and information to monitor risks;
 Reduce administrative burden and compliance costs, without endangering
financial stability;
This initiative is also in line with the objectives of the CMU. Efficient and resilient post-
trading systems are essential elements for the well-functioning of the CMU. Better means
of cooperation between competent authorities, streamlined procedures, better access to
liquidity for CSDs and credit institutions will contribute to integrating the EU capital
market, that is currently fragmented along national lines, will strengthen cross-border
investment and will lower investment costs for market participants while ensuring that
the associated risks are contained and managed. Effective and efficient CSDR rules thus
contribute to achieving the objectives of the CMU and help making post-trade markets an
important building block of an economy that works for people, in line with the strategic
priorities of the Commission.
Figure VII: Objective tree
42
4.2. Specific objectives
There are three specific objectives, relating to the five problem drivers (see section 2.3).
4.2.1. Reduce administrative burden and compliance costs, without endangering
financial stability
The effectiveness and efficiency of applying CSDR should be improved by simplifying
and clarifying the passporting process. This should, in turn, enable more competition for
CSD services across borders. Furthermore, to facilitate settlement in foreign currencies,
and promote more cross-border activity, the requirements faced by CSDs and credit
institutions when providing banking-type ancillary services should be more
proportionate. Lastly, the efficiency and safety of settlement should be ensured through
more proportionate requirements for settlement discipline, which balance the reliability
of settlement with potential negative impacts on trading behaviour and markets,
including financial stability.
Problem Problem drivers Specific objective
Disproportionate
compliance
costs
Burdensome and unclear passporting requirements for CSDS
Reduce administrative
burden and compliance
costs, without endangering
financial stability
Restrictive requirements for provision of banking services
related to settlement
Complicated and unclear requirements for settlement
discipline
4.2.2. Minimise barriers to cross-border settlement
Provision of cross-border services should be enhanced by: (a) clarifying and streamlining
the passporting process for CSDs offering such services or setting up a branch in another
Member State; (b) increasing the cooperation between authorities involved in the
supervision of the relevant CSDs; and (c) improving access to banking services related to
settlement.
Problem Problem drivers Specific objective
Barriers to
cross-border
settlement
Burdensome and unclear passporting requirements for CSDs
Minimise barriers to cross-
border settlement
Insufficient coordination and cooperation between authorities
Restrictive requirements for provision of banking services
related to settlement
4.2.3. Ensure adequate powers and information to monitor risks
The insufficient insight of EU authorities into the activities of third-country CSDs should
be addressed by increasing the reporting obligations for such CSDs. This should ensure
that adequate information is available to monitor risks. Furthermore, while better
coordination and cooperation between authorities involved in the supervision of EU
CSDs aims primarily at minimising barriers to the cross-border provision of services, it
will also provide authorities with increased powers and information to monitor any risks
that may be arising from the operation of these CSDs.
Problem Problem drivers Specific objective
Insufficient
insight into the
activities of
third-country
CSDs
Insufficient reporting by third-country CSDs
Ensure adequate powers and
information to monitor risks
Insufficient coordination and cooperation between
authorities
43
5. WHAT ARE THE AVAILABLE POLICY OPTIONS?
5.1. What is the baseline from which options are assessed?
This section describes, for each policy option, the most likely scenario is going to be
without any further intervention.
5.1.1. Burdensome and unclear passporting requirements
All issues identified in Section 2.3.1 remain. The passporting requirements are unclear
and burdensome for CSDs and national authorities, generating costs and lengthy
processes. Consequently, cross-border activities of CSDs may stagnate or fall and the
administrative burden for CSDs and national authorities remains high. Indirectly, issuers
could be negatively impacted as less cross-border CSD activities would mean less
competition and reduced choice, preventing them from benefitting from an integrated
capital market for financial services. National authorities would continue to face unclear
requirements when assessing CSDs’ applications to obtain a passport.
5.1.2. Insufficient coordination and cooperation between authorities
All issues identified in Section 2.3.2 remain. Cooperation between authorities in home
and host Member States is insufficient, creating obstacles in the cross-border operations
of CSDs and hindering the creation of a true single market for CSD services. In
particular, communication between authorities in different Member States is not
standardised and the same CSD may be subject to different supervisory arrangements and
requirements in the different Member States in which it may be operating. Inefficiencies
in the cooperation of authorities interested in the activities of CSDs operating
domestically also remain.
5.1.3. Restrictive requirements for provision of banking services related to settlement in
foreign currencies
All issues identified in section 2.3.3 will remain regarding CSDs’ access to commercial
bank money. In particular, settlement in foreign currencies by CSDs will continue to be
limited as no designated credit institution is likely to be established and commercial
banks will remain limited in their service offering (mostly intraday- credit and liquidity
to the participants of the CSD). This situation will hamper cross-border securities
transactions, e.g. bond issuances in foreign currencies, due to the disproportionate
compliance costs of obtaining these services. CSDs will be limited in their choice of
providers to settle in foreign currencies, be it designated credit institutions (which do not
exist currently) or commercial banks that are only allowed to provide these services
within the limits set by CSDR. This runs counter to the EU’s objective to ensure a true
single market for CSD services.
Although the requirements to provide banking services have a positive effect on the
stability of the financial system as liquidity and credit risks attached to these services
remain limited, they also affect competition on the EU settlements markets. Due to the
restrictiveness in the provision of these services and the compliance costs, new players,
whether in the form of a designated credit institutions or commercial banks offering these
services, will not enter the market. This runs counter to the core of the CMU Action Plan
to enhance the Union’s capital markets.
5.1.4. Unclear and complicated requirements for settlement discipline
The settlement discipline regime, as described in Art. 6 and Art.7 of CSDR and
Regulation (EU) 2018/1229, would enter into force on 1 February 2022. Retail investors
should benefit from improved settlement efficiency due to the fact that market makers
44
often provide prices for many financial instruments without having immediate access to
these securities. In case of smaller equity trades which are often carried out by retail
investors, the coverage of these sales may be considered as too expensive and
cumbersome, leading to no delivery taking place. Settlement discipline measures aim at
incentivising market makers to avoid this kind of situation. The settlement discipline
regime would also potentially allow investors to consolidate trading positions and rely on
cross-border settlement to settle trades, as they would have more confidence that they
would be settled. Finally, mandatory buy-ins can be applied by the market. Regulation
(EU) No 236/2012 (Short Selling Regulation (SSR)) introduced them for centrally
cleared equity transactions. According to some stakeholders, settlement efficiency on
intended settlement date is now almost 100% for centrally cleared equity transactions190
.
However, it should be noted that equity trading generally features high levels of liquidity.
Implementation and the resulting effect cannot therefore be directly compared to other,
less liquid markets.
However, the impact of a miscalibrated settlement discipline regime on overall market
conditions could outweigh these benefits for investors. The majority of the potential
negative impacts of the settlement discipline regime are likely to be related to mandatory
buy-ins. In particular, mandatory buy-ins as currently designed could theoretically widen
bid-offer spreads and negatively impact market liquidity, favouring settlement in non-EU
CSDs particularly for less liquid securities,191
remove incentives for securities lending in
the securities lending and repo markets and ultimately lead to increased costs for end
investors without providing additional benefits to markets or investors.192
This could
affect a broad range of asset classes including corporate bonds, sovereign bonds,
securities lending / repo transactions and other exchange traded products.193
These
increased costs would negatively impact investors’ returns and their ability to save, and
companies’ access to capital market funding, especially in times of market stress.194
Estimates195
provided suggest that in normal market conditions a mandatory buy-in
regime would theoretically increase the mid-offer price by 21 cents or 59% when the
regime applies. In times of stress the regime could theoretically increase the mid-offer
price by 146 cents or 291% in the event that the current settlement discipline regime
applies unchanged. It is thus estimated that up to 4%-5% of trade volume could cease to
occur (estimated at up to EUR 7 trillion in 2020, combining debt and equity instruments)
in the future. Therefore, applying a mandatory buy-in regime in its current form could
potentially impact negatively the efficiency of EU capital markets, leading to wider bid-
offer spreads, reduced market efficiency and less incentives to lend securities in the
securities lending and repo markets. Such developments may ultimately favour the
settlement of less liquid securities in non-EU CSDs.
In particular both equity and debt instruments with a lower floatation, such as less liquid
bonds or shares of SMEs, could be negatively affected as investors withdraw from
190
Clearstream response to the Commission CSDR targeted consultation,
https://ec.europa.eu/info/consultations/finance-2020-csdr-review_en.
191
See BlackRock response to the Commission CSDR targeted consultation, Q. 34.1 (see note 176).
192
See EFAMA response to the Commission CSDR targeted consultation, Q. 34.1,
https://www.efama.org/sites/default/files/publications/21-4005_0.pdf.
193
Ibid.
194
See for instance International Capital Markets Association (ICMA), EFAMA, ECSDA, European
Association of CCP Clearing Houses (EACH) responses to the CSDR targeted consultation, (all available
at https://ec.europa.eu/info/consultations/finance-2020-csdr-review_en).
195
Based on confidential information provided to DG FISMA services.
45
making markets/ trading in those instruments. Traders would either have to keep
securities on their books to cover any buy-ins, freezing capital, or trade only in
instruments where the supply is easily available. This could lead to an even greater
concentration of trading on a limited number of instruments, both threatening investors’
risk diversification strategies and creating systemic risk. Asset managers may not be able
to obtain the securities they want on behalf of investors, and thus may have to make sub-
optimal investment decisions or may have to pay a liquidity premium. Furthermore,
national authorities, ESMA and the Commission would need to issue numerous Q&As
and guidelines to address the lack of clarity in the relevant provisions.
Introducing a mandatory buy-in regime as of 1 February 2022 could also lead to a
duplicative re-papering exercise of existing contracts between market players in order to
take account of the upcoming rules change potentially introduced under the ongoing
review of CSDR; one estimate puts the number of clients’ contracts to be repapered at a
financial institution at between 30 - 40 000196
over a period of 10 months. Repapering of
client-facing documentation would have to go beyond updates to generic terms and
conditions adding complexity to interdependent sets of client documents. A law firm
concluded that clauses reflecting clients’ mandatory buy-in obligations, including the
necessity to appoint a buy-in agent, would be difficult and impracticable to understand in
particular for retail investors.197
Another related cost will be the obligation to connect to a buy-in agent. Market
participants will have to appoint a buy-in agent to carry out the mandatory buy-in in case
of delayed settlement. The costs for appointing and connecting to a buy-in agent are high.
One estimate provided in the targeted consultation shows that the estimated annual cost
of appointing buy-in agents to handle government bond fails in one CSD could amount to
between EUR 598 900 294 to EUR 1 197 800 588.198
One investment fund199
indicated
that connecting all their funds to a buy-in agent would require a one-off cost of
EUR 1 million. Operational costs of running a buy-in framework are also potentially
high, leading some market participants to consider changing their business model to
avoid the requirement to connect to a buy-in agent.200
This would outweigh the potential
postponed cost related to the setting up of a buy-in agent offering by one entity (only one
buy-in agent service provider that has emerged so far).201
A mandatory buy-in regime could also indirectly negatively affect issuers. Issuance
ability and pricing is related to the expected liquidity of the instrument. A decrease in
liquidity, from the knock-on effects of the mandatory buy-in regime, could increase
borrowing costs for issuers, with the greatest impact likely to fall on smaller and lower
credit rated companies, especially in times of stress where access to a wide range of
financing channels is needed. Higher issuance costs and limited liquidity could increase
196
Based on confidential information provided to DG FISMA services.
197
Simmons & Simmons LLP response to the Commission CSDR targeted consultation Q. 34.1,
https://ec.europa.eu/info/consultations/finance-2020-csdr-review_en.
198
Data provided by ICMA in its response the CSDR targeted consultation,
https://www.icmagroup.org/assets/documents/Regulatory/Secondary-markets/CSDR-Settlement-
Regulation/ICMACSDR-Review-Targeted-ConsultationFeb-21Detailed-response-020221.pdf. Estimates
based on cost of buy-in agents varying between 25 cent and 50 cent handling a volume of fails equal to
EUR 239 569 million on Euroclear only.
199
Based on confidential information provided to DG FISMA services.
200
BVI response to the Commission CSDR targeted consultation,
https://www.bvi.de/fileadmin/user_upload/2021_02_02_BVI_position_CSDR_review.pdf.
201
This is supported by confidential information provided to DG FISMA services.
46
the cost of capital for EU issuers, including innovative start-ups and SMEs, who may
continue to rely on bank loans or private placements202
for financing, inhibiting the
development of the EU capital market.
Furthermore, there is some evidence that these costs could be born to potentially address
a less significant problem, as the majority of fails seem to be resolved between one and
five days after the intended settlement date, meaning they would not enter buy-in.203
It
should also be noted that, in general, fails are most likely to appear in less liquid
instruments, increasing the probability that even the eventual buy-in may not be
successful due to the inability to source the necessary securities.204
This holds true both
for bonds and equity instruments.
Since market participants will not know which transactions will enter a buy-in,
stakeholders argue that they will have to disperse the costs of a potential buy-in across a
wide spectrum of transactions. At the end of the day, if this were to happen, end-
investors would have to pay a higher price for the same security (because of its lower
liquidity) and will ask for a higher return. The consequence at the end of the chain would
be a higher funding cost for issuers. Hence, some stakeholders argue that in order to
incrementally improve a relatively low level of settlement fails, a mandatory buy-in
would impact the costs of trading more widely.205
While mandatory buy-ins are expected to negatively impact all asset classes, the impact
will be most detrimental for less actively traded/illiquid securities, e.g. instruments issued
by SMEs, high yield and emerging markets securities. The mandatory buy-in regime in
its current form could therefore be perceived to be contrary to the wider CMU objectives,
especially when aiming to provide efficient financing to smaller corporate clients and
SMEs, whose securities will have lower inherent liquidity and would be
disproportionately affected by this regime.
Lastly, there is some limited evidence that the mandatory buy-in regime may also
indirectly undermine the CSDR objectives of safe and efficient settlement as companies
may migrate to internalised settlement to avoid the burden of the discipline regime.
ESMA observed increasing levels of internalised settlement in several jurisdictions
accompanied by a high degree of concentration. As such, they called for continuing
monitoring, including of this activity and the associated risks.206
5.1.5. Insufficient reporting for third-country CSDs
All issues identified in Section 2.3.5 remain. In particular, there would be little
information on third-country CSDs’ activities. This would directly negatively impact the
EU’s financial stability as ESMA and national authorities will continue to have no
information on these CSDs’ activities and therefore will not be able to monitor risks. It
would also directly negatively impact EU CSDs which have to comply with CSDR as
202
A private placement is a sale of shares or bonds to pre-selected investors and institutions rather than on the
open market.
203
“ESMA Report on trends, risks and vulnerabilities”, European Securities and Markets Authority, ESMA-
50-165-1287, No. 2, 2020
204
In instances where the supply of the security is so low it cannot be easily sourced or bought-in if the
settlement fail has aged the failed-to entity will receive from the failing seller a cash compensation to
restore the economic terms of the transaction. Currently the buy-in may be automatic/mandatory or
optional, upon the request of the buyer, depending on the contractual arrangements. Under the CSDR
settlement discipline regime the cash compensation would be mandatory.
205
Based on confidential information provided to DG FISMA services.
206
ESMA Report on internalised settlement (see note 86).
47
well as issuers considering that for third-country CSDs operating under the
grandfathering clause, their national supervisory and regulatory framework has not been
deemed as equivalent by the Commission.
5.2. Description of the policy options
5.2.1. Burdensome and unclear passporting requirements
The objective is to minimise barriers to cross-border settlement to enhance the cross-
border provision of services. Options 3 and 4 may be complementary.
Policy option Description
Option 1 – Do nothing
(baseline)
This is the baseline scenario (see section 5.1).
Option 2 – Reduce the
scope of the passporting
requirements
The scope of instruments subject to the passporting requirements could be reduced,
i.e. they could apply to equities instruments only. Any authorised CSD would be
able to provide services for non-equity instruments within the EEA without being
subject to the passporting requirements.
Option 3 – Clarify the role
and powers of competent
authorities and requirements
related to national laws
Certain passporting requirements would be clarified, i.e. those related to national
laws and regarding the role of the host national authority. For instance,
clarifications could include: clarifying which national laws should be considered;
deleting the words “where relevant” in Articles 23(3)(e) and 23(6)(a) of CSDR;
specifying which provisions need to be considered by non-domestic CSDs for their
assessment; specifying the information required; clarifying the role of the home and
host authorities, including whether the host authority can oppose the passport.
Option 4 – Replacing the
passporting procedure at the
host Member State level
with a notification
The current possibility for host Member State authorities to reject a passporting
request would be removed and replaced by a standardised notification from the
home Member State authorities. CSDs wishing to passport their services within the
EU would only have to obtain an approval from the home Member State competent
authorities. As long as the CSD is authorised in one Member State, the competent
authorities of the host Member State would not have to approve or reject the
passport.
Option 5 – Combination of
Option 3 and Option 4
The current requirements laid down in Article 23 of CSDR would be simplified as
per Option 4 and certain aspects of the passporting procedure would be clarified as
per Option 3.
5.2.2. Insufficient coordination and cooperation between authorities
The objective is to minimise barriers to cross-border settlement by enhancing
coordination and cooperation between authorities involved in the supervision of CSDs.
All of the options presented are alternatives.
Policy Option Description
Option 1: Do nothing
(baseline)
This is the baseline scenario (see section 5.1).
Option 2: Enhance the
existing CSDR rules for
cooperation arrangements
Introduce clarifications to the existing framework for cooperation arrangements that
are established between competent authorities of home and host Member States
where a CSD is of substantial importance for the functioning of the securities
markets and the protection of the investors in that host Member State.
Option 3: Introduce
mandatory supervisory
colleges
Supervisory colleges would be required to enhance the cooperation between
different authorities. Elements to be considered are: the CSDs for which the
establishment of a college would be required; the composition, e.g. home and host
authorities, other relevant authorities; the powers of the college (only information
sharing, or consultation/issuance of opinion before the adoption of certain decisions
by the home authority (see also next option)).
Option 4: More supervision ESMA would be granted more supervisory powers in relation to EU CSDs. Several
48
of CSDs at EU level aspects would have to be considered, including: scope, i.e. the CSDs over which
ESMA could have supervisory powers; the powers granted to ESMA, ranging from
participation in colleges (as above), via the need for them to approve all or some
decisions of national authorities, to direct supervisory powers.
5.2.3. Restrictive requirements for provision of banking services related to settlement in
foreign currencies
The objective is to enhance the cross-border provision of CSD services, through
improved access to banking-type services while ensuring financial stability. Options 2
and 3 may be complementary.
Policy option Description
Option 1 - Do nothing
(baseline)
This is the baseline scenario (see section 5.1).
Option 2 – Introduce
targeted amendments for
banking type services
Clarifications and targeted enhancements would help CSDs to provide cross-border
settlement less costly while keeping financial stability risk limited. These could
include, (a) removing certain restrictions for designated credit institutions under
article 54(4) of CSDR and/or (b) allowing CSDs with a banking license to offer
banking services to other CSDs (inside and outside their group).
Option 3 – Amend the
threshold below which
CSDs can use a commercial
bank for banking-type
ancillary services.
More flexibility for CSDs to offer services in foreign currencies, depending on the
threshold set, while mitigating additional financial stability risks and reducing
compliance costs.
Option 4 – Combination of
options 2(b) and 3
Amend threshold and broaden the potential banking-services providers by allowing
CSDs with a banking license to offer banking services to other CSDs (inside and
outside their group).
5.2.4. Unclear and complicated requirements for settlement discipline
The objective is to minimise the burden and compliance costs of the settlement discipline
regime, avoid negative impacts on EU capital markets, while ensuring a high degree of
settlement efficiency.
207
The buyer in a securities transaction is obliged to initiate a buy-in process against the seller should the
settlement of a transaction fail after a certain period of time. This needs a neutral third-party who acts as a
buy-in agent.
208
Sales in non-cleared markets are contingent on the settlement of an outright purchase of the same security.
In some markets, this can create chains of transactions with dependent settlements. As such, a single
settlement fail (at the start of the chain) can cause a sequence of settlement fails in the entire chain.
Policy option Description
Option 1 - Do nothing This is the baseline scenario (see section 5.1).
Option 2 – Introduce targeted
amendments for cash penalties
and mandatory buy-ins
Amendments could be introduced to both cash penalties and mandatory buy-ins
to clarify the rules, e.g. on scope exempting certain instruments, adjusting
provisions on the use of buy-in agents207
and pass-on mechanisms.208
49
The objective is to minimise the burden and compliance costs of the settlement discipline
regime, avoid negative impacts on EU capital markets, while ensuring a high degree of
settlement efficiency. Options 2, 3, and 4 are complementary, Option 3 and 4 alternative.
5.2.5. Insufficient reporting for third-country CSDs
The objective is to increase information available on third-country CSDs’ activities in
relation to financial instruments constituted under the law of a Member State to allow
authorities in the EU to assess potential risks (see section 2.3.5). Options 2 and 3 may
also be complementary whereas Option 4 is an alternative.
Policy option Description
Option 1 - Do nothing This is the baseline scenario (see section 5.1).
Option 2 – Introduce an end-
date to the grandfathering
clause
An end-date to the grandfathering clause would be introduced209
(e.g.
requirement for CSDs to apply for recognition 3 years from entry into force,
and/or introduce a maximum period).
Option 3 – Introduce a
notification requirement for
third-country CSDs
As proposed by ESMA210
, third-country CSDs providing services in the EEA
under the grandfathering clause or offering settlement services (for which
recognition by ESMA is not required) could be required to notify ESMA of
their activity. ESMA could also be able to submit requests for access to
information directly to these CSDs. The main information collected by ESMA
would be made available to the public.
Option 4 – Enhance the regime
for third-country CSDs
The requirements applicable to third-country CSDs would be enhanced. For
instance, settlement services could be included within the scope of the ESMA
recognition regime and/or ESMA could become a fully-fledged supervisor for
third-country CSDs.
Option 5: combination of
Options 2 and 3
Introduction of an end-date to the grandfathering clause and a notification
requirement for third-country CSDs operating under the grandfathering clause
or offering settlement services in relation to financial instruments constituted
under the law of a Member State.
5.3. Options discarded at an early stage
Certain options have been discarded at an early stage as inconsistent with the EU legal
framework or the objectives of this initiative to ensure a resilient and efficient market for
settlement in the EU. These relate in particular to the restrictive requirements for the
provision of banking-type ancillary services and the unclear and complicated
requirements for settlement discipline.
209
The end-date to the grandfathering clause would be introduced for both for EEA and third-country CSDs.
210
ESMA letter to the Commission (see note 133).
Option 3 – Follow a two-step
approach
Initially only cash penalties and reporting requirements would be introduced. If
no further improvement in settlement rates is observed, mandatory buy-ins
would be introduced.
Option 4 – Introduce voluntary
buy-ins
Buy-ins would be made voluntary for some or all asset classes. Rules on cash
penalties and reporting requirements would remain.
Option 5 – Targeted
amendments combined with a
two-step approach
Clarifications with regards to in-scope transactions will apply immediately to
cash penalties, while amendments linked to pass-on mechanism and buy-in
agents will be deferred until the potential launch of mandatory buy-ins.
50
Regarding the former, the option to introduce in CSDR a requirement for central banks to
facilitate CSDs’ access to central bank money was discarded. CSDR should be without
prejudice to the independence of central banks, which is enshrined in the TFEU, as
concerns their policies on access of domestic or foreign financial market institutions to
central banks’ accounts and central banks’ facilities. Therefore, CSDR is not an
appropriate place to impose obligations on the EU central banks.211
With regards to the unclear and complicated requirements for settlement discipline the
option to suspend the framework in its entirety was discarded. Settlement fails in the EU
remain consistently higher than in other major financial markets which affects negatively
the standing of EU financial markets as a target of investment and source of financing
among EU market participants, while also undermining the international competitiveness
of EU financial markets.
Similarly the option to differentiate the settlement discipline regime based on instrument
type, market or the existence of a clearing obligation was disregarded for several reasons.
First, this would create a two-tier market structure leading to arbitrage risks and investors
fleeing to the lighter regulated market. This runs clearly against the objectives of CMU.
Second, tougher settlement discipline measures only on the less performing markets will
likely drive away any liquidity and trading from these venues undermining financial
markets in these Member States while leading to concentration of market activity on a
few Union markets. Finally, it could encourage failing market participants to migrate to
venues that are not subject to the tougher settlement discipline measures. These effects
combined could lead to a two-tier capital market in the EU, with a small number of liquid
and efficient markets and a large number of smaller, less liquid and risky national capital
markets, undermining the role of financial markets as drivers of growth and economic
stability.
6. WHAT ARE THE IMPACTS OF THE POLICY OPTIONS?
This section describes the impact of each policy option against the drivers. In addition,
each policy option considered (other than Option 1 (baseline)) will be assessed against
the specific objectives presented in Section 4. In essence, under Option 1 (see section
5.1), all problems identified will remain, meaning that inefficiencies and disproportionate
costs will remain, to the detriment of the competitiveness of EU financial markets.
For readability and flow of the text, the sections below focus on the effectiveness of each
option in meeting the specific objectives, its coherence with the EU framework as well as
the rationale for selecting each preferred policy option. A detailed description of the costs
and benefits (efficiency) of each option can be found in Annex 7.
6.1. Impact of the policy options regarding passporting requirements
6.1.1. Option 2 - Reduce the scope of the passporting requirements
Effectiveness in meeting the specific objectives
Passporting requirements would not apply for non-equity securities. There would be no
need for CSDs to apply for a passport when providing services for these instruments
cross-border. This would provide legal clarity (no requirements) for CSDs and national
authorities, reducing the administrative burden and compliance costs for both.
211
CSDR review report (see note 9).
51
The two specific objectives would however only be partially met, as the problems
identified would remain for equities. As such, cross-border settlement activities of CSDs
for equities may stagnate or reduce, and the administrative burden for CSDs and national
authorities would remain. In addition, as passporting requirements would not apply to
non-equity securities, national authorities would not have a clear overview of the services
provided for non-equity instruments by CSDs established outside their jurisdiction and
the risks that they may or may not entail. This could impact the specific objective to
ensure adequate powers and information to monitor risks. Finally, there is no strong
justification why two categories of securities should be treated differently.
Coherence
This option ensures that CSDs benefit from a less burdensome passporting process, but
only for non-equity securities (and not for equity securities). This is only partly coherent
with the objective of CSDR to provide CSDs with the freedom to provide services across
the EU. In addition, it is only partially coherent with the CMU Action Plan212
which
favours amendments to the functioning of the CSD cross-border passport in general, and
not only for non-equity securities, to contribute to the development of a more integrated
post-trading landscape in the EU.
6.1.2. Option 3 - Clarify the role and powers of competent authorities and requirements
related to national laws
Effectiveness in meeting the specific objectives
Clarifying the passporting requirements would help CSDs and national authorities to
reduce the costs of trying to understand them (e.g. legal opinion, discussions with legal
counsel). The requirements will however remain burdensome, in particular those related
to national laws. As such, while the specific objective of reducing administrative burden
and costs could be partially met through more clarity and thus legal certainty, the specific
objective to minimise barriers to cross-border settlement will not.
Coherence
This option would ensure that CSDs benefit from clearer passporting requirements. This
would however only in part be coherent with the CMU Action Plan213
as the content of
requirements, in particular those related to national laws, will remain burdensome and, in
turn, not fully enhance the functioning of the CSD passport. The CMU Action Plan214
favours amendments to the functioning of the CSD cross-border passport to contribute to
the development of a more integrated post-trading landscape in the EU.
6.1.3. Option 4 - Replace the passporting procedure at the host Member State
level with a notification.
Effectiveness in meeting the specific objectives
Replacing the passporting procedure at the host Member State level with a notification
procedure would remove that unclear and burdensome passporting requirement. As such,
it would meet the specific objectives of reducing administrative burden and costs as well
as minimising barriers to cross-border settlement. Option 4 does not waive the
obligations stemming from national corporate legislation since harmonisation of the
212
Commission Communication ‘A Capital Markets Union for people and businesses – New Action Plan’ (see
note 10).
213
Ibid.
214
Ibid.
52
corporate laws is not the objective of CSDR and such national corporate legislation
applies to participants directly215
. Furthermore, as a notification procedure will still
remain in place, it would ensure that authorities have adequate information to monitor
risks. Not only would the host national supervisor be notified of the passport by the home
national supervisor (and would have the possibility to discuss it with the home national
supervisor during and after the passporting procedure), but the former would also
potentially be able, through the establishment of colleges (see Section 6.2.2) to have a
better overview of the supervision of the CSD on an ongoing basis, better cooperate and
raise its concerns with the home national supervisor.
Finally, Option 4 is aligned with the status of one of the main core services, settlement,
for which no passport process is currently required.216
Coherence
This option is fully coherent with the CMU Action Plan217
which favour amendments to
the functioning of the CSD cross-border passport that could contribute to the
development of a more integrated post-trading landscape in the EU. It is also consistent
with the aim of EU regulation, i.e. harmonising laws for Member States, and removing
barriers stemming from national laws.
6.1.4. Option 5 – combination of Option 3 and Option 4
Effectiveness in meeting the specific objectives
Combining Option 3 and Option 4 would allow to meet both of the following specific
objectives: (i) reducing administrative burden and costs through more clarity and thus
legal certainty and (ii) minimising barriers to cross-border settlement.
Coherence
This option would ensure that CSDs benefit from clearer passporting requirements and is
fully coherent with the CMU Action Plan218
which favours amendments to the
functioning of the CSD cross-border passport to contribute to the development of a more
integrated post-trading landscape in the EU. Finally, it is consistent with the aim of EU
regulation, i.e. harmonising laws for Member States, and removing barriers stemming
from national laws.
6.1.5. Choice of preferred policy option
The tables below provide a high-level summary of how the described options compare
(for the sake of readability, the labels of the options have been shortened). For a detailed
overview of the costs and benefits (efficiency) of each option and impacts on different
stakeholders see Annex 7.
Option 2 would only partially satisfy the objectives of minimising barriers to cross-
border settlement and of reducing administrative burden and costs, as the alleviations
would apply only to non-equity securities and not to equity securities. Option 3 is also
215
It stems from the combined reading of Articles 23 and 49(1) of CSDR that it is the responsibility of the
participants to comply with the relevant national legislation. The proposed policy options do not
contemplate any change in this respect.
216
Article 23(2) of CSDR.
217
Commission Communication ‘A Capital Markets Union for people and businesses – New Action Plan’ (see
note 10).
218
Commission Communication ‘A Capital Markets Union for people and businesses – New Action Plan’ (see
note 10).
53
only partially meeting the objectives as it only addresses the lack of clarity and not the
burdensome nature of the requirements. Option 4 would meet these specific
objectives.This option would be consistent as it would focus on a core aim of EU
regulation, i.e. mutual recognition. Option 5, which is the preferred policy option, would
combine the benefits from Option 3 and Option 4.
Effectiveness
Efficiency (cost-
effectiveness)
Coherence
Minimise
barriers to
cross-border
settlement
Ensure adequate
powers and
information to
monitor risks
Reduce
administrative
burden and costs
Option 1 – baseline
scenario
0 0 0 0 0
Option 2 – Reduce
scope of the
passporting
requirements
+ - + + +
Option 3 – Clarify
uncertainties
- + + + +
Option 4 – Replacing
passporting
procedure at the host
Member State level
with a notification
+++ +/- +++ +++ +++
Option 5 –
Combination of
Option 3 and Option
4
+++ + +++ +++ +++
Summary of winners and losers
CSDs Issuers Investors
Supervisory
authorities
Option 1 0 0 0 0
Option 2 + + + -
Option 3 + + + +
Option 4 +++ +++ +++ +/-
Option 5 +++ +++ +++ +/-
Legend: +++ = Very positive ++ = Positive + = Slightly positive +/- = Mixed effect 0 = no
effect - = Slightly negative -- = Negative --- = very negative
6.2. Impact of the policy options regarding cooperation between authorities
6.2.1. Option 2: Enhance the existing CSDR rules for cooperation arrangements
Effectiveness in meeting the specific objectives
Clarifications to the existing framework for cooperation arrangements would be
introduced in certain cases, i.e. when a CSD is operating cross-border. These would
partly meet the objective of minimising barriers to cross-border settlement and
ensuring adequate powers for authorities to monitor risks for several reasons:
 cooperation arrangements are established bilaterally, i.e. if a CSD is of substantial
importance to more than one host Member State, then the home authority needs
multiple cooperation arrangements. This leads to duplication and an increased
administrative burden for the home national authority, who would have to negotiate
and manage multiple parallel cooperation arrangements;
54
 cooperation arrangements are established for a limited number of CSDs. The
problems identified in Section 2.2.1 for all other cases for CSDs and national
authorities would therefore remain;
 ESMA does not participate in CSDR cooperation arrangements, which means that it
cannot be ensured that a similar approach will be adopted by all such arrangements.
Even if the framework was amended to provide that ESMA does participate, it would
not have the guarantees provided by the ESMA Regulation.
Coherence
This option is coherent with the current CSDR framework, as it builds on the already
foreseen arrangements. However, it is partly coherent with the CMU Action Plan,219
which highlights the need to develop a more integrated post-trading landscape in the EU
and states that if there are indications that the supervisory set-up is inadequate, stronger
supervisory coordination or direct supervision by the ESAs should be considered.
Furthermore, this option is not coherent with the ESMA Regulation, which already
foresees a specific framework for the cooperation of supervisors in Article 21.
6.2.2. Option 3: Introduce mandatory supervisory colleges
Effectiveness in meeting the specific objectives
Under Option 3, supervisory colleges would be established for some or all EU CSDs,
depending on the design of the framework. In general, the experiences with colleges in
other EU financial frameworks are positive and colleges are genuinely seen as a forum
where authorities with direct interest in the activities of a financial market infrastructure
gather and exchange views. As such, colleges are already enshrined in the ESMA
Regulation and for example put to practice in the context of EMIR for CCPs.
To meet the specific objectives of minimising barriers to cross-border settlement and
ensuring adequate powers to monitor risks, colleges could in particular be established for
CSDs offering services in relation to financial instruments constituted under the law of
another Member State as well as CSDs that are part of corporate groups that include at
least another CSD. Participation to these colleges could be reserved for authorities that
have an interest in those CSDs’ operations, e.g. the CSDs’ home and relevant authorities,
the host competent and relevant authorities in the case of CSDs that operate cross-border,
other CSDs’ competent and relevant authorities in the case of CSDs that are part of a
group of CSDs as well as the EBA, where a CSD has been authorised to provide
banking-type ancillary services.
This option would partly, but more than Option 2, meet the aforementioned specific
objectives of this initiative. The main reasons for this are twofold.
First, while colleges would be set up primarily for information-sharing purposes and the
home supervisor would maintain supervisory powers, the input of other authorities
participating to colleges would be taken more into account through their participation in
colleges, compared to under cooperation arrangements (which are only applicable where
a CSD is of substantial importance to another Member State). The involvement of other
authorities through the college will strengthen the passport effect and enhance the
cooperation of supervisors and relevant authorities for groups of CSDs, as barriers related
to lack of trust and/or sharing of information are reduced.
219
Commission Communication ‘A Capital Markets Union for people and businesses – New Action Plan’ (see
note 10).
55
Second, ESMA’s role would be strengthened, as it would participate in all colleges and
have all the powers entrusted to it under the ESMA Regulation. This would ensure
consistency across colleges, it would allow the centralisation of supervisory information,
the earlier identification of issues linked to CSDR implementation (compared to now,
where ESMA is only aware of issues when raised by national supervisors or market
participants) and the building of a common supervisory culture across EU CSDs. By
increasing cooperation between all authorities involved in the supervision of CSDs, this
option allows for a more holistic approach which more adequately responds to the
increasingly systemic nature of these infrastructures within the EU financial system. In
addition, ESMA would be able to build up its supervisory competence in this field.
Colleges would ensure that while supervisory responsibilities are aligned, a more
coherent application of CSDR in the EU is guaranteed and the current supervisory
arrangements are more effective. Nonetheless, this option does not completely eliminate
the possibility for potential divergences in the application of CSDR in the EU.
Coherence
This option is coherent with the CMU Action Plan,220
which highlights the need to
develop a more integrated post-trading landscape in the EU and states that if there are
indications that the supervisory set-up is inadequate for the desired level of market
integration, stronger supervisory coordination or direct supervision by the European
Supervisory Authorities should be considered. In addition, it is coherent with the ESMA
Regulation, which already foresees in Article 21 a specific framework for the cooperation
of supervisors through the establishment of colleges of supervisors.
6.2.3. Option 4: More supervision of CSDs at EU level
Effectiveness in meeting the specific objectives
Under this option, a single supervisor would be established for CSDs. The single
supervisor could be ESMA, the ECB, or a new entity as was the case for the Single
Supervisory Mechanism (SSM) in the field of banking. Depending on the exact design,
the single supervisor would be given full responsibility for the supervision of all or
certain CSDs in the EU, including powers to authorise CSDs and oversee compliance
with conduct of business rules. In performing these tasks, it would be required to
cooperate closely with other bodies, such as the ESCB, as well as the ESAs. However,
none of these authorities would have binding powers over the single supervisor.
This option would eliminate barriers to the cross-border provision of services (as CSDs
would be authorised and supervised at EU level) and ensure a coherent application of
CSDR within the EU, addressing effectively the need for supervisory convergence.
However, it should be noted that some CSDs in the EU are already exempt from certain
CSDR requirements,221
therefore it is not clear whether they would be able to be subject
220
Commission Communication ‘A Capital Markets Union for people and businesses – New Action Plan’ (see
note 10).
221
Article 1(4) of CSDR stipulates that Articles 10 to 20, 22 to 24 and 27, Article 28(6), Article 30(4) and
Articles 46 and 47, the provisions of Title IV and the requirements to report to competent authorities or
relevant authorities or to comply with their orders under this CSDR, do not apply to the members of the
ESCB, other Member States’ national bodies performing similar functions, or to other public bodies
charged with or intervening in the management of public debt in the Union in relation to any CSD which
the aforementioned bodies directly manage under the responsibility of the same management body, which
has access to the funds of those bodies and which is not a separate entity.
56
to supervision by an EU body. In addition, no EU body has substantial supervisory
experience over CSDs now in order to be able to be immediately operational.
It is worth noting that the main advantages and disadvantages of moving supervision of
EU CSDs at EU level are broadly the same regardless of whether EU supervision is
exercised over all or a subset of EU CSDs.
Coherence
This option is coherent with the CMU 2020 Action Plan,222
which highlights the need to
develop a more integrated post-trading landscape in the EU and states that if there are
indications that the supervisory set-up is inadequate for the desired level of market
integration, stronger supervisory coordination or direct supervision by the European
Supervisory Authorities should be considered. In addition, it is coherent with the
approach followed in the case of other financial institutions for which ESMA has already
been granted either a role in their supervision through its participation in colleges (e.g.
for CCPs) or direct supervisory powers (for credit rating agencies and trade repositories).
6.2.4. Choice of preferred policy option
The tables below provide a high-level summary of how the described options compare
(for the sake of readability, the labels of the options have been shortened). For a detailed
overview of the costs and benefits (efficiency) of each option and impacts on different
stakeholders see Annex 7.
In view of the high political priority of the review to facilitate CSDs’ access to markets
other than that of their authorisation as well as ensure financial stability by providing
supervisors with more powers to monitor risks, Option 3 is deemed more appropriate
and proportionate for the following reasons: first, it attains the right balance between
achieving the aforementioned objectives and Member States’ responsibilities; second, it
reflects the fact that ESMA does not currently have experience in the supervision of
CSDs and gives it time to build up its supervisory capacity; third, it is the most cost-
effective option at this point in time (see Annex 7 on the costs colleges and EU level
supervision would entail for all interested stakeholders).
Effectiveness
Efficiency
(cost-
effectiveness)
Coherence
Minimise barriers
to cross-border
settlement
Ensure adequate
powers and
information to
monitor risks
Reduce
administrative
burden and costs
Option 1 – baseline
scenario
0 0 0 0 0
Option 2 –Enhance
cooperation
arrangements
+ +/- + +/- +/-
Option 3 – Establish
colleges
++ ++ ++ ++ ++
Option 4 – EU
supervision
+++ +++ +/- -- +++
Summary of winners and losers
CSDs Issuers
Investors Supervisory
authorities
Option 1 0 0 0 0
222
Commission Communication ‘A Capital Markets Union for people and businesses – New Action Plan’ (see
note 10).
57
Option 2 +/- +/- +/- +/-
Option 3 ++ ++ ++ +
Option 4 ++ +++ +++ --
Legend: +++ = Very positive ++ = Positive + = Slightly positive +/- = Mixed effect0 = no
effect - = Slightly negative -- = Negative --- = very negative
6.3. Impact of the policy options regarding provision of banking services related to
settlement in foreign currencies
6.3.1. Option 2: Introduce targeted amendments for designated credit institutions
Effectiveness in meeting the specific objectives
Targeted amendments would be made to the regime for the provision of banking-type
ancillary services. Financial stability considerations led to strict rules to limit the
liquidity and credit risks incurred by CSDs. As outlined in section 2.3.3, these
requirements mean that no designated credit institution exists and compliance costs limit
foreign currency settlement as banking CSDs are unable to offer services to non-banking
CSDs even within their group. Targeted amendments could consist of removing some
restrictions for designated credit institutions, allowing more banks to provide these
services (Option 2a), or allowing CSDs authorised to provide banking services to offer
CSD services (e.g. within their corporate group of companies) (Option 2b).
For both options, cross-border settlement would improve as options for CSDs will
increase, providing issuers and investors with more opportunities and choice. In addition,
economies of scale could be more easily reached, increasing the attractiveness for new
CSD entrants in this market, in particular those based on new technologies. This would
also be consistent with the CMU Action Plan aiming for more integrated post-trade
markets and enhanced capital markets in the EU, as well as efforts to promote new
technologies.
Financial stability risks would however increase as credit and liquidity risks could rise.
This would be the case for both options 2a and 2b. For Option 2b, concentration risk
would increase as exposures would be concentrated in the, at present, five CSDs that
have been authorised to provide banking-type ancillary services including within groups
of CSDs. Nevertheless, the potential wider risks for financial stability would potentially
be greater for Option 2a as the risk of contagion to the wider banking sector would be
larger. In addition, credit institutions would not be subject to the additional capital
surcharge that CSDs are under CSDR, further amplifying the potential risks for the
banking sector. Nevertheless, for both options, it is unsure whether and if yes, to what
extent, the market will make use of the additional opportunities, which in particular, is
especially true for Option 2a where the market cannot benefit from existing established
structures, such as they could in Option 2b.
Coherence
The option to partially or completely remove restrictions for the designated credit
institution is not coherent with the current CSDR framework, as it will introduce possibly
unlimited risk into the financial system, whereas 2b could introduce more risks but
within the current arrangements of CSDR. At the same time, Option 2a could bring
further risks as potentially a greater level of risk could spread beyond CSDs to the wider
banking system, when compared to 2a. Both 2a and 2b are however, coherent with the
CMU 2020 Action Plan, which highlights the need to develop a more integrated post-
trading landscape in the EU and aims to improve cross border transactions within the EU.
58
Option 2b is relatively better than 2a in this respect. Both sub-options are coherent with
existing banking regulations as they will continue to apply on the CSDs in this option.
6.3.2. Option 3: Amend the thresholds under which CSDs can use a commercial bank
for banking-type ancillary services.
Effectiveness in meeting the specific objectives
Under this option targeted amendments would be made to the threshold for CSDs
(currently maximum of 1% of total assets and EUR 2.5 billion) to provide ancillary
banking services. This would make the provision of these services less burdensome and,
due to lower compliance costs, economies of scale for the provision of settlement in
foreign currencies could be more easily achieved. Achieving these economies of scale
would also facilitate CSDs to transition to settlement of foreign currencies in central bank
money (one of CSDR’s aims) by enabling them to reach appropriate economies of scale
to justify connecting to the relevant central bank. This would help make cross-border
transactions more available to investors against a minimum of compliance costs for
CSDs. The price for this is in terms of financial stability risks, since credit and liquidity
risks of the CSD could potentially increase, could be mitigated by increased supervisory
monitoring by the relevant banking authority. Changing the thresholds would also help
improve the efficiency of settlement markets as competition in settlement in foreign
currencies will increase and current settlement arrangements can remain in place for
CSDs.
Coherence
This option is coherent with the current CSDR framework, as it builds on the already
foreseen arrangements. It is also coherent with the CMU Action Plan,223
which highlights
the need to develop a more integrated post-trading landscape in the EU and aims to
improve cross-border transactions in the EU while preserving financial stability. It is also
coherent with banking regulations in taking financial stability as a starting point. Option
3 does not entail a big change to CSDR’s requirements which is positive. It will increase
cross-border provision of settlement services as compliance costs are limited to internal
operational risk processes and external compliance costs are limited. It could be
relatively simple to apply as the prudential framework already covers the additional risks.
6.3.2. Option 4: Amend the thresholds under which CSDs can use a commercial bank
for banking-type ancillary services and allow banking CSDs to provide services.
Effectiveness in meeting the specific objectives
The combination of options 2(b) and 3 will help achieve the specific objectives of
increasing cross-border settlement and efficiency of the provision of banking services as
well as reducing administrative costs, as elaborated under options 2 and 3, in a more
comprehensive manner than what could be achieved by applying only one of these
options. A combination of options 2(b) and 3 would have as an additional benefit as
compared to the above. While reviewing the threshold for banking services would
potentially increase the notional amounts available for banking services (including
foreign currency settlement) in EU settlement markets, including banking CSDs into the
potential providers of these services would increase potential notional amounts available
for foreign currency even further through broadening the range of providers.
223
Commission Communication ‘A Capital Markets Union for people and businesses – New Action Plan’ (see
note 10).
59
Coherence
The combination of options 2(b) and 3 is coherent with EU policies, such as the objective
of CMU to create a more integrated post-trading landscape in the EU contributing to the
EU internal market as elaborated in the respective sections.
6.3.3. Choice of preferred policy option
The tables below provide a high-level summary of how the described options compare
(for the sake of readability, the labels of the options have been shortened). For a detailed
overview of the costs and benefits (efficiency) of each option and impacts on different
stakeholders see Annex 7.
In view of the political priority of CMU and to create a single European market for
capital, improving possibilities for CSD to offer settlement in foreign currencies adds to
the aim of this review to facilitate CSDs’ access to other markets other than their home
market and minimise cross-border barriers. At the same time, this should be done while
preserving financial stability and keeping settlement markets safe. Hence, and since not
mutually exclusive, a combination of options 2b and 3 are deemed more appropriate
and proportionate (Option 4) in attaining the right balance between achieving the
aforementioned objectives.
Effectiveness Efficiency
(cost-
effectiveness)
Coherence
Minimise
barriers to
cross-border
settlement
Ensure adequate
powers and
information to
monitor risks
Reduce
administrative
burden and costs
Option 1 – baseline scenario 0 0 0 0 0
Option 2a –Targeted
Amendments- Remove
restrictions
++ + + - --
Option 2b –Targeted
Amendments-allow banking
CSDs to offer services to
other CSDs
++ + + ++ ++
Option 3 – Amend threshold +++ + +++ +++ ++
Option 4 – combination of
2(b) and 3
+++ + +++ +++ ++
Summary of winners and losers
CSDs Issuers Investors
Supervisory
authorities
Option 1 0 0 0 0
Option 2a + + + --
Option 2b ++ ++ ++ 0
Option 3 ++ +++ +++ +
Option 4 ++ +++ +++ +
Legend: +++ = Very positive ++ = Positive + = Slightly positive +/- = Mixed effect0 = no
effect - = Slightly negative -- = Negative --- = very negative
6.4. Impact of the policy options regarding settlement discipline
6.4.1. Option 2 – Introduce targeted amendments for cash penalties and mandatory
buy-ins
Effectiveness in meeting the specific objectives
This option includes amendments that would simplify elements of the settlement
discipline regime, e.g. with regards to the pass-on mechanism, in-scope transactions and
buy-in agents. These changes would be limited, introduced only in areas where the
regime would benefit from minor corrections or amendments.
60
First, amendments to the pass-on mechanism would allow to solve all settlement fails
along the same chain by one buy-in in the original settlement fail which provoked the
other fails. This would be combined with measures to address the rigidness in timing of
when a buy-in is initiated and the asymmetry in price differentials.224
This would reduce
the complexity and the burden of managing a buy-in process.
Second, certain transactions may no longer be subject to the settlement discipline regime,
e.g. corporate actions on stock (e.g. initial creation transactions and redemptions), certain
central bank transactions (e.g. monetary policy operations which are not credit
operations225
), and certain other transactions (e.g. auto-generated transactions by
CSDs)226
. In addition to mandatory buy-ins, certain transactions could be exempted from
the cash penalties regime. These changes would permanently reduce the compliance
burden on market participants by removing transactions that do not form part of market
turnover or lie outside their control. Compliance costs for regulators, i.e. replying to
Q&As, will also be reduced permanently. Furthermore these amendments would reduce
the number of settlement fails and improve settlement efficiency.
Third, more choice could be enabled as concerns buy-in agents, i.e. appoint a broader
range of actors as buy-in agents. A major concern for many stakeholders227
is that so far
only one service provider has emerged with a buy-in solution and that the offer is not
consistent with the needs of all stakeholders228
. Subject to best execution requirements
and clearly defined limitations and conflicts of interest,229
firms could be able to execute
their own buy-ins. Buy-ins already exist today without a buy-in agent, e.g. at CCPs,
many of which do not use a buy-in agent but go to auction, sourcing the liquidity from
their network on a best execution basis. Allowing parties, within limits to execute their
own buy-ins based on underlying contractual requirements, could allow flexibility to act
in the best economic interest of the non-receiving party and tailor buy-ins to the
characteristics of different types of financial instruments.
Such amendments would effectively and permanently reduce administrative burden and
compliance costs. In particular clarifications with regards to in-scope transactions would
effectively reduce complexity, administrative burden and compliance costs for all market
participants. Furthermore, fewer buy-ins would improve settlement efficiency.
Coherence
This option would be coherent with the overall objectives of CMU, as well as specific
objectives of CSDR. It would also be coherent with the REFIT initiative to have
proportionate requirements in that it would permanently lessen to a certain extent the
administrative burden and compliance costs for investors, CSDs and regulators without
endangering financial stability. These benefits would be long-term.
224
Responses to the Commission CSDR targeted consultation by ICMA (see note 198), ISLA
(https://www.islaemea.org/wp-
content/uploads/2019/03/ISLA_Response_EC_Targeted_Consultation_CSDR.pdf), AFME (see note 127).
225
Currently these would include outright operations conducted under the Eurosystem’s Asset Purchase
Programme or the Pandemic Emergency Purchase Programme, and the associated securities lending
transactions. Based on confidential information provided to DG FISMA services.
226
Responses to the CSDR targeted consultation by ECSDA (ESCDA response to the Commission CSDR
targeted consultation, https://ecsda.eu/archives/13474), Clearstream (see note 190), Euronext (see note
106), Q. 33.2.
227
Summary Report of the Commission CSDR targeted consultation (see note 92).
228
It is claimed that the legal structure of the buy-in agent and its collateral requirements are more suitable for
banking customers. Based on confidential information provided to DG FISMA services.
229
Article 24 of the RTS on settlement discipline.
61
The negative market impacts of this option would be similar to Option 1, and would be
related to the introduction on the mandatory buy-in. The clarifications contained in
Option 2 would not considerably diminish their negative market impacts.
6.4.2. Option 3 – Introduce a two-step approach
Effectiveness in meeting the specific objectives
Under this option cash penalties would apply immediately, while the implementation of
mandatory buy-ins would be deferred and triggered only where necessary, if the other
settlement discipline measures (i.e. reporting and cash penalties) prove to be insufficient
to achieve an acceptable level of settlement efficiency within the Union. Any delay in the
application of mandatory buy-ins should apply equally to the full market (i.e. both the
cleared and uncleared space) to prevent an unlevel playing field. This is essential to avoid
an unintended shift of trading volumes to a non-cleared environment, notably for less
liquid securities. The monitoring and reporting obligations under CSDR and the relevant
RTS will remain unchanged.230
Under the two-step approach it would therefore first need to be determined, following a
granular analysis of the fails in the EU settlement market and at international level, where
the main settlement fails occur, at which level and for which reasons. ESMA could be
required to produce on a regular basis (e.g. every two years) a report on settlement fails
in the market that would focus, amongst others, on the levels of fails and their evolution,
the underlying drivers, the main instruments affected, an international comparison of
settlement fail rates, as well as assess whether cash penalties remain a proportionate and
effective tool to address these fails. The entry into application of the mandatory buy-in
regime could be left to a Level 2 act to be adopted by the Commission, taking into
account, where available, ESMA’s report.
This option will be effective in addressing one of the main reasons for settlement fails,
i.e. insufficient capacity among market participants for post-trade functions. Practical
experience from other capital markets231
suggests that cash penalties may provide
sufficient incentive for the necessary capacity improvements to address settlement fails.
Furthermore, these improvements will particularly benefit the processing of smaller
trades which are more prone to fail. While encouraging improved settlement, this option
allows to avoid the most negative impacts of mandatory buy-ins related to liquidity, bid-
ask spreads or market stability. It will also discourage strategic behaviour by
counterparties. Cash penalties, like positive interest rates, will be an incentive for the
selling party to source the securities, whether outright or in repo (particularly when the
penalty is more punitive than the repo rate for the security). Furthermore, in the absence
of mandatory buy-ins, alternatives will be available to the buyer to initiate a buy-in
230
Articles 13 and 14 of the RTS on settlement discipline.
231
The US experience shows that the introduction of a ‘fail charge’ for US Treasury Securities reduced fails
significantly. On 12 November 2008, the Treasure Market Practices Group (TMPG) published their
recommendations to introduce a fails charge (known as the ‘TMPG fails charge’), which went live on 1
May 2009. Studies showed that the anticipation of the implementation of the rule had a significant effect
on settlement fails. A paper published in the ‘FRBNY Economic Policy Review/ October 2010’ states that
“primary dealer fails declined from a daily average of $379 billion during the week of October 16-2 to a
daily average of $70 billion during the week of November 13-19 and averaged less than $50 billion a day
in December”. The paper also shows that fails averaged just over $14.4 billion per day during the first four
months of 2009, but only $4.2 billion per day since the implementation of the fails charge. Based on: ‘The
introduction of the TMPG fails charge for U.S Treasure Securities’, Federal Reserve Bank of New York
(FRBNY), Economic Policy Review/ October 2010.
62
against a failing seller: cash compensation, bilateral cancellation or to extend the delivery
time to a date when the seller can make the delivery which will ensure that the buyer
receives the securities and not a cash settlement. Buy-in arrangements are usually a
standardised process and are incorporated in the terms of business between
counterparties, to cover specific markets. Lastly, this option will minimise the pro-
cyclical effects as they are related to buy-ins rather than cash penalties.232
The main costs
of this approach is setting the conditions that would justify the introduction of mandatory
buy-ins as a second step of the two-step approach.
Coherence
This option would be coherent with the objectives of CMU and CSDR as it would
provide the necessary incentives to further improve EU settlement efficiency. It would
also be coherent with the REFIT initiative as it would better comply with the principle of
proportionality in that, to the extent that cash penalties can enhance on their own
settlement efficiency, the application of additional measures (i.e. mandatory buy-ins)
would go beyond what is necessary to achieve the pursued objectives. Concerns related
to market stability or the ability of market participants to fulfil certain functions, such as
market making, would not materialise.
6.4.3. Option 4 – Introduce voluntary buy-ins
Effectiveness in meeting the specific objectives
Under this option cash penalties would be mandatory while buy-ins would be voluntary.
Even if buy-ins would be voluntary, all EU investment firms would need to put in place
contractual arrangements for buy-ins with their relevant counterparties. The monitoring
and reporting obligations under CSDR and the relevant RTS would remain unchanged.233
The decision to initiate a buy-in would be the discretionary right of the purchasing party
giving it more flexibility in achieving its investment objectives. This will apply in
relation to both transactions with and without the involvement of a CCP in order not to
incentivise migration of trading to non-cleared markets and indirectly undermine a key
EU policy objective in financial markets. In order for voluntary buy-ins to be effective a
number of high-level principles234
could be developed in CSDR. To ensure their clients’
access to voluntary buy-ins, market participants could still need to enter into a re-
papering exercise, similar in scope and cost to the described under Option 3. There are
also doubts about the use of and effectiveness of voluntary buy-ins to reduce settlement
fails. In markets dominated by large dealers, investors may be discouraged from adopting
buy-ins for fear of retaliation235
. There is evidence that buy-ins are currently rarely used
as a voluntary contractual arrangement between market participants.236
Already today,
the trading parties have the right to request buy-ins, whether through market standards
(ICMA rules), legal standards (stock exchange regulations) or contractual rights.
232
The potential for a buy-in impacts the starting bid-offer spread and its impact will be pro-cyclical, i.e. when
liquidity reduces, the price increase due to the buy-in will be greater further reducing trading activity and
thus liquidity.
233
Articles 13 and 14 of the RTS on settlement discipline.
234
For instance, the ICMA response to the Commission CSDR targeted consultation reply suggests that the
following principles should form part of a voluntary buy-in: (i) the contractual right for the failed-to party
to initiate a buy-in, (ii) ability to recover costs incurred in executing the process, (iii) ensuring that the non-
failing party is restored to the equivalent economic position and (iv) providing for a cash settlement
alternative (see note 198).
235
Reply to the Commission targeted consultation by Clearstream, Q. 34.1 (see note 190).
236
Reply to the Commission targeted consultation by Clearstream, Q. 34.1 (see note 190).
63
However, that is hardly practiced. Hence, voluntary buy-ins do not seem efficient in
ensuring settlement efficiency.
Coherence
This option is partly coherent with the objectives of CMU and CSDR as it will provide
incentives to further improve settlement efficiency in the form of cash penalties. It
contains major disadvantages in the form of increased compliance costs for traders who
will need to keep in place a system allowing them to carry out buy-ins if contractually
agreed. It opens the possibility for abusive market practices as firms may be discouraged
from applying buy-ins if it will hurt established trading relationships. This option is also
not proportional. Due to their voluntary nature and evidence so far buy-ins will remain
unused, although market participants would incur re-papering costs and regulators face
compliance costs related to clarifications and guidance.
6.4.4. Option 5 – Combination of targeted amendments to settlement discipline regime
with a two-step implementation of cash penalties and mandatory buy-ins
Effectiveness in meeting the specific objectives
The combination of Option 2 and Option 3 will help achieve the specific objective of
reducing administrative burden and compliance costs without endangering financial
stability, as explained in sections 6.4.2 and 6.4.3, more comprehensively than each option
individually by targeting both procedural aspects of the regime (Option 2) and market
impacts (Option 3).
Coherence
The combination of Option 2 and Option 3 is coherent with the objectives of CMU and
CSDR as it would provide the necessary incentives to further improve EU settlement
efficiency (Option 3). It would also be coherent with the REFIT initiative as it would
better comply with the principle of proportionality (Option 3) and reducing
administrative burden (Option 2), by introducing clarifications and simplifications to the
operation of the settlement discipline regime.
6.4.5. Choice of preferred policy option
The tables below provide a high-level summary of how the described options compare
(for the sake of readability, the labels of the options have been shortened). For a detailed
overview of the costs and benefits (efficiency) of each option and impacts on different
stakeholders see Annex 7.
In view of the importance attached by CMU to safe and efficient financial markets
Option 3 offers the most effective, efficient and coherent approach. Thanks to cash
penalties it will support improvements in settlement efficiency, without however
endangering stability and liquidity across markets and financial instruments. It is more
effective in addressing this objective than Option 4, which will have greater negative
impacts on market stability, liquidity and pricing while compliance costs for market
participants and regulators will be similar to Option 3. The effects of a voluntary buy-in
will be similar to the ones described under Option 1, although they may be smaller as
buy-ins will not be applied consistently by market participants. The targeted amendments
(Option 2) will bring benefits irrespective of the chosen settlement regime in terms of
effectiveness, efficiency or lower compliance costs. Hence it can be combined with either
Option 3 or Option 4. The benefits will however be greatest when combined with Option
3. Settlement efficiency will improve thanks to cash penalties, which will themselves
benefit from clarifications, while mandatory buy-ins will be delayed and also further
64
refined. Hence the preferred policy option is Option 5 (combination of Options 2 and 3)
and it will ensure the proportionality and efficiency of the Settlement Discipline Regime.
Effectiveness
Efficiency
(Cost-
effectiveness)
Coherence
Minimise
barriers to cross-
border settlement
Ensure adequate powers
and information to
monitor risks
Reduce
administrative
burden and costs
Option 1 – Baseline
scenario
0 0 0 0 0
Option 2 –Targeted
amendments
0 0 +++ +++ ++
Option 3 – Two-step
approach
0 0 ++ ++ ++
Option 4 – Voluntary
buy-ins
0 0 - - +/-
Option 5 – Two-step
approach with targeted
amendments
0 0 +++ +++ ++
Summary of winners and losers
CSDs Issuers Investors
Supervisory
authorities
Option 1 0 0 0 0
Option 2 + ++ +++ ++
Option 3 + +/- ++ ++
Option 4 - - ++ --
Option 5 + ++ ++ ++
Legend: +++ = Very positive ++ = Positive + = Slightly positive +/- = Mixed effect0 = no
effect - = Slightly negative -- = Negative --- = very negative
6.5. Impact of the policy options regarding third-country CSDs
6.5.1. Option 2 – Introduce an end-date to the grandfathering clause
Effectiveness in meeting the specific objectives
Introducing an end-date to the grandfathering clause would ensure that third-country
CSDs currently operating under the grand-fathering clause are subject to equivalent
rules.237
It would therefore help ensure a more level playing field between EU authorised
CSDs (complying with CSDR) and third-country CSDs when they both operate in the
EU. In that sense, and compared to Option 1, it would ensure adequate powers and
information to monitor risks for issuers, as third-country CSDs would be forced to apply
rules that are at least equivalent.
Coherence
This option is coherent with the aim of a grandfathering clause, which is to provide time
for entities to adapt to a new situation created by the CSDR. In this case, CSDR entered
into force in 2014.238
Both EU CSDs and non-EU CSDs have had sufficient time to adapt
to CSDR. In addition, this option would contribute to a level playing field between EU
and third-country CSDs and therefore contribute to create a more integrated post-trading
landscape in the EU as aimed for by the new CMU Action Plan.239
237
The end-date to the grandfathering clause would be introduced for both for EEA and third-country CSDs.
238
NB: CSDR was included in the EEA Agreement on 1 January 2020.
239
Commission Communication ‘A Capital Markets Union for people and businesses – New Action Plan’ (see
note 10).
65
6.5.2. Option 3 – Introduce a notification requirement for third-country CSDs
Effectiveness in meeting the specific objectives
Third-country CSDs would have to notify to ESMA when they are providing services in
the EU. It would therefore help authorities (but not only) to have more information on
their activities and to identify and monitor any potential risks. Options 2 and 3 are not
mutually exclusive: Option 3 helps achieve the specific objective of ensuring adequate
powers and information to monitor risks from an EU authorities’ point of view whereas
Option 2 helps the same specific objective also from an investors’/issuers’ perspective.
These two options could therefore be complementary.
Coherence
This option is coherent with the REFIT initiative to have proportionate requirements.
While authorities have very little information on which third-country CSDs operate in the
EU, a notification process would help to get this information. It would be coherent with
the CMU objective to have a more integrated post-trading landscape in the EU as EU
authorities would have more information on which CSDs operate in the EU and therefore
more information to monitor potential risks.
6.5.3. Option 4 – Enhance the regime for third-country CSDs providing services
Effectiveness in meeting the specific objectives
A more comprehensive third-country regime either requiring ESMA recognition for the
provision of all CSD services by third-country CSDs (i.e. also for settlement services)
and/or ESMA supervision over third-country CSDs similar to that exercised over third-
country CCPs under EMIR (e.g. exercise of supervisory powers over all or certain third-
country CSDs) would ensure that adequate powers and information to monitor risks are
available at EU level. However, taking into account that: (a) very little information is
available as to whether and to what extent third-country CSDs provide services in
relation to financial instruments constituted under the law of a Member State; and (b) the
increased costs these options would imply for ESMA, the introduction of an enhanced
regime for third-countries CSDs does not seem proportionate now. Only the specific
objective to ensure adequate powers and information to monitor risks seems to be
significantly met with Option 4.
Coherence
This option is coherent with the Parliament Resolution on CMU240
where it calls to
consider gradually granting ESMA direct supervisory powers, including direct oversight
over certain market segments such as CSDs. This option is also coherent with the ESMA
Regulation241
that requires the conduct of a comprehensive assessment of the potential
supervision of third-country CSDs. However, having done this assessment, it seems that
it could be deemed excessive to require third-country CSDs to be subject to a new
enhanced third-country regime while authorities do not even know how many operate in
the EU and the volume of settlement it concerns. Due to this lack of proportionality, this
option would therefore not be coherent with the REFIT initiative.
240
European Parliament resolution of 8 October 2020 on further development of the Capital Markets Union
(CMU), (2020/2036,(INI)), para. 21.
241
Article 81(2c) of the ESMA Regulation.
66
6.5.4. Option 5 – combination of Options 2 and 3
Effectiveness in meeting the specific objectives
The combination of Options 2 and 3 will help achieve the specific objectives of ensuring
adequate information and powers to monitor risks as well as reducing administrative
costs, as elaborated under Sections 6.5.1 and 6.5.2, in a more comprehensive manner than
what could be achieved by applying only one of these options.
Coherence
The combination of Options 2 and 3 is coherent with a broad range of EU policies, i.e.
the REFIT nature of this initiative, the objectives of the CMU to create a more integrated
post-trading landscape in the EU as well as the rationale behind the introduction of the
grandfathering clause in CSDR, as elaborated in Sections 6.5.1 and 6.5.2.
6.5.5. Choice of preferred policy option
The tables below provide a high-level summary of how the described options compare
(for the sake of readability, the labels of the options have been shortened). For a detailed
overview of the costs and benefits (efficiency) of each option and impacts on different
stakeholders see Annex 7.
Option 5 (i.e. the combination of Options 2 and 3) is the preferred option. Option 2
would ensure adequate powers and information to monitor risks, as third-country CSDs
would be forced to apply rules at least equivalent. Option 3 would help to meet the
specific objective of ensuring adequate powers and information to monitor risks for EU
authorities. As the number of third-country CSDs is unknown and thus whether there is
an issue for financial stability or not, Option 4 is premature and disproportionate.
Effectiveness Efficiency
(cost-
effectiveness)
Coherence
Minimise
barriers to
cross-border
settlement
Ensure adequate
powers and
information to
monitor risks
Reduce
administrative
burden and
costs
Option 1 – Baseline
scenario
0 0 0 0 0
Option 2 – Introduction
of an end-date to the
grand-fathering clause
0 ++ ++ ++ +++
Option 3 – Introduction
of a notification
requirement for third-
country CSDs
0 +++ +/- ++ +++
Option 4 – Enhanced
CSDR third-country
regime
0 +++ --- --- +/-
Option 5 –
Combination of
Options 2 and 3
0 +++ ++ ++ +++
Summary of winners and losers
EU CSDs /Issuers Investors
Supervisory
authorities
Option 1 0 0 0 0
Option 2 ++ ++ ++ ++
Option 3 ++ +/- +/- +++
Option 4 ++ +/- +/- ++
67
Option 5 ++ ++ ++ +++
Legend: +++ = Very positive ++ = Positive + = Slightly positive +/- = Mixed effect0 = no
effect - = Slightly negative -- = Negative --- = very negative
7. HOW DO THE OPTIONS COMPARE?
The preceding section analyses the policy options for each of the five key drivers
considered in this impact assessment and explains the choice of the preferred policy
options. A comparison of the different policy options is summarised in the table below.
Effectiveness
Efficiency
(Cost
effectiveness)
Coherence
Objective
1
Minimise
barriers to
cross-
border
settlement
Objective 2
Ensure
adequate
powers and
information to
monitor risks
Objective 3
Reduce
administrative
burden and
compliance
costs
Passporting
require-
ments
Option 1
Do nothing
(baseline)
0 0 0 0 0
Option 2
Reduce the
scope of the
passporting
requirements
+ - + + +
Option 3
Clarify
uncertainties
- + + + +
Option 4
Replace
passporting
procedure at
the host
Member State
level with a
notification
+++ +/- +++ +++ +++
Option 5
Combination
of Option 3
and Option 4
+++ + +++ +++ +++
Cooperatio
n between
authorities
Option 1
Do nothing
(Baseline)
0 0 0 0 0
Option 2
Enhance
cooperation
arrangements
0 0 0 0 0
Option 3
Establish
colleges
++ ++ ++ ++ ++
Option 4
EU
supervision
+++ +++ +/- -- +++
Banking
services
Option 1
Do nothing
(Baseline)
0 0 0 0 0
Option 2a ++ + + - --
68
(remove DCI
restrictions)
Option 2b
Banking
CSDs to
provide
services to
other CSDs
incl.
intragroup
++ + + ++ ++
Option 3
Amend
threshold
+++ + +++ +++ ++
Option 4
Combination
of options
2(b) and 3
+++ + +++ +++ ++
Settlement
discipline
Option 1
Do nothing
(Baseline)
0 0 0 0 0
Option 2
Targeted
amendments
0 0 +++ +++ ++
Option 3
Two-step
approach
0 0 ++ ++ ++
Option 4
Voluntary
buy-in
0 0 - - +/-
Option 5
Two-step
approach with
targeted
amendments
0 0 0 +++ ++
Third-
country
CSDs
Option 1
Do nothing
(baseline)
0 0 0 0 0
Option 2
Introduction
of an end-date
to
grandfatherin
g clause
0 ++ ++ ++ +++
Option 3
Introduction
notification
requirement
for third-
country CSDs
0 +++ +/- ++ +++
Option 4
Enhance
CSDR third-
country
regime
0 +++ --- --- +/-
Option 5 –
combination
of Options 2
and 3
0 +++ ++ ++ +++
69
Legend: +++ = Very positive ++ = Positive + = Slightly positive +/- = Mixed effect 0 = no
effect - = Slightly negative -- = Negative --- = very negative
8. PREFERRED PACKAGE
8.1. Summary of preferred aggregated options
Section 7 analyses and compares the policy options for each of the drivers considered in
this impact assessment. The section below explain why each preferred policy options
represents the best overall trade-off between effectiveness and costs, hence is the most
proportionate and efficient one in the long run.
Passporting requirements: Based on the assessment and comparison of all options,
Option 5 (combination of Option 3 – clarification of uncertainties – and Option 4 –
passporting notification) is the preferred option. The analysis shows that it is better
suited to achieve the specific objectives of reducing administrative burden and
compliance costs as well as minimising barriers to cross-border settlement than all other
options. Concerns of certain national authorities that their powers may as a result be
reduced are addressed by the preferred policy option to enhance the cooperation between
authorities by requiring the establishment of colleges.
Cooperation between authorities: Based on the assessment and comparison of all
options, Option 3 (mandatory colleges of supervisors) is the preferred option. It
allows to better achieve the specific objective of minimising barriers to cross-border
settlement and ensuring adequate powers for authorities to monitor risks than all the other
options. In particular, Option 3 is more appropriate and proportionate in attaining the
right balance between achieving the aforementioned objectives while reflecting the fact
that responsibility remains with the Member States.
Banking services: Based on the assessment and comparison of all options, Option 2b
(allow banking CSDs to offer services to other CSDs) in combination with Option 3
(amend thresholds) are preferred (together referred to as Option 4). They allow for
enhanced cross-border transactions in foreign currencies and more competition, which is
in line with CMU. Increased risks to financial stability are limited and could be managed.
Settlement discipline: Based on the assessment and comparison of all options, a
combination of Option 2 (Clarifications to the rules governing settlement discipline)
and Option 3 (two-step approach - deferred implementation of mandatory buy-ins)
are preferred (represented as Option 5). It allows to introduce the necessary
clarifications with regards to in-scope transactions or the use of buy-in agents. Option 2
will reduce the complexity (pass-on mechanism) and burden of the regime both for
market participants and regulators. Furthermore, Option 3 will provide the necessary
incentives, through the use of cash penalties, for necessary improvements in settlement
efficiency. At the same time Option 3, allows to avoid the most negative impacts of buy-
ins. Indeed, considering the negative impacts on liquidity, pricing and market Option 3
allows time for the regulators to revise and improve the buy-in regime and set the
appropriate terms of entry into application of mandatory buy-ins, should cash penalties
alone prove insufficient in addressing settlement fails rates in the EU.
Third-country CSDs: Based on the assessment and comparison of all options, Option 5,
i.e. the combination of Options 2 (end of the grandfathering clause) and 3 (notification
for third-country CSDs), is preferred. It allows to better achieve the specific objectives
of ensuring adequate information for authorities to monitor risks, having a positive
impact CSDs, investors and supervisory authorities at national and EU level. As very
little information is currently available on third-country CSD’s activities in the EEA, any
70
other option would seem either inadequate or premature and disproportionate in terms of
budget required compared to the risks currently identified.
8.2. Combined impacts of the package
8.2.1. Overall impact of the package on relevant stakeholders242
The overall package of options will have a positive effect, enabling a more proportionate
regulation of CSDs and enhancing the competitiveness of the EU settlement market.
CSDs would notably benefit from reduced costs when operating cross-border in the EU,
due to a reduction in barriers to cross-border settlement from the setting up of mandatory
colleges and the replacement of the passporting procedure at the host Member State level
by a simple notification. The introduction of mandatory colleges would also positively
impact EU CSDs due to the legal certainty arising from more supervisory convergence
and a reduction in the number of interactions by CSDs with various national authorities
in the EU. CSDs would benefit from a reinforced level playing field, both within the EU,
with the introduction of mandatory colleges that would help ensure consistency in
supervisory approaches across the EU, and outside the EU, with the introduction of an
end-date of the grandfathering clause for third-country CSDs.
The preferred options regarding the provision of banking services related to settlement in
foreign currencies may also create additional opportunities for CSDs that do not hold a
banking license. In particular, increasing the threshold could enable some CSDs to
develop their services to investors both domestically and cross-border, and thus obtain
appropriate economies of scale to cover authorisation costs to provide banking services
themselves at a later date. The proposed changes to the settlement discipline regime
would ensure a more proportionate approach to the treatment of settlement fails, thus
avoiding certain unnecessary implementation costs. Finally, competition between CSDs
could also drive more innovation by CSDs and hence compounding benefits in terms of
settlement efficiency and international competitiveness.
Under the preferred options, investors and issuers would benefit from an increased
competition between CSDs due to the replacement of the passporting procedure at the
host Member State level with a simple notification and the establishment of mandatory
colleges. In the same vein, under the preferred options regarding the provision of banking
services related to settlement in foreign currencies by non-banking CSDs, issuers and
investors would have more choice in terms of financing arrangements and would benefit
from the increased competition, a greater choice in issuance, risk diversification and
currency diversification in their cross-border investments. The enhanced supervision of
EU CSDs through the establishment of colleges and of third-country CSDs through the
end-date for the grandfathering clause and the notification requirements could have a
positive impact on the protection of issuers and investors, by ensuring that ESMA is
aware of any potential risks.
Finally, the proposed changes to the settlement discipline regime would ensure a more
proportionate approach to the treatment of settlement fails for investors, thus avoiding
certain unnecessary implementation costs, while ensuring that levels of settlement
efficiency continue to improve in the EU.
Under the preferred policy options, ESMA may incur limited additional costs but would
benefit from a strengthened supervisory environment due to establishment of colleges
242
See Annex 4 for more details on the specific impacts of the preferred package on the relevant stakeholders.
71
and the increased information it will obtain for the activities of third-country CSDs. In
terms of costs, ESMA would mainly be impacted by the participation to mandatory
colleges and the management of the process for the notification by third-country CSDs of
their EU activities, as well as the need to develop and revise regulatory technical
standards. The latter would however be a small one-off cost that could potentially be
covered by a notification fee to be paid by each third-country CSD. The replacement of
the passporting procedure by a notification would nevertheless alleviate ESMA’s costs as
the passporting requirements would be simpler and clearer. Further, a clear determination
of in-scope transactions would also lessen the administrative burden on ESMA related to
replying to Q&As. ESMA would also benefit from some of the preferred policy options
which would strengthen the supervisory environment, in particular the notification
process for third-country CSDs.
Finally, the impact of the preferred policy options on national authorities would be
limited but generally positive. In particular, they will alleviate the costs and time spent on
passporting if the possibility for the host Member State authority to refuse the
passporting request is removed.
8.2.2. Impact on small and medium sized enterprises
The proposed options in the Impact Assessment are not expected to have any direct
material impact on SMEs. However, the postponement of the mandatory buy-in regime
should alleviate the most negative impacts of mandatory buy-ins related to liquidity.243
This should indirectly positively impact SMEs, whose securities are less liquid. In
addition, SMEs could benefit indirectly from improvements which could lead to a more
efficient and sound settlement system, notably through removing inefficiencies in the
system and promoting competitiveness (e.g. through measures to facilitate the cross-
border provision of services and reduce disproportionate costs). In addition, easier cross-
border settlement could lower issuance costs and cost of capital for European issuers, in
particular innovative start-ups and SMEs. Together these could help attract SMEs to
capital markets and contribute to a deepening of CMU.
8.2.3. Social impact
The proposed options in the Impact Assessment are not expected to have any material
social impact.
8.2.4. Environmental impact
The initiative in question has no direct and/or identifiable impacts leading to significant
harm or affecting the consistency with the climate-neutrality objectives and the
obligations arising out of the European Climate Law.
8.2.5. Impact on financial stability
The overall impact of the package of preferred options on financial stability is neutral or
positive. On the one hand, the adjusted requirements for the provision of banking-type
ancillary services to facilitate settlement in foreign currencies mean that financial
stability risks could theoretically increase as credit, liquidity but also concentration risks
rise. However this could be mitigated by: limiting the increase of the threshold;
243
CSDR aims at limiting the impact of the buy-in regime on SMEs, by introducing a specific extension
period of 15 business days before the triggering of the buy-in (instead of 4 to 7 business days – see Annex
9 for more details on the buy-in process). Such longer extension period may however prove insufficient for
SMEs with the least liquidity and, once the delay is reached, the buy-in procedure will apply like for other
financial instruments.
72
increasing supervisory monitoring by the relevant authorities; and setting accompanying
risk requirements, such as minimum risk mitigation standards (e.g. creditworthiness,
concentration limits). On the other hand, other preferred options could strengthen
financial stability. This is notably the case of the establishment of mandatory colleges
(which would strengthen the supervision of CSDs across the EU), the proposed targeted
amendments to the settlement discipline regime, including the two-step approach and
targeted amendments (which, while encouraging improved settlement, could allow some
of the potentially most negative impact of mandatory buy-ins related to liquidity, bid-ask
spreads or market stability to be mitigated) and the notification procedure for third-
country CSDs (which would allow national authorities and ESMA to have a better
understanding of the activities carried out by third-country CSDs in the EU, and
consequently of the potential risk they may pose to financial stability in the EU).
8.2.6. Impact on the EU budget
The above policy options should not in principle have any implications for the EU
budget. Possible additional tasks arising for ESMA, such as the development of
additional technical standards and the participation to mandatory colleges should be
manageable within their current resources, in particular given the reduced number of
Q&As and/or need for clarifications that modifications, e.g. to the settlement discipline
regime, that should be needed. The management of the process for the notification by
third-country CSDs of their activities within the EU, would be a one-off cost. However,
in principle, it could potentially be covered by a notification fee to be paid by each third-
country CSD.
8.3. REFIT (simplification and improved efficiency)
The need to eliminate disproportionate costs and burdens to small companies, and to
simplify rules without putting financial stability at risk is the reason the CSDR review
was included in the 2021 Commission's Regulatory Fitness and Performance programme
(REFIT). As part of REFIT, the Commission assessed the extent to which policy
requirements in CSDR have met their objectives in an efficient and effective way, while
at the same time being coherent, relevant and providing EU added-value.
The evaluation indicates that, even though the impact on settlement efficiency and
financial stability is not yet fully measurable, CSDR may impose in some targeted areas
disproportionate costs and burdens and that certain requirements may be simplified to
achieve the objective of financial stability more efficiently. These areas include: (1)
cross-border provision of services in the EU; (2) provision of banking-type ancillary
services; and (3) settlement discipline. This impact assessment therefore considers the
costs and benefits of areas where targeted action could ensure fulfilment of the CSDR’s
objectives in a more proportionate, efficient and effective manner. This impact
assessment provides evidence that a reduction of costs and burdens can be achieved
hand-in-hand with a simplification of CSDR, without compromising financial stability.
Such evidence includes input received from market participants and various authorities.
Table REFIT Cost Savings – Preferred Option(s)
Description Amount Comments
Replacing the
passporting
procedure at
the host
Member State
level with a
Potential savings of ca.
EUR 10 million in the first
year; thereafter ca.
EUR 4 million per year.
Estimate is based on Commission calculations on the basis of
confidential data. It is assumed that the notification process would
enable 10 other CSDs to passport in 26 Member States. This could
help to save ca. EUR 5 850 000 for CSDs (one-off benefit) as well as
ca. EUR 390 000 for CSDs per year (recurring cost saving). It could
also help to save ca. EUR 590 000 for 27 national authorities (one-off
73
notification benefit).
Establishment
of mandatory
supervisory
colleges
Benefits of streamlined
procedures, not quantifiable.
ESMA will incur some
costs. These are likely to be
offset by savings from
greater legal clarity.
Overall, net benefits are
expected.
Colleges will: ensure supervisory convergence, provide greater legal
certainty for CSDs and will help reduce the level of interactions of
CSDs with various national authorities across the EU. While these cost
savings cannot be quantified, they are expected to be significant.
Amendment
of rules for
banking-type
ancillary
services
Small to moderate net
benefits.
CSDs as well as issuers and investors benefit from better opportunities
to offer foreign currency settlement. This is a recurrent opportunity
cost saving estimated by the Commission based on qualitative input.
Potential benefits of up to EUR 80 billion in increased settlement
activity, in particular in CSDs not currently providing these services.
A large amount may also however be offset as CSDs currently
providing banking services may lose business to new entrants.
Phased-in
approach to
settlement
discipline and
clarification of
rules
Up to 375 million annually
of saved connection costs.
Deferred introduction of
mandatory buy-in will
prevent some trading
volumes disappearing or
migrating outside the EU
(Estimated at up to 4% - 5%
of trade volume, equal to
EUR 7 trillion annually).
The proposed two-step approach would result in deferred cost related
to the setting up of a buy-in agent offering by one entity. However,
this is offset by the fact that the average cost per market participant to
set up a connection to a buy-in agent would be around EUR 1 million,
amounting to EUR 1.5 billion for all in-scope market participants in
the EU for four years (375 million annually). Depending on the
potential targeted changes to be made to the buy-in regime, such costs
savings could either be temporary (i.e. until the buy-in regime enters
into force) or permanent (e.g. if the changes allow for a simplified
approach regarding the requirements related to buy-in agents).
Although not quantifiable, cost savings are also expected for both
market participants and CSDs from the proposed clarifications of the
buy-in and cash penalties rules.
Notification of
third-country
CSDs and
introducing an
end-date to the
grandfathering
clause
0 Based on Commission estimates following the submission of
confidential data, assuming that 5 third-country CSDs would notified,
the costs would be estimated around ca. EUR 13 000 for ESMA. This
would be one-off cost that could potentially be covered by a
notification fee to be paid by each third-country CSD.
We currently do not know how many third-country CSDs are using the
grandfathering clause and would apply for recognition to ESMA. It
has been assumed that ESMA can carry out its other permanent tasks,
such as in relation to non-EU CSD recognition with its existing staff.
9. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?
The envisaged options aim at rendering the application of CSDR more effective and
efficient. To this end, a number of targeted adjustments to CSDR are considered. The
proposed legislative amendment to CSDR should include a provision stating that an
evaluation of CSDR in its entirety should be carried out, with a particular focus on its
effectiveness and efficiency in meeting its original objectives (i.e. improve the efficiency
and safety of EU settlement markets). The evaluation should thus consider all aspects of
CSDR, but in particular the elements shown in the table below to monitor and evaluate
progress towards meeting the specific objectives.
Specific
objective to
Monitoring indicators
When will
monitoring
By
whom
Source of
informati
74
measure start on
Ensure
adequate
powers and
information
to monitor
risks
Number of 3rd country CSDs that have applied for
recognition.
Number of colleges established by EU CSDs.
From date of
application of
the proposed
amendments
to CSDR.
ESMA ESMA
Reduce
administrati
ve burden
and
compliance
costs
EU settlement efficiency rates.
Average (no. of days) duration of settlement fails.
Number of CSDs providing cross-border services.
Number of countries in which CSDs provide cross-border
services.
Number of CSDs able to access banking services.
Number of CSDs providing foreign currency settlement.
Number of CSDs able to use the exception under the
threshold.
1 year after
date of
application of
the proposed
amendments
to CSDR.
ESMA,
ESCB,
CSDs
ESMA
Minimise
barriers to
cross-border
settlement
Number of CSDs providing cross-border services.
Number of countries in which CSDs provide cross-border
services.
Number of CSDs able to access banking services.
Growth of foreign currency settlement.
Number of CSDs providing foreign currency settlement.
Number of CSDs able to use the exception under the
threshold.
1 year after
date of
application of
the proposed
amendments
to CSDR.
ESMA,
ESCB,
CSDs
ESMA
In principle, this evaluation should take place at least 5 years after the application of
these amendments. The evaluation should seek to collect input from all relevant
stakeholders, but in particular CSDs, banks and custodians, investment funds, investors
and issuers. Input would also be required from ESMA as well as national authorities and
central banks. Statistical data for the analysis should be sought primarily from ESMA.
75
ANNEX 1: PROCEDURAL INFORMATION
Lead DG, Decide Planning/CWP references
 Lead Directorate-General: Directorate-General for Financial Stability, Financial
Services and Capital Markets Union.
 Decide Planning Reference: PLAN/2020/8721
 CWP references: The initiative is included in the Commission Work Programme
2020244
as a REFIT item.245
Organisation and timing
 Organisation and timing of Inter Service Steering Group’s meetings: the Inter Service
Steering Group included representatives of the Directorates General Climate Action
(CLIMA), Competition (COMP), Economic and Financial Affairs (ECFIN), Internal
Market, Industry, Entrepreneurship and SMEs (GROW), Justice and Consumers
(JUST), Taxation and Customs Union (TAXUD), Trade (TRADE), the Legal Service
(LS) and the Secretariat General (SG).
o 1st
Meeting on 19 February 2021;
o 2nd
meeting on 25 June 2021;
o 3rd
meeting on 9 September 2021;
o Written consultation (17- 23 September 2021).
Consultation of the RSB
 The draft Impact Assessment was submitted to the Regulatory Scrutiny Board on 29
September 2021, for consideration at a meeting on 27 October 2021. The Regulatory
Scrutiny Board issued a positive opinion on 29 October 2021 (ARES(2021) 6677103
- 29/10/2021)
Evidence, sources and quality
Evidence used in the impact assessment came from a variety of sources, including:
 Replies by stakeholders to a targeted consultation which ran from 8 December 2020
and 2 February 2021 to obtain feedback on the implementation of CSDR246
:
 Reports from the European Securities and Markets Authority including:
o Report on internalised settlement247
;
o Report on the cross-border provision of services by CSDs248
;
o Report on the provision of banking-type ancillary services under
CSDR249
;
o Report on the use of FinTech by CSDs250
.
244
Communication from the Commission to the European Parliament, the Council, the European Economic
and Social Committee and the Committee of the Regions, Commission Work Programme 2021 ‘A Union
of vitality in a world of fragility’, Annex I, COM(2020) 690 final.
245
REFIT is the Commission's Regulatory Fitness and Performance programme.
246
Summary Report of the Commission CSDR targeted consultation (see note 92).
247
ESMA Report on internalised settlement (see note 86).
248
ESMA Report on cross-border services (see note 50).
249
ESMA Report ‘Provision of banking-type ancillary services under CSDR’ (see note 88).
250
ESMA Report ‘Use of Fintech by CSDs’ (see note 89).
76
 Report from the Commission to the European Parliament and Council under
Article 75 of 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 (COM(2021) 348 final).251
 Discussions with experts from Member States' authorities: Meetings held on 22
September 2020, 15 July 2021.252
 Discussions with MEPs from the Economic and Monetary Affairs Committee: 6
September 2021.
 Statistics and reports published by the European Central Bank and the Bank of
International Settlements (BIS). In the case of the European Central Bank the
Statistical Data Warehouse253
was used and in particular the data compiled in the
“Securities Trading, Clearing and Settlement Statistics”254
. For international
comparison the data provided by the Bank for International Settlement,
Committee on Payments and Market Infrastructures255
was used. The Committee
periodically publishes reference works on payment, clearing and settlement
systems in the member countries.
ANNEX 2: STAKEHOLDER CONSULTATION
This annex outlines the feedback received from stakeholders via the targeted consultation
on the CSDR review (section 1), and in the context of building a Capital Markets Union
(section 2). It provides information on the reports provided by ESMA (section 3) as well
as an overview of an exchange of views on the CSDR review with representatives of
Member States, of EU bodies and authorities, during the meeting of the Derivatives and
Market Infrastructures Member States Working Group, which took place in Brussels on
22 September 2020 and 15 July 2021 (section 4).
1. TARGETED CONSULTATION
First, a targeted public consultation256
on the CSDR review was conducted between
8 December 2020 and 2 February 2021. The Commission sought feedback in areas where
targeted action may be necessary to ensure the fulfilment of the objectives of the CSDR
in a more proportionate, efficient and effective manner, notably:
 CSD authorisation & review and evaluation processes;
 cross-border provision of services in the EU;
251
CSDR Review report (see note 9).
252
Summaries are available at: https://ec.europa.eu/transparency/expert-groups-
register/screen/meetings/consult?lang=en&meetingId=22398&fromExpertGroups=false ;
https://ec.europa.eu/transparency/expert-groups-
register/screen/meetings/consult?lang=en&meetingId=28987&fromExpertGroups=false.
253
European Central Bank Statistical Data Warehouse, Payment Statistics:
https://sdw.ecb.europa.eu/browse.do?node=9691104.
254
See the latest edition “Securities trading, clearing and settlement statistics – June 21”, European Central
Bank, available at: https://sdw.ecb.europa.eu/reports.do?node=1000004055.
255
For a compilation of data and publication on settlement see Bank for International Settlement, Committee
on Payments and Market Infrastructures: https://www.bis.org/cpmi/paysysinfo.htm.
256
The targeted consultation questionnaire is available at: https://ec.europa.eu/info/consultations/finance-
2020-csdr-review_en
77
 internalised settlement;
 CSDR and technological innovation;
 authorisation to provide banking-type ancillary services;
 scope of requirements applying to the settlement of financial instruments;
 settlement discipline.
The Commission received 91 responses to the targeted consultation. The feedback
statement summarising the responses received was published on the Commission
website257
. The majority of responses came from firms and industry associations, i.e. 43
companies/business organisations and 33 business associations. In addition, responses
were received from 10 public authorities, one NGO and four entities categorised as
“Other”. Among the companies and business associations responding, most indicated the
following as their main field of activity: banking (30 respondents), operation of financial
market infrastructure (23 respondents) or investment management (13 respondents). No
private individuals responded to this targeted consultation. Responses were received from
18 Member States, with the largest number coming from Germany (12), Belgium (8),
France (8) and the Netherlands (7). In addition, a number of responses came from outside
the EU, mainly the United Kingdom (17) and the United States (8).
The key messages from the consultation were the following:
 According to a vast majority of respondents, the rules on the cross-border
provision of services in the EU need to be revised, in particular to clarify and
simplify the passporting rules as well as to enhance the cooperation between
national competent authorities (NCAs).
 CSDs argued that the rules on the authorisation to provide banking-type ancillary
services hinder settlement in foreign currencies and restrict access to liquidity for
CSDs not authorised to provide banking-type ancillary services.
 The settlement discipline regime was the topic for which the Commission
received the most contributions. All stakeholders agreed that clarity on the way
forward is needed as soon as possible.
 The framework for third-country CSDs raised questions amongst all categories of
stakeholders, in particular on the need to have more information on third-country
CSDs providing services in relation to financial instruments constituted under the
law of a Member State.
 Respondents supported the simplification of certain requirements regarding
CSDs’ authorisation, annual review and evaluation, as well as review of the
grandfathering clauses.
 A majority of respondents stated that immediate action is not required on two
topics: (a) technological innovation, because any changes to CSDR to realise the
full potential of fintech should be postponed until the Pilot Regime Regulation is
agreed upon by the colegislators and implemented; and (b) internalised
settlement, as the obligation has only been in force for a limited period.
In addition to the public consultation, DG FISMA also received confidential
information from a number of firms.
257
Summary Report of the Commission CSDR targeted consultation (see note 92).
78
2. CAPITAL MARKETS UNION
Building on its goal to finalise the creation of capital markets union (CMU), the
Commission launched a call for expression of interest to join a High-Level Forum
(HLF) on capital markets union on 10 October 2019.
On 10 June 2020 the HLF published its final report258
and recommended, amongst
others, that the Commission conducts a targeted review of CSDR to strengthen the CSD
passport and improve supervisory convergence among national competent authorities. It
also invited national central banks to facilitate the servicing of domestic issuance in non-
domestic central bank money. A call for feedback on this final report has provided the
Commission with views from a wider range of stakeholders.
The 2020 CMU Action Plan259
announced the Commission’s intention to come forward
with a legislative proposal to amend CSDR to improve its efficiency and effectiveness
(CSDR REFIT) and contribute to the development of a more efficient post-trading
landscape in the EU. In particular, Action 13 (developing cross-border services) states
that “to improve the cross-border provision of settlement services in the EU without
negatively impacting financial stability, the Commission will review the rules covering a
wide range of topics, including: (i) the cross-border provision of services by CSDs on the
basis of a CSD passport and (ii) the procedures and conditions under which CSDs have
been authorised to designate credit institutions or themselves to provide banking-type
ancillary services”.
3. ESMA
Under Article 74 of CSDR, ESMA is required to submit a number of reports to the
Commission on the implementation of the Regulation annually. Four reports published
in 2020 and 2021 were submitted to the Commission in the context of the CSDR
review. In November 2020, ESMA submitted two reports on internalised settlement260
and the cross-border provision of services by CSDs and the handling of applications to
provide notary and central maintenance services cross-border261
. In July and August
2021, ESMA submitted two additional reports on the provision of banking-type ancillary
services under CSDR262
and the use of fintech by CSDs263
.
On 20 May 2021, ESMA also sent a letter to the Commission264
suggesting changes in
three areas: in relation to T2S, the third-country recognition regime, and the frequency of
ESMA reports to the European Commission on CSDR implementation. ESMA sent
258
Final report of the High Level Forum on the Capital Markets Union (see note 70).(europa.eu).:
259
Commission Communication ‘A Capital Markets Union for people and businesses – New Action Plan’ (see
note 10), Action 13.
260
https://www.esma.europa.eu/sites/default/files/library/esma70-156-3729_csdr_report_to_ec_-
_internalised_settlement.pdf
261
https://www.esma.europa.eu/sites/default/files/library/esma70-156-3569_csdr_report_to_ec_-_csd_cross-
border_services.pdf
262
esma70-156-4582_report_to_the_ec_-_csdr_banking_services.pdf (europa.eu)
263
Report to the European Commission: use of Fintech by CSDs, ESMA, 2 August 2021:
https://www.esma.europa.eu/sites/default/files/library/esma70-156-3569_csdr_report_to_ec_-_csd_cross-
border_services.pdf
264
https://www.esma.europa.eu/sites/default/files/library/esma70-156-4519_letter_to_ec_-_csdr_review.pdf
79
another letter on 23 September 2021, supporting a delay in the application of the buy-in
regime.265
4. MEETING OF THE DERIVATIVES AND MARKET INFRASTRUCTURES MEMBER
STATES WORKING GROUP
The Commission conducted several meetings with Member States, stakeholders,
and MEPs. In particular, in September 2020, the Commission held a Member States’
Expert Group meeting. The European Parliament Economic and Monetary Affairs
Committee secretariat, the ECB and ESMA were also invited. A subsequent meeting was
held in July 2021 to consider a wide range of policy options and their potential impacts.
A summary of the discussions is available online for both meetings266
. In addition, a
meeting was held on 6 September 2021 with MEPs to present the CSDR report267
and the
next steps.
265
ESMA letter to the European Commission, ‘ESMA’s views on the way forward on settlement discipline in
the context of the CSDR review’, 23 September 2021. Available at:
https://www.esma.europa.eu/file/120971/download?token=IjhiamXS.
266
Link to the minutes of the meetings to be added once they are published.
267
Report from the Commission to the European Parliament and the Council under Article 75 of 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, COM(2021) 348 final, 1 July 2021:
https://ec.europa.eu/finance/docs/policy/210701-csdr-report_en.pdf
80
ANNEX 3: WHO IS AFFECTED AND HOW?
Practical implications of the initiative
1. IMPLICATIONS FOR CSDS
Most options retained have a positive effect ensuring more proportionate regulation of
CSDs and enhancing the competitiveness of the EU settlement market.
First, CSDs would benefit from reduced costs when operating in the EU, notably due to a
reduction of barriers to cross-border settlement stemming from the setting up of
mandatory colleges and the replacement of the current passporting procedure at the
Member State level by a simple notification.
In particular, the passporting requirements related to national laws and the role of
national authorities are the ones that raised most issues. Removing such requirements
would alleviate, clarify and accelerate the passporting process. This benefit would be
ongoing. Should a CSD wish to passport in 26 Member States to be able to provide
services throughout the EU, it is estimated that it would cost on average at least
EUR 780 000 (see section 2.3.1). Should the simplified passporting process reduce by
75% the costs of passporting, this CSD would incur a one-off saving, on average,
EUR 585 000. Currently 15 CSDs are providing services cross border in at least one
Member State. If the simplified passporting process allows at least 10 other CSDs to
passport in 26 Member States this would help to save on average EUR 5 850 000 for
CSDs. This would be a one-off benefit for CSDs.268
Ongoing costs of monitoring
compliance with the passport would also be significantly reduced. Should a CSD
passport in 26 Member States to provide services throughout the EU, it is estimated that
it would cost on average at least EUR 52 000 per year (see section 2.3.1). Should the
simplified passporting process reduce by 75% the costs of passporting, this CSD would
be saving, on average, EUR 39 000 per year. Currently 15 CSDs are providing services
cross border in at least one Member State. If the simplified passporting process entails at
least 10 other CSDs to passport in 26 Member States this would help to save ca.
EUR 390 000 for CSDs per year. This would be ongoing benefit for CSDs.
The introduction of mandatory colleges would also benefit to EU CSDs due to the legal
certainty related to the enhancement of supervisory convergence and reduction of the
level of interactions of CSDs with various national competent authorities across the EU.
Second, CSDs would benefit from a reinforced level playing field, both within the EU,
with the introduction of mandatory colleges that would help ensuring consistency of the
supervisory approaches across Member States, and outside the EU, with the end date of
the grandfathering clause for third-country CSDs. The implementation of a notification
requirement by third-country CSDs regarding the activities they carry out within the EU
and/or with EU participants would also indirectly benefit to EU CSDs, as it would help
identify which third-country CSDs provide services and in which volumes, thus
increasing transparency in the market for EU CSDs.
Third, the preferred options regarding the provision of banking services related to
settlement in foreign currencies may create additional opportunities for CSDs that do not
268
Commission calculations based on confidential information provided to DG FISMA services.
81
hold a banking license and thus increase competition in this domain. The option
consisting in allowing CSDs already authorised to provide banking services (or “banking
CSDs”) to offer such services to CSDs that do not have such authorisation (“non-banking
CSDs”) could immediately start since it would not require any further authorisation and
the risk management arrangement are already in place at the level of the banking CSDs.
On the downside, it could favour groups that already include a banking CSDs and, from a
risk perspective, concentrate the risks within such groups.
Increasing the threshold could enable some CSDs to develop their services to investors
both domestically and cross-border and thus obtain appropriate economies of scale to
cover authorisation costs to provide banking services themselves. The combination of
these would further amplify the possible benefits.
It is estimated that269
EUR 16 billion additional settlement in foreign currencies could be
expected on an annual basis270
. If extrapolated to the total number of EEA non-banking
CSDs, this could mean an additional annual possible offering of at least EUR 80 billion
of settlement in foreign currencies. This does not take into account whether if this
additional settlement would affect existing settlement in foreign currencies undertaken by
CSDs already authorised to provide ancillary banking services. The additional offering of
settlement in foreign currencies would tap in the identified demand, mostly in the area of
bonds where a lack of offering holds back multi-currency bond issuance. Increased
competition between CSDs could also drive more innovation by CSDs and hence
settlement efficiencies.
An unlikely negative effect could be the possible increased probability of contagion
effects on settlements through defaults of settlement agents in foreign currencies
(proportionate to the increased thresholds).271
This could however be offset by increased
supervision regarding the relevant credit institutions providing the services to CSDs.
One-off costs (authorisations or setting up the operational capacity) could be covered by
longer term providing of the service.
Finally, the proposed changes to the settlement discipline regime would ensure a more
proportionate approach to the treatment of settlement fails. The target amendments
contemplated for cash penalties and mandatory buy-in would bring the needed clarity to
CSDs in order to implement these requirements in the most efficient manner. CSDs
would be affected directly by the suspension of the buy-in framework, and there would
be sunk (or at least delayed) costs to a greater or lesser degree depending on the CSD in
question.272
2. IMPLICATIONS FOR ISSUERS
Under the preferred options, issuers would benefit from increased competition between
CSDs. The replacement of the passporting procedure at the level of the host Member
State with a simple notification would increase cross-border activities. In addition, an
improved framework for the cross-border provision of services through the establishment
269
European Commission consultation, ECB consultation (confidential) and ESMA Report ‘Provision of
banking-type ancillary services under CSDR’ (see note 88).
270
Current total absolute value of settlement of the CSDs and applied the growth percentages mentioned by
the CSDs themselves. This gives an anticipated total of settlement in foreign currencies (settlement +
corporate actions). We then subtracted from these figures the current absolute values in foreign currencies,
which gives the anticipated total net gain from the proposed CSDR changes.
271
Confidential information provided to DG FISMA services.
272272
Supported by confidential information provided to DG FISMA services.
82
of mandatory colleges could lead to an increased supervisory convergence, thus
removing some barriers to the competition between CSDs. Together, the proposed
changes to CSDR could lead to more competition between CSDs and a wider choice for
issuers of listing venues and access to a deeper capital market.
In the same vein, under the preferred options regarding the provision of banking services
related to settlement in foreign currencies by non-banking CSDs, issuers would have
more choice in terms of financing arrangements and would benefit from increased
competition and a greater choice in issuance.
The enhanced supervision of EU CSDs through the establishment of colleges and of
third-country CSDs through the end-date for the grandfathering clause and the
notification requirements could have a positive impact on the protection of issuers and
investors. In particular, the end of the grandfathering clause for third-country CSDs could
positively affect issuers on an ongoing basis as third-country CSDs would have to
operate under a regime equivalent to CSDR, and therefore according to the same
standards in terms of protection of issuers. The notification requirement for third-country
CSDs would also have a positive impact on issuers as it would increase transparency in
the market, which would help identifying any potential risks, in particular on financial
stability.
With regard to the end of the grandfathering clause for third-country CSDs it should
however be noted that, as very little information is available on how many third-country
CSDs operate in the EU, this option, when it enters into place, may reduce the number of
services offered by third-country CSDs in the EU.
Lastly, issuers would benefit from specific clarifications with regards to transactions that
are in-scope of the settlement discipline regime. For example, according to some
stakeholders, exempting ETP (exchange-traded products) primary market transactions
from mandatory buy-in could potentially help avoid a circular scenario whereby the ETP
provider creates ETP units just to receive these same units back through the buy-in
process to subsequently cancelling them273
.
3. IMPLICATIONS FOR INVESTORS
The main benefits of the chosen options for investors would stem from increased
competition between CSDs as well as the introduction of a two-step approach and
clarifications to the settlement discipline regime. Competition between CSDs would be
enhanced by the replacement of the passporting procedure at the level of the host
Member State with a simple notification or through greater supervisory convergence
thanks to the establishment of mandatory colleges which would lead to increased CSD
cross-border activities. Together, such changes could lead to more integrated capital
markets, more efficient settlement, including cross-border settlement, benefitting
investors.
Similarly greater access to settlement in foreign currencies by non-banking CSDs would
give investors more choice in terms of instruments and hence greater risk and currency
diversification in their cross-border investments.
The enhanced supervision of EU CSDs through the establishment of colleges and of
third-country CSDs through the end-date for the grandfathering clause and the
273
See EFAMA public consultation reply, Q.31.2 & Q.34.1
83
notification requirements could have a positive impact on the protection of investors, by
giving providing the market with greater transparency, predictability and regulatory
stability.
With regard to the end of the grandfathering clause for third-country CSDs it should
however be noted that, as very little information is available on how many third-country
CSDs operate in the EU, this option, when it enters into place, may reduce the number of
services offered by third-country CSDs in the EU.
Finally, the proposed changes to the settlement discipline regime would ensure a more
proportionate approach to the treatment of settlement fails, while ensuring that levels of
settlement efficiency continue to improve in the EU, benefitting investors.
The targeted amendments contemplated for cash penalties and mandatory buy-in would
bring necessary clarifications to investors in order to implement these requirements in the
most efficient manner. In particular, amendments to the pass-on mechanism would allow
solving all settlement fails along the same chain by one buy-in in the original settlement
fail which provoked the other fails. According to one estimate the introduction of a pass-
on mechanism would reduce costs by 37.5%274
. This would be combined with measures
to address the rigidness in timing of when a buy-in is initiated and the asymmetry in price
differentials275
. These technical clarifications would reduce the complexity and the
burden of managing a buy-in process, hence costs for investors. In addition, certain
transactions would no longer be subject to the settlement discipline regime further to the
proposed change of scope, which would permanently reduce the compliance burden on
market participants by removing certain transactions.
Regarding the two-step approach for mandatory buy-in, the major negative impacts in
terms of liquidity and market stability caused by mandatory buy-ins would be, at least
temporarily, avoided. Such approach would also avoid a duplicative repapering work for
participants that could arise due to changes to the regime under the targeted amendments
previously proposed (which would have otherwise been implemented after the entry into
force of the buy-in regime, thus triggering the need for participants to do some
repapering in order to take into account such changes).
It should be noted that the proposed two-step approach would result in sunk cost related
to the setting up of a buy-in agent offering by one entity (the only one buy-in agent
service provider that has emerged so far).276
However, this is offset by the fact that to
comply with the buy-in requirements, with IT, HR and consulting costs, it is estimated
that the average cost per market participant to set up a connection to a buy-in agent
would be around EUR 1 million, amounting to EUR 1.5 billion for all in-scope EU
market participants277
. Depending on the potential targeted changes to be made to the
buy-in regime, such costs savings could either be temporary (i.e. until the buy-in regime
enters into force) or permanent (e.g. if the changes allow for a simplified approach
regarding the requirements related to buy-in agents).
4. IMPLICATIONS FOR ESMA
Under the preferred policy options, ESMA may incur limited additional costs but would
benefit from a strengthened supervisory environment.
274
For explanation and calculation of costs savings see J.P. Morgan public consultation reply, Q. 34.1
275
ICMA, ISLA, AFME public consultation reply.
276
This is supported by confidential information provided to DG FISMA services.
277
This is supported by confidential information provided to DG FISMA services.
84
In terms of costs, ESMA would mainly be impacted by the establishment of mandatory
colleges. Indeed, it is estimated that such additional costs may range from about
EUR 130 000 to EUR 260 000 per annum depending on the number of CSDs for which
colleges could be established and their powers.278
However, ESMA would be able to
benefit from the experience it has already acquired in the field of colleges under EMIR,
and therefore very limited, if any, one-off operational costs are envisaged.
Other costs may also arise from the management by ESMA of the process for the
notification by third-country CSDs of their activities within the EU. Based on
Commission estimates following the submission of confidential data279
, ESMA estimated
costs for one third-country CSD notification would amount to ca. EUR 2 600 per
notification. Assuming that 5 third-country CSDs would notified, the costs would be
estimated around ca. EUR 13 000 for ESMA. This would be one-off cost that could
potentially be covered by a notification fee to be paid by each third-country CSD.
In addition, as ESMA grants recognition for third-country CSDs, it might potentially also
increase ESMA costs if third-country CSDs which are currently using the grandfathering
clause would decide to apply for recognition in order to continue their activities in the
EEA. It is not currently known how many third-country CSDs are using the
grandfathering clause and would apply for recognition. However, it can be assumed that
these costs have been anticipated since CSDR entered into application in 2014.
Finally, ESMA may incur costs in the context of the development of new RTS and ITS in
the context of the implementation of the proposed options regarding the provisions of
ancillary banking services and the settlement discipline regime.
On the other hand, the simplification of the passporting procedure would alleviate their
costs as the passporting requirements would be simpler and clearer. Further, a clear
determination of in-scope transactions would also lessen the administrative burden on
ESMA related to replying to Q&A’s.
Beyond the potential limited costs, ESMA would benefit from some of the preferred
policy options which would strengthen the supervisory environment. In particular, the
notification process for third-country CSDs would directly positively affect ESMA as it
would give the European authority more information and help it to identify and monitor
risks. Further, amendments to the pass-on mechanism would be beneficial to ESMA as
fewer buy-ins would contribute to market stability. Finally, a clear determination of in-
scope transactions would also lessen the administrative burden on ESMA related to
replying to Q&A’s.
5. IMPLICATIONS FOR NCAS
The impact of the preferred policy options on NCAs would be limited but generally
positive.
Additional costs may be incurred by NCAs due to the need to monitor more closely the
ancillary banking activities carried out under the new proposed framework (i.e. higher
thresholds and possibility for banking CSDs to provide banking services to non-banking
CSDs), and their participations to mandatory colleges (or their organisation, as the case
may be).
278
Commission estimates based on confidential data provided to DG FISMA services.
279
Based on confidential information provided to DG FISMA services.
85
Nonetheless, at the same time, their ongoing costs will be reduced due to the streamlined
cooperation of authorities and their increased access to information and powers to
monitor risks compared to today.
Further, NCAs will alleviate the costs and time spent on passporting if the passporting
procedure is simplified. Should a CSD wish to passport in 26 Member States to be able
to provide services throughout the EU, it is estimated that it would cost to national
authorities altogether at least EUR 79 000 (see section 2.3.5). Should the simplified
passporting process reduce by 75% the costs of passporting, the 26 national authorities
would be saving all together, on average, ca. EUR 59 000. Currently, 15 CSDs are
providing services cross border in at least one Member State. If the simplified
passporting process enables at least 10 other CSDs to passport in 26 Member States this
would help to save on average EUR 590 000 for 27 national authorities.
Finally, the notification requirement for third-country CSDs would indirectly impact
NCAs as they would get information on third-country CSDs activities through ESMA,
helping them to identify and monitor risks.
6. IMPACT ON THIRD COUNTRIES
The main impact on third countries would come from the new requirement for third-
country CSDs to notify the activities they carry out in the EU and the end of the
grandfathering clause for third-country CSDs. In practice however, such impact should
be limited, first because the triggering of the recognition requirement further to the end of
the grandfathering clause should have been anticipated by the relevant third-country
CSDs (the purpose of the grandfathering clause never was to allow third-country CSDs
to keep providing services for an indefinite period of time without complying with CSDR
provisions), second because the new notification requirement would be a one-off
exercise.
The proposed options do not create any new kind of interactions between EU or Member
State authorities with third-country authorities.
86
Summary of costs and benefits
I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
Direct benefits
Simplified passporting
process and easier provision
of cross-border services by
CSDs.
One-off reduction of administrative costs for
CSDs: estimated at ca. EUR 5 850 000 for CSDs.
Ongoing reduction of compliance costs for
CSDs: estimated at ca. EUR 390 000 per year for
CSDs.
One-off reduction of administrative costs for
NCAs: estimated at ca. EUR 590 000 for all
NCAs.
Clarified and simplified passporting process,
lowering administrative costs for both CSDs
and NCAs.
It is estimated that this can bring about one-
off savings of, on average, EUR 585 000 per
CSD. The total figure assumes that at least
10 other CSDs passport in 26 Member
States.
Savings of, on average, EUR 39 000 per
year per CSD. It is estimated that the
simplified passporting process would reduce
by 75% the costs of passporting. The total
figure assumes that 10 CSDs would benefit
from the new regime for passporting in 26
Member States.
Total saving of, on average, ca. EUR 59 000
per NCA. Assumptions: the simplified
passporting process would reduce by 75%
the costs of passporting The total figure also
assumes that 26 NCAs benefit from these
savings for 10 CSDs passporting into their
respective Member States.
Direct increase of cross-
border competition between
CSDs, benefiting to
investors and issuers.
No estimate available. The replacement of the passporting
procedure at the host Member State level
with a notification reduces the costs of
cross-border entry and thereby facilitates
competition. In addition, an improved
framework for the cross-border provision of
services through the establishment of
mandatory colleges could lead to increased
supervisory convergence, thus removing
additional barriers to cross-border
competition. This will benefit both investors
and issuers and will increase market
efficiency.
87
Enhanced supervisory
convergence.
No estimate available. The introduction of mandatory colleges
would benefit EU CSDs operating cross-
border due to the legal certainty related to
the enhancement of supervisory
convergence and reduction of the level of
interactions of CSDs with various national
competent authorities across the EU. This
would also enhance supervision of CSDs
operating cross-border preventing spill-over
effects and allow for better management of
systemic risk.
Reinforced level playing
field for CSDs, both within
the EU and outside the EU.
No estimate available. Within the EU: mandatory colleges would
help ensuring consistency of supervision
across Member States, thus ensuring level
playing field and benefiting EU CSDs.
Outside the EU: end date of the
grandfathering clause for third-country
CSDs would ensure level playing field with
third-country CSDs, benefiting EU CSDs.
Additional opportunities for
CSDs that do not hold a
banking license.
It is estimated that additional EUR 16 billion
settlement in foreign currencies could be
expected annually280
. If extrapolated to the total
number of EEA non-banking CSDs, this could
mean an additional annual possible offering of
at least EUR 80 billion281
of settlement in
foreign currencies.
Increasing the threshold could enable some
CSDs to develop their services to investors
both domestically and cross-border,
benefitting investors and issuers through a
more competitive offering.
More proportionate
approach to the treatment of
settlement fails.
Delayed implementation costs for investors
and issuers with a postponement in the
introduction of the mandatory buy-in: estimated
at ca. EUR 1.5 billion.282
Reduction of annual operational/ subscription
fees for connecting to a buy-in agent to handle
government bond fails in one CSD, estimated
between EUR 598 900 294 and EUR 1 197 800
588, according to one estimate.283
Average cost per market participant to set up
a connection to a buy-in agent is estimated,
on average to be EUR 1 million, based on
stakeholder input. This results in a total
figure of EUR 1.5 billion for all in-scope EU
market participants286
. Such costs savings
could be temporary (i.e. until the buy-in
regime enters into force) or permanent (e.g.
if conditions for the entry into force of the
280
Based on anonymised confidential information provided to DG FISMA services. This figure is based on the
current total absolute value of settlement of CSDs and applied to potential growth in settlement of CSDs.
This gives an anticipated total of settlement in foreign currencies. The current absolute values in foreign
currencies are then subtracted, which gives the anticipated total net gain from the proposed CSDR changes.
281
This estimate of benefits does not take into account whether it would affect existing settlement in foreign
currencies undertaken by CSDs already authorised to provide ancillary banking services.
282
This is supported by confidential information provided to DG FISMA services.
283
Data provided by ICMA in its response the CSDR targeted consultation,
https://www.icmagroup.org/assets/documents/Regulatory/Secondary-markets/CSDR-Settlement-
Regulation/ICMACSDR-Review-Targeted-ConsultationFeb-21Detailed-response-020221.pdf..
88
Introduction of a pass-on mechanism could
reduce costs by 37.5%, according to one
estimate284
.
Deferred introduction of mandatory buy-in will
prevent some trading volumes disappearing or
migrating outside the EU (Estimated at up to 4%
- 5% of trade volume, equal to EUR 7 trillion
annually285
).
buy-in regime are never met).
The targeted amendments contemplated for
cash penalties and mandatory buy-in would
also bring necessary clarifications and
reduce the complexity and the burden of
managing a buy-in process, hence reducing
costs for investors, market infrastructure
providers and authorities alike.
Improved supervisory
capabilities for ESMA and
NCAs.
No estimate available. ESMA and NCAs would have more
information and would be able to better
identify and monitor risks.
Amendments to the pass-on mechanism
would mean fewer buy-ins and would
contribute to market stability.
Indirect benefits
Increased protection of
issuers and investors.
No estimate available. Enhanced supervision of EU CSDs through
the establishment of colleges and of third-
country CSDs through the end-date for the
grandfathering clause and the introduction
of the notification requirements would lead
to improved supervision of CSDs and thus a
better protection of issuers and investors.
Increased transparency in
the market.
No estimate available. The implementation of a notification
requirement by third-country CSDs
regarding the activities they carry out within
the EU and/or with EU participants would
also indirectly benefit market stability, as it
would help identify which third-country
CSDs provide services and in which
volumes, thus increasing transparency in the
market and help identify potential systemic
risk.
Increased competition
between CSDs regarding the
provision of settlement
services is foreign
No estimate available. Issuers and investors would have more
choice in terms of financing arrangements,
issuance and risk diversification in their
286
Confidential information provided to DG FISMA.
284
For explanation and calculation of costs savings see J.P. Morgan public consultation reply, Q. 34.1.
285
Based on confidential data provided to DG FISMA services indicated that 4%-5% of trade volume could
cease to occur. Annual equity and equity-like instrument trading volumes and bond trading volumes were
equal to EUR 128 trillion end-2019 (See chapter “1.3.2 Size of the market” of the Impact Assessment),
giving a figure of up to EUR 7 trillion.
89
currencies, benefitting
investors and issuers.
cross-border investments.
Reduction of administrative
burden related to the
development of Q&As.
No estimate available. Clarifications regarding the settlement
discipline regime (penalties and buy-in)
would lessen the administrative burden on
ESMA related to replying to Q&A’s.
Streamlined cooperation of
authorities.
No estimate available. Ongoing costs will be reduced for NCAs
due to the streamlined cooperation of
authorities through the creation of colleges.
II. Overview of costs – Preferred option
Citizens/Consumers
[Investors/ Issuers]
Businesses [Market
Infrastructure providers,
CSDs]
Administrations
[NCAs, ESMA]
One-off Recurrent One-off Recurrent One-off Recurrent
Replacing of
passporting
at the host
Member
State level
with a
notification
Direct costs
No cost
impact
No cost
impact
No cost
impact
No cost
impact
No cost
impact apart
from
(neglible)
costs
changing
current
procedures.
Marginal
costs to
assess
notificatio
ns.
Indirect costs No cost
impact
No cost
impact
No cost
impact
No cost
impact
No cost
impact
No cost
impact
Establish
colleges
Direct costs
No cost
impact
No cost
impact
No cost
impact
No cost
impact
No cost
impact
Establish
ment of
colleges
EUR
260000
Indirect costs No cost
impact
No cost
impact
No cost
impact
No cost
impact
No cost
impact
No cost
impact
Targeted
amendment
Direct costs No cost No cost No cost No cost No cost
impact as
No cost
impact as
90
to allow
banking
CSDs to
offer
services to
other CSDs
impact impact impact impact within
current
supervisory
arrangement
s
within
current
supervisor
y
arrangem
ents
Indirect costs No cost
impact
No cost
impact
No cost
impact
No cost
impact
No cost
impact
No cost
impact
Amend
threshold
for banking
services
Direct costs
No cost
impact
No cost
impact
No cost
impact
No cost
impact
No cost
impact as
within
current
supervisory
arrangement
s
No cost
impact as
within
current
supervisor
y
arrangem
ents
Indirect costs No cost
impact
No cost
impact
No cost
impact
No cost
impact
No cost
impact
No cost
impact
Targeted
amendment
to
settlement
discipline
regime
Direct costs
Marginal
compliance
costs to the
clarified
rules, i.e.
removing
out-of-
scope
transactions
and setting
up a pass-
on
mechanism.
No cost impact. Marginal
compliance
costs to the
clarified rules.
In case of
compliance
costs to
amended buy-
in rules, these
can become
sunk cost (if
mandatory buy-
in will be
abandoned).
No cost impact. No cost
impact.
Reduction
of costs
related to
settlement
monitoring
and
compliance
, guidance
provided to
market
participant
s.
Indirect costs No cost
impact
No cost impact No cost impact No cost impact No cost impact No cost
impact
Deferred
introduction
of
mandatory
Direct costs
No cost
impact
No cost impact Costs related to
the setting up
of a mandatory
buy-in (i.e.
setting up or
connecting to a
Some reporting
costs as CSDs
will need to
provide more
accurate and
timely data as
No cost impact Some costs
related to
settlement
fail
monitoring,
occassional
91
buy-in buy-in agent)
may prove to
be sunk costs if
mandatory buy-
in is
abandoned.
to the
evolution of
settlement
efficiency to
support
decision on the
implementatio
n of mandatory
buy-in.
ly going
beyond
current
requireme
nts, and
assessment
of the
evolution
of fail rate
to support
decision on
the
implement
ation of
mandatory
buy-in.
Indirect costs Setting up
cost for
collecting
cash
penalties,
but this is
largely
already
prepared by
the market
participants.
Higher cost of
financial
transactions
that enter
delayed
settlement
(Cash penalties
added to a
transaction
cost)287
. These
cost are
manageable for
the market.
Cost related to
the
implementatio
n of cash
penalties.
These costs are
marginal and
largely
implemented.
No cost impact No cost impact Potential
costs
related to
determinin
g the need
and terms
of
introductio
n of
mandatory
buy-in.
Ending the
grand-
fathering
clause
Direct costs
No cost
impact
No cost impact Third-country
CSDs would
incur costs
attributed to
seeking
authorisation
from ESMA.
Third-country
CSDs would
incur recurrent
additional costs
related to
compliance
with relevant
EU rules (in
case third
country rules
are deemed not
equivalent with
EU rules) and
Marginal costs
for ESMA
related to
setting up
procedure for
handling
equivalence
decisions from
third-country
CSDs.
Marginally
increased
costs for
ESMA for
handling
authorizati
on
requests
from third-
country
CSDs.
287
The initiative supported by this Impact Assessment does not introduce cash penalties, so its costs cannot be
directly attributed to it. However, the costs of cash penalties in terms of impact on market pricing have not
been incurred as cash penalties have not yet entered into force.
92
potentially
operating two
settlement
regimes (a EU
one and a third
country one).
Indirect costs No cost
impact
No cost impact No cost impact No cost impact No cost impact No cost
impact
Notification
requirement
for third-
country
CSDs
Direct costs
No cost
impact
No cost impact Third-country
CSDs would
incur costs
attributed to
the notification
process with
ESMA.
No cost impact Marginal
costs for
ESMA related
to setting up
procedure
for handling
third-country
CSD
notifications.
Marginally
increased
costs
related to
handling
new
notificatio
ns. ESMA
estimated
costs for
one third-
country
CSD
notificatio
n would
amount to
ca. EUR 2
600 per
notificatio
n.
Indirect costs No cost
impact
No cost impact No cost impact No cost impact No cost impact No cost
impact
93
ANNEX 4: ANALYTICAL METHODS
The analysis carried out as part of the impact assessment is based on three
methodological approaches:
1. desk research;
2. qualitative analysis and;
3. quantitative analysis.
The data used to calculate the expected benefits and costs stem from a variety of different
data sources. Sources include in particular the targeted consultation that ran from
December 2020 to February 2021, stakeholder meetings (such as with the European
Central Securities Depositories Association (ECSDA) and other direct contributions
(including confidential ones) received. Additional data was collected from publicly
available sources (e.g. websites and annual statements of CSDs) and from the European
Securities Markets Authority (ESMA).
The analysis is strongly based on cost estimates provided by both supervisors, market
participants and CSDs. In some cases, the data analysed cannot be publicly distributed
given an extremely limited number of datapoints on specific market actors. Making such
information public may allow identification of the contributor. Publication of this data
could provide information to active or potential competitors which may allow them to
gain insights as to cost functions and other sensitive corporate information, thus leading
to unfair competitive advantages. This data has been considered by the Commission in its
analysis and the results are reflected qualitatively in this impact assessment. To that end,
respective figures have been presented in the Impact Assessment to the Regulatory
Scrutiny Board as part of the impact assessment scrutiny process as coming from
confidential contributions. Some data has been removed afterwards as the publication
would lead to identification of the contributor.
The presented analysis faces several methodological limitations. In particular, no
meaningful estimates can be provided as to the increase in competition between CSDs
and resulting lower costs that would occur under the preferred policy options. Estimates
are provided only in terms of cost savings for cross-border entry of CSDs under a new
passporting regime. While the Commission expects a clear increase in competition, the
market impact will ultimately depend on respective corporate decisions of CSDs to
engage in cross-border market entry.
Likewise, in the area of banking services, the number of banking CSD is at present very
limited (5), as, but to a lesser extent, the non-banking CSDs. This, in combination with a
lack of data, makes the meaningful estimation on the effects of the presented options
difficult to provide and qualitative information was used and presented to make the case
for the presented preferred options. While the Commission does expect these benefits to
materialize, these will also depend on future business decisions taken by the respective
CSDs.
Likewise, the possible impact of the mandatory buy-in regime, if and when implemented,
cannot be clearly specified. The presented analysis is based on input received from both
market participants and supervisors. Limitations exists in particular as concerns the
possible impact on market liquidity and volatility. Since the regime is not presently in
application, all data collected in relation to these market impacts is based on modelling.
This data nonetheless provides a good indication of the expected effects. Other data on
94
costs (e.g. connection to buy-in agents) provides further support for the preferred policy
option.
ANNEX 5: EVALUATION
Section 1 Executive Summary
The Central Securities Depositories Regulation (CSDR – Regulation 909/2014) is an
essential element of safe, stable and efficient EU capital markets. It offers a framework
for the settlement of securities transactions ensuring that buyers receive securities and
sellers receive payment after a securities transaction is agreed upon. Other services
performed post-trade typically include clearing (guaranteeing performance by ensuring
there is a buyer to every seller and a seller to every buyer) and post-trade reporting
(where individual transactions and/ or positions of participants are kept track of).
Post-trade services are an integral part of the value chain, as they ensure that a
transaction is completed, i.e. transfering ownership of a security from one party to
another, and transfering cash as payment. Post-trade services are provided by financial
market infrastructures, i.e. Central Counterparties (CCPs), trade repositories,
sometimesby banks (including custodians) and Central Securities Depositories (CSDs).
CSDs, together with central counterparties (CCPs), help safeguard financial markets and
give market participants confidence that securities transactions are executed properly and
in a timely manner, including during periods of extreme stress. Due to their key position
in the settlement process, the securities settlement systems operated by CSDs are of
systemic importance for the functioning of securities markets. Playing an important role
in the securities holding systems through which their participants report the securities
holdings of investors, the securities settlement systems operated by CSDs also serve as
an essential tool to control the integrity of an issue, hindering the undue creation or
reduction of issued securities, and thus playing an important role in maintaining investor
confidence. Moreover, securities settlement systems operated by CSDs are closely
involved in securing collateral for monetary policy operations as well as in securing
collateral between credit institutions and are, therefore, important actors in the
collateralisation process.
CSDR was the EU’s response to the call of the Financial Stability Board, on 20 October
2010, for the revision and enhancement of the existing standards to ensure more robust
financial market infrastructures.288
It took into account the global standards for financial
market infrastructures set by the Committee on Payments and Settlement Systems
(CPSS) of the Bank of International Settlements (BIS) and the International Organisation
of Securities Commissions (IOSCO) in April 2012.289
CSDR entered into force on 17
September 2014 with some parts, notably the part on settlement discipline, entering into
force with a delayed application, on 1 February 2022.
CSDR has been included in the 2021 Commission's Regulatory Fitness and Performance
programme (REFIT). Inclusion in the REFIT programme was justified by the need to
simplify targeted areas of CSDR and make them more proportionate, as evidenced by the
contributions to the public consultation on CSDR290
, as well as by the Commission's
review of the application of CSDR, carried out in accordance with Article 75 of
CSDR.291
288
https://www.fsb.org/wp-content/uploads/pr_101020.pdf
289
https://www.bis.org/cpmi/publ/d101.htm
290
https://ec.europa.eu/info/consultations/finance-2020-csdr-review_en
291
https://ec.europa.eu/info/publications/210701-csdr-report_en
In this context, the purpose of this evaluation is to assess to what extent specific policy
requirements in CSDR have met their objectives and in particular whether these
requirements have done so in an efficient and effective way, while at the same time
ensuring that CSDR is coherent, relevant and providing EU added-value.
Given that some of the core requirements of CSDR have only recently become applicable
or are not applicable yet, this assessment does not constitute a full evaluation of CSDR,
due to the lack of adequate evidence and as it is too early to draw a firm conclusion on
long-term impacts. Instead, the evaluation assesses the core requirements of CSDR:
 shorten settlement periods and set cash penalties and other deterrents for
settlement fails;
 ensure stability of CSDs by setting strict organisational, conduct of business and
prudential requirements for CSDs;
 allow authorised CSDs to provide their services across the EU;
 increase prudential and supervisory requirements for CSDs and other institutions
providing banking services that support securities settlement.
Given that the evaluation has been conducted in parallel with the CSDR review, it has
fed into the problem definition of the impact assessment (IA) accompanying the CSDR
REFIT initiative, and is presented as an Annex to the IA on the CSDR Review.
This evaluation is based primarily on the results of consultations with stakeholders,
regular exchanges with Members of the European Parliament and experts from the
Member States, reports from and discussions with the European Securities and Markets
Authority (ESMA), the European Systemic Risk Board (ESRB), and the European
System of Central Banks (ESCB), and additional desk research of the Commission
services. More specific sources included:
 the CSDR review report of 1 July 2021292
;
 the targeted public consultation of 8 December 2020293
;
 the feedback statement related to the targeted consulation294
;
 reports from ESMA on the implementation of CSDR295
, as required by Article 74
of CSDR and various input received from a wide array of stakeholders;
On the basis of the above-mentioned evidence, this evaluation has considered the
following five criteria to assess the core requirements of CSDR, in accordance with the
Better Regulation guidelines:
 Efficiency;
 Effectiveness;
292
CSDR review report (see note 9).
293
https://ec.europa.eu/info/consultations/finance-2020-csdr-review_en
294
https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/2020-
csdr-review-summary-of-responses_en.pdf
295
reports on the CSDR Review. See: On 5 November 2020, it published a report on internalised settlement:
https://www.esma.europa.eu/sites/default/files/library/esma70-156-3729_csdr_report_to_ec_-
_internalised_settlement.pdf. Also on 5 November 2020, it published its report on the provision of CSD
cross-border services and handling of related applications:
https://www.esma.europa.eu/sites/default/files/library/esma70-156-3569_csdr_report_to_ec_-_csd_cross-
border_services.pdf. On 8 July 2021 it published its report on the provision of banking-type ancillary
services: https://www.esma.europa.eu/sites/default/files/library/esma70-156-4582_report_to_the_ec_-
_csdr_banking_services.pdf and ; Report to the European Commission: use of Fintech by CSDs, ESMA, 2
August 2021: https://www.esma.europa.eu/sites/default/files/library/esma70-156-
3569_csdr_report_to_ec_-_csd_cross-border_services.pdf.
 Relevance;
 Coherence;
 Added-value of EU action.
This evaluation conludes the following:
 On the effectiveness and efficiency of the core requirements of CSDR, it indicates
that while the volume of settled trades increased since the entry into force of CSDR,
cross-border transactions remained stable and feedback from stakeholders indicate
that in several areas, e.g. passporting, licensing, and supervisory assessments,
significant barriers exist and preliminary findings suggest that actions (i) to reduce
disproportionate compliance burdens, (ii) to improve cross-border activity could
be undertaken. Improvements could also be sought in the area of banking services,
where the access to banking-type ancillary services is limited which in turn inhibits
settlement in foreign currencies and in improvement of supervision, both impacting
the possibilities or opportunities for firms to offer services cross-border.
 The objectives of CSDR to increase the safety and efficiency of EU settlement
market and ensuring a level playing field for CSD services remain relevant, and
associated risks with EU settlement markets persist.
 In terms of coherence, CSDR is aligned with international efforts ensure stability and
safety of post-trade infrastructures. In addition, CSDR is coherent with other pieces
of EU legislation, such as the Commission’s Capital Market Union Action Plan, EU
securities and banking regulations, as well as the Commission’s proposal to introduce
a pilot regime for technological innovations of CSDs and DORA.
 In terms of the EU added value, CSDR covered a gap that existed in legislation by
introducing a new framework aiming to address, in a uniform process at EU level, the
lack of a harmonised approach towards the EU’s settlement markets and in
addressing the related systemic risks.
Section 2 Introduction
CSDR entered into force on 17 September 2014. It aims to maintain safe and trustworthy
post-trade infrastructures that safeguard financial markets and provide market
participants confidence that securities transactions are executed properly and in a timely
manner, including during periods of extreme stress.
CSDR lays down the core requirements for the EU’s settlement markets. These include
common requirements for CSDs across the EU and provide inter alia rules on:
 shorter settlement periods and cash penalties and other deterrents for settlement
fails (‘settlement discipline-rules’);
 strict organisational, conduct of business and prudential requirements for CSDs;
 a passport system allowing authorised CSDs to provide their services across the
EU;
 increased prudential and supervisory requirements for CSDs and other institutions
providing banking services that support securities settlement;
 increased cooperation requirements for authorities across Member States with
respect to CSDs providing their services in relation to financial instruments
constituted under the law of a Member State other than that of their authorisation
and to CSDs establishing a branch in another Member State.
In accordance with Article 75 of CSDR, the Commission was mandated to carry out a
review of the application of CSDR and to present any appropriate legislative proposals.
In this context, the Commission has carried out an assessment of the rules currently in
place, based in particular on a targeted public consultation and input from various
stakeholders, carried out by DG FISMA in the course of 2020 and the first half of 2021.
On 1 July 2021, the Commission adopted a report on the review of CSDR (the CSDR
review report)296
. The report identified areas for which targeted action is necessary to
ensure fulfilment of the CSDR objectives in a more proportionate, efficient and effective
manner.
Certain of core requirements of CSDR have not yet been implemented or the
implementation is incomplete. In particular, at this stage, the rules around settlement
discipline are not yet applicable and are scheduled to enter into application on 1 February
2022. As such, due to the lack of adequate evidence, the evaluation cannot assess
holistically and with historical data all elements of the impact of CSDR.
Nevertheless, the CSDR review report already identifies a number of issues relating to
the implementation of those requirements that already apply (namely, (1) passporting
requirements, (2) cooperation amongst authorities and supervisory convergence, (3)
banking services related to settlement, especially to foreign currencies, (4) aspects of the
settlement discipline framework, in particular mandatory buy-ins, (5) the framework for
third-country CSDs).
In addition, under Article 81(2c) of Regulation (EU) 2010/10 establishing a European
Supervisory Authority (European Securities and Markets Authority), the Commission is
required, after consulting all relevant authorities and stakeholders, to conduct a
comprehensive assessment of the potential supervision of third-country CSDs by ESMA
exploring certain aspects, including recognition based on systemic importance, ongoing
compliance, fines and periodic penalty payments.
In accordance with the CSDR review report and further analysis conducted in this
evaluation, the Commission considers proposing a targeted legislative initiative on
CSDR. This initiative is part of the Commission's Regulatory Fitness and Performance
programme (REFIT) and included in the Commission Work Programme297
and the 2020
Capital Markets Union Action Plan.298
In this context, the purpose of this evaluation is to assess to what extent specific policy
requirements in CSDR have met their objectives and in particular whether these
requirements have done so in an efficient and effective way, while at the same time being
coherent, relevant and providing EU added-value. The evaluation has fed into the
problem definition of the impact assessment (IA).
Section 3 Background to the initiative
296
Report from the Commission to the European Parliament and the Council under Article 75 of 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, COM(2021) 348 final, 1 July 2021:
https://ec.europa.eu/finance/docs/policy/210701-csdr-report_en.pdf
297
Commission Work Programme 2021 (see note 244).
298
Communication from the Commission to the European Parliament, the Council, the European Economic
and Social Committee and the Committee of the Regions “A Capital Markets Union for people and
businesses-new action plan”, COM (2020) 590 final.
Description of the initiative and its objectives
CSDR was published in the Official Journal of the European Union on 28 August 2014,
and entered into force on 17 September 2014. Some of the requirements did not
immediately become applicable, as CSDR empowered the Commission to adopt
secondary legislation specifying technical modalities and a phase-in of some
requirements. As a result, requirements to adress settlement fails will only start to apply
from 1 February 2022.299
Other elements of CSDR that have later entry dates are the
requirement to issue in book-entry form,300
the shortening of the settlement period to 2
days after the conclusion of the securities transaction301
and certain reporting
requirements that were made dependent on the entry into force of the technical secondary
legislations.
Recital (5) of CSDR provides a description of the objectives of the Regulation:
"It is necessary to lay down in a regulation a number of uniform obligations to be
imposed on market participants regarding certain aspects of the settlement cycle and
discipline and to provide a set of common requirements for CSDs operating securities
settlement systems. The directly applicable rules of a regulation should ensure that all
market operators and CSDs are subject to identical directly applicable obligations,
standards and rules. A regulation should increase the safety and efficiency of
settlement in the Union by preventing any diverging national rules as a result of the
transposition of a directive. A regulation should reduce the regulatory complexity for
market operators and CSDs resulting from different national rules and should allow
CSDs to provide their services on a cross-border basis without having to comply with
different sets of national requirements such as those concerning the authorisation,
supervision, organisation or risks of CSDs. A regulation imposing identical requirements
on CSDs should also contribute to eliminating competitive distortions."
CSDR seeks to increase the safety and improve settlement efficiency as well as provide a
set of common requirements for CSDs across the EU while reducing systemic risk
through the application of its core requirements, which include:
1. shorter settlement periods and cash penalties and other deterrents for settlement
fails;
2. strict authorisation, organisational, conduct of business and prudential
requirements for CSDs;
3. a passport system allowing authorised CSDs to provide their services across the
EU;
4. increased prudential and supervisory requirements for CSDs and other institutions
providing banking services that support securities settlement;
5. increased cooperation requirements for authorities across Member States with
respect to CSDs providing their services in relation to financial instruments
constituted under the law of a Member State other than that of their authorisation
and to CSDs establishing a branch in another Member State.
299
Originally intended to apply from 1 February 2020, the entry into force was twice delayed upon proposal
by ESMA: esma70-156-3490_final_report_-_csdr_rts_on_settlement_discipline_-
_postponement_until_1_february_2022.pdf.
300
Article 3(1) CSDR: from 1 January 2023 for transferable securities issued after that date and from 1
January 2025 to all transferable securities.
301
Article 5(2) CSDR: application from 1 January 2015.
Thus, CSDR plays a pivotal role in the post-trade harmonisation efforts in the EU,
enhancing the legal and operational conditions in particular for cross-border settlement in
the Union, while promoting cross-border competition and financial stability.
CSDR seeked to address the three main problems identified in the impact assessment that
accompanied the CSDR proposal in 2014302
related to the functioning of the EU’s
settlement markets: (i) higher risk for cross-border (compared to domestic) settlement;
(ii) higher cost for cross-border settlement; and (iii) unlevel playing field for CSD
services. These issues followed from ultimately three main drivers: (1) different market
practices on the organisation of settlement; (2) different rules for CSDs across the EU;
and (3) barriers of access to/from CSDs.
The strategic objectives of CSDR were to tackle the three key consequences of the
problems identified in the previous section by:
(1) Increasing safety of the EU settlement market;
(2) Increasing efficiency of the EU settlement market;
(3) Ensuring level playing field for CSD services.
These strategic objectives translated into a number of specific objectives, as follows:
 Reduce the complexity of cross-border settlement – this should increase both
safety and efficiency of cross-border settlement;
 Reduce risk of arbitrage to the "softest" market practice (in terms of settlement
discipline) – this should increase the safety of settlement in general;
 Ensure consistent definition of CSD services across the EU – this should improve
level playing field between CSDs, as well as increase safety;
 Reduce the fragmentation of post-trading markets – this should increase both
safety and efficiency of cross-border settlement;
 Reduce the scope for national monopolies – this should improve the level playing
field for CSD services and increase competition between CSDs and between
CSDs and intermediaries.
These specific objectives were to be achieved by a number of concrete operational
objectives, which were grouped in the following three categories:
(1) Enhance framework for settlement in the EU – by improving cross-
border settlement discipline and harmonizing settlement periods;
(2) Introduce consistent rules for CSDs across the EU – such rules refered to
both the prudential and organisational rules to ensure the safety,
efficiency and level playing field of CSDs, as well as the licensing
framework, to ensure the level playing field and competition among
CSDs;
(3) Remove barriers of access to/from CSDs – this refers to both access
between issuers and CSDs as well as between the CSDs themselves and
between CSDs and other market infrastructures such as trading venues
and CCPs.
An overview of the various objectives and their interconnectedness is depicted below in
Figure 1. It also provides a description - in a summarised diagram format - on how
302
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=SWD%3A2012%3A0023%3AFIN
CSDR was expected to work and the intervention logic. This evaluation uses it as a
structure carry out the evaluation and answer specific questions.
Figure 1: Overview of objectives
Nb: the arrows represent the key interrelationships. Most factors represented above are in fact interlinked. *
refers to a competitive environment.
Description of the situation before the adoption of CSDR
Against the background of the ongoing financial crisis, around 2008 various international
institutions pleaded to strenghten ensuring safe and sound post-trade infrastructures
inbuilding a safer, more stable and efficient global financial system. To that effect the
Council urged to step up the EU ambitions for post-trade infrastructures with emphasis
on safety and soundness, whereby it noted that "the reality of a single European securities
market is not compatible with a fragmented European post-trading sector. Achieving
competitive, efficient and safe pan-European post trading arrangements is becoming
more and more critical".303
It was noted that CSDs are systemically important market infrastructures. Firstly, they
intervene throughout the life span of securities, from issuance to reimbursement.
Secondly, they perform, sometimes after prior netting by Central Counterparties (CCPs),
most of the processes that lead to the settlement of a transaction, i.e. the delivery of
securities against cash. In addition, CSDs play a crucial role in the transmission of
monetary policies. Concrete cases at the time that urged action were the Lehman and
Bear Stearns cases, where difficulties were encountered in terms of the ownership of
securities as well as the number of outstanding securities (more securities with
counterparties than issued).
Before the entry into force of the CSDR there was no central EU regulation where this
subject matter was regulated, although a number of topics were addressed in different
regulations, such as SFD, MIFID.
303
https://data.consilium.europa.eu/doc/document/ST-16212-2008-INIT/en/pdf
Strategic Specific Operational
Ensure level playing field
for CSD services
Increase efficiency of
cross-border transactions
Introduce consistent rules
for CSDs across the EU:
- Prudential and
organisational rules
- Licensing framework
Remove barriers of access
to/from CSDs:
- Access issuers-CSDs
- Access CSDs-CSDs or
CSDs-other infrastructures
Enhance framework for
settlement in the EU
- Settlement discipline
- Settlement periods
Reduce scope for national
monopolies
Reduce complexity of
cross-border settlement
Increase safety of cross-
border transactions
Reduce fragmentation of
post trading market
Reduce risk of arbitrage to
the “softest” market
practice*
Ensure consistent
definition of CSD services
across the EU
Strategic Specific Operational
Ensure level playing field
for CSD services
Increase efficiency of
cross-border transactions
Introduce consistent rules
for CSDs across the EU:
- Prudential and
organisational rules
- Licensing framework
Remove barriers of access
to/from CSDs:
- Access issuers-CSDs
- Access CSDs-CSDs or
CSDs-other infrastructures
Enhance framework for
settlement in the EU
- Settlement discipline
- Settlement periods
Reduce scope for national
monopolies
Reduce complexity of
cross-border settlement
Increase safety of cross-
border transactions
Reduce fragmentation of
post trading market
Reduce risk of arbitrage to
the “softest” market
practice*
Ensure consistent
definition of CSD services
across the EU
At the time, securities transactions in Europe were already becoming increasingly cross-
border and was expected to increase once the Target2 Securities (T2S)304
pan-European
common settlement platform would start. Despite this, cross-border securities settlement
in Europe remained complex due to different – highly fragmented along national lines –
market practices regarding settlement as well as to persisting barriers of access. This had
implications for the safety and efficiency of cross-border securities transactions. For
instance, costs of cross-border settlement were about 4 times more costly as within
national borders.305
In the EU in 2010, over 330 million securities transactions were settled by CSDs, for a
total value of approximately €920 trillion. EU CSDs held almost €39 trillion of securities
at the end of 2010.
The IA in 2010 identified several problems relating to the functioning of the EU
settlement markets, which included: (i) higher risk for cross-border (compared to
domestic) settlement, (ii) higher cost for cross-border settlement and (iii) unlevel playing
field for CSD services.
CSDR was adopted to address these problems by setting out the measures as identified
above.
Section 4 Evaluation Questions
This section summarises the review questions addressed in this evaluation.
Question 1: How effective has the EU intervention been?
- To what extent have the objectives of CSDR to: (1) increase safety of cross-border
transactions; (2) increase efficiency of cross-border transactions and (3) ensure level
playing field for CSD services been achieved and what factors influenced the
achievements observed?
Question 2: How efficient has the EU intervention been?
- To what extent have CSDR’s core requirements on settlement discipline,
organisational, conduct of business and prudential requirements for CSDs, the passport
system, increased prudential and supervisory requirements and increased cooperation
requirements given the effects they have achieved in promoting an EU settlement market
and in mitigating systemic risk?
Question 3: How relevant is the EU intervention?
- To what extent are CSDR's requirements on settlement discipline, organisational,
conduct of business and prudential requirements for CSDs, the passport system,
increased prudential and supervisory requirements and increased cooperation
requirements still relevant to promote an EU settlement market and the stability of the
financial markets and in light of current developments in this market?
Question 4: How coherent is the EU intervention?
304
See T2S website for more details http://www.ecb.int/paym/t2s/html/index.en.html
305
Commission Staff Working Document, “Impact Assessment accompanying the proposal for a regulation on
improving securities settlement in the European Union and on Central Securities Depositories (CSDs)”,
SWD (2012) 22 final, p.58.
- To what extent are CSDR's requirements on settlement discipline, organisational,
conduct of business and prudential requirements for CSDs, the passport system,
increased prudential and supervisory requirements and increased cooperation
requirements coherent with other pieces of EU financial legislation.
Question 5: What is the EU-added value of the intervention?
To what extent have CSDR's requirements on settlement discipline, organisational,
conduct of business and prudential requirements for CSDs, the passport system,
increased prudential and supervisory requirements and increased cooperation
requirements helped increasing safety of cross-border transactions, increasing efficiency
of cross-border transactions; ensuring level playing field for CSD services and to what
extent do the risks relating to the markets continue to require action at EU level?
Section 5 Methodology
This evaluation is based primarily on the results of consultations with stakeholders,
reports from the European Securities and Markets Authority (ESMA), various inputs
from different stakeholders and additional desk research of the Commission services.
More specific sources included:
 the CSDR review report306
;
 a targeted public consultation seeking feedback on a range of specific areas where
targeted action may be necessary to ensure the fulfilment of the objectives of
CSDR in a more proportionate, efficient and effective manner as mandated by
Article 75 CSDR.307
This consulation took place from 8 December 2020 until 2
February 2021 and received 91 responses from a broad range of stakeholders
across the EU as well as from third-countries. A detailed summary of the
responses to the two consultations is provided in the feedback statement to the
consultation.308
 Reports from ESMA309
, as required by Article 75 of CSDR.
In addition to these sources, input from the European Parliament as well as from
dedicated meetings with Member States was also considered. In particular, a resolution
by the European Parliament on stocktaking and challenges of the EU Financial Services
Regulation: impact and the way forward towards a more efficient and effective EU
framework for Financial Regulation and a Capital Markets Union, adopted in January
2016310
. The Commission services also engaged in exchanges with MEPs from the
ECON Committee involved in the CSDR review.
306
Report from the Commission to the European Parliament and the Council under Article 75 of 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, COM(2021) 348 final, 1 July 2021:
https://ec.europa.eu/finance/docs/policy/210701-csdr-report_en.pdf
307
Feedback to the targeted consultation by the European Commission:
https://ec.europa.eu/info/consultations/finance-2020-csdr-review_en
308
https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/2020-
csdr-review-summary-of-responses_en.pdf.
309
See notes 50, 86, 88, 89.
310
European Parliament Resolution 2015/2106 (INI) of 19 January 2016.
The Commission services also participated in various meetings and working groups of
the ESCB as well as ESMA where post-trade developments are discussed.
Limitations – robustness of findings
While CSDR entered into force on 17 September 2014, certain core requirements
(including those on settlement discipline) provided for in the Regulation are yet to be
implemented or completed. This has a number of consequences.
First, it means that a full evaluation of the effectiveness and efficiency of CSDR in
meeting its objectives is not possible.
Second, there is only a limited amount of quantitative evidence available to carry out the
evaluation, as the experience drawn from the applicable requirements only spans a couple
of years. In the specific instance of settlement discipline, for example, there is no data
available, as the regime is only scheduled to apply from February 2022.
Nevertheless, the evaluation draws from the data collected by European public
authorities and bodies (i.e. ESMA, ESCB) on the basis of rules which are already in
place as well as the responses to the public consultation and contacts and sometimes
concerns by external stakeholders. In addition, it is important to highlight that the market
for settlement is yet, only a few years after entering into force, still fragmented, with
many local specificities in legal, taxation and other administrative areas so that
comparisons are highly difficult to make. This entails that in some areas proxies and
assumptions have been made.
Section 6 Implementation state of play (Results)
Overview of requirements in place
As mentioned, CSDR has been directly applicable since 17 September 2014. A
Regulation was deemed to be the most suitable policy instrument to ensure the
application of uniform requirements throughout the EU with exactly the same scope,
without any gold-plating and without allowing residual powers to Member States. In
addition, CSDR empowered the Commission to adopt delegated acts in accordance with
Article 290 TFEU to specifying some requirements and implementing acts in accordance
with Article 291 TFEU to ensure the uniform conditions of implementation. CSDR also
required ESMA to prepare draft regulatory technical standards and implementing
technical standards, to be adopted by the Commission, and carry out appropriate impact
assessments pursuant to Regulation (EU) No 1095/2010.
This section focuses on the application of those rules that are relevant to achieve CSDR's
objectives to increase safety of the EU settlement market, increase efficiency of the EU
settlement market and ensure a level playing field for CSD services.
The following key obligations have started to apply with respect to these three objectives:
 Increasing efficiency of the EU settlement market: shortening settlement times
from T+3 to T+2 and a passporting regime to enable CSDs their services across
the EU.
 Increasing safety of the EU settlement market: authorisation, organisational,
conduct of business and prudential requirements for CSDs, integrity of issue
requirements, part of the settlement discipline measures (where CSDs have to
have internal processes and procedures in place as well as external contractual
measures in place to facilitate timely settlement) and a framework for the
provision of banking services by CSDs.
 Ensuring level playing field for CSD services: a passporting framework, a
framework for supervisory cooperation and a framework for third-country CSDs.
These rules are in place across EU Member States as well as the European Economic
Area (‘EEA’). As with any other EU Regulation, its provisions are directly applicable
(i.e. legally binding in all Member States without transposition into national law) as from
the day of entry into force.
Not all of the requirements of CSDR already apply. Many provisions of CSDR, in
particular when taken together with the implementation dates included within the
different technical standards, result in a phased-in application of the legal framework.
This is notably the case of the reporting, penalties and buy-in requirements of the
settlement discipline regime, for which entry into force has been postponed twice. These
requirements are currently scheduled to apply from 1 February 2022.
These requirements should be considered within the relevant objectives of CSDR.
What is the current situation?
1. Requirements aimed at increasing efficiency of the EU settlement market
An important achievement of the CSDR is that settlement periods are reduced to T+2.
The settlement period was harmonised in the EU and set at a maximum of two days after
the trading day (T+2). A harmonised settlement period aims to reduce operational
inefficiencies and risks for cross-border transactions, while reducing funding costs for
investors (i.e. for those that have to deliver cash or securities at T+3 but can only receive
them at T+2). Shorter settlement periods has an important advantage of reducing
counterparty risk, that is, the period of time during which an investor runs a risk that its
counterparty will default on its obligation to deliver cash or securities at the agreed
settlement date.
A core objective of CSDR was the creation of a single market for CSDs. CSDR creates a
passporting regime whereby CSDs may provide their services in the EU without the need
for further local authorisation. When a CSD provides its services in a Member State other
than where it is established, the competent authority of the home Member State is
responsible for the supervision of that CSD. However, the procedure through which a
CSD authorised in an EU Member State can provide notary and central maintenance
services in relation to financial instruments constituted under the law of another EU
Member State or to set up a branch in another Member State is based on the cooperation
of the CSD's home Member State competent authority with the host Member State
competent authority. In that case, the home Member State competent authority bears the
primary responsibility to determine the adequacy of the administrative structure and the
financial situation of the CSD wishing to provide its services in the host Member State.
The host Member State competent authority shall however approve a part of the
passporting file consisting of the description of the measures that the requesting CSD
will implement in order to allow its participants to comply with the relevant provisions of
the corporate or similar law of the home Member State.
Despite the fact that most of the applying CSDs have been able to obtain a “passport” to
offer notary and central maintenance services in one or several other Member States,
anecdotal information from stakeholders has indicated that this process has been
significantly more burdensome than previously thought. The majority of CSDs
considered that the passporting process has not prevented CSDs from offering issuer
CSD services for securities constituted under the laws of another Member State as such,
but has slowed down their ambitions. Certain CSDs noted that they had to withdraw
some passport requests due to, what they perceived to be national constraints, e.g.
compliance with the direct individual segregation model applicable under national law.311
Finally, CSDR introduced rules on settlement discipline to prevent and address failures in
the settlement of securities transactions and therefore ensure the efficiency of transaction
settlement. The two main elements of the settlement discipline regime are cash penalties
and mandatory buy-ins. All CSDs would be required to impose cash penalties on their
participants in case of settlement fails. If despite the cash penalties, a CSD participant
(original seller) would fail to deliver the securities it would be subject to a mandatory
buy-in. A buy-in provides the buyer of securities with the right to buy the securities
elsewhere, cancel the original transaction and put the costs of the buy-in, as well as any
price difference, with the original seller. The settlement discipline regime also imposes
requirements on the reporting of settlement fails by the CSDs.
Since 2017, ESMA has frequently updated its CSDR Q&A’s on settlement discipline
regime, with currently 7 Q&A’s related to settlement discipline.312
More than 25 Q&As
on settlement discipline are however being assessed at this point in time.
The settlement discipline regime was due to enter into force on 13 December 2020 but
was postponed twice: (1) to 1 February 2020 (this short delay, based on a proposal by
ESMA, was considered necessary to take into account the additional time needed for the
establishment of some essential features for the functioning of the new framework); (2)
due to the impact of the Covid-19 pandemic, ESMA313
decided to propose postponing
the date of entry into force of a CSDR Regulatory Technical Standards (RTS) on
settlement discipline314
until 1 February 2022.
Despite the absence of experience in applying the rules, the development and
specification of the framework in the relevant regulatory technical standard has allowed
all interested parties to better understand the regime and the challenges its application
could give rise to, especially at times of crisis, e.g. such as the COVID-19 crisis in spring
2020.
Despite the lack of complete data in this respect due to lack of mandatory reporting, it
seems that settlement fails rates have remained stable in the EU since 2018 (approx. 6%
for equities and 3% for bonds315
) in a context of the dramatic increase in trading
(settlement instructions increased by 30% between 2015 – 2019 in EU CSDs316
), but still
remain higher than other jurisdictions (in particular, higher than in the US where roughly
2% of all US treasuries and mortgage backed securities transactions fail317
). The
311
Feedback to the targeted consultation by the European Commission:
https://ec.europa.eu/info/consultations/finance-2020-csdr-review_en
312
CSDR Q&As (see note 164).
313
ESMA proposes to further postpone CSDR settlement discipline (europa.eu):
https://www.esma.europa.eu/press-news/esma-news/esma-proposes-further-postpone-csdr-settlement-
discipline.
314
RTS on settlement discipline.
315
“ESMA Report on trends, risks and vulnerabilities”, European Securities and Markets Authority, ESMA-
50-165-1287, No. 2, 2 September 2020.
316
Data generated through the Securities Trading, Clearing and Settlement Statistics Database, European
Central Bank. Accessed on 29 April 2021. Available at:
https://sdw.ecb.europa.eu/browse.do?node=9691131.
317
K. Burne, ‘How to succeed in fixing settlement fails’, Aerial View, Bank of New York Mellon, 2020.
forthcoming entry into force of the settlement discipline regime is expected to further
improve such rates. But it is yet to be determined what the exact impact of each
requirement of this regime (i.e. reporting, penalties and buy-in requirements) will be.
2. Requirements aimed at increasing safety of the EU settlement market
CSDs are subject to authorisation by the competent authorities of their home Member
Sate which examine how CSDs operate on a daily basis, carry out regular reviews and
take appropriate action when necessary. Under Articles 16 and 54 of CSDR, CSDs should
obtain an authorisation to provide core CSD services as well as non-banking and
banking-type ancillary services. Article 69(4) however allows CSDs authorised under
national law before the adoption of CSDR to continue operating under such national law
until they have been authorised under the new CSDR rules (the “grandfathering clause”).
Feedback received from respondents to the public consultation show that the
authorisation procedure has been widely regarded as lengthy (sometimes up to 2 years,
although broadly about 6 months from the date that the application is complete)318
and
burdensome by CSDs. As of 31 July 2021, out of 28 EEA CSDs that are subject to
authorisation requirements under CSDR, two have not been authorised under CSDR, and
still relying on the grandfathering clause.319
Once a CSD has been authorised, CSDR requires NCAs to review its compliance with
CSDR and to evaluate the risks to which the CSD is or might be exposed, as well as the
risks it might create. This must be carried out at least annually, with the NCA’s
determining the specific depth and frequency of the review and evaluation taking into
consideration the size, nature and systemic importance of the CSD under supervision.
The experience in this respect shows that this exercise may be redundant from one year
to the other, depending on the CSD at stake. The majority of key stakeholders (i.e.
national competent authorities and CSDs) considered this exercise to be too burdensome
to be carried out on an annual basis unless justified by the risk profile of the CSD. Thus,
most respondents to the public consultation considered that the frequency of the annual
review process should be amended in order to allow for more flexibility in this respect.
CSDR also sets organisational rules for CSDs including notably: governance, record
keeping and outsourcing rules; conduct of business rules in the relations between CSDs
and their users, including transparency requirements and communication procedures with
participants; rules regarding the provision of services by CSDs in order to ensure the
integrity of securities issues, protection of securities of participants and those of their
clients, protection of the settlement finality and cash settlement and protection against a
participant's default; and capital requirements and prudential requirements covering legal,
general business, operational and investment risks.
Today, all these organisational rules have entered into force and are implemented by the
key stakeholders, in particular the CSDs. These requirements did not raise concerns from
key stakeholders in the answers to the public consultation. As regards the integrity of the
issue, it should only be noted that in May 2020 T2S faced an operational incident which
led to 1 835 securities positions and 22 cash balances ending up with negative
balances320
. This incident was solved within two days but raised some questions
regarding the interpretation of some CSDR level 2 provisions regarding the suspension of
318
https://ec.europa.eu/info/consultations/finance-2020-csdr-review_en.
319
ESMA data provided to the Commission.
320
TARGET2-Securities Annual Report 2020 (europa.eu).
a securities issue from settlement until the problem is solved.
CSDR also introduced a regime for the provision of banking-type ancillary services by
CSDs. By preference, and in order to avoid settlement risks due to the insolvency of the
settlement agent, a CSD should settle, whenever practical and available, the cash leg of
the securities transaction through accounts opened with a central bank. If this option is
not practical and available, CSDR provides two other possibilities, both subject to
conditions and requirements: to settle through accounts opened with a credit institution
and to provide banking services ancillary to settlement directly.
CSDs offering settlement in commercial bank money as an ancillary service must comply
with additional requirements to mitigate mainly credit and liquidity risks for the CSD and
its participants,321
e.g. CSDs have to be authorised as a credit institution under the
applicable banking legislation and comply with the regulatory capital requirements set in
the Capital Requirements Regulation. Today, only 5 out of the 28 CSDs in the EEA have
applied to provide banking services under CSDR (of which 5 have been already
authorised), and all of them provided these services pre-CSDR and no new providers
have entered the market.322
CSDs offering settlement through a credit institution and above certain thresholds (i.e.
the total value of cash settlement must be less than 1% of the total value of all securities
transactions against cash settled in the books of the CSD and shall not exceed a
maximum of EUR 2.5 billion per year) shall ensure that such credit institution is a
limited-licence bank that provides services only to CSDs and that complies with
additional requirements to mitigate the risks. However, no such designated credit
institutions exists to date.323
As such, CSDs cannot make use of this option to settle in
commercial bank money.
CSDs settling in commercial bank money below the abovementioned thresholds do not
have to comply with all the credit and liquidity requirements (i.e. they can use a normal
commercial bank or can perform the services themselves).
From the public consultation and in contacts with stakeholders, it has become clear, that
the settlement in commercial bank money in foreign currencies is limited and has not
grown substantially since the introduction of CSDR. Although the safety of the
settlement markets is an important objective, from the perspective of the objective to
enhance cross-border transactions and the improvement of efficiency of settlement
markets this is sub-optimal and the constraints appear disproportionate. First, designated
credit institutions do not exist (yet). The fact that it can only service CSDs, thus have a
very limited business role, is assumed to have prevented market players from establishing
such an institution. Second, the thresholds under which CSDs can use a commercial bank
to settle in commercial bank money are deemed too low by many stakeholders to develop
foreign currency settlement services. As an example, for smaller CSDs with lower
turnover ratio324
, e.g. 11, the current threshold of EUR 2.5 billion settlement per year
321
Credit risk is the risk an institution faces when lending to borrowers that cannot meet their obligations.
Liquidity risk refers to the inability of an institution to meet its own financial obligations.
322
ESMA CSD Register (see note 26)
323
ESMA Report ‘Provision of banking-type ancillary services under CSDR’ (see note 88).
324
The asset turnover ratio measures the value of a company's sales or revenues relative to the value of its
assets. The asset turnover ratio can be used as an indicator of the efficiency with which a company is using
its assets to generate revenue. The higher the asset turnover ratio, the more efficient a company is at
generating revenue from its assets. Conversely, if a company has a low asset turnover ratio, it indicates it is
not efficiently using its assets to generate sales..
would be reached with issuance corresponding to EUR 229 million – less than half the
size of a regular bond issue, leaving no possibility to offer issuance to others in the same
or other currencies in commercial bank money. In a recent confidential survey, a majority
of respondents indicated that an increase in the threshold in Article 54(5) would satisfy
the CSDs’ needs for the intended business of settlement in foreign currencies325
.
3. Requirements aimed at ensuring a level playing field for CSD services
CSDR includes provisions that aim to ensure a level playing field for CSD services both
at EU and international level.
Within the EU, CSDR introduced two sets of rules in this respect: a passporting
framework, already presented in paragraph 1 above; and a framework for supervisory
cooperation.
Under a framework for supervisory cooperation, national competent authorities, relevant
authorities and ESMA are required to cooperate closely and, on request and without
undue delay, provide one another with the information required for the purposes of
carrying out their duties.
With respect to the provision of services in other Member States, CSDR further provides
that where a CSD has become of substantial importance for the functioning of the
securities markets and the protection of the investors in more than one host Member
State, the home Member State may decide that such cooperation arrangements are to
include colleges of supervisors326
. In practice however, only one college has been set up
for an EU CSD327
.
It emerges from answers to the public consultation and various bilateral inputs from
stakeholders that views are split on whether cooperation arrangements under CSDR work
in an efficient manner. It should however be noted that the majority of respondents to the
public consultation, including public authorities and banks, considered that the
cooperation amongst NCAs would be improved if colleges were established and they
were always involved in notably the passporting process328
.
Regarding third-country CSDs, Article 25(1) of CSDR provides that they may provide
their services in the EU, including through setting up branches on the territory of the EU.
Article 25(2) requires a third-country CSD to apply for recognition to ESMA in two
specific cases: (a) where it intends to provide certain core CSD services (issuance and
central maintenance services related to financial instruments governed by the law of a
Member State); or (b) where it intends to provide its services in the EU through a branch
set up in a Member State. Services other than those described (including settlement
services) do not require recognition by ESMA under Article 25 CSDR. ESMA may
recognise a third-country CSD that wishes to provide issuance and central maintenance
services only where the conditions referred to in Article 25(4) of CSDR are met. One of
those conditions is that the Commission has adopted an implementing act determining
that the regulatory framework applicable to CSDs of that third country is equivalent in
325
Based on confidential information provided to DG FISMA services.
326
Article 24(4) of CSDR
327
The Latvian supervisory authority established and led the Nasdaq CSD SE supervisory college in
cooperation with supervisory authorities and central banks of Lithuania, Estonia and Latvia
https://www.fktk.lv/en/news/press-releases/nasdaq-merges-its-baltic-csds-to-create-nasdaq-csd/.
328
Summary report of the targeted consultation document on the review of regulation on improving securities
settlement in the European Union and on central securities depositories 8 December 2020 – 2 February
2021, paragraph 3.3.3
accordance with CSDR. One CSD has applied to date for recognition to ESMA, i.e. the
UK CSD in the context of Brexit. At least two other CSDs have contacted ESMA and
have expressed their intention to apply for recognition as third-country CSDs.
However, according to the current provisions of Article 25 of CSDR, the recognition
process is only triggered once there is an equivalence decision issued by the European
Commission in respect of a particular third country. In the meantime, according to Article
69(4) of CSDR, third-country CSDs can continue providing services in the EU under the
national regimes (the so-called “grandfathering clause”). As CSDR is now approaching
its full entry into force (notably with the settlement discipline regime that should enter
into force on 1 February 2022), concerns start to arise regarding such grandfathering
clause. Some stakeholders, including national competent authorities and certain EU
CSDs, supported the introduction of an end-date to the grandfathering arguing, amongst
others, that currently third-country CSDs can continue to service EU securities even
though they comply with rules which have not been determined as equivalent by the
Commission. However, other stakeholders, mainly a couple of national competent
authorities and third-country CSDs expressed their views against amending the current
grandfathering framework, arguing that this would create legal and financial uncertainty
for third-country CSDs if they are not recognised by the end of the grandfathering period,
which would introduce unnecessary risk to the market.
Notwithstanding the above, a common observation is the lack of clear information on the
exact services that third-country CSDs provide within the EU under the grandfathering
clause329
.
Section 7 Answers to the evaluation questions
Question 1: How effective has the EU intervention been?
- To what extent have the objectives of CSDR to: (1) increase efficiency of the EU
settlement market; (2) increase safety of the EU settlement market and (3) ensure level
playing field for CSD services been achieved and what factors influenced the
achievements observed?
1. Efficiency of the EU settlement market
At the time of adoption of CSDR, settlement markets in the Union were fragmented. This
was identified as a source of risk and additional costs for cross-border settlement. Given
the systemic relevance of CSDs, the promotion of competition between CSDs was one of
CSDR’s objectives, with the view to creating a single market for securities settlement,
allowing any investor in the Union to invest in all Union securities with the same ease as
in, and using the same processes as for, domestic securities. This was considered
essential to the proper functioning of the internal market.
In 2010, the European securities market was deemed very significant; according to ECB
statistics330
, 690 million trades were executed on securities exchanges in the EU in 2010,
representing a total value of over €33 trillion. The EU capital market was the second in
329
https://ec.europa.eu/info/consultations/finance-2020-csdr-review_en
330
http://sdw.ecb.europa.eu/reports.do?node=1000001584.
size after the US capital market and represents around 30% of the global market (the US
represented around 35% of the total331
).
In 2014, when CSDR was adopted, EUR 43.5 trillion worth of securities were held in EU
securities settlement systems, which handled over 330 million delivery instructions for a
total of turnover of over EUR 850 trillion.
At the end of 2019, there were over EUR 53 trillion worth of securities in EU Securities
Settlement Systems handling over 420 million delivery instructions in 2019 for a total of
turnover of over EUR 1 120 trillion332
. This represents a growth of 22% in value of
securities held, 27% in number of delivery instructions and 32% in turnover in the period
between 2014 and 2019.
This also confirms the important role of CSDs serving the growing European Capital
Markets.
Depite this overall growth of the EU settlement activity, an important consideration is
that in the EU the three333
largest CSDs hold over 60% of all securities held in EU CSDs.
In the same period, the value of securities held by the UK CSD334
rose from
EUR 6 215 billion in 2015 to EUR 6 406 billion in 2019 (an increase of 3%), while the
value of delivery instructions rose from EUR 272 087 billion to EUR 357 184 billion
respectively (an increase of 31%)335
. In the US336
, the value of securities held by the two
CSDs337
rose from EUR 100 739 billion in 2015 to EUR 130 366 billion in 2019 (an
increase of 29%), the number of delivery instructions processed increased from
362 663 000 (2015) to 672 887 000 (2019) (an increase of 86%) for a value of
EUR 355 trillion in 2015 to EUR 401 trillion in 2019 (an increase of 13%).
Depite this overall growth of the EU settlement activity, an important consideration is
that in the EU the three338
largest CSDs hold over 60% of all securities held in EU CSDs.
It can be concluded that EU settlement activity is concentrated in a few CSDs, albeit that
the same applies to settlement activity in other comparable jurisdictions. In addition,
there was generally increased settlement activity, explained by increased trading activity,
that in turn can
Other signs point in the direction of a slow but surely moving in the direction of a real
EU settlement market as well. First, mergers between clearing houses, CSDs, and stock
exchanges have created EU financial market infrastructure conglomerates, such as the
formation of Clearstream through the merger of Cedel International and Deutsche Boerse
in 2012. With the acquisition of the Norwegian and Danish CSDs in 2019 and 2020
331
According to the McKinsey "Global Capital Markets: Entering a New Era" September 2009
http://www.mckinsey.com/mgi/reports/pdfs/gcm_sixth_annual_report/gcm_sixth_annual_report_full_repor
t.pdf
332
Data generated through the Securities Trading, Clearing and Settlement Statistics Database, European
Central Bank. Accessed on 29 April 2021. Available at:
https://sdw.ecb.europa.eu/browse.do?node=9691131
333
Euroclear Bank Belgium (28%), Clearstream Banking Frankfurt (18%), Clearstream Banking Luxembourg
(15%).
334
Euroclear UK and Ireland.
335
“Securities trading, clearing and settlement statistics”, European Central Bank, September 2020
336
Bank for International Settlement, Red Book Statistics, Payment and financial market infrastructures.
Available at: https://stats.bis.org/statx/toc/CPMI.html. Accessed on 01 June 2021.
337
DTC and Fedwire Securities Service
338
Euroclear Bank Belgium (28%), Clearstream Banking Frankfurt (18%), Clearstream Banking Luxembourg
(15%).
respectively, Euronext has also strengthened its presence in the EU settlement markets as
well in the area of stock exchanges and clearing houses with the acquisition of Borsa
Italiana, MTS, where most of Italy’s sovereign debt is traded, as well as the major multi-
asset clearing house, CC&G in 2020..
Economies of scope could also be obtained through horizontal synergies. In 2009
Euroclear brought the Belgian, Dutch and French domestic CSDs onto a single platform,
under a harmonised framework, but as separate legal entities. Nasdaq has also
consolidated the three Baltic CSDs (Estonia, Lithuania and Latvia) in 2017 and the
Icelandic CSD into a single legal entity in 2020. As a result of these changes the
nominally fragmented post-trade market in Europe is dominated by large conglomarates
offering post-trade services, i.e. Euroclear (bringing together the international CSD
Euroclear Bank and national CSDs in Belgium, Finland, France, Ireland, the Netherlands,
Sweden and the United Kingdom), Euronext (bringing together national CSDs in
Portugal, Denmark, Norway and Italy), Nasdaq CSD (following the merger of the
regional CSDs for Lithuania, Latvia, Estonia and Iceland) and Deutsche Boerse Group
(operating the ICSD Clearstream Luxembourg, the German CSD and LuxCSD).
Responses from the public consultation confirm these findings. Although most
stakeholders, did not express an opinion as to whether CSDR has actually increased
competition amongst CSDs, a group of stakeholders representing central banks, CSDs
and their participants, as well as a CSD and a bank underlined that data on competition in
the CSD market and the level of cross-CSD settlement does not provide evidence of a
significant increase in competition or cross-border services or cross-CSD settlement.
According to those stakeholders, reasons for the lack of evidence for increased
competition between CSDs and the absence of significant cross-CSD settlement include:
(a) diverging national practices in corporate actions processing and diverging national
corporate laws or corporate governance rules; (b) diverging practices in withholding tax
refund and relief at-source procedures; (c) diverging market practices in collateral
management; (d) lack of harmonisation in issuance procedures. It was also noted that
such national divergences also hinder mergers of CSDs.
There were also positive views on CSDR’s impact on competition. In particular, it was
noted that the harmonisation brought about by CSDR (which according to a bank
enhanced, amongst other things, the transparency of CSD fees and introduced high
standards for CSDs’ operations) contributed to competition amongst EU CSDs. Some
stakeholders noted that CSDR’s impact on competition should not be analysed in
isolation as many other factors, such as the launch of T2S and the related harmonisation
efforts, impacted the CSD market in recent years.
Although various parrallel developments in the EU settlement market make the drawing
of conlusions difficult, especially since the time frame for trends between the original
CSDR entry into force and present is short, developments pointed out above point to a
slowly but steadily forming EU settlement market but still largely focused around
national markets, due to different, legal, corporate and tax rules that make the formation
of single European wide CDS operators difficult to form.
CSDR also aimed at improving efficiency of the EU settlement market by increasing
competition between CSDs through the introduction of the passporting regime. This
objective has been at least partly achieved since most of the applying CSDs have been
able to obtain a “passport” to offer notary and central maintenance services in one or
several other Member States. However, the process itself has been significantly more
burdensome than previously thought. The majority of CSDs considered that the
passporting process has not prevented CSDs from offering issuer CSD services for
securities constituted under the laws of another Member State as such, but has slowed
down their ambitions. Certain CSDs noted that they had to withdraw some passport
requests due to local constraints that are disputable, e.g. compliance with the direct
individual segregation model applicable under national law.
Another important achievement of the CSDR is that settlement periods are reduced to
T+2. The settlement period was harmonised in Europe and set at a maximum of two days
after the trading day (T+2). A harmonised settlement period aims to reduce operational
inefficiencies and risks for cross-border transactions, while reducing funding costs for
investors (for instance, for those that have to deliver cash or securities at T+3 but can
only receive them at T+2). Shorter settlement periods has an important advantage of
reducing counterparty risk, that is, the period of time during which an investor runs a risk
that its counterparty will default on its obligation to deliver cash or securities at the
agreed settlement date.
Finally, CSDR also aimed to achieve efficiency of the EU settlement market by imposing
a strict settlement discipline regime that would reduce settlement fails rates within the
EU. Given that this framework has not yet entered into force it is difficult to assess what
the exact impact on settlement efficiency would have. However, a large majority of the
respondents to the public consultation, including public authorities, CSDs, CCPs, banks,
asset management companies, market makers, and their respective associations, have
raised already the fact that the settlement discipline framework should be reviewed. From
those respondents, a vast majority indicated that the rules related to buy-ins should be
reviewed, with a large majority (all categories of stakeholder included) in favour of
voluntary buy-ins. Such respondents notably anticipate that the mandatory buy-in
requirements as introduced in CSDR may reduce market liquidity, increase the costs for
investors, creat unlevel playing field for EU CSDs and negatively impact securities
lending and repo markets.339
The reporting and penalty requirements of the settlement
discipline regime have however raised much less comments from respondents.
In light of the above, we can conclude that CSDR has largely paved the way of a more
efficient EU settlement market, notably by creating synergies and cross border
opportunities for CSDs, and by reducing settlement period to T+2. However, CSDR may
still be improved with a view to better achieve this objective, in particular by simplifying
the passeporting process and enhancing supervisory cooperation between authorities with
a view to facilitate the developement of cross-border activities. Furthermore, despite the
fact that it has not yet entered into force, further thoughts should be put into the
improvement of the settlement discipline regime, in particular the buy-in requirements.
2. Safety of the EU settlement market
Before the entry into force of CSDR, CSDs were subject to different authorisation and
supervision regimes across the EU.340
Differences can be broadly divided into three
categories: (1) different definitions of CSD services, (2) different authorisation and
supervision regimes and organisational rules, and (3) lack of a common prudential
framework.
339
Summary report of the targeted consultation document on the review of regulation on improving securities
settlement in the European Union and on central securities depositories 8 December 2020 – 2 February
2021, paragraph 3.7.2.
340
2014 IA, p.14: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=SWD%3A2012%3A0022%3AFIN
It was determined that definitions of CSDs and of the CSDs' services vary considerably,
for instance in the different holding systems, with the three core functions not
distinguished between each other nor with the ancillary functions. In the indirect holding
systems the central safekeeping function was either incorporated into the notary function
(France) or into the settlement function (the UK). Ancillary services were not uniformly
defined or recognised, especially the banking services which could not be offered by
CSDs in most Member States, while they form an integral part of the CSD functions in
other Member States (Germany, Belgium).
These differences had consequences in terms of level playing field but also of safety: the
lack of a common definition of core CSD services and of who can/cannot provide such
services can lead to some of the core services, particularly settlement, being provided by
institutions not authorised as CSDs causing an unlevel playing field as some parties
could for example settle internally protected by the SFD, and others could not, or for
instance between those who are allowed to provide banking-type of services and those
who are not.
Risk to the soundness of CSDs, arose from the ability of some CSDs to engage in
activities with higher risk, such as banking-type of activities, raising the risk profile of
CSDs that undertake these activities, albeit mitigated to some extent by the limitation in
scope of these activities (essentially to deposit taking and credit granting related to the
CSD's core activities) and by strict CPSS-IOSCO requirements, including full
collateralisation of credit.
In some Member States there was no specific authorisation regime for CSDs but their
functions were regulated by various national regulations. In most direct holding countries
CSDs are designated by law to perform some core and ancillary functions such as
registrar and account providing (safekeeping) functions and the other functions are
derived from these. In other countries CSDs are deemed to have a banking status. These
differences led to the fragmentation of the EU post trading market described. This
fragmentation resulted in the cross-border settlement of transactions relying on a
"spaghetti" model of links between CSDs and/or a chain of intermediaries. This has
obvious consequences for the safety and efficiency of cross-border transactions.
Before CSDR, organisational and conduct of business requirements, rules regarding the
integrity of the issue and rules regarding the provision of banking services ancillary to
settlement, diverged from one Member State to the other, with some CSDs being subject
to less stringent requirements than others. Harmonisation of such requirement from the
above in CSDR aimed at strengthning CSDs organisation and rebalancing the
relationship between CSDs and participants.
Finally, European CSDs also lacked a common prudential framework. They were subject
to technical standards by ECB and to recommendations by CPSS-IOSCO and ESCB-
CESR. However, due to their soft law nature, these standards and recommendations are
implemented in different ways. This raised several problems: possible failures due to non
regulated operational or financial risks would have tremendous consequences for a
national market as it would essentially block the securities market, with severe
implications for the ability of market participants to honour their obligations, the lack of
a common prudential framework could lead to regulatory arbitrage favouring the CSD
with the "softest" approach and as the markets are becoming more integrated, link
arrangements between CSDs are expected to increase, especially in the post-T2S
environment possibly creating additional legal, credit, liquidity and operational risks
arising from differences between the laws of the linked CSDs concerning netting, finality
of transfers, ownership and collateral owing to inefficiencies associated with the
operation of the link, such as variations in the settlement cycles and settlement discipline
of the linked systems and for example in the case one CSD permits provisional transfers
of funds or securities that may be unwound.
Prudential requirements are also about ensuring the CSDs have reconciliation rules of
their records in order to prevent the unauthorised creation or deletion of securities. There
are also rules that prohibit artificial creation of securities, provisional transfers of
securities across CSD links and re-use of securities without client consent, or rules that
require CSDs to segregate participants' securities from their own assets and to support the
segregation of securities belonging to a participant's customers on the participant's books.
In light of the above, we can conclude that CSDR has generally achieved the objective of
improving safety of the EU settlement market, at the risk of being sometimes too
stringent. Indeed, although the majority of CSDs that responded to the public
consultation consider that the conditions set out in CSDR for the provision of banking-
type ancillary services by CSDs are proportionate, some CSDs noted that such
requirements may not be proportionate to the risks and volumes of certain banking
services they intend to provide, especially in the case of smaller CSDs. It can be noted in
this respect that all of the 5 CSDs that have applied to provide banking services under
CSDR already provided these services pre-CSDR and no new providers have entered the
market. Furthermore, none of the CSDs providing services do so through designated
credit insitutitions as allowed by CSDR, for the simple reason that no credit institution
offer such services for the moment (respondent to the consultation mentionning notably
that the limited activity and the limited number of potential transactions due to CSDR
restrictions mean that such kind of credit institutions would not be economically viable).
3. Level playing field for CSDs
Before the entry into force of CSDR, cooperation between national competent authorities
regarding the supervision of EU CSDs was ensured on a bilateral basis only, between the
authorities, without: i) any strict requirement applying in this respect; ii) a minimum
common set of organisational and prudential requirements applicable to CSDs; and iii)
the involvment of ESMA. Such situation created the risk of an unlevel playing field
between EU CSDs operating in a Member State, those established locally being subject
to local requirements whilst those operating on a cross border basis were subject to a
different set of requirements, not necessarily always completely aligned.
By creating an harmonized set of requirements applying to CSDs and introducing
cooperation requirements between national competent authorities, CSDR moved
substantially closer to its objective to ensure a level playing field for CSDs within the
EU. However, evidence from the targeted consultation and bilateral information provided
by stakeholders shows that views are split on whether cooperation arrangements under
CSDR work in the most efficient manner. For example, despite the fact that CSDR
provides the possibility for national competent authorities to set up colleges, no such
college has yet been put in place for EU CSDs. It should be noted that the majority of
respondents to the targeted consultation, including public authorities and banks,
considered that the cooperation amongst national competent authorities would be
improved if colleges were established and, in particular, they were always involved in the
passporting process notably.341
On an international level, CSDR aimed at ensuring the EU alignment with the global
standards applying to the setllement environment, in particular the Principle for Financial
Markets Infrastructures (PFMIs) adopted by the Bank of International Settlements (BIS)
and the International Organisation of Securities Commissions (IOSCO) in April 2012.342
This aimed at ensuring international consistency in the framework under which CSDs
operate. Nevertheless, in some aspects the requirements set out in CSDR go beyond the
PFMIs, e.g. this is the case for settlement discipline regime, which includes the buy-in
regime that is not part of the PFMIs and rarely implemented in other jurisdictions343
, e.g.
the UK announced it is not implementing the CSDR Settlement Discipline Regime344
.
The impact of the discrepancies between the rules applicable to EU CSDs and those
applicable to non-EU CSDs could be attenuated if non-EU CSDs were authorised to
provide core services within the EU only further to an equivalence and recognition
process. However, the existence of a grandfathering clause in CSDR, allowing non-EU
CSDs to continue providing services in the EU under the national regimes until an
equivalence decision is issued by the Commission creates a de facto situation where
third-country CSDs may keep serving EU participants under a legal framework different
(and potentially less stringent) to the one applicable to EU CSDs. Without any end-date
to the grandfathering clause and absent the possibility for the Commission to issue
negative equivalence decisions, such situation could continue - potentially indefinately.
Question 2: How efficient has the EU intervention been?
- To what extent have CSDR’s core requirements on settlement discipline,
organisational, conduct of business and prudential requirements for CSDs, the passport
system, increased prudential and supervisory requirements and increased cooperation
requirements given the effects they have achieved in promoting an EU settlement market
and in mitigating systemic risk?
Since not all of the requirements of CSDR have entered into application, such as the
requirements of settlement fails part of the settlement discipline rules, and CSDR’s
limited history of application overall make definitive conclusions on settlement
efficiency difficult, the following can be mentioned.
In broad terms, CSDR is achieving its original objectives to enhance the efficiency of
settlement in the EU and the soundness of Central Securities Depositories (‘CSDs’). For
341
Summary report of the targeted consultation document on the review of regulation on improving securities
settlement in the European Union and on central securities depositories 8 December 2020 – 2 February
2021, paragraph 3.3.3.
342
Principles for financial market infrastructures, Issued by the Committee on Payments and Market
Infrastructure (CPMI) of the Bank of International Settlements (BIS) and the International Organization of
Securities Commissions (IOSCO) in April 2012.
343
During the CSDR public consultation stakeholders referred to a few arrangements similar to the CSDR
settlement discipline regime. For instance, in the USA, the SHO Regulation and SEC Rule 204, relates
only to short-selling and the obligation that broker and dealer must close-out unresolved equities
transactions. Examples of buy-ins were given for Asian markets, e.g. Singapore Exchange where any
unsettled buy-in trade is carried forward to the next business day for settlement. If the buy-in and
procurement remains unsuccessful by ISD +6, cash settlement will be initiated against the seller to provide
resolution of the sale trade. However the Singapore Exchange has a very low failure rate because of DvP
and very few trades go to buy-in.
344
Written statement by Chancellor of the Exchequer on 23 June 2020. See: https://questions-
statements.parliament.uk/written-statements/detail/2020-06-23/HCWS309.
most areas, significant changes to CSDR would be premature considering the relatively
recent application of requirements.
One of the main objectives of CSDR was to reduce the complexity of and facilitate cross-
border settlement in order to limit the risk and cost involved in such operations. The
ongoing inefficiencies in the EU settlement market are due to a burdensome passporting
process, insufficient cooperation between authorities CSDR has not proved efficient at
faciliating cross-border settlement. Passporting requirements remain burdensome, there is
insufficient coordination among the various authorities responsible, while requirements
for the provision of banking services remain restrictive. CSDR requires the establishment
of cooperative arrangements between home and host authorities when certain conditions
are met and even allows for the voluntary establishment of colleges of supervisors, in
practice such arrangements have barely been used. Compliance costs with CSDR
requirements have so far proved disproprotionate, both for market participants and
regulators. Legal requirements remain unclear requiring regulators to provide guidance to
CSDs and other market participants. Compliance costs are thus considered excessively
burdensome or the costs outweigh the potential benefits of the regime.
As a result the competition amongst providers of CSD services remains limited and the
costs incurred by investors in cross-border transaction remain high. CSDR has thus
proved so far inefficient in creating an integrated EU market for settlement services.
In certain areas of CSDR, requirements evaluated indicate that certain enhancements can
be made. For instance:
 Passporting. Responses from stakeholders in the public consultation indicate that
costs for obtaining passports in the different Member States was costly and
burdensome and from an individual confidential response the Commission has
received an estimation on the costs of passporting to a few countries, and together
with legal costs understand that these costs run into the millions of Euro.
 Supervision. From supervisors, the Commission received input to the effect that
supervision can be quite burdensome and as an example the annual assessments
of CSDs are quite resource costly and that in some cases these costs could be
attributed to the industry. In addition, authorisation is mentioned as costly,
although it can be said that these are one-off costs and that most authorisations
have been finalized. On the other hand, these costs could hamper new entrants
into the market.
Question 3: How relevant is the EU intervention?
- To what extent are CSDR's requirements on settlement discipline, organisational,
conduct of business and prudential requirements for CSDs, the passport system,
increased prudential and supervisory requirements and increased cooperation
requirements still relevant to promote an EU settlement market and the stability of the
financial markets and in light of current developments in this market?
CSDR originated from the call of the FSB in 2010 for more robust core market
infrastructures and asked for the revision of the and enhancement of existing standards.
In April 2012, the Committee on Payments and Settlement Systems (CPSS) of the Bank
of International Settlements (BIS) and the International Organisation of Securities
Commissions (IOSCO) adopted global standards for financial market infrastructures.
Taking into account the global nature of financial markets and the systemic importance
of CSDs, it was deemed necessary to ensure international convergence of the
requirements to which they are subject.
Since entry into force of CSDR in September 2014, the markets in settlement have
increased significantly, both in terms of numbers of instructions as well in terms of total
volume. Although there have been few new entrants in the market, consolidation within
the EU of settlement providers have been taken place, adding evidence that competition
benefits from CSDR although not for the smaller players. In addition, due to their
essential role in the facitating of transparent, legally sound and efficient securities
trading, attention of regulatory authorities have also focused on this part of the essential
infrastructure of the financial markets. In the EU, for instance, initiatives are being
developed to make CSD more operational resilient and make these infrastructure
morefuture proof in terms of innovative technologies, such as blockchain. In this context,
7 years after the entry into force of CSDR, its objectives to contribute to safe settlement
markets, efficient settlement markets and increased cross border transactions remain
valid. As discussed above, the initial results of evaluating the core requirements of CSDR
show that CSDR is broadly achieving its objectives with in certain areas there could be
enhancements in terms of optimizing the requirements to achieve the objectives in a more
effective and efficient manner.
This is also confirmed by the EU’s Capital Markets Union action plan345
to make its
financial markets deeper and more liquid with, as a corner stone in those plans,
developing more integrated and more efficient financial infrastructures in the area of
post-trade. In addition, as stated in the Commission’s Communication on open strategic
autonomy346
for the financial structure, post-trade has a role, to develop these
infrastructure into strong international competitive players and boost European strategic
autonomy.
Question 4: How coherent is the EU intervention?
-To what extent are CSDR's requirements on settlement discipline, organisational,
conduct of business and prudential requirements for CSDs, the passport system,
increased prudential and supervisory requirements and increased cooperation
requirements coherent with other pieces of EU financial legislation.
CSDR brought harmonized requirements for central securities depositories. These
requirements were introduced after the Financial Stability Board, on 20 October
2010,called for more robust core market infrastructures and asked for the revision and
enhancement of the existing standards. In April 2012, the Committee on Payments and
Settlement Systems (CPSS) of the Bank of International Settlements (BIS) and the
International Organisation of Securities Commissions (IOSCO) adopted global standards
for financial market infrastructures. Taking into account the global nature of financial
markets and the systemic importance of CSDs, it was deemed necessary to ensure
international convergence of the requirements to which they are subject.
CSDR is also broadly in line with the EU’s core pillar of creating and boosting the
Internal Market and the freedom to provide services: the creation of an integrated market
for securities settlement with no distinction between national and cross-border securities
transactions is needed for the proper functioning of this internal market. For example, the
freedom to provide services is apparent in the passporting but also third-country parts of
345
https://eur-lex.europa.eu/resource.html?uri=cellar:61042990-fe46-11ea-b44f-
01aa75ed71a1.0001.02/DOC_1&format=PDF
346
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021DC0032&from=EN
CSDR; CSDs should benefit from a clear and as less burdensome access as possible and
deemed necessary.
Other relevant existing EU regulations that have an interplay with the CSDR are:
 The banking regulations, Capital Requirements Regulation347
and Directive348
.
Prudential and other requirements are either directly, in the case of banking
CSDs, or indirectly, in the case of non-banking CSDs, applicable to CSDR
actors.
 Securities’ markets legislations, such as Settlement Finality Directive349
,
Financial Collateral Directive350
as well as MIFID351
and EMIR352
.
In addition, CSDR requirements are in line with initiatives currently undertaken by the
EU. First, the Commission’s Capital Market Union Action Plan353
, striving for deeper
and more liquid financial markets in the EU and of which a core element is the
development of post – trading infrastructures, amongst which CSDs are a constituting
part. Second, post trading infrastructures are strategic nodes in the financial system and
could play a part in the strategy of the EU to strenghten its stategic autonomy. As CSDs
serve as gateways to foreign financial markets and their openness benefits EU businesses
and investors, their soundness and relevance will also help to boost the role of the EU on
the world stage. Strengthening market infrastructures’ operational resilience includes
shielding the sector from increasingly pervasive, targeted and impactful cybersecurity
threats and vulnerabilities. A number of EU-based financial market infrastructures
provide global depository and messaging services. Their international operations make
them vulnerable to disruptive actions by third countries. It is important for the EU to
preserve the global reach of these infrastructures, while safeguarding the open strategic
autonomy of the EU. Third, CSDR is in line with current initiatives in the area of digital
innovation: the Commission’s proposal to introduce a pilot regime for technological
347
Regulation (EU) No 575/2013 (see note 157).
348
Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending
Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding
companies, remuneration, supervisory measures and powers and capital conservation measures: https://eur-
lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019L0878&from=EN
349
Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality
in payment and securities settlement systems: https://eur-lex.europa.eu/eli/dir/1998/26/oj/eng
350
Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral
arrangements: https://eur-lex.europa.eu/eli/dir/2002/47/oj
351
Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in
financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast): https://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02014L0065-20160701
352
Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC
derivatives, central counterparties and trade repositories: https://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX%3A02012R0648-20210628
353
https://ec.europa.eu/info/business-economy-euro/growth-and-investment/capital-markets-union/capital-
markets-union-2020-action-
plan_en#:~:text=On%2024%20September%202020%20the%20Commission%20adopted%20a,and%20co
mpanies%2C%20regardless%20of%20where%20they%20are%20located.
innovations354
of CSDs and the initiative to enhance operational resilience of financial
markets participants (DORA)355
.
Where CSDR is broadly coherent with the aformentioned legislations in terms of conduct
of business rules, organisational and prudential rules, 2 areas were coherence is limited
are the folowing:
 Third-country regime: in most EU legislation in the financial sector, third-
country regimes consist of an equivalence framework including a notification
requirement for recognition, also for existing third-country providers within the
EU. CSDR has grandfathered existing providers without an end-date.
 Passporting: in most EU legislation in the financial sector, passporting consists
of a mere notfication to the host Member State, in CSDR passporting
effectively means an authorization process by the host Member State as the
passporting process is not standardized as such and Article 49(1) could lead to
relevant national authorities to examine if a CSD complies with the host
commercial and civil laws before entering the market.
Question 5: What is the EU-added value of the intervention?
To what extent have CSDR's requirements on settlement discipline, organisational,
conduct of business and prudential requirements for CSDs, the passport system,
increased prudential and supervisory requirements and increased cooperation
requirements helped increasing safety of cross-border transactions, increasing efficiency
of cross-border transactions; ensuring level playing field for CSD services and to what
extent do the risks relating to the markets continue to require action at EU level?
CSDR is the first EU-wide regulation on Central Securities Depositories which, since
2014, introduced a uniform approach for the EU settlement markets. It introduced a
framework aiming for efficient settlement markets, increased cross-border transactions
and a level playing field CSDs for relevant stakeholders on the EU capital markets.
As the EU markets for settlement is, by its very nature, an interconnected and
international market, the EU level requirements by a directly applicable Regulation
contributed to a level playing field for competition in the area of settlement, increased
cross-border transactions as well as increasing safety of these markets. Although not all
requirements have entered into application, such as the majority of settlement discipline
requirements, the following can be mentioned on the added value of of EU action on
settlements.
First, after the entry into force of CSDR, markets have become less fragmented along
national lines. CSDR contributed to aligning rules across the whole of the EU and the
EEA. Requirements on banking services brought the same rules across the EU with
respect to prudential rules but also similar treatment of credit and liquidity risks and on
how banking services should be authorised and supervised. Passporting requirements
354
COM(2020) 594 final, 2020/0267 (COD), Proposal for a of the European Parliament and of the Council on
a pilot regime for market infrastructures based on distributed ledger technology: https://eur-
lex.europa.eu/legal-content/EN/TXT/PDF/?uri=COM:2020:594:FIN
355
Proposal for a Regulation of the European Parliament and of the Council on digital operational resilience
for the financial sector (DORA) and amending Regulations (EC) No 1060/2009, (EU) No 648/2012, (EU)
No 600/2014 and (EU) No 909/2014.
brought increased opportunities to offer services across intra EU-borders and third–
country requirements brought certainty for those CSDs offering their services within the
EU.
Second, this consistency has increased the safety of EU settlement markets as supervision
has become more intertwined and benefitting from more coordination and actions aimed
at supervisory convergence by the European Securities Markets Authority. This has led
to more consistent rules but also more coordination of the application of the rules by
bringing guidance to supervisors on how to apply certain rules. Enhanced data improved
the position of supervisors and enabled to also compare across border.
Although CSDR requirements have helped to mitigate risks on the European market, led
to more cross-border transactions as demonstrated by increased cooperation between
market players as well as the overall increase in the market in terms of size and number
of settlement instructions, feedback from the public consultation as well as the wider
feedback process, seems to indicate that requirements are sub-optimal and could be
recalibrated in the areas mentioned above.
This supports the added value of the EU action via CSDR. Current initiatives such as the
Commission’s Capital Markets Union action plan356
efforts to create more integrated
post-trade infrastructures within the EU also support the future EU value–added.
Section 8 Conclusions
The objectives of CSDR to increase the safety and efficiency of EU settlement market
and ensuring a level playing field for CSD services remain relevant, and associated
risks with EU settlement markets persist.
While not all of the key CSDR requirements have entered into application, such as the
measures to address settlement fails, the analysis shows that, based on the evidence
available, the initial results of CSDR are delivering on the general objective to promote a
more level playing field, increase safety and promote an efficient EU settlement market.
The impact of the settlement fails measures have not been measurable as they have not
been in place on the date of writing of this evaluation.
On the effectiveness and efficiency of the core requirements of CSDR, the evaluation
indicates that while the volume of settled trades increased since the entry into force of
CSDR, cross-border transactions remained stable and feedback from stakeholders
indicate that in several areas, such as passporting, licensing, and supervisory assessments,
significant barriers exist and preliminary findings suggest that actions (i) to reduce
disproportionate compliance burdens, (ii) to improve cross-border activity could be
undertaken. Improvements could be sought in the area of banking services, where the
access to banking type ancillary services is limited which in turn inhibits settlement in
foreign currencies and in improvement of supervision, both impacting the possibilities or
opportunities for firms to offer services cross-border.
356
https://ec.europa.eu/info/business-economy-euro/growth-and-investment/capital-markets-union/capital-
markets-union-2020-action-
plan_en#:~:text=On%2024%20September%202020%20the%20Commission%20adopted%20a,and%20co
mpanies%2C%20regardless%20of%20where%20they%20are%20located.
The objectives of CSDR to increase the safety and efficiency of EU settlement market
and ensuring a level playing field for CSD services remain relevant, and associated
risks with EU settlement markets persist.
In terms of coherence, CSDR is aligned with international efforts to ensure stability and
safety of post trade infrastructures. In addition, CSDR is coherent with other pieces of
EU legislation, such as the Commission’s Capital Market Union Action Plan, the
Commission’s proposal to introduce a pilot regime for technological innovations of
CSDs and DORA.
In terms of the EU added value, CSDR covered a gap that existed in legislation by
introducing a new framework aiming to address, in a uniform process at EU level, the
lack of a harmonised approach towards the EU’s settlement markets and in addressing
the related systemic risks.
ANNEX 6: DETAILED DESCRIPTION OF IDENTIFIED PROBLEM AREAS
1. Barriers to cross-border settlement
One of the main objectives of CSDR was to facilitate cross-border settlement in order to
limit the risk and cost involved in such operations. Nevertheless, seven years after
CSDR’s adoption, most stakeholders see limited progress in the provision of cross-border
services by CSDs (see point (c) in Section 1.3.3).357
The evaluation,358
has identified
three main reasons for this: burdensome passporting process; insufficient cooperation
between authorities; and restrictive requirements for the provision of banking services
related to settlement.
First, the passporting process (i.e. the special procedure under which a CSD authorised
in a Member State can provide services in relation to financial instruments constituted
under the law of another Member State), is burdensome as it requires, where relevant,
the agreement of the host Member State authority, regarding the assessment by the CSD
of the measure that it intends to take to allow its users to comply with the national law
referred to in Article 49(1). All CSDs and their association responding to the
Commission targeted consultation as well as some public authorities, noted difficulties in
the process of obtaining the CSDR passport in one or several Member States.359
Although the initial intention was to ensure that the provision of cross-border services by
a CSD would not be used as a way for issuers, investors or third parties to circumvent
applicable national laws, it made the passporting process burdensome. The additional
burden deters CSDs from expanding their activities across borders (see sections 1.3.3,
2.2.1 and 2.3.1). This is in contrast to other areas of EU financial services legislation
where minimal additional input is required by host Member State authorities to provide
services cross-border.
15 CSDs have obtained or applied for a passport in at least one host Member State (see
Annex 8, Figure I),360
with nine of them being of substantial importance361
to Member
States (including EEA countries) other than that of their authorisation.362
One CSD noted that it stopped providing cross-border services to avoid the procedure
while another stated that it is easier to provide services for securities constituted under
third-country law than the law of a Member State.363
Furthermore, some third-country
CSDs may provide their services in relation to financial instruments constituted under the
357
ESMA Report on cross-border services (see note 50), p. 20.
358
See “Annex 6 – Evaluation” and ESMA Report ‘Provision of banking-type ancillary services under CSDR’
(see note 88).
359
Summary report of the targeted consultation document on the review of regulation on improving securities
settlement in the European Union and on central securities depositories (‘Summary report of the CSDR
targeted consultation’) ,
https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/2020-
csdr-review-summary-of-responses_en.pdf .
360
ESMA CSD Register (see note 26).
361
Commission Delegated Regulation (EU) 2017/389 (see note 58), specifies the criteria to be considered in
order to determine whether a CSD is of substantial importance for the functioning of the securities markets
and the protection of investors in the host Member States concerned.
362
Two CSDs are of substantial importance to one host Member State; three CSDs are of substantial
importance to three host Member States; one CSD in six host Member States; one ICSD is of substantial
importance in 19 host Member States and the other in 23 host Member States
363
Summary Report of the Commission CSDR targeted consultation (see note 92).
law of a Member State without complying with the passporting requirements that apply
to EU CSDs (see section 2.3.5). This means that, in some cases, it is easier for those
CSDs to operate cross-border in the EU than for an EU CSD.
Second, the evaluation and stakeholder feedback has shown that cooperation between
authorities in home and host Member States and supervisory convergence is
insufficient, creating further obstacles in the CSDs’ cross-border operations, hindering
the creation of a true single market for settlement (see section 2.3.2), a conclusion that
High Level Forum on the CMU also reached.364
While CSDR requires the establishment
of cooperative arrangements between home and host authorities when certain conditions
are met and allows for the voluntary establishment of colleges of supervisors, in practice
there is no evidence that such arrangements have been used. For example, while six
CSDs are of substantial importance to more than one host Member States, only one
college of supervisors has been set up under Article 24(3) of CSDR365
and no
information is available to ESMA on whether the other required cooperative
arrangements under CSDR have been set up. This means that communication between
authorities in different Member States is not standardised; the same CSD is likely to be
subject to different supervisory arrangements and requirements in the different Member
States in which it may operate. This is further exacerbated by the fact that no single
authority participates in any arrangements that may have been set up to ensure that they
all follow in practice the same supervisory approach (see also section 2.3.2).
Third, CSDR contains strict conditions for CSDs to settle a transaction in
commercial bank money (see section 2.3.3). A securities trade typically results in an
obligation for the seller to deliver securities (securities leg) and a corresponding
obligation for the buyer to deliver cash (cash leg). To ensure delivery of the cash, a CSD
may use accounts at a central bank366
or commercial bank money (i.e. CSDs may open
accounts in their own books or in a commercial bank). Access to central banks depends
on the respective central bank, brings cost and therefore requires certain economies of
scale. Consequently, settlement in commercial bank money is sometimes the only option
available for CSDs that want to settle in currencies other than that of the jurisdiction in
which they are authorised (e.g. because the CSD does not have an account with the
central bank of the transaction’s currency). However the restrictive nature of the
conditions (low threshold, no designated credit institutions, lack of economies of scale to
recuperate costs for banking license) under which this is possible means that CSDs
refrain from any cross-border activity.367
As a result, the percentage of EEA CSDs’
settlement activity in foreign currencies remains small (Figure II), while the level of
settlement in foreign currencies remains very limited; only five to seven CSDs between
2016 and 2020 settling more than 10% of the transactions in foreign currencies.
Furthermore, as seen in Figure III, only four CSDs use more than four foreign
currencies in their settlement activity (one uses 10 foreign currencies; three use between
364
Final report of the High Level Forum on the Capital Markets Union (see note 70), p. 16.
365
The Latvian supervisory authority established and led the Nasdaq CSD SE supervisory college in
cooperation with supervisory authorities and central banks of Lithuania, Estonia and Latvia
https://www.fktk.lv/en/news/press-releases/nasdaq-merges-its-baltic-csds-to-create-nasdaq-csd/.
366
CSDR, in line with international standards, gives preference to settlement in central bank money as a credit
balance at a central bank implies no credit risk since what defines a central bank is its absolute ability to
issue currency to meet its needs. CSDs in the EU in principle have access to the central bank of the
currency in their jurisdiction and can therefore settle trades in that currency in central bank money.
367
As central banks can set their own access criteria, such as an obligation to be established in the jurisdiction
of the relevant currency, this is even more pertinent for EEA CSDs considering activities outside the EEA.
25 and 33 currencies).368
The other CSDs settling in foreign currencies use between one
and two foreign currencies.369
This means that issuers have a limited choice for
multicurrency issuance which prevents genuine cross-border competition on all
currencies (especially since issuers seek one-stop-shop solutions).370
Figure II: Settlement in foreign currencies by EEA CSDs
Figure III: Number of CSDs per range of yearly settlement in foreign currencies371
2. Disproportionate compliance costs
CSDR introduced new requirements for CSDs to safeguard the essential role they play in
financing the economy and channelling investments. Nevertheless, market participants
and authorities have identified targeted areas where the compliance costs are
368
ESMA Report ‘Provision of banking-type ancillary services under CSDR’ (see note 88).
369
Ibid.
370
Euronext response to the Commission targeted consultation on CSDR:
https://www.euronext.com/it/regulation/government-affairs.
371
Report to the European Commission: provision of banking-type ancillary services under CSDR, ESMA, 8
July 2021: esma70-156-4582_report_to_the_ec_-_csdr_banking_services.pdf (europa.eu)
disproportionate, because (a) legal requirements are unclear, and/or (b) they are
considered excessively burdensome, and/or (c) the costs of complying with the rules
appear to outweigh the potential benefits.
Three areas have been identified as generating disproportionate compliance costs:
passporting rules; rules on the provision of banking services related to settlement; and the
settlement discipline regime.
First, the CSDR passporting rules allow CSDs to provide services for financial
instruments constituted under the law of any Members State and not just that of their
authorisation. In this way, CSDs can benefit from access to a larger market and
issuers have more choice in where they issue and hold their securities. While the aim was
to ensure the functioning of the EU single market, the legal requirements have turned
out to be unclear in practice and burdensome (see section 2.3.1). For example, CSDs
wishing to provide their services across the EU would need the agreement of 26 Member
State authorities, in addition to their home authority, to do so. One CSD reported that 10-
15 pages of application were needed for each EU jurisdiction that a passport was
requested; this needed a further ca. 25-60 pages of external legal advice annexed per
jurisdiction.372
The following examples shed light on burdensome and unclear passporting requirements:
First, the concept “securities constituted under the law of a Member State”373
gives
rise to interpretation. Article 23(2) of CSDR refers to “the law of another Member State
referred to in Article 49(1) [of CSDR]”, the latter provision mentioning the “corporate or
similar law of the Member State under which the securities are constituted”. This could
be understood as referring to the ‘governing law’ (i.e. the law governing the issuance)
or/and to the ‘issuer law’ (i.e. the law where the issuer is headquartered). This issue is
often encountered for debt securities as for shares the governing and issuer laws are
usually the same. According to a Q&A on this issue the 'law under which the securities
are constituted' in the meaning of Article 49(1) of CSDR should be by default the
‘standard’ law of the issuance for each type of financial instrument per host Member
State (i.e. for shares, the national law of the issuer, and for bonds, the law that has been
contractually chosen to govern the issuance). However, several specific situations exist
which are detailed in the Q&As. For example, under the current provisions of CSDR, the
case may arise where a CSD would need to require passports in two separate Member
States for a single issuance. This situation is considered in Q&A 9 of ESMA.374
Article
23 of CSDR provides that CSDs should assess the measures to be taken to allow its users
to comply with the national law referred to in Article 49(1). However, in the case of
bonds, this could actually refer to the laws of two different Member States: the law of the
issuer Member State and the law contractually elected for the bond issuance.
It should also be noted that – contrary to the Regulation– Q&As are not legally binding
and therefore stakeholders may claim that they are entitled not follow them as, in
their view, they are complying with the Regulation itself even if they are not complying
with the Q&A. Only a change to the EU legislation clarifying a legal requirement would
be legally binding.
372
Based on confidential information provided to DG FISMA services.
373
Article 23(2) and Article 49(1) of CSDR.
374
CSDR Q&As, ESMA70-156-4448, 31 March 2021,
https://www.esma.europa.eu/sites/default/files/library/esma70-708036281-2_csdr_qas_2.pdf
In their answer to the targeted consultation,375
multiple stakeholders raised the issue of
the lack of clarity of Article 23(2) of CSDR. The time required for CSDs to identify the
law to be considered as the “law under which securities are constituted” is burdensome.
In addition, the lack of legal clarity as to which law should be considered creates
uncertainty as to whether a passporting process has to be launched, and which national
authorities should be involved in it.
Second, a question was raised as to whether the CSDR passporting procedure applied
to all types of securities. A Q&A376
clarified that Article 23 applies to all financial
instruments.377
However, this broad scope creates more barriers for CSDs to operate
cross-border. For instance, according to a stakeholder the initial intention of the policy-
makers was for the passporting requirement to cover equities only; the broad scope has
resulted in an artificial barrier for issuance of bonds that already benefitted from the
freedom of issuance prior to the CSDR.378
Another underlined that the determination of
the relevant host Member State is easier for shares than for bonds as for the latter
different laws can apply such as the law of the issuer (for corporate aspects) or the law (s)
contractually chosen to govern some (economic) rights. In addition, it noted that bond
markets are very dynamic and the complexities of the passporting regime are particularly
problematic for the issuance of bonds since they harm CSDs’ ability to attract bond
issuance from abroad.379
Third, Article 23(3)(e) of CSDR requires CSDs to include in the information they
communicate to their competent authority, “where relevant, an assessment of the
measures the CSDs intends to take to allow its users to comply with the national law
referred to in Article 49(1)”. The use of “where relevant” does not allow for a
harmonised approach.380
ESMA has clarified through a Q&A that “relevant” means
“whenever there are requirements under the national law that it has determined as being
relevant for the users of each cross-border service it provides or intends to provide”.381
It
is therefore left to the CSDs to make their due diligence in that respect, increasing the
burden imposed on them.
Fourth, the passporting process is lengthy. The average time required between receipt
of the application and its transmission to host Member State authorities is six months.382
The length of the review by the host Member State authority for applications reported as
“approved” was on average 4 months.383
It could be a lengthy and burdensome procedure
before the CSD obtains the authorisation to provide its services in the host Member State.
CSDs wishing to provide their services in multiple Member States have to repeat the
process for each Member State separately. The lengthy process means that the issuer will
either have to put on hold its projects during this period384
or seek another provider,
where alternatives exist. Ten-months on average per passport process may be particularly
long for short-term instruments, especially in situations where the CSDs would like to
375
Summary Report of the Commission CSDR targeted consultation (see note 92).
376
CSDR Q&As (see note 164)
377
Financial instruments are defined in point (15) of Article 4(1) of Directive 2014/65/EU (see note 2).
378
ESCDA response to the Commission CSDR targeted consultation, https://ecsda.eu/archives/13474.
379
Euronext response to the Commission CSDR targeted consultation (see note 106).
380
ESMA Report on cross-border services (see note 50), par. 102.
381
CSDR Q&As (see note 164), question 9(f).
382
ESMA Report on cross-border services (see note 50), para. 68.
383
Ibid, par. 72.
384
Based on confidential information provided to DG FISMA services.
passport its services in multiple jurisdictions. This limits the incentive to request a
passport and engage in cross-border business, limiting competition.
Fifth, the passporting process is not standardised, as confirmed amongst others by
ESMA.385
This has led to divergences in the way different national authorities handle
passporting applications, e.g. the level of detail requested on the measures CSDs take to
allow their users to comply with the national laws of the host Member State. For
instance, it was reported that the legal opinion (which can have a significant impact on
the passporting costs) and which is considered as mandatory by an ESMA Q&A, is only
accepted by certain national authorities (but not by others) if issued as “external
assessment”.386
Other examples include the need for additional supervision by the host
authority on top of that of the home authority and the need for the foreign CSD to
comply with certain domestic laws.
Sixth, the role of the host national authority is unclear, e.g. on whether it can request
additional information and/or what is its role in the assessment of the measures the CSD
intends to take to allow its users to comply with national law.387
The complexity of the passporting procedure and the difficulties in obtaining a passport,
have been highlighted both by CSDs and their association as well as some public
authorities.388
One CSD stated that “[it] is our assessment that despite the passporting
regime introduced by CSDR, cross-border activity, namely the possibility for CSDs to
offer services as Issuer CSDs for instruments issued under the law of another Member
State has not sufficiently increased. Overall, the passport process has regrettably been
significantly more burdensome than what was intended by the legislator”.389
In addition, the lack of clarity and complexity as regards how to comply with the legal
requirements, and the subsequent threat of potential legal action, generate costs that
present an unnecessary barrier to the development of CSD activities. A CSD reported
confidentially390
that the internal legal support required throughout the passporting
process was significant, including: interpretation of Article 23 of CSDR, clarification of
where passports were needed to maintain operating licenses, and preparation of local
legal work. After this, passport notifications were prepared, external legal advice was
385
“Some authorities noted important discrepancies in the level of detail provided in respect of the measures
set up by CSDs to allow their users complying with national requirements, as this is not harmonised under
CSDR. Moreover, some CSDs solely seem to rely on the issuer to perform a legal analysis of the capacity
of the CSD to service their issuance. Some also claimed it is not clear whether a legal opinion is needed to
support the assessment. Another respondent highlighted that there are some important differences in the
degree of information in the provided documentation (e.g. from very detailed information to rather limited
and high-level information) and mostly in the assessments done by different CSDs. Some CSDs provided
independent legal opinions, some provided internal assessment and others estimated that an assessment of
each national requirement under Article 49 of CSDR was not necessary, due to the typology of
services/instruments the CSD provided.”, ESMA Report on cross-border services (see note 50), para. 107.
386
Based on confidential information provided to DG FISMA services.
387
CSDR Q&A (see note 164), CSDR Question 9(g) clarifies the role of host NCAs. Q&As are not legally
binding.
388
To question 10 of the targeted consultation on whether they have encountered any particular difficulty in
the process of obtaining the CSDR “passport” in one or several Member States different to the one of the
place of establishment, 12 responded positively, 7 did not have an opinion while none of the respondents
answered negatively.
389
Euronext response to the Commission CSDR targeted consultation (see note 106), page 16.
390
Based on confidential information provided to DG FISMA services.
sought,391
and comments from host national authorities had to be addressed. Another
CSD stated confidentially392
that the CSD had to do most of the work rather than external
lawyers; consequently, in most cases, it was not achievable or realistic that the legal
opinion cover the compliance of the CSD’s procedures with the local laws. Even if most
CSDs applying for a passport to operate cross-border have been able to obtain it,
stakeholders have indicated that this process is difficult, lengthy and demanding (see
section 2.3.1).
Second, the rules around the provision of banking services create disproportionate
compliance costs for CSDs. This negatively impacts the provision of cross-border
services. In addition, the lack of options to settle in either commercial bank money or
central bank money could undermine the safety of the settlement market, as transactions
could be settled free of payment instead of delivery versus payment, increasing risks for
the market as a whole.393
More specifically:
 CSDs offering settlement in commercial bank money as an ancillary service must
comply with additional requirements to mitigate mainly credit and liquidity
risks for the CSD and its participants,394
e.g. CSDs have to be authorised as a
credit institution under the applicable banking legislation and comply with the
regulatory capital requirements set in Regulation (EU) No 575/2013 (Capital
Requirements Regulation). This has led to a doubling of regulatory capital and
significant investments in operational compliance relative to the situation where
only CSDR would be applicable.395
At end 2020, the level of regulatory capital of
a CSD with a banking licence estimated to be more than twice the amount
compared to the situation where it had to comply only with CSDR and without
taking into account the number of staff responsible for assessing, controlling and
mitigating the banking risks taken by the bank.396
In addition, CSDR does not
allow banking CSDs to offer their services to other (non-banking) CSDs
irrespective of whether the latter is within or outside their group.397
As a result of
the increased costs, only 5 out of 28 CSDs in the EEA have applied and been
authorised to provide banking services;398
all provided these services pre-CSDR
and no new providers have entered the market. Moreover, one CSD stopped
providing issuance and settlement services in currencies other than the Euro.399
 CSDs offering settlement above a certain threshold may also use a specialised
bank (known as a designated credit institution, which is a limited-licence bank
introduced by CSDR that provides services only to CSDs) that has to comply
with additional requirements to mitigate the risks. Nevertheless, considering the
costs required to be authorised as a designated credit institution and the
limited range of services that such entities can offer, no designated credit
institutions exist to date as a business case is difficult to make, as confirmed by
391
In addition to the internal legal support, it is in practice impossible to provide a formalised assessment per
market and per type of securities in all EEA countries without external legal advice.
392
Information provided to DG FISMA services confidentially.
393
European Post-Trade Forum Report (see note 11), p. 117.
394
Credit risk is the risk an institution faces when lending to borrowers that cannot meet their obligations.
Liquidity risk refers to the inability of an institution to meet its own financial obligations.
395
Based on confidential information provided to DG FISMA services.
396
Based on confidential information provided to DG FISMA services.
397
Article 54 of CSDR.
398
ESMA CSD Register (see note 26).
399
Based on confidential information provided to DG FISMA services.
ESMA.400
Therefore, while this was an option in CSDR, CSDs cannot use it to
settle in commercial bank money. Consequently, CSDR does not achieve its
objective. The decision of BNY Mellon to stop its CSD project in 2015 can be
attributed to the restrictions imposed on designated credit institutions.401
 CSDs settling in commercial bank money below a certain threshold, do not
have to comply with all credit and liquidity requirements (i.e. they can use a
commercial bank).402
However, this means that they have to limit the offer of
their services in other currencies in order not to exceed the threshold of 1%
of total settlement and EUR 2.5 billion, thus incurring opportunity costs from
the loss of business. For example, in northern Europe, CSDs without access to
central bank money, such as Finland, Sweden and Denmark are confronted
directly with this limit, limiting possibilities for cross-border transactions between
these countries.403
Estimates are that, for CSDs without a banking license,
settlement activities in foreign currencies could potentially increase over a 5-year
horizon by ca. 5% of the total value of all securities transactions against cash
settled in the books of such CSDs.404
The majority of stakeholders responding to
the Commission targeted consultation, including CSDs and their association
suggested a reassessment of the threshold set out in Article 54(5) of CSD.405
New
entrant CSDs wishing to offer settlement services throughout the EU (and thus
likely to require commercial bank money settlement facilities) may also be
discouraged from entering the EU market due to the conditions for settlement in
commercial bank money, which were introduced to ensure financial stability.
 Contributing to the reluctance of market participants could be the intensive
process to obtain a banking authorisation. For CSDs already authorised to provide
these services, the average time to receive the authorisation after the application
was deemed complete was approximately 6 months, as prescribed by CSDR. In
practice however, it can take up to two to three years for the application to be
deemed complete by the national authorities.406
Third, the rules on settlement discipline,407 although not yet applicable, would
potentially create disproportionate compliance costs for CSDs and market participants
according to evidence provided by the majority of stakeholders.
To ensure the safety of settlement, any participant in a securities settlement system
should settle its obligation on the intended settlement date (“ISD”); a settlement fail
occurs when a transaction does not settle on that date.408
The settlement discipline regime
aims to encourage market participants to avoid settlement fails; its two main elements
are the measures to prevent settlement fails (Article 6 of CSDR) and the measures to
400
ESMA Report ‘Provision of banking-type ancillary services under CSDR’ (see note 88), p. 4.
401
European Post-Trade Forum Report (see note 11), p.117.
402
Based on confidential information provided to DG FISMA services.
403
European Post-Trade Forum Report (see note 11), p. 117.
404
Based on the anonymised and consolidated outcome of a survey conducted among CSDs provided by the
ESCB.
405
Summary Report of the Commission CSDR targeted consultation (see note 92).
406
ESMA Report ‘Provision of banking-type ancillary services under CSDR’ (see note 88) p 10.
407
Articles 6 and 7 of CSDR.
408
CSDR defines settlement fails as the non-occurrence of settlement, or partial settlement of a securities
transaction on the intended settlement date, due to the lack of securities or cash and regardless of the
underlying cause (Article 2(15) of CSDR).
address settlement fails (Article 7 of CSDR). The latter comprise two main pillars; cash
penalties and mandatory buy-ins. CSDs would be required to impose cash penalties on
their participants in case of settlement fails. If despite the cash penalties, a CSD
participant (original seller) fails to deliver the securities, it will be subject to a
mandatory buy-in. A buy-in provides the buyer of securities with the right to buy the
securities elsewhere, cancel the original transaction and put the costs of the buy-in, as
well as any price difference, with the original seller.409
The original objective of the settlement discipline regime as contained in the
Commission proposal410
was to address high settlement fail rates, but mainly to
harmonize the diverse market discipline measures across EU capital markets. Hence the
proposed settlement discipline measures were general, with detailed technical standards
to be set in secondary legislation411
. The final set-up of the settlement discipline
measures became evident to the market participants only when the 2018 regulatory
technical standard412
(RTS) was published. Furthermore, only the period of market
volatility of spring 2020 triggered reflections about the potential impact of the regime on
trading conditions or their ability to fulfil certain market functions.
Entry into force of the settlement discipline regime could provide a strong incentive for
all market participants to improve back-office capacity and operations to handle post-
trading functions. The higher EU fail rates seem to stem from operational and structural
factors; a lack of cash does not seem to be typically the issue.413
These deficiencies
include understaffing, fragmented IT infrastructure and systems or highly manual
procedures and lack of straight-through-processing. Insufficient operational post-trade
capacities may lead to incorrect settlement instructions (miscommunication, human error
etc.) that cannot be matched by CSDs.414
The settlement discipline regime would however create both high one-off (i.e. connecting
to buy-in agents, repapering existing contracts to take account of mandatory buy-in rules)
and ongoing costs (i.e. in terms of pricing and reduced liquidity of instruments
potentially at risk of being bought-in or trades being abandoned or migrating to non-EU
trading venues (see section 2.3.4)).
Evidence provided seems to show that these costs are disproportionate and would stem
both from the lack of clarity around the rules governing the process (i.e. what
transactions are in-scope or how to use buy-in agents), and from the framework’s
impact on market conditions (deterioration of liquidity for some instruments, higher
bid-ask spreads) and market participants’ trading behaviour (migration of trading
from peripheral instruments to liquid instruments, doubts around the viability of the
market maker role for less liquid instruments). The costs of applying in particular the
rules on mandatory buy-in could outweigh their benefits for three main reasons:
First, even though the settlement discipline regime did not yet apply in the early days of
the Covid-19 pandemic (i.e. March/April 2020), the crisis gave stakeholders the
opportunity to reflect on how it would have impacted the market if it were in place.415
In
409
More details regarding the buy-in process is included in Annex 9.
410
COM (2012) 73 final
411
See the Impact Assessment supporting the 2012 CSDR proposal. See SWD92012) 22 final, Option 1.1.2:
Introduce common EU principles for settlement discipline
412
Commission Delegated Regulation (EU) 2018/1229
413
‘ESMA Report on trends, risks and vulnerabilities’, No.2, 2021, ESMA50-165-1842.
414
Based on confidential information provided to DG FISMA services.
415
Summary Report of the Commission CSDR targeted consultation (see note 92).
essence, mandatory buy-ins could have exacerbated the negative impacts linked to
the crisis; in particular they could have increased liquidity pressure and increased
the costs of securities at risk of being bought-in.416
For instruments where there are few available buyers and sellers, market makers play a
key role by taking risk onto their balance sheet to provide immediate execution to clients.
For these securities, market makers417
are an important source of liquidity and thus often
offer securities they do not hold,418
based on the reasonable assumption of sourcing these
securities when necessary. For securities not held on their balance sheet, or which cannot
be readily sourced, the introduction of a mandatory buy-in regime under CSDR would
fundamentally impact the ability of market makers to make markets. To adjust for the
expected cost of being bought-in, market makers will have to add a premium to their
prices – which will widen the bid-offer spread (which will in turn increase costs to end-
investors) – or they may simply not make an offer price on an enquiry thereby negatively
affecting market liquidity.
Although these liquidity effects are most pronounced in choices made by market makers,
all investors, even in liquid securities, could face similar trade-offs between entering into
a trade (providing liquidity), the availability of the instrument and the cost of being
bought-in. The impacts are likely to be reflected in behavioural change, rather than a
price adjustment. For instance, according to feedback from the targeted consultation,
lenders of bonds might become less inclined to lend, to reduce the risk that they get
bought in if they sell securities on loan which cannot be recalled on time.419
During
periods of market stress, in particular as investors hoard cash and withdraw the less risky
instruments, some securities, especially those with limited availability, will experience
further deterioration of liquidity resulting in increased settlement fails.
If during this period of market stress mandatory buy-ins had been in place, participants
would have had to buy back the securities that already had limited availability and
therefore would have added liquidity pressure on them.420 Investors would have
chased a small number of available securities, driving up prices and potentially, further
driving volatility in a stressed market. The costs of mandatory buy-ins for market
participants (that have to buy exactly these securities) would thus have increased, making
it even more difficult for market participants to manage. One estimate is that the
volume of buy-ins in corporate bonds would have more than doubled during the
Covid-19 market turmoil, compared to normal market conditions.421
This would have led
to a noticeable increase in the cost of these instruments, illustrated by bid-offer spreads.
According to one bank, the application of mandatory buy-ins to EU government bonds
416
More than half of respondents to the targeted consultation, all categories included, considered that the
CSDR settlement discipline regime would have had a significant negative impact on the market if it had
been in place during the market turmoil provoked by Covid-19. Summary Report of the Commission
CSDR targeted consultation (see note 92).
417
By providing a buy and sell price for securities (bid-ask spread) market makers establish liquidity and
pricing, and help end-investors to redeem funds or transact in a timely fashion in instruments for which
there may not be a counterparty with an immediate opposite intention.
418
Market makers aim to run low levels of inventory since high levels of inventories have high risk, capital
and funding costs.
419
Especially during a credit crunch, this effect could be amplified as lenders would want to have the ability to
sell holdings at short notice to raise cash liquidity and the amount they will be willing to lend will be
further reduced
420
Based on responses to the Commission CSDR targeted consultation from AFME, Association of German
Banks, EFAMA, et al.
421
Based on confidential information provided to DG FISMA services.
could have led to a 50%-100% increase in bid-offer spreads depending on the size
and the status of the markets.422
Second, the settlement discipline regime could also give rise to unintended
consequences for the competitiveness of the EU capital markets. Capital markets
outside the EU do not have a settlement discipline regime as strict as that of the EU;423
e.g. the UK announced it is not implementing the CSDR settlement discipline regime.424
Investors may therefore be tempted, in light of the increased costs of trading EU
securities due to the higher price for their settlement, to focus on other markets for the
settlement of their transactions. In particular mandatory buy-ins may create an additional
cost and risk for EU-settled securities that could disadvantage EU companies compared
to their global peers. Wider spreads and less liquidity will reduce the investment returns
of pension funds, asset managers and, ultimately, end investors, which, according to
some stakeholders, could risk driving issuance, trading and investment activity outside of
the EU.425
One firm stated that they would limit their activity and stop providing liquidity
to EU investors for emerging markets and US high grade and high yield bonds, where the
majority of liquidity comes from outside of Europe, because of the potential cost of these
rules.426
This would limit access to global liquidity for EU investors, as foreign investors
will be unlikely to assume the costs and risks involved. This would be detrimental to EU
businesses that would face a lower demand for their securities, but also for EU financial
infrastructures and CMU. It is worth noting that non-EU/EEA investors hold around
22% of European-issued securities. The impact of the entry into force of mandatory
buy-ins could therefore lead to a potentially major loss of counterparties and liquidity for
the EU capital market.427
A significant part of the EU capital market may hence be
affected, depending on where transactions are settled, with liquidity and pricing heavily
favouring non-EEA settlement and trading. The potential negative impact on the
attractiveness of the EU market would be at odds with the objectives pursued by the
settlement discipline regime and CSDR as a whole to make the EU capital market more
attractive by increasing the safety of settlement.
Finally, against the above arguments, it should be noted that despite the dramatic
increase in trading (settlement instructions increased by 30% between 2015 – 2019 in
422
Based on confidential information provided to DG FISMA services.
423
During the CSDR consultation process stakeholders referred to SHO Regulation and SEC Rule 204, which
however relates only to short-selling and the obligation that broker and dealer must close-out unresolved
equities transactions. This was introduced to discourage the market from naked short-selling. Also
examples of buy-in were given for Asian markets, in particular Singapore Exchange where any unsettled
buy-in trade is carried forward to the next business day for settlement. If the buy-in and procurement
remains unsuccessful by ISD +6, cash settlement will be initiated against the seller to provide resolution of
the sale trade. However the Singapore Exchange has a very low failure rate because of DvP and very few
trades go to buy-in.
424
Written statement by Chancellor of the Exchequer on 23 June 2020, https://questions-
statements.parliament.uk/written-statements/detail/2020-06-23/HCWS309. In the meantime the UK will
continue to apply CREST settlement discipline rules on failed transactions (p.37):
https://www.crh.com/media/3376/crest-rules-january-2021.pdf It provides for fines on either failed bought
or sold transactions.
425
See AFME response to the Commission CSDR targeted consultation, p. 36,
https://www.afme.eu/Portals/0/DispatchFeaturedImages/AFME_CSDR_CP_Response_Final.pdf.
426
Based on confidential information provided to DG FISMA services.
427
‘Who Owns the European Economy? Evolution of the Ownership of EU-Listed Companies between 1970
and 2012’, The European Savings Institute & INSEAD OEE Data Services, 2013,
https://ec.europa.eu/info/sites/default/files/file_import/1308-report-who-owns-european-
economy_en_0.pdf.
EU CSDs428
) the settlement fail rate has remained relatively stable in the EU, both
as a share of value and number of total transactions (See Annex 8, Figure II ). More
specifically, for debt instruments there is a clear decrease in settlement fails (as a % of
total number of transactions) compared to 2015, both for corporate (from 5% to 3.5% in
January 2021) and government bonds (from 3% to 2% in January 2021). In terms of
failed settlement instructions as percentage of value of settlement instructions, corporate
bonds remain at a low and stable rate (ca. 2% since 2015), while the ratio for government
bonds has increased (from 2% in January 2018 to 3% in January 2021),429
implying fails
among bonds with a higher face value. For equity products the picture is less clear.
Settlement fails, calculated as percentage of total number of transactions, fell to 3%
before the Covid-19 market turmoil, but have since increased again to 4.5%. In terms of
settlement fails as percentage of value, the ratio has increased to 9% in January 2021
from 6% before March 2020.430
Only recently has ESMA recorded a slow improvement
in the settlement rate for equities, while the failure rate for debt instruments recovered
quicker.431
It should be noted however that between January 2018 and March 2020 the
settlement fails rate for equities was low and stable, both as a share of total value (6%)
and total number (3%) of equity transactions.432
This indicates that that in normal market
circumstances settlement in the EU can be relatively efficient. Finally, in the case of
fixed income instruments, data seems to show that the majority of fails are resolved
before the end of the notional extension period. For instance, approximately 1.5% of
corporate bonds were still not settled at ISD + 7, compared to 0.2% of sovereign
bonds.433
In absolute terms, this approximately equates to an estimated 1250 buy-ins per
business day, for one CSD and one instrument type. In relative terms, the buy-in regime
targets a small proportion of the total volume of transactions but will necessitate an
impact on the pricing and liquidity on a much larger percentage of overall transactions.434
However, even if settlement efficiency in the EU seems to be stable or improving
slightly, fail rates in the EU still remain higher than in, e.g. the US where about 2% of all
US treasuries and mortgage backed securities transactions fail.435
Different levels of
settlement efficiency between national capital markets can partly explain the lower
overall EU settlement efficiency.436
The top five EU Member States had a settlement
efficiency437
between 0.20% - 0.44% in 2020. Comparable figures for the least
performing five Member States ranged from 4.76% - 13.80%. This illustrates that there
428
Data generated through the Securities Trading, Clearing and Settlement Statistics Database, European
Central Bank, https://sdw.ecb.europa.eu/browse.do?node=9691131.
429
See Figure II, Annex 8. Based on confidential data provided to DG FISMA services.
430
See Figure II, Annex 8. Based on confidential data provided to DG FISMA services.
431
‘ESMA Report on trends, risks and vulnerabilities”, ESMA50-165-1524, No. 1, March 2021.
432
A higher settlement fail rate for equities compared to debt products can be explained by the fact that
equities are more likely to form part of a chain of settlement fails. A staff paper by the Bank of England
found that only a small proportion of fails (17%) in the highly liquid FTSE100 securities was not part of a
cascade of fails. By contrast, for gilts more than 40% that failed was not involved in a cascade of fails.
Source: “Securities settlement fails network and buy-in strategies”, Gurrola-Perez, P., He J. & Harper, G.,
Staff Working Paper No. 821, Bank of England, September 2019.
433
See AFME response to the Commission CSDR targeted consultation, Q. 34.1 based on data provided by
Euroclear Bank for the fixed income market in 2020 (see note 127).
434
Ibid.
435
K. Burne, ‘How to succeed in fixing settlement fails’, Aerial View, Bank of New York Mellon, 2020.
436
Based on confidential information provided to DG FISMA services.
437
Calculated as percentage of total value of all transactions, equity and debt combined. Looking at settlement
efficiency as percentage of total number of transactions, the best and worst performing Member States are
broadly similar.
seems to be still some room for improvement in the EU’s settlement efficiency, in some
instruments more than others. Nevertheless, these small improvements, need to be
balanced against the potential disproportionate costs of investing in the settlement
discipline regime and applying it over time.
3. Insufficient insight into the activities of third-country CSDs
Under CSDR, third-country CSDs providing services in the EU provide insufficient
insight into their activities in relation to financial instruments constituted under the
law of a Member State, in particular when they provide services under the
grandfathering clause (see section 2.3.5). This leads to potential risks for the whole
settlement ecosystem, and in particular could have negative impacts on three groups of
stakeholders: EU authorities, EU CSDs and issuers.
First, EU authorities are not aware of the activities of third-country CSDs in the
EEA, a fact underlined both by ESMA and several respondents to the targeted
consultation; ESMA itself recognised that “… there is no information available either at
EEA level (ESMA, European Commission) or at the level of NCAs as to the activity of
TC-CSDs [third-country CSDs] in the EEA, unless provided by the TC-CSDs on a pure
voluntary basis”438
. Some third-country CSDs operating in the EU are not subject to any
notification requirement for their activities with respect to securities constituted under the
law of a Member State (see section 2.3.5). EU authorities therefore have no information
on which services they provide, their volume or the Member States affected by them.
This means that, if needed, neither issuers nor public authorities at national and EU level
can assess the impact of these CSDs on the financial stability of the EU which may in
itself create a risk to financial stability.
Second, there is an uneven playing field between EU CSDs and third-country CSDs
as these latter are not required to comply with rules at least equivalent to CSDR for their
activities in relation to financial instruments constituted under the law of a Member State.
Third, the lack of information on third-country CSDs’ activities may create a risk
for investors. The Commission has not assessed the rules to which CSDs operating
under the grandfathering clause are subject, despite the fact that they provide services in
relation to the same financial instruments EU CSDs do (see section 2.3.5). The lack of
information on those CSDs’ activities may create a risk for investors where the
legislation governing them does not offer the same level of protection as EU legislation.
438
ESMA letter to the European Commission, ‘ESMA’s Proposals regarding the Review of the CSD
Regulation (CSDR), 20 May 2021, https://www.esma.europa.eu/sites/default/files/library/esma70-156-
4519_letter_to_ec_-_csdr_review.pdf .
ANNEX 7: ANALYSIS OF ALL THE OPTIONS
This section describes the costs and benefits of each policy option on the drivers.
1. IMPACT OF THE POLICY OPTIONS REGARDING PASSPORTING REQUIREMENTS
1.1. Option 2 - Reduce the scope of the passporting requirements
Cost-benefit analysis
 CSDs: Any EU CSD would be able to provide services for non-equity instruments
within the EU without being subject to a passporting process, increasing their
potential to expand cross-border, and thus benefit from potential economies of scale
and scope. This benefit would be ongoing. However, the unclear and burdensome
passporting requirements, for equities would remain, creating cross-border barriers
for CSDs, reducing competitiveness. This cost would be ongoing.
 Issuers: Issuers would be positively impacted as it would increase cross-border
activities for non-equity securities, e.g. bonds. It would therefore mean more choice
and competition between CSDs and more offers for issuers. This benefit would be
ongoing. However, as the benefits would be limited to non-equities, the problems
identified would remain for equity securities, limiting the potential benefits for
issuers.
 Investors: Investors would be positively impacted as it would increase cross-border
activities for non-equity securities, e.g. bonds. It would therefore mean more choice
and competition between CSDs. This benefit would be ongoing.
 ESMA: No impact identified.
 NCAs: NCAs of host Member states would not have a clear overview on the services
provided for non-equity instruments by CSDs established outside their jurisdiction
and the risks that they may or may not entail. This cost would be ongoing.
1.2. Option 3 - Clarify the role and powers of competent authorities and
requirements related to national laws
Cost-benefit analysis
CSDs: CSDs could have a clearer view on the passporting requirements, hence
accelerating the passporting process and spending less time and costs on
understanding the different requirements. This benefit would be ongoing.
Clarifications could therefore lead to some improvements in cross-border activities.
However, the burden of requesting an approval from the host Member State regarding
the analysis of the measures to be taken by the CSD to allow its participants to
comply with the requirements related to national laws would still remain even if
clarified. Should a CSD wish to passport in 26 Member States to be able to provide
services throughout the EU, it is estimated that it would cost on average at least
EUR 780 000 for the CSD (see section 2.3.1). Should the simplified passporting
process reduce by 15% the costs of passporting, this CSD would be saving, on
average, EUR 117 000. Currently 15 CSDs are providing services cross border in at
least one Member State. If the notification process enables at least 10 other CSDs to
passport in 26 Member States this would help to save on average EUR 1 170 000 for
CSDs. This would be a one-off benefit for CSDs.439
Ongoing costs of monitoring
compliance with the passport would also be slightly reduced. Should a CSD had
passported in 26 Member States to be able to provide services throughout the EU, it
is estimated that it would cost on average at least EUR 52 000 (see section 2.3.1).
Should the simplified process reduce by 15% the costs of passporting, this CSD
would be saving, on average, EUR 7 800. Currently 15 CSDs are providing services
cross border in at least one Member State. If the simplified process enable at least 10
other CSDs to passport in 26 Member States this would help to save on average
EUR 78 000 for CSDs per year. This would be ongoing benefit for CSDs.
 Issuers: If the simplification of the passporting requirements leads to some
improvements in cross-border activities, issuers can benefit from a more diversified
offer from CSDs. This benefit would be ongoing.
 Investors: If the simplification of the passporting requirements leads to some
improvements in cross-border activities, investors can benefit from more competition
between CSDs. This benefit would be ongoing.
 ESMA: ESMA would have a clearer view on the passporting requirements, and
therefore would spend less time to clarify them. This benefit would be ongoing.
 NCAs: NCAs would have a clearer view on the passporting requirements, hence
spending less time on understanding them. In addition, it would remove the
uncertainty as regards the role of the host NCA. This benefit would be ongoing.
However, the burden of requesting an approval from the host Member State regarding
the analysis of the measures to be taken by the CSD to allow its participants to
comply with the requirements related to national laws would still remain even if
clarified.
Should a CSD wish to passport in 26 Member States to be able to provide services
throughout the EU, it is estimated that it would cost to national authorities altogether
at least EUR 79 000 (see section 2.3.5). Should the simplified process reduce by 15%
the costs of passporting, the 26 national authorities would be saving all together, on
average, ca. EUR 11 800. Currently, 15 CSDs are providing services cross border in
at least one Member State. If the simplified process enables at least 10 other CSDs to
passport in 26 Member States this would help to save ca. EUR 118 000 for 27
national authorities. This would be a one-off benefit for NCAs.
1.3. Option 4 - Replace the passporting procedure at the level of the host Member
State with a simple notification
Cost-benefit analysis
 CSDs: The passporting requirements related to national laws and the role of NCAs
are the ones that raised most issues. Removing the possibility for the host Member
State competent authorities to refuse a passporting request would alleviate, clarify
and speed up the passporting process. This benefit would be ongoing.
Should a CSD wish to passport in 26 Member States to be able to provide services
throughout the EU, it is estimated that it would cost on average at least EUR 780 000
per CSD (see section 2.3.1). Should the simplified process reduce by 75% the costs of
passporting, this CSD would be saving, on average, EUR 585 000. Currently 15
439
Commission estimates based on confidential information provided to DG FISMA services.
CSDs are providing services cross border in at least one Member State. If the
simolified process enables at least 10 other CSDs to passport in 26 Member States
this would help to save ca. EUR 5 850 000 for CSDs. This would be a one-off benefit
for CSDs.440
Ongoing costs of monitoring compliance with the passport would also be
significantly. Should a CSD had passported in 26 Member States to be able to
provide services throughout the EU, it is estimated that it would cost on average at
least EUR 52 000 (see section 2.3.1). Should the simplified process reduce by 75%
the costs of passporting, this CSD would be saving, on average, EUR 39 000.
Currently 15 CSDs are providing services cross border in at least one Member State.
If the simplified process enables at least 10 other CSDs to passport in 26 Member
States this would help to save ca. EUR 390 000 for CSDs per year. This would be
ongoing benefit for CSDs.
 Issuers: Issuers could be positively impacted as it would increase cross-border
activities. It would therefore mean more choice and competition between CSDs and
more offers for issuers. This benefit would be ongoing.
 Investors: If the simplification of the passporting requirements leads to some
improvements in cross-border activities, investors can benefit from more competition
between CSDs. This benefit would be ongoing.
 ESMA: The simplified process would alleviate their costs as the passporting
requirements would be streamlined and clearer.
 NCAs: By replacing the passporting procedure at the level of the host Member State
by a notification, NCAs will alleviate the costs and time spent on passporting;
however, at the same time, NCAs would have less oversight on the measures taken
by the CSDs to allow their users to comply with the national law referred to in Article
49(1) and also no power to oppose the passporting. At the same time, the simple fact
that NCAs would have less oversight does not mean that CSDs would not have to
continue applying national laws. In addition, as a notification procedure would still
remain in place, it would ensure adequate information to monitor risks for the
authorities.
Should a CSD wish to passport in 26 Member States to be able to provide services
throughout the EU, it is estimated that it would cost to national authorities altogether
at least EUR 79 000 (see section 2.3.5). Should the simplified process reduce by 75%
the costs of passporting, the 26 national authorities would be saving all together, on
average, ca. EUR 59 000. Currently, 15 CSDs are providing services cross border in
at least one Member State. If the simplified process enables at least 10 other CSDs to
passport in 26 Member States this would help to save on average EUR 590 000 for 27
national authorities. This would be a one-off benefit for NCAs.
1.4. Combination of Option 3 and Option 4
Cost-benefit analysis
CSDs: CSDs could have a clearer view on the passporting requirements, hence
accelerating the passporting process and spending less time and costs on
understanding the different requirements. This benefit would be ongoing.
440
Commission estimates based on confidential information provided to DG FISMA services.
Clarifications could therefore lead to some improvements in cross-border activities.
Further, the burden of requesting an approval from the host Member State would be
removed. This would be a one-off benefit for CSDs, although ongoing costs of
monitoring compliance with the passport would also be slightly reduced.
More details on the quantified costs and benefits are included in Section 1.2 and 1.3
of this Annex, regarding options 3 and 4.
 Issuers: If the simplification of the passporting requirements leads to some
improvements in cross-border activities, issuers can benefit from a more diversified
offer from CSDs. This benefit would be ongoing.
 Investors: If the simplification of the passporting requirements leads to some
improvements in cross-border activities, investors can benefit from more competition
between CSDs. This benefit would be ongoing.
 ESMA: ESMA would have a clearer view on the passporting requirements, and
therefore would spend less time to clarify them. The simplified process would also
alleviate their costs as the passporting requirements would be streamlined and clearer.
This benefit would be ongoing.
 NCAs: NCAs would have a clearer view on the passporting requirements, hence
spending less time on understanding them. In addition, it would remove the
uncertainty as regards the role of the host NCA. This benefit would be ongoing.
Further, the burden of requesting an approval from the host Member State would be
removed, which will alleviate the costs and time spent on passporting. This would be
a one-off benefit for NCAs.
However, NCAs would have less decision making powers on the measures taken by
the CSDs to allow their users to comply with the national law referred to in Article
49(1) and also no power to oppose the passporting. At the same time, the simple fact
that NCAs would have less oversight does not mean that CSDs would not have to
continue applying national laws. In addition, as a notification procedure would still
remain in place, it would ensure adequate information to monitor risks for the
authorities. Finally, NCAs could benefit for a compensatory increase of oversight on
passported CSDs through the establishment of mandatory colleges, which would
allow them to have an ongoing oversight rather than a one off possibility to refuse a
passport.
2. IMPACT OF THE POLICY OPTIONS REGARDING COOPERATION BETWEEN
AUTHORITIES
2.1. Option 2: Enhance the existing CSDR rules for cooperation arrangements
Cost-benefit analysis
 CSDs: CSDs benefit from a reduction of costs as a result of addressing partly the
barriers to cross-border settlement and the lack of supervisory convergence. This
benefit would be ongoing.
 Issuers: Issuers would benefit from the partly improved cross-border provision of
services and supervisory convergence as well as from increased financial stability.
This benefit would be ongoing.
 Investors: Investors would benefit from the partly improved cross-border provision of
services and supervisory convergence as well as from increased financial stability.
This benefit would be ongoing.
 NCAs: NCAs may incur limited additional costs arising from their participation to the
cooperation arrangements. Nonetheless, they will benefit from slightly increased
access to information and powers to monitor risks compared to today. This benefit
would be ongoing.
 ESMA: No impacts for ESMA or, in case the framework is amended to provide for
ESMA participation to the cooperation arrangements, limited additional [ongoing]
costs.
 Banks: no impact identified.
2.2. Option 3: Introduce mandatory supervisory colleges
Cost-benefit analysis
 CSDs: By addressing, even partly, the barriers to cross-border settlement and the
absence of supervisory convergence, CSDs would benefit (to a greater extent when
compared to option 1) from a reduction of costs when operating in the EU. This
benefit would be ongoing.
 Issuers: would benefit (to a greater extent when compared to option 1) from the
partly improved framework for the cross-border provision of services, the increased
supervisory convergence and financial stability. This benefit would be ongoing.
 Investors: would benefit (to a greater extent when compared to option 1) from the
partly improved framework for the cross-border provision of services, the increased
supervisory convergence and financial stability. This benefit would be ongoing.
 NCAs: NCAs may incur limited additional ongoing costs arising from their
participation to colleges. Nonetheless, at the same time, their ongoing costs will be
reduced due to the streamlined cooperation of authorities and their increased access
to information and powers to monitor risks compared to today.
 ESMA: ESMA may incur additional costs from its participation to colleges. It is
estimated that such additional costs may range from about EUR 130 000 to
EUR 260 000 per annum depending on the number of CSDs for which colleges could
be established and their powers.441
However, ESMA would be able to benefit from
the experience it has already acquired in the field of colleges under EMIR, and
therefore very limited, if any, one-off operational costs are envisaged.
 Banks: no impact identified.
2.3. Option 4: More supervision of CSDs at EU level
Cost-benefit analysis
 CSDs: By removing the barriers to cross-border settlement and the absence of
supervisory convergence, CSDs would benefit from a significant reduction of costs
when operating in the EU. This benefit would be ongoing. Nevertheless, if the costs
of EU supervision were passed to CSDs, they would face higher costs.
 Issuers: Issuers would benefit from the free provision of cross-border services, the
increased supervisory convergence and financial stability. This benefit would be
ongoing.
441
Commission estimates based on confidential data provided to DG FISMA services.
 Investors: Investors would benefit from the free provision of cross-border services,
the increased supervisory convergence and financial stability. This benefit would be
ongoing.
 NCAs: NCAs ongoing costs would be significantly reduced (depending on the model
of single supervision to be chosen), as authorisation and supervisory powers would be
moved at EU level.
 ESMA: This would require a significant extension of supervisory capacity inside
ESMA (should ESMA be retained as the single supervisor) or the creation from
scratch of a single supervisor and would therefore have major budgetary
consequences for the EU. According to some estimates, depending on the exact
nature of ESMA’s powers and the CSDs over which ESMA would exercise such
powers, the budgetary implications of this option could potentially range from
EUR 0.5 million to EUR 4 million per annum depending on the design.442
These
costs would be ongoing. One option would be to cover the costs via fees to EU CSDs
subject to ESMA’s supervision.
 Banks: no impact identified.
3. IMPACT OF THE POLICY OPTIONS REGARDING PROVISION OF BANKING SERVICES
RELATED TO SETTLEMENT IN FOREIGN CURRENCIES
3.1. Option 2: Introduce targeted amendments for designated credit institutions
Cost-benefit analysis
In terms of specific stakeholders, the effects are estimated to be the following:
 CSDs: Benefit from increased opportunities for cross-border transactions as
settlement in foreign currencies would become easier. Financial stability risks,
however, in terms of credit and liquidity risks and concentration risks will increase
depending on the relative increase in foreign currency settlement. It also could reduce
the incentives to use central bank money, one of the principles of CSDR. Option 2a:
broad access to foreign currencies for CSDs as all banks can step in. Option 2b:
existing banking CSDs can immediately start, no establishment needed, risk
management arrangements in place, greater concentration risks within these groups
and risks to competitiveness for smaller non-banking CSDs vis-a-vis the usually
larger banking CSDs.
 Investors: Investors will benefit from the increased competition and greater choice in
issuance and also in terms of risk diversification. This contributes to enhanced EU
capital markets through increased cross border provision of services.
 Issuers: Issuers will benefit from the increased competition, mainly in the area of
foreign currency settlement, and also in terms of risk diversification. This contributes
to enhanced EU capital markets through increased cross border provision of services.
 NCAs/supervisory authorities: Increase of potential financial stability risks for both
options, requiring more intensive and costly monitoring by supervisory authorities.
 Banks/competition vs other CSDs: potential for unlevel playing field against banks
since ancillary services will move into CSDs where the settlement takes place.
442
Commission estimates based on confidential data provided to DG FISMA services.
3.2. Option 3: Amend the thresholds under which CSDs can use a commercial bank
for banking-type ancillary services.
Cost-benefit analysis
Option 3 leaves the structure of CSDR intact (and for example CSDs risk management
policies can for a large part remain in place and as such, the risks to financial stability
should be minimal; credit and liquidity risks will remain limited and possibly mitigated
by accommodating risk mitigating conditions. Although, there would be a potential
increase in exposures to credit institutions, that could be mitigated by limiting the
increase of the threshold. The calibration of the level of the thresholds could prove
challenging however as only limited qualitative information is available. Broadly
speaking an increase of the threshold to 5% would be sufficient to cater for expected
foreign currency settlement over a time horizon of the next years, although one CSD
would see a raise to 10% desirable.443
In addition to amending the threshold,
accompanying risk requirements may be set, such as minimum risk mitigation standards
(e.g. creditworthiness, concentration limits) or ongoing monitoring by supervisors. These
could be set via level 1 or level 2 legislation, which would provide different degrees of
flexibility; level 2 could make the threshold more sustainable, flexible and adaptable as
new increased thresholds could be quickly reached.
In terms of specific stakeholders, the effects are estimated to be the following:
 CSDs: Increasing the threshold could enable at least some CSDs to develop their
services to investors both domestically and cross-border and thus obtain appropriate
economies of scale to cover authorisation costs to provide banking services
themselves.
From available confidential information from stakeholders, 5 non-banking CSDs
indicate that, if thresholds are amended, in total, EUR 16 billion additional settlement
in foreign currencies is expected on an annual basis444
and if we extrapolate that
number to the total number of EEA non-banking CSDs (ca. 25) we arrive at an
additional annual possible offering of at least EUR 80 billion of settlement in foreign
currencies, without taking into account if this additional settlement would affect
existing settlement in foreign currencies undertaken by CSDs already authorised to
provide ancillary banking services. The additional offering of settlement in foreign
currencies would tap in the identified demand, mostly in the area of bonds where a
lack of offering is holding back multi-currency bond issuance.445
Increased
competition between CSDs would benefit investors in terms of pricing, possibly
contributing to further enhancing demand.
An unlikely negative effect could be the possible contagion effects on settlements
through defaults of settlement agents in foreign currencies.446
One-off costs
443
ESCB input based on the anonymised and consolidated outcome of a survey conducted among CSDs
provided by the ESCB.
444
Current total absolute value of settlement of the CSDs and applied the growth percentages mentioned by
the CSDs themselves. This gives an anticipated total of settlement in foreign currencies (settlement +
corporate actions). The current absolute values in foreign currencies are then subtracted, which gives the
anticipated total net gain from the proposed CSDR changes.
445
European Post-Trade Forum Report, 15 May 2017, p. 117; https://ec.europa.eu/info/publications/170515-
eptf-report_en
446
Based on confidential information provided to DG FISMA services.
(authorisations or setting up the operational capacity) could be covered by longer
term providing of the service.
 Investors: Investors will benefit from the increased competition, a greater choice in
issuance and currency diversification in their cross-border investments.
 Issuers: Issuers will have more choice in terms of financing arrangements and will be
able to offer a broader range of products, mainly in the area of foreign currency
settlement.
 NCAs/supervisory authorities: Depending on the increase of the threshold and
consequent financial stability risks, limited additional supervisory activity would be
needed to monitor ongoing risks, such as credit and liquidity risks. As supervisory
arrangements will remain the same, this will likely be more in terms of intensity and
not scope of the supervision or costs.
 ESMA: No substantial impact. Depending on how the requirements were to be
introduced, ESMA may have to develop new regulatory technical standards, possibly
in cooperation with EBA and /or ECB or take further action.
3.3. Option 4: Combine amending the thresholds (option 2(b)) with allowing
banking CSDs to offer banking-type ancillary services.
Cost-benefit analysis
When combining the options 2(b) and 3 into option 4 the costs and benefits of the
respective options remain in place. However, one additional benefit would emerge.
While raising the threshold for banking services to increase the notional amounts
available for banking services (including foreign currency settlement) in EU settlement
markets, the inclusion of banking CSDs into the potential providers of these services
would increase potential notional amounts available for foreign currency settlement even
further through broadening of the range of providers.
This would further enhance the impact on the CMU as this could positively impact
capital markets and financing across borders and with other currency areas.
In terms of specific stakeholders, the effects are estimated to be the following, relative to
the options 2 and 3:
 CSDs: Increased availability of banking services, including foreign currency services
due to combined increase of availability of for example foreign currency settlement
and broadening of the provider base.
 Investors: Investors will benefit from the further increased competition, a greater
choice in issuance and currency diversification in their cross-border investments.
 Issuers: Issuers will have more choice in terms of financing arrangements and will be
able to offer a broader range of products, mainly in the area of foreign currency
settlement.
 NCAs/supervisory authorities: -
 ESMA: No impact.
4. IMPACT OF THE POLICY OPTIONS REGARDING SETTLEMENT DISCIPLINE
The objective of this option is to minimise the burden and compliance costs of the
settlement discipline regime, avoid negative impacts on EU capital markets, while
ensuring a high degree of settlement efficiency.
4.1. Option 2 – Introduce targeted amendments for cash penalties and mandatory
buy-ins
Cost-benefit analysis
 CSDs/CCPs: CSDs would benefit from the introduction of a single process for the
treatment of penalties as well as clarifications with regards to in-scope transactions. A
duplicative operational process could create new cross-border risks.
 Investors: Benefits from amendments to the pass-on mechanism would be permanent,
as they would reduce the number of buy-ins required to remedy settlement fails. It
would also create greater flexibility and increases the possibility that the buy-in can
be actioned. According to one estimate the introduction of a pass-on mechanism
would reduce costs by 37.5%447
. Furthermore, market participants will benefit from a
clear identification of in-scope transactions reducing the number of transactions that
cannot be resolved (i.e. transactions outside the participants or primary market
transactions for Exchange Traded Funds).
Sunk cost related to the setting up of a buy-in agent offering, although only one
service provided has emerged so far. The total costs include setting up the
infrastructure and personnel costs.
To comply with the buy-in requirements, with IT, HR and consulting costs, it is
estimated that the average cost per market participant to set up a connection to a buy-
in agent would be around EUR 1 million over 4 years, amounting to EUR 1.5 billion
for all in-scope market participants in the EU448
. Although Option 2 will offer savings
to market participants as it will allow for alternative solutions, it is likely that some
market participants will still choose to have access to a buy-in agent and will incur
the additional costs. This would be a one-off cost.
 Issuers: Issuers will in particular benefit from the removal of certain corporate
actions on stock (e.g. initial creation transactions and redemptions) or primary market
operations449
from the scope of the settlement discipline regime. These changes
would permanently reduce the compliance burden on market participants by
removing transactions that do not form part of market turnover.
 NCAs/ ESMA: Amendments to the pass-on mechanism would be beneficial as fewer
buy-ins would contribute to market stability. A clear determination of in-scope
transactions would also lessen the administrative burden on ESMA related to replying
to Q&A’s. Nevertheless, such modifications are also likely to require a revision of the
corresponding level 2 standards relating to settlement discipline by ESMA.
4.2. Option 3 – Introduce a two-step approach
Cost-benefit analysis
447
For explanation and calculation of costs savings see J.P. Morgan public consultation reply, Q. 34.1
448
Based on confidential information provided to DG FISMA services.
449
Meaning the process of initial creation of securities, whereby the securities are created, but they are not yet
been subscribed for, so no capital has been raised. See AFME reply to CSDR public consultation, p.32
 CSDs: CSDs affected directly by the suspension of the buy-in framework, although
there may be some sunk costs. Costs associated with the implementation of the
penalty regime, although it is broadly prepared throughout the infrastructure. Likely
higher reporting requirements as CSDs will need to provide accurate data as to the
evolution of settlement efficiency to inform ESMA/ EC decision about the need to
implement a mandatory buy-in. The costs associated with increased reporting
requirements should not be significant as CSDs already report settlement efficiency
rates regularly to ESMA.
 Investors: One-off costs to prepare the introduction of cash penalties, related to
capacity improvements in terms of IT systems and staffing in the affected enterprises.
However, the implementation of the penalty regime is already broadly prepared
throughout the infrastructure and concerns about the effects are modest compared to
the disadvantages of combining the penalty regime with mandatory buy-in450
. Cash
penalties will cover all unresolved trades irrespective of size. Hence the capacity
improvements they will trigger will benefit both professional and retail investors.
These incentives will be reinforced by the fact that mandatory buy-ins are suspended,
not cancelled, so post-trade processing of smaller transactions carried out by retail
investors will also improve. Deferred, one-off, repapering costs for market
participants upon the potential introduction of mandatory buy-ins. Costs of potential
duplicative repapering (i.e. repapering related to entry into force of the buy-in regime
as from February 2022 and potential additional repapering due to potential
clarifications introduced under Option 2) would be avoided.
The major negative impacts in terms of liquidity and market stability caused by
mandatory buy-ins would be, at least temporarily, avoided. Cost of settlement fail in
the form of penalties on the failing party, which is currently avoided as the settlement
discipline regime is not yet implemented.
The proposed two-step approach would result in deferred cost related to the setting up
of a buy-in agent service451
. In addition the average cost per market participant to set
up a connection to a buy-in agent would be around EUR 1 million, as described in
Option 2. Depending on the potential targeted changes to be made to the buy-in
regime, such costs savings could either be temporary (i.e. until the buy-in regime
enters into force) or permanent (e.g. if the changes allow for a simplified approach
regarding the requirements related to buy-in agents).
 Issuers: The benefits will be limited to certain primary market transactions and
accrue only as long as mandatory buy-ins are deferred.
 NCAs and ESMA: Ongoing monitoring cost for settlement efficiency rates in national
markets (NCAs) and EU (ESMA) as well as ongoing costs related to defining the
appropriate terms or scope in terms of type of instrument or transaction size for the
potential introduction of a mandatory buy-in.
4.3. Option 4 – Introduce voluntary buy-ins
Cost-benefit analysis
 CSDs: CSDs likely not affected, although ongoing reporting costs may increase
as companies report buy-in irregularly. Sunk costs related to the setting up of a
450
EBF public consultation reply, Q. 34.1
451
Supported by confidential information provided to DG FISMA services.
buy-in service in the affected CSDs, although with the voluntary nature of buy-
ins demand for their service will materialize.
 Investors: Negative impacts across asset classes similar to option 1, although the
extent of the negative effect will depend on practical use of voluntary buy-ins by
the purchasing party. Cost saving will also be limited as companies will need to
maintain buy-in processes in case a counterparty demands their application.
Market makers will find price-setting even more complicated in less liquid/
peripheral instruments as it is unclear whether the trade will be subject to buy-in.
Voluntary buy-ins would allow investors greater flexibility in making investment
choices that suit their own investment strategy and risk appetite, although
evidence suggests that investors tend not to choose currently available
instruments to resolve unsettled transactions.
 Issuers: Negative impacts related to the inconsistent application of mandatory
buy-ins, leading potentially to a decrease in primary market issuance activity.
 NCAs and ESMA: Potentially higher monitoring costs related to market
supervision and prevention of abusive market behaviour with respect to voluntary
buy-ins. To incentivise the use of voluntary buy-ins as an investor’s right could
be enshrined in to law together with guiding principles. This would likely
increase compliance costs for ESMA as market participants will regardless
demand clarifications regarding the guiding principles.
4.4. Option 5 – Combining targeted amendments to settlement discipline regime
with a two-step approach
Cost-benefit analysis
 CSDs: Similar benefits and costs to the ones described under Option 2 and Option 3.
In general CSDs will benefit from the suspension of the buy-in framework, although
there may be potentially some sunk costs. The penalty regime, is broadly prepared
throughout the infrastructure. Likely higher reporting requirements as CSDs will need
to provide accurate data as to the evolution of settlement efficiency to inform ESMA/
EC decision about the need to implement a mandatory buy-in. CSDs would benefit
from the introduction of a single process for the treatment of penalties as well as
clarifications with regards to in-scope transactions.
 Investors: The benefits and costs will be similar to the ones described under Option 3,
although their magnitude will be increased (benefits) or decreased (costs) thanks to
the clarifications contained in Option 2. In particular costs will be comparatively
lower thanks to the clarifications regarding in-scope transactions, pass-on mechanism
or the use of buy-in agents contained in Option 2.
The major negative impacts in terms of liquidity and market stability caused by
mandatory buy-ins would be, at least temporarily, avoided.
 Issuers: The benefits will be limited to certain primary market transactions and
accrue only as long as mandatory buy-ins are deferred.
 NCAs and ESMA: Ongoing monitoring cost for settlement efficiency rates in national
markets (NCAs) and EU (ESMA) as well as ongoing costs related to defining the
appropriate terms or scope in terms of type of instrument or transaction size for the
potential introduction of a mandatory buy-in.
5. IMPACT OF THE POLICY OPTIONS REGARDING THIRD-COUNTRY CSDS
5.1. Option 2 - Introduce an end-date to the grandfathering clause
Cost-benefit analysis
 EU CSDs452
: this would indirectly positively impact EU CSDs on an ongoing basis as
it would contribute to the level playing field between EU authorised CSDs and third-
country CSDs which would have to comply with equivalent CSDR rules. In addition,
CSDs of one Member State and one EEA country are still operating under the grand-
fathering clause and are still not authorised under CSDR. These CSDs have already
started the authorisation process and therefore no additional costs need to be
considered.453
 Issuers: it could positively affect issuers on an ongoing basis in those cases where the
legislation governing third-country CSDs does not offer the same level of protection
than EU legislation would. However, as very little information is available on how
many third-country CSDs operate in the EU, this option, when it enters into place,
may reduce the number of services offered by third-country CSDs in the EU.
 Investors: it could positively affect investors on an ongoing basis in those cases
where the legislation governing third-country CSDs does not offer the same level of
protection than EU legislation would. However, as very little information is available
on how many third-country CSDs operate in the EU, this option, when it enters into
place, may reduce the number of services offered by third-country CSDs in the EU.
 ESMA: It is currently unknown how many third-country CSDs are using the
grandfathering clause and would apply for recognition to ESMA. In the 2014 impact
assessment, it was assumed that ESMA could carry out its permanent tasks, in
relation to non-EU CSD recognition with its existing staff.454
Given that the task
itself is unchanged, it is assume that there is no impact to the introduction of an end-
date for the grandfathering clause.
 NCAs: no major impact identified. In case third-country CSDs benefiting from the
grandfathering clause seek recognition, ESMA would consult NCAs which can
slightly increase their costs.
5.2. Option 3 - Introduce a notification requirement for third-country CSDs
Cost-benefit analysis
 CSDs455
: As there is very limited information, if any, available on third-country
CSDs’ activities operating in the EEA, this option would help to identify which third-
country CSDs provide services and for which volumes, thus increasing transparency
in the market for EU CSDs. This benefit would be ongoing.
 Issuers: Option 3 would have a positive impact on issuers as it would increase
transparency in the market. This information would help to identify any potential
452
The cost benefit analysis mainly focuses on the costs and benefits for EEA entities and therefore the impact
on third-country CSDs themselves is not included.
453
Based on confidential information provided to DG FISMA services.
454
.The Impact Assessment is available here: https://eur-lex.europa.eu/legal-
content/EN/TXT/PDF/?uri=CELEX:52012SC0022&from=EN.
455
The cost benefit analysis mainly focuses on the costs and benefits for EEA entities and therefore the impact
on third-country CSDs themselves is not included.
risks, in particular on financial stability and, in turn, for. This benefit would be
ongoing, sustainable.
 Investors: Option 3 would also have a positive impact on investors as it would
increase transparency in the market. This information would help to identify any
potential risks, in particular on financial stability and, in turn, for investors. This
benefit would be ongoing, sustainable.
 ESMA: Option 3 would directly positively impact ESMA as it would give the
European authority more information and help it to identify and monitor risks. ESMA
being at the centre of the notification process, it could also slightly increased
operational. costs
Based on Commission estimates following the submission of confidential data456
,
ESMA estimated costs for one third-country CSD notification would amount to ca.
EUR 2 600 per notification. Assuming that 5 third-country CSDs would notified, the
costs would be estimated around ca. EUR 13 000 for ESMA. This would be one-off
cost that could potentially be covered by a notification fee to be paid by each third-
country CSD.
 NCAs: It would indirectly impact NCAs as they would get information on third-
country CSDs activities through ESMA, helping them to identify and monitor risks.
This benefit would be ongoing.
5.3. Option 4 – Enhance the regime for third-country CSDs providing services in
the EEA
Cost-benefit analysis
 EU CSDs457
: This option would have no direct impact on EU CSDs as it would only
require third-country CSDs to be subject to a new enhanced third-country regime. As
there is very limited information, if any, available on third-country CSDs’ activities
operating in the EEA, this option would help to identify which third-country CSDs
provide services and for which volumes, thereby increasing transparency in the
market for EU CSDs. This benefit would be ongoing.
 Issuers: It would benefit issuers in those cases where the legislation governing third-
country CSDs does not offer the same level of protection than EU legislation would.
It would also have a positive impact on issuers as it would increase transparency in
the market. This benefit would be ongoing. However, it could also have a negative
impact for issuers that use services of third-country CSDs. In case of enhancement of
the regime, such issuers could lose access to the services of third-country CSDs.
 Investors: Similarly to the case for issuers, this option would benefit investors in
those cases where the legislation governing third-country CSDs does not offer the
same level of protection than EU legislation would, as well as by increasing
transparency in the market. This benefit would be ongoing. However, it could also
have a negative impact for investors that use settlement services of third-country
CSDs which are not subject to recognition requirements for the moment. In case of
enhancement of the regime, such investors could lose access to the services of third-
country CSDs.
456
Based on confidential information provided to DG FISMA services.
457
The cost benefit analysis mainly focuses on the costs and benefits for EEA entities and therefore the impact
of on third-country CSDs themselves is not included.
 ESMA: the new powers given to ESMA would ensure that an EU authority has the
overview of the activities of third-country CSDs, therefore increasing information
helping to identify and monitor risks. However, an enhanced third-country regime,
depending on its exact features, could generate significant costs for ESMA
potentially in the three main following areas: (1) initial recognition of third-country
CSDs, (2) ongoing monitoring and (3) exercise of ESMA supervisory powers.
Based on Commission estimates following the submission of confidential data458
: (1)
ESMA estimated costs for the initial recognition of third-country CSDs based on a
broad scope (i.e. notary service, maintenance services and settlement services) is ca.
52 000 per third-country CSD (one off cost); (2) ESMA estimated costs for the
ongoing monitoring of a third CSD based on a broad scope is ca. EUR 31 000 per
third-country per year (ongoing costs); (3) ESMA estimated costs to exercise
supervisory powers based on a broad scope would amount to ca. EUR 78 000 per
third-country CSD per year (ongoing costs).
Based on the assumption that 5 third-country CSDs would seek recognition, it would
potentially generate costs for ESMA, i.e.: (1) ESMA estimated costs for the initial
recognition of third-country CSDs would amount to ca. EUR 260 000 (one off cost);
(2) ESMA estimated costs for the ongoing monitoring on such CSD would amount to
ca. EUR 155 000 per year (ongoing costs); (3) ESMA estimated costs to exercise
supervisory powers would amount to ca. EUR 390 000 per year (ongoing costs).
These costs would therefore be significant and it should be seen how and whether it
could potentially be covered by a fee to be paid by each third-country CSD.
Taking into account that the number of third-country CSDs potentially affected by
such an option is not currently identified and that there is no indication that the
activities of third-country CSDs may pose a risk for the financial stability of the EU
or its Member States, this Option could be seen as premature and disproportionate.
 NCAs: No major impact identified. It would indirectly impact NCAs as they would
get more information on third-country CSDs activities through ESMA, helping them
to identify and monitor risks. This benefit would be ongoing. In addition, ESMA
would consult NCAs for third-country CSDs recognition which can slightly increase
their costs.
5.4. Option 5: Combination of Options 2 and 3
 EU CSDs459
: the introduction of an end-date to the grandfathering clause would
indirectly positively impact EU CSDs on an ongoing basis as it would contribute to
the level playing field between EU authorised CSDs and third-country CSDs which
would have to comply with equivalent CSDR rules. In addition, the introduction of
an end-date to the grandfathering clause for EEA CSDs would not lead to additional
costs as any EEA CSDs not yet authorised have already started the authorisation
process.460
The introduction of the notification requirement for third-country CSDs
would also increase transparency in the market, benefitting also EU CSDs.
458
Based on confidential information provided to DG FISMA services.
459
The cost benefit analysis mainly focuses on the costs and benefits for EEA entities and therefore the impact
on third-country CSDs themselves is not included.
460
Based on confidential information provided to DG FISMA services.
 Issuers: the combination of Options 2 and 3 would positively affect issuers on an
ongoing basis in those cases where the legislation governing third-country CSDs
does not offer the same level of protection than EU legislation would while
increasing transparency in the market. However, as very little information is
available on how many third-country CSDs operate in the EU, the introduction of
an end-date to the grandfathering clause, when it applies, may reduce the number
of third-country CSDs offering services in the EU.
 Investors: the combination of Options 2 and 3 would positively affect investors
on an ongoing basis in those cases where the legislation governing third-country
CSDs does not offer the same level of protection than EU legislation would while
increasing transparency in the market. However, as very little information is
available on how many third-country CSDs operate in the EU, the introduction of
an end-date to the grandfathering clause, when it applies, may reduce the number
of by third-country CSDs offering services in the EU.
 ESMA: The introduction of a notification requirement for third-country CSDs
would directly positively impact ESMA as it would give the European authority
more information and help it to identify and monitor risks. ESMA being at the
centre of the notification process, could also face slightly increased operational
costs. Based on Commission estimates following the submission of confidential
data461
, ESMA estimated costs for one third-country CSD notification would
amount to ca. EUR 2 600 per notification. Assuming that 5 third-country CSDs
would notified, the costs would be estimated around ca. EUR 13 000 for ESMA.
This would be one-off cost that could potentially be covered by a notification fee
to be paid by each third-country CSD. The introduction of the end-date for the
grandfathering clause will mean that ESMA may adopt some recognition
decisions, however this is a task that already lies with ESMA.
 NCAs: NCAs may be consulted when ESMA assesses an application for
recognition by third-country CSDs which may marginally increase their
operational costs; in addition, NCAs will have access to increased information
regarding the activities of third-country CSDs which will help them to identify
and monitor risks.
461
Based on confidential information provided to DG FISMA services.
ANNEX 8: GRAPHS AND FIGURES
Figure I: Passporting of CSD services in the EU462
EEA countries were
passport is sought/obtained
EEA countries where CSD is of
substantial importance
ATHEXCSD 1 (CY) 0
Lux CSD 3 (DK, FR, NL) 0
Clearstream Banking AG 8 (AT, FI, FR, IE, LU, NL, ES
and LI).
6 (BE, IE, LI, LU, SK, SI)
Clearstream Banking SA
(ICSD)
28 (AT, BG, CY, CZ, DK,
EE, FI, FR, DE, EL, HU, IS,
IE, LV, LT, MT, NL, NO. PL,
PT, RO, SK, SI, ES, SE ;
process ongoing in BE, HR,
IT)
19 (AT, BG, HR, CY, EE, FI, DE, IS,
IE, LV, LI, LT, MT, NL, NO, PT, RO,
SK, SI)
Euroclear Bank (ICSD) 27 (AT, BG, HR, CY, CZ,
DK, EE, FI, FR, DE, EL, HU,
IS, IE, IT, LV, LT, LU, MT,
NL, PL, PT, RO, SK, SI, ES,
SE)
23 (AT, BG, HR, CY, DK, EE, FI, FR,
DE, EL, IS, IE, LV, LI, LT, LU, MT,
NL, NO, PT, RO, SK, SI)
Euroclear Belgium 25 (AT, BG, CY, CZ, DK,
EE, FI, FR, DE, EL, HU, IE,
IT, LV, LT, LU, MT, NL, PL,
PT, RO, SK, SI, ES, SE)
0
Euroclear France 27 (AT, BE, BG, CY, CZ,
DK, EE, FI, DE, EL, HU, IE,
IT, LV, LT, LU, MT, NL, PT,
RO, SK, SI, ES, SE; process
ongoing in IS, LI, PL)
3 (BE, IE, NL)
Euroclear Netherlands 26 (AT, BE, BG, CY, CZ, DE,
DK, EE, FI, FR, EL, HU, IE,
IT, LU, LV, LT, MT, PT, RO,
SK, SI, ES, SE; process
ongoing in IS, LI)
0
Euroclear Sweden 4 (DE, DK, FR, FI) 3 (DK, FI, MT)
Euroclear Finland 4 (BE, DK, DE, SE) 0
Iberclear Spain 1 (DE) 1 (IE)
ID2S 1 (IE) 0
KDD Slovenia 1 (BG) 0
KDPW Poland 3 (CY, LU, NL) 0
Nasdaq Latvia 3 (EE, IS, LT) 3 (EE, IS, LT)
OeKB CSD Austria 1 (DE) 1 (LI)
Monte Titoli 7 (AT, DE, EL, FR, IE, LU,
MT, NL)
1 (IE)
VP Securities A/S Denmark 1 (process ongoing in MT) 0
Note: The table shows the extent of cross-border service provision by individual CSDs (left column) and in
what Member States a given CSD is systemically important (right column). Although a growing number of
CSDs provide service on a cross-border basis (15 CSDs have obtained or applied for a passport in at least
one host Member State), only a small number has expanded their offering in non-domestic markets
sufficiently to become systemically important (9). Source: ESMA CSD Register.
462
ESMA CSD Register (see note 26).
Figure II: Settlement efficiency on EU capital markets (Total and separately for
debt and equity instrument)
Note: The graphs show the evolution of settlement fails for all in-scope financial instruments (both equity
and debt) in terms of % of turnover (left graph) and total number of instructions (right graph). The left
graph shows that following a spike in spring 2020 settlement fails returned to pre-crisis levels, while the
values in the right hand graph remained elevated, indicating potentially that a higher number of small-
value transactions fail.
Note: The graphs show the evolution of settlement fails for debt instruments (corporate and government
bonds) in terms of % of turnover (left graph) and total number of transactions (right graph). The graphs
show a stable settlement fail rate for corporate bonds in terms of value (left graph), while the number of
failing corporate bonds instructions continues to fall, indicating an increasing number of high value bond
transactions failing. In the case of government bonds this evolution is even more pronounced.
Note: The graphs show the evolution of settlement fails for equity instruments (exchange-traded funds
(ETFs) and equities) in terms of % of turnover (left graph) and total number of transactions (right graph).
The graphs show a stable settlement fail rate for ETFs in terms of value and number of transactions. The
values for equities show that most recently both the value and number of failed equities transactions has
increased.
Figure III463: Euroclear governance structure
Note: Euroclear is one of the biggest groups of CSDs in the EU. Euroclear SA is the parent company for
six domestic CSDs and an ICSD, Euroclear Bank. Risk management is carried out at both group level and
at the level of each daughter-company (CSD) to identify local risks. Three domestic CSDs (France,
Belgium and the Netherlands) use a common settlement platform (ESES).
Figure IV464: Estimates of the expected increase in mandatory buy-in bid/offer
spread
463
https://www.euroclear.com/about/en/ourgovernancestructure.html
464
Based on confidential information provided to DG FISMA services.
Note: The table shows the estimated465
impact of mandatory buy-in (MBI) on European government bonds
(EGB) with a 10-year maturity in basis points (bp) for a financial institution. The pricing data is taken
from an inter-dealer electronic platform (MTS). Taking account current liquidity conditions (Spring 2021),
the application of MBI to EGBs would lead to a 50% to 100% increase in bid-offer spread (B/O spread)
depending on the size and the status of the markets to a complete drop of activity (off).
ANNEX 9: DESCRIPTION OF THE BUY-IN PROCESS
When the seller fails to deliver the securities within a predetermined extension period
following the ISD, a mandatory buy-in process is set in motion. A buy-in provides the
buyer of securities – in case of a settlement fail – with the right to obtain the securities
elsewhere, cancel the original transaction and settle the costs of the buy-in, as well as any
price difference, with the original seller.
The extension period, following which the mandatory buy-in must be triggered, varies
depending on the type of security and its liquidity466
, as does the timeframe during which
the execution of the buy-in must be completed. Once the extension period has ended, a
buy-in agent must be appointed in order to execute the buy-in. This buy-in agent must act
in accordance with best execution requirements when executing the buy-in. If the buy-in
process fails or where a buy-in is not possible, the failing seller is required to pay cash
compensation to the buyer. The buyer can, however, prior to this cash compensation,
defer the buy-in for an additional timeframe, which is equal to the timeframe originally
provided for the completion of the buy-in process.
In addition to bearing the costs related to the buy-in, the failing seller will also be
required to pay the price difference between the buy-in price and the price originally
agreed at the time of the transaction, if the latter is lower than the price effectively paid at
the buy-in execution. On the other hand, if the original price agreed at the time of the
465
Initial year and without taking into account the buy-in agent nor the increase in funding costs.
466
Four business days for financial instruments other than those traded on an SME growth market. Based on
asset type and liquidity of the financial instruments concerned, 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. For operations composed of several
transactions including securities repurchase or lending agreements, the buy-in process referred to in
paragraph 3 shall not apply where the timeframe of those operations is sufficiently short and renders the
buy-in process ineffective. It should be noted that such exemptions mentioned above shall not apply in
relation to transactions for shares where those transactions are cleared by a CCP. Finally, for financial
instruments traded on an SME growth market the extension period is of 15 business days (unless the SME
growth market decides to apply a shorter period).
original transaction is higher than the price effectively paid at the buy-in execution, the
price difference will be “deemed paid”, which means that the failing seller will not be
entitled to payment of the difference by the buyer.