Tuesday, March 20, 2012

European Commission Proposes New EU Securities Settlement Regime

As part of its ongoing efforts to create a sounder financial system, the European Commission has proposed a common EU regulatory framework for the institutions responsible for securities settlement, called Central Securities Depositories (CSDs). The proposal will bring more safety and efficiency to securities settlement in Europe. It also seeks to shorten the time it takes for securities settlement and to minimize settlement fails.

Commissioner for Internal Market Michel Barnier is committed to ensuring that all financial markets are properly regulated and supervised. He said that settlement is a crucial process for the securities markets and the financing of the economy, and as such its safety and efficiency needs to be ensured. The proposal will introduce, in line with international partners, common standards across the EU for securities settlement and CSDs to ensure a true single market for the services provided by national CSDs.

Settlement is an important process, which ensures the exchange of securities against cash following a securities transaction, for instance an acquisition or a sale of securities). CSDs are systemically important institutions for the financial markets because they operate the infrastructures, the securities settlement systems, that enable the settlement of virtually all securities transactions. CSDs also track how many securities have been issued, by whom, and each change in the holding of such securities. CSDs are still regulated only at the national level, and cross-border settlement is less safe and efficient than domestic settlement.

Specifically, the Commission proposes to harmonize the settlement period and set at a maximum of two days after the trading day for the securities traded on stock exchanges or other regulated markets, Currently, two to three days are necessary for most securities transactions in Europe. In addition, market participants that fail to deliver their securities on the agreed settlement date will be subject to penalties, and will have to buy those securities in the market and deliver them to their counterparties. Further, issuers and investors will be required to keep an electronic record for virtually all securities, and to record them in CSDs if they are traded on stock exchanges or other regulated markets.

For their part, the CSDs would have to comply with strict organizational, conduct of business and prudential requirements to ensure their viability and the protection of their users. They will also have to be authorized and supervised by their national regulators. Authorized CSDs will be granted a passport to provide their services in other Member States; and users will be able to choose between all 30 CSDs in Europe. In turn, EU CSDs would have access to any other CSDs or other market infrastructures such as trading venues or Central Counterparties (CCPs), whichever country they are based in.

The proposal now passes to the European Parliament and the Council for negotiation and adoption. CSDs may be subject to the rules of the MiFID Directive for certain services they provide, such as the provision of securities accounts and, possibly, collateral management services. It would be for the European Parliament and the Council to decide, in the context of the current review of MiFID, whether, similarly to banks, CSDs should be exempted from certain rules of MiFID.

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