Shearman & Sterling LLP | FinReg | European Securities and Markets Authority Publishes Recommendations to Reform the EU Central Securities Depositories Regulation
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  • European Securities and Markets Authority Publishes Recommendations to Reform the EU Central Securities Depositories Regulation

    The European Securities and Markets Authority has published a letter addressed to the European Commission making recommendations for inclusion in the Commission's Review of CSDR. The EU Central Securities Depositaries Regulation provides a harmonized regulatory and prudential regime for central securities depositories and increases the robustness and resilience of securities settlement arrangements. There is a single market for CSD services across the EU and a third-country equivalence regime for CSDs. ESMA's recommendations include:
    1. That the Target2-Securities system, a systemically important common settlement platform, providing settlement services in central bank money for the majority of EEA CSDs, be brought within the scope of CSDR.
    2. Amendment of the supervision arrangements for T2S. Currently, the European Central Bank oversees T2S, alongside a cooperative framework based on a memorandum of understanding between the ECB, ESMA, the national competent authorities of the CSDs participating in T2S, and the central banks overseeing the CSDs. ESMA considers that CSDR should provide for a cooperative arrangement for supervision/oversight of T2S in the form of a college of supervisors, with clear roles for the participating authorities.
    3. Expansion of the recognition regime for third-country CSDs to incorporate settlement services, which would be in addition to the existing recognition regime for notary and central maintenance services. ESMA points out that third-country CSDs can freely provide settlement services in the EU without any EU oversight or competing with EU CSDs. However, when the EU settlement discipline regime comes into play (currently set for February 1, 2022), the already unlevel playing field between EU and TC-CSDs will deepen. ESMA is concerned that settlement activity will migrate to third-country CSDs which are subject to fewer regulatory requirements. The settlement discipline regime is set out in technical standards that cover measures for preventing settlement fails through automated matching, a hold and release mechanism and partial settlement. The RTS also provides measures for monitoring and addressing settlement fails, such as a mechanism for cash penalties and a buy-in process.

    The U.K. government on-shored the CSDR into U.K. law after Brexit, but announced in June 2020 that the T+2 and buy-in rules under U.K. CSDR will be abandoned. This was decided on the basis that there will be a "market solution", which means that industry will still need to promote more effective settlements and buy-in. Following the U.K. announcement, there are questions about whether the EU will follow through with the settlement discipline regime and in what format.

    View ESMA's letter to the Commission.

    View details of the Commission's Review of CSDR.

    View details of the delay to the EU settlement regime.

    View the UK government's announcement.

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