Central Securities Depository Regulation (CSDR)

Background

The Central Securities Depository Regulation (CSDR) No. 909/2014/ EU is a crucial piece of regulation implemented as an outcome of the financial crisis of 2008, to ensure that the financial system becomes more resilient by strengthening the core infrastructures. After implementing Target2-Securities (T2S), which introduced a T+2 settlement cycle, CSDR was brought about to further protect the central security depositories and bring consistency across the EU. Settling trades across borders represents a high cost for investors as well as high risk within one country, therefore, CSDR also looks to harmonise settlement discipline within the EU to maintain a standardised approach.

Overview

CSDR hosts the provision of shorter settlement periods, mandatory buy-ins, as well as cash penalties in order to significantly reduce settlement fails. The regulation also requires Central Securities Depositories (CSDs) to obtain authorisation from their National Competent Authority (NCA).

A review of CSDR was finalised in 2023, with the aim of creating a more integrated EU post-trading landscape, particularly by making securities settlement more efficient while attempting to enhance Central Securities Depositories (CSDs) supervision.

The review resulted in the introduction of clarifications to the scope of the application of cash penalties and mandatory buy-ins, as well as in a common ground on supervisory aspects which sees the European Securities and Markets Authority (ESMA) more involved than before.

The impact on Securities Lending & Borrowing?

The Central Securities Depository Regulation (CSDR) aims to improve efficiency in the securities lending industry by enforcing timely settlement of trades. This will require industry participants to upgrade their technology to identify who is responsible for settlement failures and allow for associated costs to be passed on. While CSDR is expected to significantly reduce settlement fails, it won’t eliminate them completely. The industry needs to prepare for this by adopting measures like mandatory partial settlement, sharing settlement instructions (SSI), and standardisation.