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 during of 2008,7-20092008 , 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 representss 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 was published in the Official Journal in August 2014, and entered into force in September 2014; it will apply to all European Central Securities Depositories . 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 CSDs to obtain authorisation from their National Competent Authority (NCA). CSDR contains in total 76 articles split into 6 key sections:

• Subject matter and scope
• Securities settlement
• CSDs – authorisation, supervision and service provision
• Provision of banking-type ancillary services for CSD participants
• Sanctions
• Delegated powers and other provisions

Key Objectives

• Synchronise rules across all EU authorised CSDs, and create an integrated market
• Increase the efficiency of security settlement/infrastructure to prevent settlement fails
• Expand the safety of security settlement/infrastructure to ensure resiliency
• Eliminate distinction between national and cross-border transactions

Scope

CSDR regulation applies to the activities of all European CSDs, defined as ‘a legal person that operates a securities settlement system’, as well as the settlement of all financial instruments. These include, but are not limited to,‘ Transferable securities and money market instruments’, as defined in point 15 of Article 4(1) of Directive 2014/65/EU. A CSD can also be determined as an entity that can accept or hold securities at a centralised level. Trading parties/venues and central counterparties as well as clearing/settlement agents will have to comply with measures such as the mandatory buy-in regime as well any cash penalties for fails.

How Will CSDR Affect Securities Lending?

The execution of CSDR will have many beneficial impacts to the securities lending industry, and for the first time, timely settlement will be subject to enforcement. At ISLA, we believe that its introduction is a vital move towards a more standardised and efficient post trade market. It has given firms the opportunity to streamline their back and middle office processing operations and technology to become more efficient and cost-effective, whilst avoiding penalties. Whilst CSDR can help to drastically improve settlement fails, it will inevitably still be a moderate occurrence, and firms must integrate sufficient technology upgrades to be able to determine liability for such fails, and allow the pass on of associated costs to the relevant party. In April 2018, ISLA published the results of a settlement survey undertaken with several member firms to understand how the market manages loan settlements. The results showed that members’ settlement rates were between 80-90%, and that the majority of fails occurred in loan returns. CSDR has forced the industry to address the issue of settlement efficiency without jeopardising liquidity, especially with the upcoming adoption of buy-ins and cash penalties. Mandatory partialling, SSI sharing, and standardisation are key elements that firms will need to review in preparation for CSDR.