Main Menu

CSD REgulation

On 10th March 2017 the CSD Regulation was published in the European Union’s Official Journal, entering into force on 30th March 2017. This marks the start of the application period during which EU Central Securities Depositories (CSDs) must seek authorisation from their local Competent Authority. At the end of that process – expected to last 12 months – most of the CSD Regulation will take effect in the UK.

Whilst most of the CSD Regulation affects the CSDs such as Euroclear and Clearstream, there are some aspects of the Regulation that will impact PIMFA member firms. These include the following:

This requires transferable securities which are admitted to trading or traded on trading venues to be represented in book-entry form on or before the intended settlement date. The CSD Regulation requires this to apply from 1st January 2023 for all transferable securities issued after that date and from 1st January 2025 to all transferable securities. The UK Government is expected to consult on this issue later in 2017.

For transactions in transferable securities, money-market instruments, units in collective investment undertakings and emission allowances which are executed on trading venues, the intended settlement date (ISD) must be no later than on the second business day after the trading takes place. The requirement does not apply to transactions which are negotiated privately but executed on a trading venue, to transactions which are executed bilaterally but reported to a trading venue or to the first transaction where the transferable securities concerned are subject to initial recording in book-entry form.

The move from T+3 to T+2 standard settlement took effect from 6th October 2014 in the UK.

These articles effectively introduce a mandatory buying-in and settlement discipline regime across the EU. Some of the key features of the proposed regime include:

  • A penalty mechanism which is designed to serve as an effective deterrent for participants that cause settlement fails. This will include cash penalties for participants that cause settlement fails.
  • Where a failing participant does not deliver the financial instruments to the receiving participant within 4 business days after the ISD (the “extension period”) a buy-in process shall be initiated whereby those instruments shall be available for settlement and delivered to the receiving participant within an appropriate timeframe.
  • Where the transaction relates to a financial instrument traded on an SME growth market the extension period shall be 15 days unless the SME growth market decides to apply a shorter period.
  • If the buy-in fails or is not possible, the receiving participant can choose to be paid cash compensation or to defer the execution of the buy-in to an appropriate later date (the “deferral period”). If the relevant financial instruments are not delivered to the receiving participant at the end of the deferral period, cash compensation shall be paid. Cash compensation shall be paid to the receiving participant no later than on the second business day after the end of either the buy-in process or the deferral period, where the latter was chosen.
    The settlement discipline and buying-in aspects of the CSD Regulation will not take effect until at least a year later than the rest of the CSD Regulation, the precise timeline yet to be confirmed.

PIMFA is actively engaged in the Bank of England’s Settlement Discipline Working Group and also involved in the separate Trading and Settlement Task Forces being chaired by the London Stock Exchange and Euroclear UK & Ireland respectively.

Article 38(5) requires a CSD participant to offer its clients at least the choice between omnibus client segregation and individual client segregation and inform them of the costs and risks associated with each option.

The article also requires CSDs and their participants to publicly disclose the levels of protection and the costs associated with the different levels of segregation that they provide and shall offer those services on reasonable commercial terms. A description of the main legal implications of the respective levels of segregation offered, including information on the insolvency law applicable in the relevant jurisdictions, also needs to be included.

ESMA have clarified that CSD participants should be ready to comply with the requirements of Article 38 at the time of the authorisation of the CSD that operates the securities settlement system in which they are participants.

PIMFA is preparing some Q&As to help member firms with their compliance with Article 38 and this should be available by the end of June 2017.

Almost there...

Complete the quick form below to download the Membership Brochure