19 Feb 2015 – In its response to the ESMA consultation on “Level 2” legislation on central securities depositories, ECSDA identifies several issues that need to be solved prior to the finalisation of the new rules.
In relation to the new authorisation process for CSDs, ECSDA advocates a different approach on:
1. Record keeping requirements
The proposed rules for CSD record keeping are far-reaching and cannot realistically be implemented by the end of 2015. In particular:
- Requiring CSDs to use Legal Entity Identifiers (LEI) for all issuers and CSD clients is not going to work when CSDs have no means to force third parties to comply;
- Harmonised codes should be used for the purpose of regulatory reporting – not for CSD’s own records – and they should be compatible with global ISO standards;
- Rules on record keeping should not apply retroactively;
- A transition phase of at least 24 months, aligned with the implementation timeline for settlement discipline requirements, should be introduced.
2. Links with non-EU CSDs
European CSDs must be allowed to continue to maintain links with non-EU CSDs. Expecting CSDs or intermediaries established in non-EU jurisdictions to be subject to a comparable regulatory regime as that in place in the EU is not realistic, given that European rules are among the strictest in the world. It is also not justified from a risk perspective since CSD links do not expose the linked CSDs to credit risk. Forcing European CSDs to discontinue existing links with non-EU CSDs would be detrimental to market integration and would not in any way enhance the safety of cross-border settlements, since transactions would have to occur outside the network of existing infrastructures.
3. The reconciliation process
The proposed rules on reconciliation need to be adapted in two ways to avoid negative consequences on financial stability:
- Suspension of settlement in a financial instrument should not be automatic in case of discrepancies. There should be an element of proportionality to ensure that the damage caused by the suspension is not greater than that caused by the reconciliation error;
- Requirements on daily reconciliation should only apply to cases where the CSD provides central maintenance services for a financial instrument. In other cases, including in the case of offshore investment funds for which a transfer agent provides the notary and central maintenance services, the CSD is not in a position to impose daily reconciliation to the third party transfer agent.