ECSDA views on the Future of European Post-Trade

Recently, the European Commission has launched a consultation on the Future of European Post-Trade, based on the conclusions of the European Post Trade Forum (EPTF). European CSDs thank the European Commission for the constructive and effective discussions at the EPTF, in which they have been deeply involved. In addition to the insight provided in the report resulting from the forum, Central Securities Depositories (CSDs) note several trends in their immediate ecosystem which are important to post-trade more widely.

CSDs are highly regulated institutions, not only at the national level but going forward, they are also highly regulated within the European Economic Area (EEA) as a result of the CSD Regulation (Regulation EU 909/2014, hereafter “CSDR”). At the time of writing, as only one CSD is operating on the basis of the European CSDR licence, it is too early to be certain of the broader consequences of this regulation on European post-trade landscape and remain to be examined at a later stage. More explanations on the trends provided below, a description of CSD ecosystem and our sources for data and conclusions are provided in the consolidated response and in the ECSDA Factbook.

General information on the CSD ecosystem:

– An increase in the issuance of securities
ECSDA notes that the number of securities recorded within CSDs has slightly increased. At 31 December 2016, ECSDA members collectively held securities worth more than EUR 54.9 trillion, which is a 2.3 % increase in comparison with the previous year.

– A decrease in the total number of CSD participants
The total number of participants at ECSDA member CSDs has decreased from 7,021 in 2015 to 6,785 in 2016 (3.4 percent less), meaning that there is a diminishing number of institutions that are subject to the CSDR requirements for CSD participants.

– Settlement within the CSD Settlement systems decreases
Even though the amount of securities held at CSDs has increased, the number of securities settled within the CSD systems of ECSDA members has decreased by 5% between 2015 and 2016. The value of delivery instructions going through CSDs’ systems decreased to €67 trillion (by nearly almost 6 percent) since 2014.

– The European Central Bank is a major stakeholder in the ecosystem of European CSDs

– The number of CSDs in Europe is relatively stable
In the past, a number of attempts have been made to consolidate CSD infrastructure. Some CSDs delivered solutions that have significantly improved the management of securities accounts across different jurisdictions. In 2017, there was a successful merger of three CSDs. Despite this major step of creating a single legal entity and deployment of common CSD system, the securities accounts, continue to be maintained in three different securities settlement systems governed by the laws of three different Member States.

Trends that CSDs deem most important:

1. ECSDA expects that there may be a negative trend in the portion of regulated settlement.
This is due to a combination of factors including the facts noted above, i.e. the decreasing number of CSD participants and decrease of securities settlement instructions on CSD books, combined with the recently issued ESMA opinion on AIFMD (with regard to the unlimited liability, which is not compatible with a CSD profile, that may need to be taken to continue providing cross-border services to fund depositories) and the ESMA Q&A on article 35 of the CSDR (if not all levels of the holding chain are required to use international communication standards at the same time).

2. International competitiveness among financial centres is growing.
The costs of post-trade are an important factor for participants across the financial market. CSD related costs are only a minute part of all post-trade related costs. Costs (for the totality of transaction processing steps and involved intermediaries) continue to be important for the end-investor. European policy-makers should endeavour to decrease the administrative burden and be even more conscious of the cost implication of their decisions to increase the competitive attractiveness of European infrastructure and market places in comparison with other financial centres worldwide.

3. Importance of collateral and collateral mobilisation continue to grow.
Through their collateral management services, triparty, securities lending and borrowing and other services, CSDs are cornerstones in enabling market participants to manage and optimise the use of collateral. They facilitate the safe and legally transparent re-use and efficiency in collateral mobilisation, both locally and globally.

4. Increasing needs in global infrastructure solutions
European policy-makers should support the global connectivity of European infrastructures to international financial centres in order to ensure their international competitiveness to attract international investors and allow European investors to diversify and invest in foreign assets in a safe infrastructure environment.

5. Gradual change in the business models of CSD users
Regulation should not impede this flexibility (with relevant risk considerations) and be neutral to the profile of CSD users, which is not fully recognised today (notably, under ESMA opinion on AIFMD and UCITS, the differentiation is done for fund depositary CSD users that hold assets issued cross-border).

CSDs particularly see the need to focus on corporate action processing, shareholder identification and withholding tax processing barriers. ECSDA believes that a barrier related to DvP settlement in foreign currency needs to be addressed as well.

ECSDA looks forward to further collaboration and discussions on the future of European post-trade with European authorities and policy-makers.

To read the full response to the consultation click here