A new framework for CSD authorisation

22 May 2014 – ECSDA calls for a truly harmonised process for authorising and supervising central securities depositories in the European Union and warns against excessive recordkeeping requirements that seek to turn CSDs into ‘transaction repositories’.

In the second part of its response to the ESMA public consultation on technical standards on the CSD Regulation, ECSDA makes recommendations on the future rules for authorising and supervising CSDs in the European Union.

European CSDs support a truly harmonised authorisation process, and warn against the imposition of additional requirements by national regulators on top of European rules. Such ‘gold-plating’ should be avoided as much as possible to ensure truly equal conditions of competition for CSDs and truly harmonised safety standards across EU markets. That said, harmonised standards do not require a “one-size-fits-all” approach. Some flexibility is needed to allow for European technical standards to be implemented proportionately, taking into account the diversity in CSD business models, activities and size.

ECSDA also warns against disproportionate restrictions on CSD participations in other legal entities, and excessive recordkeeping requirements. Indeed, the objective of recordkeeping rules imposed on CSDs is to allow regulators to assess compliance with the CSD Regulation. These rules are not meant to provide regulators with transaction data allowing them to oversee the activities of market participants, and CSDs should thus not be confused with trade repositories. Furthermore, ECSDA estimates that implementing the recordkeeping requirements currently being proposed by ESMA would involve system development costs for all European CSDs of more than EUR 75 million, possibly even up to EUR 115 million. The mandatory use of Legal Entity Identifiers (LEI) and of non-proprietary format for CSD records, in particular, would be extremely costly to implement.

CSDs will have to make important technical adaptations to their systems in order to comply with some of the most complex technical standards. It is thus indispensable for ESMA to recognise that CSDs will not realistically be able to demonstrate compliance with all technical standards during the initial authorisation process. An appropriate transition period must be foreseen, at least for the following standards:

  • Settlement discipline: CSDs, market participants and other infrastructures should be given up to three years to comply with the new rules on buy-ins and penalties for late settlement, to be adopted under CSDR article 7;
  • Recordkeeping: Depending on the scope of the final requirements, a transition period of at least 14 months will have to be determined to allow CSDs to develop the required functionalities;
  • Requirements on a secondary processing site: CSD having to set up a new secondary processing site should be given at least 6 months after the entry into force of the technical standards to achieve compliance.

Moreover, technical standards should ensure that the recognition of third country CSDs under CSDR is not just a one-off exercise, but an ongoing process. Once a third country CSD is recognised, follow-up arrangements should be in place to ensure ongoing supervisory equivalence.

Finally, for CSDs with a banking licence, ESMA should anticipate possible overlaps and avoid inconsistencies between CSDR technical standards and applicable banking legislation.

Download the full ECSDA paper “A new framework for CSD authorisation and supervision