Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012 (CSDR) was published in the Official Journal on 28 August 2014, and entered into force on 17 September 2014.
The Central Securities Depositories Regulation (CSDR) is to introduce a European regime governing CSDs with main aim to increase the safety and efficiency of securities settlement and the settlement infrastructures in the EU.
The CSDR was published in the Official Journal in August 2014 and is gradually entering into force. In March 2017, the EU Commission published Regulatory Standards on: (i) authorisation and supervision of CSDs; (ii) prudential requirements for CSDs; (iii) reporting of internalised settlement; and (iv) cash penalties.
Through CSDR, new efficiency measures are introduced for supervision and authorization of all CSDs in EU. CSDR is introduced to support the objectives of Target2securities(T2S) through securities settlement discipline regime. The main objectives of CSDR:-
- To harmonize the different rules applicable to the CSDs in EU
- To increase safety of CSDs through applying high prudential requirements in line with international standards
- To increase the safety of securities settlement and the settlement infrastructures in the EU
- Shorter settlement periods
- Settlement discipline measures (mandatory cash penalties and ‘buy-ins’ for settlement fails)
- An obligation regarding dematerialization for most securities
- Increased prudential and supervisory requirements for CSDs and other institutions providing banking services ancillary to securities settlement
- New account segregation rules, Mandatory Daily reconciliation processes, Book-entry form of securities, Use of Legal Entity Identifier codes
CSDR applies to European Central Securities Depositaries (CSDs), their participants, and to securities settlement systems in the European Union (EU).
Trading parties, central counterparties (CCPs) and trading venues will also be impacted and will have to directly comply with some of the measures, in particular with the introduction of mandatory buy-ins and penalties for settlement failures.
- Settlement: All CSDs has to complete settlement cycle for trades in 2 days following the transaction date.
- Mandatory buy-ins and Cash penalties: CSDs has to implement a penalty mechanism for each failed settlement instruction along with mandatory Buy-in process. Rate of Cash penalties are set out by the EU Commission.
- CSDs: CSDs will have to suspend settlement when a reconciliation break reflects an undue creation or deletion of securities that cannot be resolved within 24 hours, CSDR requires CSDs to provide fair and open access to their services while being sure that their customers do not expose one another to undue risk.
- Banking-type ancillary services: CSDs which are willing to provide banking type ancillary services such as certain cash credit and payment services need to obtain an additional authorization.
- CSD’s Customers – Account segregation: CSDs and their participants are obliged to segregate the securities accounts for each client and to offer their clients the choice between omnibus and individual client account, inform them about the cost and risk associated with each option.
- Internalized settlement: Clients have to report transactions that are settled outside of securities settlement systems including information about the value and volume of all such securities transactions on a quarterly basis to their National Competent Authorities.
- Book-entry form: Any issuer established in the EU that issues or has issued transferable securities which are admitted to trading or traded on trading venues, is required to arrange for such securities to be represented in book-entry form.
- Mandatory LEI (Legal Entity Identifier) use: The mandatory use of LEI should facilitate record keeping, as well as notary and settlement activities.