The European Parliament adopted by 552 votes to 33, with 9 abstentions, a resolution on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 909/2014 as regards settlement discipline, cross-border provision of services, supervisory cooperation, provision of banking-type ancillary services and requirements for third-country central securities depositories (CSDs).

The proposed amendment to the CSD Regulation aims to reduce compliance costs and regulatory burdens for CSDs and to make it easier for CSDs to offer a wider range of cross-border services, while improving their cross-border supervision.

Parliament’s position adopted at first reading following the ordinary legislative procedure amended the Commission proposal as follows:

Measures to prevent settlement fails

European Securities and Markets Authority (ESMA) should, in close cooperation with the members of the ESCB, develop draft regulatory technical standards to specify the measures to prevent settlement fails in order to increase settlement efficiency and in particular:

- the measures to be taken by investment firms;

- the details of the procedures that facilitate settlement, which could include the shaping of transaction sizes, partial settlement of failing trades and the use of auto-lend/borrow programmes provided by certain CSDs; and

- the details of the measures to encourage and incentivise the timely settlement of transactions.

Measures to address settlement fails

For each securities settlement system it operates, a CSD should:

- establish a system that monitors settlement fails of transactions in financial instruments;

- establish procedures that facilitate the settlement of transactions in financial instruments that are not settled on the intended settlement date. Those procedures should provide for a penalty mechanism that serves as an effective deterrent to participants that cause settlement fails.

The penalty mechanism should include cash penalties for participants that cause settlement fails. Cash penalties should be calculated on a daily basis for each business day that a transaction fails to be settled after its intended settlement date until the transaction is either settled or bilaterally cancelled.

CSDs, CCPs and trading venues should establish procedures that enable them to suspend , in consultation with their respective competent authorities, any participant that fails consistently and systematically to deliver the financial instruments on the intended settlement date and to disclose to the public its identity only after giving that participant the opportunity to submit its observations and provided that the competent authorities of the CSDs, CCPs and trading venues, and of that participant have been duly informed. Public disclosure of suspensions should not contain personal data.

Buy-ins

The amended text clarifies the scope of the buy-in process laid down in Regulation (EU) No 909/2014.

Mandatory buy-ins should be a measure of last resort and should apply only where the following two conditions are met at the same time: (1) the application of other measures, such as cash penalties or the suspension, by CSDs, central counterparties or trading venues, of participants that cause settlement fails consistently and systematically, has not resulted in a long-term sustainable reduction of settlement fails in the Union or in maintaining a reduced level of settlement fails in the Union; and (2) the level of settlement fails has or is likely to have a negative effect on the financial stability of the Union.

College of Supervisory Authorities

A college of supervisors should be established for CSDs the activities of which are considered to be of substantial importance for the functioning of the securities markets and the protection of investors in at least two host Member States. A college set up under this Regulation should not prevent or replace other forms of cooperation between competent authorities. ESMA should develop draft regulatory technical standards to specify the criteria on the basis of which it can be determined whether the activities are of substantial importance.

Members of a college should have the possibility of requesting the adoption by the college of a non-binding opinion concerning issues identified during the review and evaluation of a CSD or during the review and evaluation of providers of banking-type ancillary services, or concerning issues that relate to the extension or outsourcing of activities and services provided by the CSD, or concerning any potential breach of the requirements of Regulation (EU) No 909/2014 arising from the provision of services in a host Member State. Non-binding opinions should be adopted by a simple majority vote.

Information to competent authorities

Any natural or legal person or such persons acting in concert, who have taken a decision either to acquire, directly or indirectly, a qualifying holding in a CSD or to further increase, directly or indirectly, such a qualifying holding in a CSD as a result of which the proportion of the voting rights or of the capital held would reach or exceed 10 %, 20 %, 30 % or 50 % or would lead to the CSD becoming its subsidiary, should first notify the competent authority of that CSD in writing thereof, indicating the size of the intended holding and relevant information.

When assessing the notification and the information communicated, the competent authority should, in order to ensure the sound and prudent management of the CSD in which an acquisition is proposed and having regard to the likely influence of the proposed acquirer on the CSD, assess the suitability of the proposed acquirer and the financial soundness of the proposed acquisition.

Review

No later than five years from the date of entry into force of the amending regulation, the Commission should review the regulation and draw up a general report thereon. The Commission should analyse in particular: (i) the functioning of the regulatory and supervisory framework for Union CSDs, especially those CSDs whose activities are of substantial importance for the functioning of securities markets and the protection of investors in the Union in at least two host Member States, focusing in particular on the cross-border provision of services, potential risks for clients and participants of CSDs, investor protection and the financial stability in the Union; (ii) the scope of the Union regulatory and supervisory framework for third-country CSDs.

The Committee on Economic and Monetary Affairs adopted the report by Johan VAN OVERTVELDT (ECR, BE) on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 909/2014 as regards settlement discipline, cross-border provision of services, supervisory cooperation, provision of banking-type ancillary services and requirements for third-country central securities depositories (CSDs).

The committee responsible recommended that the European Parliament's position adopted at first reading under the ordinary legislative procedure should amend the proposal as follows:

The proposed amendment to the CSD Regulation aims to reduce compliance costs and regulatory burdens for CSDs and to make it easier for CSDs to offer a wider range of cross-border services, while improving their cross-border supervision.

The main provisions of the proposed revision of the CSD Regulation relate to

- settlement discipline: introduction of a ‘two-step approach’ whereby mandatory buy-ins could become applicable if and when the penalties regime alone does not improve settlement fails in the EU;

- banking-type ancillary services;

- cooperation of authorities through colleges;

- passporting, i.e. simplifying the requirements for CSDs to operate throughout the EU with a single licence, by removing costly and duplicative procedures;

- cooperation between supervisory authorities;

- surveillance of third country CSDs.

To ensure effective and efficient coordination of supervision by competent authorities, Members believe that the obligation to establish mandatory colleges should be based on a single existing and reliable criterion, namely the substantial importance of a CSD for a jurisdiction other than the one where it is established. The threshold for the mandatory establishment by the competent authorities of a college of supervisors should be met when a CSD is of substantial importance in at least two host Member States.

The report shall include in particular a new article concerning the colleges of supervisors for CSDs providing services in another Member State and for CSDs that are part of a group with two or more CSDs.

ESMA should establish, manage and chair a college of supervisors. The college should consist of:

- ESMA, as the chair of the college;

- the competent authority of the CSD’s home Member State;

- the relevant authorities;

- the competent authority of the host Member States where the CSD is of substantial importance;

- the European Banking Authority, where a CSD has been authorised.

Members of a college should have the possibility of requesting the adoption by the college of a formal opinion concerning issues identified during the review and evaluation process of CSDs, or during the review and evaluation of providers of banking-type ancillary services, or concerning issues that relate to the extension or outsourcing of activities and services provided by the CSD. The process for the adoption of formal opinions should rely on a simple majority vote.

PURPOSE: to amend certain elements of the Central Securities Depositories (CSD) Regulation in order to eliminate compliance burdens and disproportionate costs and simplify the rules without undermining investor protection, market integrity and financial stability.

PROPOSED ACT: Regulation of the European Parliament and of the Council.

ROLE OF THE EUROPEAN PARLIAMENT: the European Parliament decides in accordance with the ordinary legislative procedure and on an equal footing with the Council.

BACKGROUND: Regulation (EU) No 909/2014 of the European Parliament and of the Council standardises the requirements for the settlement of financial instruments and the rules on the organisation of central securities depositories (CSDs) and the conduct of their business, in order to promote safe, efficient and smooth settlement.

CSDs play an essential role in the financing of the economy through their role in the issuance of securities and by allowing securities transactions to be completed. CSDs also play an important role in the implementation of monetary policy by central banks. As CSDs are systemically important financial institutions for the financial markets, it is essential that the framework applicable to them remains fit for purpose.

The CSD Regulation required the Commission to review the Regulation and report on its implementation and the way forward for its revision by 19 September 2019. In its resolution on the further development of the Capital Markets Union, the European Parliament also called on the Commission to review, in the context of Brexit and the COVID-19 crisis, the settlement discipline regime of the CSD Regulation.

In 2019, the Commission conducted a targeted consultation on the application of Regulation (EU) No 909/2014. On 1 July 2021, the Commission adopted a report concluding that, overall, the CSD Regulation is achieving its original objectives of increasing the efficiency of securities settlement in the EU and the soundness of CSDs. In most areas, it considered it premature to make substantial changes to the Regulation. However, it indicated areas where further action might be needed to achieve the objectives of the CSD Regulation in a more proportionate, effective and efficient way .

A simplification of the requirements in certain areas covered by Regulation (EU) No 909/2014, and a more proportionate approach to those areas, is in line with the Commission's Regulatory Fitness and Performance (REFIT) programme which emphasises the need for cost reduction and simplification so that Union policies achieve their objectives in the most efficient way, and aims in particular at reducing regulatory and administrative burdens.

CONTENT: the proposal aims to adjust the requirements of Regulation (EU) No 909/2014 on CSDs without compromising its overall objectives, in order to: (i) simplify these requirements and make them more efficient ; and (ii) reduce the disproportionate costs and burdens arising from them .

In concrete terms, the proposal aims to:

- minimise obstacles to cross-border settlements and reduce the administrative burden and compliance costs by simplifying the passporting process under the CSD Regulation. The possibility for the supervisory authority of the host Member State to refuse the passport is to be abolished and replaced by a notification from the supervisory authority of the home Member State to the supervisory authority of the host Member State. According to the Commission, the simplified passporting process is expected to reduce costs by up to 75%, generating a one-off saving of EUR 585 000 on average per CSD;

- enhance the cooperation between national supervisors by establishing colleges of supervisors to facilitate CSDs' access to markets other than their home market and ensure financial stability by providing supervisors with more powers to monitor risks;

- facilitate CSDs’ access to banking-type ancillary services by allowing CSDs with a banking license to offer such services to other CSDs and reviewing the thresholds below which CSDs may use a commercial bank. It is estimated that the proposed measures regarding CSDs' access to bank-like ancillary services could generate EUR 16 billion of additional foreign currency securities settlement on an annual basis;

- combine the clarification of various elements related to settlement discipline with a revision of the implementation timeline for mandatory buy-ins . It is proposed to clarify the scope of application of cash penalties and automatic buy-backs by specifying, inter alia, the categories of transactions that are excluded from them. Such exclusions should cover in particular transactions that failed for reasons not attributable to the participants and transactions that do not involve two trading parties, for which the application of cash penalties or mandatory buy-ins would not be practicable or could lead to detrimental consequences for the market;

- introduce an expiry date for the grandfathering clause for EU and third country CSDs and a notification requirement for third country CSDs , thus ensuring that authorities within the EU have the powers and information they need to monitor the risks associated with both EU and third country CSDs, including through enhanced supervisory cooperation.

BUDGETARY IMPLICATIONS: the proposal will have no implications on the EU budget. The European Securities and Markets Authority (ESMA) will be mainly affected by the participation in colleges, the development or updating of five technical standards and the management of the notification procedure by third country CSDs of their activities in the EU. However, this last point represents a limited one-off cost. The tasks proposed for ESMA therefore do not require the creation of additional posts and can be carried out with existing resources. The same applies to the EBA.