On 15 April the European Parliament formally adopted the Regulation on Central Securities Depositaries (CSDR), a crucial piece of the new EU landscape for securities trading. The impact will be far reaching – and not just for Europe.
As firms chart their way through MiFID II and global OTC reform, they will be wise to take it into account as trade reporting, transparency and testing architectures will need to be in place in 2015. The clock is ticking, timelines are marching forwards and the technical standards really should be on your agendas.
The 101-page CSDR is designed to strengthen the framework, addressing the systemically important role of CSDs in the securities market. It covers the settlement process, widening access rights, solidifying prudential and business conduct rules and enforcing supervisory requirements for limiting CSDs providing “ancillary services” (i.e., central maintenance services and other services which do not increase the risk profile of the CSD).
One of the most significant shifts introduced in the regulation is the move towards a minimum settlement period of two days after trade date. This move to T+2 is seen by the Parliament as a way to provide a less risky and more efficient system for CSDs and the wider market. The rule will complement the ECB’s TARGET2-Securities (T2S) programme, which aims to centralise the delivery-versus-payment settlement service. The first T2S wave will be rolled out to selected CSDs starting in June 2015.
ESMA received its mandate from the European Parliament to begin drafting 31 technical standards under the CSDR, many of which sound eerily familiar to those in the middle of MiFID II. ESMA will be defining asset types, liquidity calculations and extension periods amongst other market rules.
Differing definitions of asset classes and liquidity benchmarks will undoubtedly hamper already strained trading businesses – many of which are blissfully unaware that the comment period will close on 22 May 2014.
Confusion will no doubt arise over the issue of transaction types for, as the CSDR states, OTC trades will not be subject to the T+2 rule and will remain at T+3 (or the agreed-upon settlement period among counterparties). This will mean that firms need to either add further detail to an already complex trade reporting matrix for government debt securities or move OTC settlement to a day earlier than actually required.
Solutions will need to factor in a short timeframe for implementation with only an eight-month window foreseen. As regulators have not dictated a tiered implementation schedule for the adoption of T+2 under CSDR – merely stating that it should be adopted by the beginning of T2S implementation in mid-2015 – timelines will be tight. October 2014 will see the widespread adoption of T+2 by large international CSDs; with Euroclear in the UK, Ireland, France, the Netherlands and Belgium – and Monte Titoli in Italy – confirmed for that month. Simultaneous implementation of T+2 across major EU CSDs will avoid the unnecessary confusion of CSDs operating on different national settlement timelines. Nevertheless, the large scale 6 October ‘big bang’ implementation will place a huge strain on market participants, who will have to factor in a number of moving parts to ensure they remain compliant.
In an obvious attempt to address business concerns over the potential for greater settlement fails under T2S, the ECB has released a best practice guide for the migration to T+2 for T2S market participants.
However one cuts it, CSDs must begin the task of creating incentivised products and services to maintain their market share and draw in new business. It’s a case of sink or swim for them as they enter the unknown waters of market competition. We look forward to the innovations that will result.
But we also note that, by introducing new competition, along with a large amount of other change, the risk of settlement failures will increase.
Businesses large and small will be impacted in some way right across the financial services sector. Best keep a weathered eye on the horizon, as it is becoming ever closer …