EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 22 February 2006 
at the request of the Cypriot Ministry of Finance 
on a draft law amending the Cyprus Securities  and Stock Exchange (Central Depository and 
Central Securities Registry) Laws of 1996 to 2005 
(CON/2006/9) 
 
Introduction and legal basis On 7 February 2006 the European Central Bank (ECB)  received a request from the Cypriot Ministry of 
Finance for an opinion on a draft law amending the Cyprus Securities and Stock Exchange (Central 
Depository and Central Securities Registry) Laws of 1996 to 2005 (hereinafter the ‘draft law’).  
The ECB’s competence to de liver an opinion is based on Article 105(4) of the Treaty establishing the 
European Community and on the fifth and sixth indent s of Article 2(1) of Council Decision 98/415/EC of 
29 June 1998 on the consultation of the European Ce ntral Bank by national authorities regarding draft 
legislative provisions
1, as the draft law relates to payment and settlement systems and to rules applicable 
to financial institutions insofar as they materially influence the stability of financial institutions and 
markets. In accordance with the firs t sentence of Article 17.5 of the Rules of Procedure of the European 
Central Bank, the Governing Council has adopted this opinion. 
 1  Purpose of the draft law and general observations 
1.1 The ECB understands that the objective of the dr aft law is to enable the Central Depository and 
Central Registry (CDCR) for securities listed and traded on the Cyprus Stock Exchange (CSE) to 
operate more flexibly. This would be achieved by delegating to the Council of the CSE (hereinafter 
the ‘CSE Council’) the power to regulate certain technical issues relevant to the management of the CDCR’s business by means of ‘Regulatory Decisions’.  Until now, such issues have been dealt with 
by means of either CSE ‘Council Re gulations’, which are subject to the endorsement of the Cypriot 
Council of Ministers and the approval of the House of Representatives
2 or CSE ‘Council 
Decisions’, which are subject to the approval of the Cyprus Securities and Exchange Commission. 
In this context, the ECB understands that the inte ntion underlying the draft law is that the CSE 
                                                      
1  OJ L 189, 3.7.1998, p. 42.  
2  See section 192 of the Cyprus Securities  and Stock Exchange Laws of 1993 to 2005. 
2 Council should have the power in future to regulat e technical matters only, while other issues will 
continue to be regulated by law.  
1.2 The ECB notes that the CSE Council is responsib le for managing and operating: (i) the CSE, a 
public law-regulated market that operates subject to the supervision of the Cypriot Minister for 
Finance3; and (ii) the CDCR4, which operates as a division of the CSE rather than as an 
independent legal entity. Members of the CSE Counc il are designated by the Minister for Finance 
and appointed by the Council of Ministers5.  
 2.  Corporate governance considerations 2.1 The changes that the draft law introduces to the decision-making process within both the CSE and 
the CDCR have important implications for the la tter’s governance and supervision, which the draft 
law does not directly address. As the CDCR is the central securities depository (CSD) for all 
Cypriot book-entry securities, its governance arra ngements are of a significance that goes beyond 
corporate law. The ECB therefore makes a few obser vations relevant to the supervision of payment 
and securities clearing and settlement systems. The se observations are also in the spirit of the 
future implementation of Directive 2004/39/EC  on markets in financial instruments
6 (MiFID), and 
in particular of Articles 36 to 47 thereof. The ECB emphasises these observations are offered as policy recommendations only, not as a statement of legal requirements.  
2.2 As CSDs combine the provision of final settleme nt with the recording of changes in legal title 
resulting from transactions in securities, they shou ld identify, monitor and assess sources of risk.  
2.3 Regardless of a CSD’s status under national company law or of the national corporate governance 
requirements applicable to it, a CSD should adop t the highest corporate governance standards or 
best practices recommended for listed companies and ensure that they are effectively implemented. 
These may include traditional corporate governan ce mechanisms, (e.g. the appointment of non-
executive directors and the use of specialised boa rd committees, such as an audit committee), or 
mechanisms specifically developed for securities settlement systems, (e.g. the use of board 
advisory committees or public consultation documen ts). It is noted that a CSD should disclose 
adequately its corporate governance arrangements to  enable its participants and the competent 
public authorities to assess how to  prevent, resolve or mitigate conflicts of interest among owners, 
the CSE Council and CSD participants, and how to safeguard the public interest. Finally, corporate 
                                                     
 
3  Ibid, sections 3(1) and (2), read in c onjunction with section 7(1). State superv ision is exercised through the Cyprus 
Securities and Exchange Commission. 
4  Ibid, section 9, read in conjunction with section 3 of the Cypr us Securities and Stock Exch ange (Central Depository and 
Central Securities Regi stry) Laws of 1996 to 2005  (hereinafter the ‘CDCSR Laws’).  Accordingly, the CSE Council 
supervises their operation, manages th eir resources and is responsible for implementing their business strategy. 
5  Ibid, section 11(1).   
6  Directive 2004/39/EC of the European  Parliament and of the Council of 21 April 2004 on markets in financial 
instruments amending Council Directiv es 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European 
Parliament and of the Council and repealing Council Directive 93/22/EEC (OJ L 145, 30.4.2004, p. 1). 
3 governance arrangements for CSDs should be subj ect to adequate regulation and oversight. 
Regulators, central banks and competition auth orities should institute policies the combined 
operation of which ensures that services are provided at a fair price to participants under equitable 
conditions of access.  
 3 Powers delegated to the CSE Council under the draft law 3.1 Section 2 of the draft law amends section 2 of  the CDCSR Laws entitled ‘Interpretation’ to provide 
that ‘“Regulatory Decision” means the decision of the [CSE] Council containing regulatory content, issued in accordance with the provisions of  this Law and which is published in the Official 
Gazette of the Republic’. It follows from the defin ition of the term ‘Regulatory Decision’ that the 
powers which the draft law confers on the CSE Co uncil are conceived as being regulatory powers 
of general applicability and that rights and oblig ations imposed under Regulatory Decisions issued 
by the CSE Council would bind all regulated market participants
7, not contractually, but as a matter 
of law.  
3.2 The ECB would remind the consulting authority that, in view of the obligation incumbent on 
Member States to consult the ECB on any draft legi slative provision within its field of competence 
pursuant to Decision (EC) No 98/415, and taking into consideration the vague nature of the 
delegation to the CSE Council, it will be necess ary to submit to the ECB for consultation all 
significant secondary legislation8, including Regulatory Decisions, issued by the CSE Council on 
the basis of the powers delegated to it under the draft law before such legislation is adopted.  
 4 Scope of delegation under the draft law 4.1  The ECB notes that, while the contents of th e Regulatory Decisions to be issued by the CSE 
Council under the powers delegated to it pursuant to the draft law cannot be anticipated, several of 
the provisions of the draft law – in particular sections 13, 15, 19 and 22 – confer broad decision-
making powers on the CSE Council in connection w ith matters not directly related to the 
management and operation of the CDCR
9. These powers, inter alia , affect: (i) the property rights of 
owners of securities registered with the CDCR; ( ii) the finality of the settlement of transactions 
entered into in respect of securities listed a nd traded on the CSE; and (iii) financial stability10. The 
                                                      
7  This refers to CSE Members (brokerage firms), issuers of securities listed and traded on the CSE and investors. 
8  The ECB draws attention to its ‘Guide  to consultation of the European Centra l Bank by national authorities regarding 
draft legislative provisions’ which states on page 14 that ‘[T]h e duty of consultation is not limited to draft legislative 
provisions which are destined to be adopted by a parliame nt. Decision 98/415/EC covers all types of legally binding 
provisions, including secondary legislation, as well as binding acts of general applicability of [national central banks] or 
supervisory authorities (where thes e bodies have regulatory powers)’. 
9  The ECB notes that section 3 of the CDCSR Laws, appa rently limits the CSE Council’s powers to the ‘creation, 
management and administra tion of [the CDCSR]’.  
10  Section 19 of the draft law which, inter alia , confers on the CSE Council the power to  establish and operate a ‘fund’ and 
to determine the contributions to be ma de by  CSE members and/or depositories and the giving of guarantees or security 
by the CSE Members and/or the depositories, to ensure th e clearing and settlement of stock exchange transactions. 
4 ECB notes that, as Cyprus has implemented the Settlement Finality Directive (SFD)11, the draft law 
could further clarify that settlement finality i ssues are governed by the national law implementing 
the SFD12, and that it is only on technical issues (includi ng deadlines, transfer of funds issues, etc.) 
that the CSE Council will enjoy decision-making powers. The same principle should apply to issues affecting the property rights of CSE Members and their clients, which are already governed 
by national law. Overall, the ECB recommends th at the scope of delegation to the CSE Council 
should be restricted to technical issues only. 
4.2 The ECB considers that section 20 of the draft law, which empowers the CSE Council to stipulate, 
by means of Regulatory Decisions, the conditions  for provision of the services of a custodian 
(‘depository’), is prima facie  inconsistent with the freedom to provide services and the ‘home 
country control’ principle enshrined in  the Investment Services Directive (ISD)
13.  
4.3 Regarding the exercise, under the draft law, of broad decision-making powers by the CSE Council, 
the ECB would also draw attention to the provisions of Articles 34, 36, 46 and 48 of the MiFID on regulated markets and competent authorities
14. In view of the future implementation of the MiFID 
in Cyprus, certain amendments to the dr aft law may need to be considered.  
 5. Assessment of the CDCR agains t the Eurosystem user standards 
5.1 Because Cyprus has not yet adopted the euro a nd the CDCR is not used for Eurosystem operations , 
the Eurosystem has not assessed  the CDCR against the Standards for the use of EU securities 
settlement systems in ESCB credit operations (known as the ‘Eurosystem user standards’)
15.  
5.2 The ECB considers that sections 3, 5 (on the limitation of the CSE’s responsibility) and 9 of the 
draft law are prima facie  inconsistent with the Eurosystem user standards. 
 
                                                      
11  Directive 98/26/EC of the European Pa rliament and of the Council of 19 May 199 8 on settlement finality in payment and 
securities settlement systems (OJ L 166, 11.6.1998, p. 45).  
12  Law 8(I)/2003 on settlement finality in payment and securiti es settlement systems (Offici al Gazette of the Republic, 
No 3679, 31.1.2003). See ECB Opinion CON/2005/28 of 10 August 2005 at the request of the Central Bank of Cyprus on 
a draft law amending the Settlement Finality in Payment Systems and Securities Settl ement Systems Law of 2003.  
13  See Titles V and VI of C ouncil Directive 93/22/EEC of 10 May 1993 on inve stment services in the securities field 
(OJ L 141, 11.6.1993, p. 27). Directive as last amended by Directive 2004/39/EC (OJ L 145, 30.4.2004, p. 1). Pursuant to 
the ISD, the competent home Member Stat e authorities are responsib le for the prudential supervision of investment 
services firms. However, responsibility for implementing the rules of conduct and for monitoring compliance with these 
rules remains within the competence of the host Member State,  which, when applying them, has to respect the principle 
of the public interest. 
14  The MiFID was originally intended to be transposed into national legislation after the standard period of two years from 
adoption (April 2006). In June 2005, the Commission presente d a proposal to extend the transposition deadline for 
Member States and the compliance date for regulated  firms to October 2006 and April 2007, respectively. 
15  Published in 1998, the Eurosystem user  standards have been regarded as de facto common standards for EU securities 
settlement systems. Nevertheless, they are not intended to be a comprehensive set of standards for the oversight or 
supervision of securities settlement systems. The standards are available on the ECB’s website at 
http://www.ecb.int/home/ html/index.en.html. 
5 6. Additional comments  
6.1 Section 19 of the draft law amends section 24 of  the CDCSR Laws entitled ‘Certain issues defined 
by a decision of the Council’ to, inter alia , provide that ‘(f) … the currency in which stock 
exchange transactions are conducted in and any ot her related matters rega rding currency exchange 
rates’ will be determined by means of Regulator y Decisions issued by the CSE Council. The ECB 
invites the legislator to clarify in the draft law whether the purpose of this amendment is to enable 
the CSE Council to designate the euro as a reference unit for tran sactions in the context of the 
planned common trading platform between the CSE a nd the Athens Stock Exchange, or to institute 
the euro as the settlement currency for such transactions. Whilst the u se of the euro as a trading unit 
of account in a common platform raises no concern, its use as a settlement currency would need to take into account that, before Cyprus adopts the eu ro, it qualifies in Cyprus as a foreign currency, 
and thus is subject to liquidity and credit risk s. This may have implications for the smooth 
settlement of securities transactions. 
6.2 Whatever the purpose of the designation of th e euro, the ECB would remind the consulting 
authority that the CSE Council’s power under sec tion 19 of the draft law to define ‘matters 
regarding currency exchange ra tes’ by means of Regulatory Decisions will become redundant (as 
far as the euro is concerned) once Cyprus has adopted  the euro, and draws attention to the fact that 
the ECB publishes the euro foreign exchange re ference rates on its website based on the daily 
concertation procedure between cent ral banks within and outside the European System of Central 
Banks. 
6.3 Given the urgency of the present consultation, th is opinion raises general issues only. The ECB 
reserves the right to raise further issues on a future occasion.  
 This opinion will be published on the ECB’s website.   Done at Frankfurt am Main, 22 February 2006. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET