TABLE OF CONTENT

1........... Introduction and procedural issues. 4

1.1........ Introduction. 4

1.2........ Impact assessment and opinion of the Impact Assessment Board. 5

1.3........ External expertise and consultation of interested parties. 5

2........... Background and context 6

2.1........ Post trading services. 6

2.2........ What are CSDs?. 6

2.3........ Current CSD landscape in the EU.. 8

2.4........ Other intermediaries in the post trading area. 8

2.5........ Size of market 9

2.6........ Costs for CSD services. 10

2.7........ Target2 Securities. 10

2.8........ Overview of legislative framework. 11

2.9........ Relationship with other legislative initiatives. 11

3........... Problem definition. 12

3.1........ Key driver 1: Different market practices on the organisation of settlement 13

3.2........ Key driver 2: Different rules for CSDs. 15

3.3........ Key driver 3: Barriers of access to/from CSDs. 17

3.4........ How would the problems evolve without EU action. 19

3.5........ The EU's right to act and justification. 20

4........... Objectives. 21

4.1........ General, specific and operational objectives. 21

4.2........ Consistency with other EU policies. 22

5........... Policy Options, Analysis and Comparison. 23

5.1........ Options for objective 1 – Enhance framework for settlement in the EU.. 23

5.2........ Options for objective 2 - Introduce consistent rules for CSDs. 28

5.3........ Options for objective 3 – remove barriers of access to/from CSDs. 35

6........... Preferred Policy Options and Instruments. 39

6.1........ Preferred policy options. 39

6.2........ The cumulative impacts of the preferred policy options. 40

6.3........ The preferred policy instrument 44

6.4........ Timing of the initiative. 44

6.5........ Impacts of the detailed technical rules. 45

7........... Monitoring and evaluation. 45

7.1........ Objective 1 – Enhance framework for settlement 45

7.2........ Objective 2 – Consistent rules for CSDs. 46

7.3........ Objective 3 - Access. 46

8........... Annexes. 47

8.1........ Annex 1 – Political mandate and basis of the work programme. 47

8.2........ Annex 2 – External expertise. 49

8.3........ Annex 3 – Data on CSDs in the EU.. 51

8.4........ Annex 4 – Additional data on CSD and custodian costs. 58

8.5........ Annex 5 – Market discipline measures and implementation plans. 60

8.6........ Annex 6 – Overview of settlement periods and efficiency in Europe. 62

8.7........ Annex 7 – Overview of legislative framework. 63

8.8........ Annex 8– Authorisation requirements for CSDs in EU and non EU countries. 65

8.9........ Annex 9 – Lehman and Bear Stern case studies. 69

8.10...... Annex 10 – Overview of restrictions on the choice of CSD by issuers. 70

8.11...... Annex 11 – Possible principles to be proposed in legislation. 74

8.12...... Annex 12 – Options in respect of banking type of services. 77

8.13...... Annex 13 – Summary of the responses to the public consultation. 88

8.14...... Annex 14 – Glossary of terms. 99

1. Introduction and procedural issues 1.1. Introduction

Central Securities Depositories (CSDs)[1] are systemically important market infrastructures. Firstly, they intervene throughout the life span of securities, from issuance to reimbursement. Secondly, they perform, sometimes after prior netting by Central Counterparties (CCPs), most of the processes that lead to the settlement of a transaction, i.e. the delivery of securities against cash.

Over 330 million securities transactions were settled in the EU in 2010 by CSDs, for a total value of approximately €920 trillion. EU CSDs held almost €39 trillion of securities at the end of 2010 (please see section 2.5).

The ECOFIN Council of 2 December 2008[2] emphasised the need to strengthen the safety and soundness of securities settlement systems ("SSS" or "settlement systems") operated by CSDs. More recently, on 20 October 2010, the Financial Stability Board (FSB) called for more robust core market infrastructures and asked for the revision and enhancement of existing standards. The Committee on Payments and Settlement Systems (CPSS) of the Bank of International Settlements (BIS) and the International Organisation of Securities Commissions (IOSCO) are in the process of finalising draft global standards[3]. These will replace the CPSS-IOSCO recommendations from 2001, which were adapted at European level in 2009 by the European System of Central Banks (ESCB) and the Committee of European Securities Regulators (CESR[4]).

Securities transactions in Europe are becoming increasingly cross-border and this should increase once the Target2 Securities (T2S)[5] pan-European common settlement platform will start in 2015. Despite this, cross-border securities settlement in Europe remains complex due to different national market practices regarding settlement as well as to persisting barriers of access. This has implications for the safety and efficiency of cross-border securities transactions. Various studies and regulatory initiatives have been carried out for the last decade, spearheaded by the Lamfalussy report on financial services regulation in 2001.

Political support has been demonstrated at the EU level, for instance by France and Germany, who invited President Barroso to consider the possibility of harmonisation of settlement periods, and by the ECOFIN Council, who agreed that EU legislation is needed to tackle barriers of access. The preparation of a legislative proposal on CSDs and settlement was included in the Commission's work programme for 2011. Further detail on the political mandate and basis of the work programme is provided in Annex 1 and on the timing of the proposal in section 6.4.

This report analyses the various options aiming at addressing both topics introduced above: (a) the safety and efficiency of cross-border settlement in Europe and (b) the safety and soundness of CSDs, as systemically important market infrastructures. In addition, the report looks at level playing field issues, since CSDs have developed as natural monopolies in their domestic markets.

1.2. Impact assessment and opinion of the Impact Assessment Board

The Directorate General (DG) for Internal Market and Services is the lead DG.

Work on the Impact Assessment started in October 2010 with three meetings of the Steering Group held from 10 November 2010 to 8 March 2011. The following DGs and Commission services participated in the meetings: Competition, Economic and Monetary Affairs, Industry and Entrepreneurship, Legal Service, Secretariat General, Justice, Taxation and Customs Union, Energy and Climate Action.

The report was sent to the Impact Assessment Board on 16 March 2011. The Board discussed the report in its hearing on 13 April 2011. The report was then resubmitted on 8 August 2011. Following the Board's comments, the following elements have been added and strengthened:

· A reflection of stakeholder views throughout the document

· More evidence of the problems, including more data on costs and safety issues in sections 2.6, 2.7, 3.2.3 and Annex 4

· More detail on each option in the description boxes, with a detailed description in Annex 11

· More analysis of the content of licence, particularly with respect to banking-type of ancillary services, in section 5.2.2 and Annex 12

· An estimation of order of magnitude of overall benefits and an overview of impacts on different groups of stakeholders in section 6.2

· A clearer and more robust monitoring and evaluation framework in section 7

1.3. External expertise and consultation of interested parties 1.3.1. External expertise

The Commission services have consulted the great majority of stakeholders, including regulators, CSDs and CSD participants, as described in Annex 2.

1.3.2. Public consultation

A public consultation was held from 13.01.2011 to 1.03.2011, containing 56 questions concerning scope and definition, authorisation and supervision, access and interoperability, prudential and organizational requirements, settlement discipline, settlement cycles and sanctions. It received 101 answers consisting of 33 banks, 20 public authorities, 16 CSDs, 10 other market infrastructures, 11 investors and issuers, and 11 other. The summary can be consulted under Annex 13.

The initiative was welcomed by almost all respondents, who shared the view of the consultation paper that settlement processes and CSDs play a systemically important role for financial markets and should be subject to proper regulation.

2. Background and context 2.1. Post trading services

Central Securities Depositaries (CSDs) play a key role in the processes that take place between the conclusion of a securities transaction (i.e. an initial issuance of securities[6] or a sale or purchase of securities on or off a trading venues[7]) and the settlement of that transaction (i.e. the transfer of securities against cash). These processes are typically referred to as "post trading services" rendered by "post trading infrastructures". A settlement flow could look as in Figure 1, with the caveat that the way these processes are set up depends on a number of factors, such as whether the transaction is done on or off a trading venue, market convention, type of securities traded, domestic versus cross border investment, legal framework and whether the trade is cleared by a Central Counterparty (CCP)[8] prior to settlement. These processes are also subject to dynamic change as markets evolve.

Figure 1 describes the possible processes between the trade date (T) and the moment when settlement occurs in the CSD - in this example after 3 days ("T+3").

Figure 1: Example of a settlement flow

Source: based on the Oxera report, "Methodology for monitoring prices, costs and volumes of trading and post-trading activities", July 2007

Around these processes, a number of services rendered either by CSDs and CCPs or by intermediaries (custodian banks) have evolved over time, with a view to improve the settlement or to optimize the use of a client's assets (see section 2.2).

2.2. What are CSDs?

CSDs are essential in the post trading area, in that they ensure the initial recording as well as the safekeeping and settlement of securities. While there is no commonly accepted definition of a CSD or of the functions they perform, there is nevertheless a range of functions that are performed by many CSDs. These functions can be broadly divided into "core" functions and "ancillary" functions, which are mostly supporting the core functions.

2.2.1. Core functions

· The "notary" function means the entering of securities into book-entry. It generally occurs at the same time as the issuance by the issuer. It ascertains the existence of the securities when they are brought for reimbursement upon maturity

· The "settlement" function means the operation of a securities settlement system, through which securities are initially delivered to investors or are subsequently exchanged between buyers and sellers (via participants to the SSS)

· The "central safekeeping" function means the maintenance of "top tier" accounts in a book entry system.

These three core functions are offered by almost all CSDs in Europe, but variations exist. In "direct holding" countries (Nordic countries, Cyprus, Estonia, Greece, Malta, Romania, Slovakia and Slovenia), CSDs are designated by law as direct account providers for all investors, including the ultimate investors. In "indirect holding" countries, CSDs hold only top tier accounts for their participants, who maintain accounts for investors further down the holding chain. Variations may exist of these models.

2.2.2. Ancillary functions

Ancillary services vary considerably from one country to another, and can be broadly divided into two categories:

· Ancillary functions where the CSD does not take principal risk, including:

– Organising a securities lending mechanism enabling participants to borrow securities for the purpose of fulfilling a delivery obligation

– Managing collateral

– Processing corporate actions (taxes, dividends, proxy voting)

– Maintaining the shareholder register

– Opening "lower tier" securities accounts, either in direct holding systems or when the CSD acts as "investor CSD" by maintaining for its customers securities issued in "issuer CSDs"

· Banking/securities-type of functions where the CSD takes principal risk:

– Opening cash accounts and providing credit for settlement

– Pre-financing dividends and other corporate actions

2.3. Current CSD landscape in the EU

The European CSD market is very fragmented, with over 30 CSDs at the end of 2010 (including the two ICSDs), as well as 9 central bank-operated settlement systems, the latter dealing primarily in government debt. This is due to the initial creation of domestic CSDs to serve national markets, as well as to persisting cross-border barriers of entry for CSDs (for certain types of securities, notably shares) – please see section 3.3 for more details. An overview of ownership structure, asset coverage and size of the different settlement systems in the EU is provided in Annex 3. By comparison, the US market is very concentrated, with only two CSDs, one for government securities, and the other for all other securities (see Annex 8).

However, a first consolidation process started at the end of the 20th century with the creation of two cross border groups, each composed of at least a CSD and of an ICSD. These two cross-border groups are described in Annex 3.

2.4. Other intermediaries in the post trading area

Banks acting as "custodian banks" perform, albeit at different levels, some of the ancillary functions performed by CSDs. For instance, they act as lower tier account provider, by simply opening securities accounts for their customers. Furthermore, they perform lower tier settlement, especially when two customers have securities accounts with the same custodian bank (so-called "internalisation").

CSDs and custodian banks often compete for ancillary functions. For cross-border transactions investors can access securities in an issuer CSD by using either a custodian bank or an investor CSD that has a link with the issuer CSD. In the most basic form a link means that the investor CSD participates directly to the settlement system of the issuer CSD, which essentially puts the investor CSD in an intermediary position, similarly to a custodian. A simple representation of different options for cross-border settlement is on the right side of Figure 2 below. Figure 5 in Annex 3 provides a complete picture of the types of links between CSDs.

Figure 2: Examples of domestic and cross-border settlement

Domestic settlement || Cross-border settlement

||

Source: BIS, "Cross-border securities settlement", March 2005 http://www.bis.org/publ/cpss12.pdf

2.5. Size of market

The European securities market is by any measure very significant; according to ECB statistics[9], there were over 690 million trades executed on securities exchanges in the EU in 2010, representing a total value of over €33 trillion. The EU capital market is the second in size after the US one and represents around 30% of the global market (the US represents around 35% of the total[10]).

According to ECB statistics, there were almost €39 trillion worth of securities in EU securities settlement systems at the end of 2010; over 330 million securities transactions[11] were settled in the EU in 2010, for a total turnover of approximately €920 trillion[12] – please refer to Annex 3, Tables 13, 14 and 15.

Cross-border activity is generally increasing in Europe, as documented by the recent Oxera report[13], which finds that an increasing proportion of members on trading platforms, CCPs and, to a much lesser extent CSDs originate from outside the domicile of these infrastructures in 2009 compared to 2006 (see Table 16 in Annex 4). However, for reasons explained in section 3.3 cross-border activity remains limited for CSDs; on average in 2009 the proportion of cross-border members of CSDs was only 3% (although the same proportion by value of securities held was 15%, up from 12% in 2006).

2.6. Costs for CSD services

CSD costs typically represent a very small proportion of the costs associated with a trade. For instance, the Oxera report shows that the CSD costs incurred by funds are 1.5% of their total costs of holding and transacting, excluding fund management. The rest of the costs are represented by CCPs (1%), custodians (22%), trading venues (4.5%), and brokers (71%). According to the Oxera report, CSDs in Europe charge on average 46 cents per transaction for settlement and 0.0016% per value of securities held for safekeeping.

However, these costs are much higher for cross-border transactions. Some of this difference may be justified by economies of scale since cross-border volumes are lower than domestic volumes. However, it is mostly due to the complexity of settlement for cross-border transactions, which involves sometimes long holding chains of intermediaries and CSDs, as described further in section 3. The gap has declined since 2006 but remains significant (see Table 17 in Annex 4).

More detailed information on CSD and custodian costs is provided in Annex 4.

2.7. Target2 Securities

The post trading landscape in Europe is expected to change considerably with the planned start of TARGET2-Securities (T2S) in 2015. T2S is a project launched by the Eurosystem that is intended to create a technical platform for pan-European securities settlement. Participating CSDs[14] will (at least over time) outsource the IT platform for settlement to T2S, while nevertheless maintaining the legal relationship of settlement with their customers (in the form of securities accounts) and continuing to perform their notary, safekeeping and ancillary functions. T2S will provide important benefits including[15]:

· Reduce settlement costs, especially for cross-border settlement in Europe. T2S will equalise basic costs for settlement of domestic and cross-border securities (the current base price estimated by T2S is 15 cents per transaction[16])

· Increase settlement volumes and encourage increased cross-border transactions in Europe since it will provide for customised solutions for cross-border links

· Stimulate competition for settlement services between CSDs as well as between custodian banks since their wholesale customers are likely to wish to reduce their number of suppliers by seeking partners with pan-European or at least regional services

The T2S Programme Office and the ECB Services have expressed their strong support to the EU Commission's initiative for a legislative proposal to strengthen the CSDs' legal framework and harmonise the rules underpinning the holding and transfer of securities in the Union.

2.8. Overview of legislative framework

The term CSD already exists in the current legislative "acquis communautaire", but it is not defined. Among the CSD core functions only the settlement function is addressed at EU level by the Settlement Finality Directive (SFD)[17]. A detailed overview of current EU legislation relating to CSD functions is provided in Annex 7.

Certain elements of CSDs are also addressed by soft law:

· CPSS-IOSCO recommendations at global level and ESCB-CESR recommendations at European level. These are non-binding recommendations for public authorities (market regulators, banking supervisors) to use in their assessment of the safety, soundness and efficiency of CSDs and of the SSS these operate. In a more constraining manner, the ECB imposes similar technical standards to CSDs of the Eurozone as a precondition for their participation to collateralisation of monitory policy operations (remittance of securities against credit)

· The Code of Conduct of 2006 defined by the Industry (the European CSD association, ECSDA, the European exchanges federation, FESE, and the European CCP association, EACH) under the auspices of the Services of the European Commission. It provides for a certain number of non discriminatory rules for access and interoperability arrangements between market infrastructures (for equities) on a non-binding basis

2.9. Relationship with other legislative initiatives

There is currently another legislative initiative as well as a potential legal initiative on which the Commission services have been publicly consulting, that are related to the issues and the proposals described in this report in respect of CSDs and settlement:

· The draft regulation on short selling[18] is related to settlement discipline; Article 13 installs penalising measures for sellers that do not deliver certain securities for settlement within a specific time period (buy-in, cash compensation, daily penalty payments for late settlement, trade prohibition). This would be extended with a wider scope in the settlement discipline section of the CSD legislation

· The possible Securities Law Directive (SLD) is intended to impose certain requirements on account providers at all levels of the holding chain (e.g. reconciliation of accounts, rights of account holders etc.). Most CSDs should be covered by the SLD at least for their ancillary account provider function and will therefore be subject to the corresponding requirements (in addition to the requirements in the CSD legislation)

3. Problem definition

There are three fundamental issues in respect of post-trading activities in the EU which this report is addressing: higher risk for cross-border (compared to domestic) settlement, higher cost for cross-border settlement and unlevel playing field for CSD services. These issues are the consequences of ultimately three main drivers: (1) different market practices on the organisation of settlement, (2) different rules for CSDs across the EU, and (3) barriers of access to/from CSDs.

The diagram below provides an overview of these drivers, the problems they generate and the consequences of these problems.

Figure 3: Problem tree

Note: the arrows represent the key interrelationships. Most factors represented above are interlinked * refers to a competitive environment

3.1. Key driver 1: Different market practices on the organisation of settlement

Different market practices in respect of settlement can broadly be split into two categories: (1) different settlement discipline practices, and (2) different settlement periods. These issues were identified as early as 2001 by the Giovannini report[19] as barriers to post-trading activities in Europe and have been discussed at length over the last decade by the various groups described in Annex 2. Both of these issues are also regarded as high priority harmonisation targets by T2S, where the T2S project will not achieve the desired harmonisation (see Table 10 in Annex 2).

3.1.1. Different settlement discipline practices

Market discipline refers to measures that prevent or address settlement fails[20], i.e. situations when settlement of a transaction does not take place on the Intended Settlement Date (ISD). Table 23 in Annex 5 gives an overview of such measures.

Practices differ in the EU markets as to whether or how these measures are used:

· Securities borrowing is mandatory in Hungary, Poland and Spain if the settlement of certain on-exchange transactions is likely to fail. The CSDs in these and other markets (Germany, Greece, Italy) have made centralised borrowing services available to their members

· Most CSDs charge penalties to participants who fail to settle on time, however these penalties differ considerably between markets as concerns the form (fee for recycling or separate penalty), the type of transactions/securities (generally on-exchange transactions), the amount (fixed per instruction or percentage of the transaction value), the type of fails (fails due to lack of securities vs. fails due to lack of cash), and who pays the fee (direct participant of the CSD or other parties further down the chain)[21]

· In addition, certain markets have obligations for participants to buy-in the securities they have failed to deliver on ISD. Buy-in procedures differ widely between markets in terms of timing of the buy-in obligation, which varies from ISD+3 (Austria) to ISD+7 (Belgium, France, Nordic markets) or later (UK), and buy-in penalties, which vary from 20% of the countervalue or closing price (Belgium, France) to 100% (Germany). Please see Annex 5, Table 24 for an overview. The buy-in may be automatic/mandatory or optional, upon the request of the buyer. Last, while CSDs generally monitor settlement fails, the buy-ins are usually executed by CCPs (for CCP-cleared transactions) or could be triggered by exchanges (for other on-exchange transactions), with the ultimate responsibility borne by the defaulting market participant.

These differences between market practices for settlement discipline have important consequences for the safety and efficiency of cross-border transactions in Europe:

· Cross-border settlement experiences an increased number of settlement fails. An ICMA study from 2010[22] shows that the Italian CSD rate of fails for transactions cleared through an international CCP during 2009-2010 was much higher (sometimes reaching almost 11%) than that for domestic trades (c. 1%), Settlement fails increase counterparty risk, market risk and liquidity risk for market participants. Furthermore, they create disruptions for corporate actions, for instance if a dividend payment occurs in the period of delayed settlement – see section 3.1.2 for a more detailed discussion of corporate actions

· In a competitive situation where market participants can choose their settlement location (for example in the context of T2S or if access barriers are removed – see section 3.3), these differences could favour regulatory arbitrage strategies looking for the CSD with the "softest" approach

· Since there is no common cross-border practice for the definition, monitoring and reporting of fails, this affects the ability of a market participant, a CSD or a regulator to understand areas of risk, identify areas for mitigating measures and act accordingly in a cross-border environment

3.1.2. Different settlement periods

The time between a trade and the intended settlement date (settlement period) differs in European markets. The standard settlement period for exchanged traded shares is T+3 (i.e. three days after trade date) in all markets except Germany, Slovenia and Bulgaria, where it is T+2 (French Parliament has also announced plans to move to T+2 with the other European markets). Markets where shares still exist in paper form, for instance the UK, allow longer settlement periods for transactions in such shares, of up to T+10.

For government bonds/bills, corporate bonds and OTC transactions there is a broad diversity by market and by asset class, including some instruments that settle on T+0, i.e. on trade date, and others (although very few) that have a much longer settlement period. For this reason, the overall proportion of transactions that settle on less than T+3 is relatively substantial in Europe.[23] Please refer to Table 26 in Annex 6 for an extensive list of settlement periods for different European markets.

If markets are not connected, these differences do not create problems. However, with the increase of cross-border investments, these differences have a number of consequences again in terms of safety and efficiency:

· Differences in settlement periods increase the complexity of cross-border transactions and create additional operational risks and back office costs as a standard settlement period in a national market is transferred into a non-standard period for a cross-border transaction. This can lead to increased settlement fails, with all the consequences discussed in the section above

· Funding costs are increased for investors buying securities in a T+2 market and selling them in a T+3 market

· Another problem relates to the processing of corporate actions, e.g. payment of dividends. A buyer acquires the share either cum dividend (at a higher price) or ex dividend (at a lower price). Post trade processes in each market ensure that the actual payment of the dividend arrives at the right place (the "cum" buyer or the "ex" seller). This does not work cross-border between national markets with different settlement periods and as a consequence, a dividend can be paid out to the wrong person. Corresponding compensation payments (so called "market claims") amount to billions of euro per year, with associated costs in the tens of millions of euro[24]

· More generally, longer settlement periods increase counterparty risk, i.e. the risk that the counterparty to a trade will default between trade and settlement

3.2. Key driver 2: Different rules for CSDs

CSDs are subject to different authorisation and supervision regimes across the EU. An overview of such regimes in selected countries is provided in Annex 8. Differences can be broadly divided into three categories: (1) different definitions of CSD services, (2) different authorisation and supervision regimes, and (3) lack of a common prudential framework.

3.2.1. Different definitions of CSD services

Definitions of CSDs and of the CSDs' services vary considerably, for instance in the direct holding systems, the three core functions are not distinguished between each other nor with the ancillary functions. In the indirect holding systems the central safekeeping function is incorporated either into the notary function (France) or into the settlement function (the UK). Ancillary services are not uniformly defined or recognised, especially the banking services which cannot be offered by CSDs in most Member States, while they form an integral part of the CSD functions in other Member States (Germany, Belgium).

These differences have consequences in terms of safety and level playing field:

· The lack of a common (and precise) definition of core CSD services and of who can/cannot provide such services can lead to some of the core services, particularly settlement, being provided by institutions not authorised as CSDs (see section 2.4). The so called "internalisation" of settlement increases counterparty risk since the corresponding settlements are not protected by the SFD (see section 2.8), and liquidity risk since lower tier intermediaries cannot organise large scale securities lending facilities to cover for a shortfall[25]

· More important risk concerns, this time for the soundness of CSDs, arise from the ability of some CSDs to engage in activities with higher risk, such as banking-type of activities. This risk is mitigated to some extent by the limitation in scope of these activities (essentially to deposit taking and credit granting related to the CSD's core activities) and by strict CPSS-IOSCO requirements, including full collateralisation of credit. CSDs have been resilient, including during the 2008 financial crisis, however the risk inherent in banking-type of activities increases the risk profile of CSDs that undertake these activities

· The lack of a common definition also affects the level playing field between CSDs, for instance between those who are allowed to provide banking-type of services and those who are not

3.2.2. Different authorisation and supervision regimes

CSDs in the EU are regulated at national level. In some countries there is no specific authorisation regime for CSDs but their functions are regulated by various national regulations (Italy); in most direct holding countries CSDs are designated by law to perform some core and ancillary functions such as registrar and account providing (safekeeping) functions and the other functions are derived from these (Denmark, Finland, Sweden); in other countries CSDs are deemed to have a banking status (Germany). A detailed overview is provided in Annex 8

These differences, coupled with the access barriers discussed in the next section, lead to the fragmentation of the EU post trading market described in introduction section. This fragmentation results in the cross-border settlement of transactions relying on a "spaghetti" model of links between CSDs and/or a chain of intermediaries. This has obvious consequences for the safety and efficiency of cross-border transactions:

· Cross-border transactions face a higher degree of risk inherent in cross-system links (see section 3.3 below)

· Costs for cross-border settlement (as well as for safekeeping) are higher (sometimes much higher) than for the same services at national level, as illustrated in Annex 3 or for the same services rendered by the US DTCC[26]. More generally for efficiency, the necessity to use multiple settlement locations in Europe does not allow cross-border market participants to place their assets in a single "liquidity" pool and have quick and continuous access to this pool in order to lower their operational costs and funding costs[27]

This fragmentation of the market could theoretically be reduced through mergers of CSDs. A consolidation of the CSD landscape has been observed during the last 10 years, with the emergence of two major groups around the two ICSDs (see Annex 3). However, this consolidation has not led to the reduction of the number of CSDs.

3.2.3. Lack of common prudential rules

European CSDs lack a common prudential framework. As described in section 2.8 they are subject to technical standards by ECB and to recommendations by CPSS-IOSCO and ESCB-CESR. However, due to their soft law nature, these standards and recommendations are implemented in different ways. This raises several problems:

· While there is no history of CSDs or settlement systems failing, a failure due to non regulated operational or financial risks would have tremendous consequences for a national market as it would essentially block the securities market, with severe implications for the ability of market participants to honour their obligations

· As the markets are becoming more integrated, link arrangements between CSDs are expected to increase, especially in the post-T2S environment. Depending on their complexity and degree of integration, link arrangements can create additional legal risks arising from differences between the laws of the linked CSDs concerning netting, finality of transfers, ownership and collateral. Links also present additional operational risks owing to inefficiencies associated with the operation of the link, especially because of variations in the settlement cycles and settlement discipline of the linked systems. Last, links may create significant credit and liquidity risks between CSDs, particularly if one CSD permits provisional transfers of funds or securities that may be unwound

· Prudential requirements are also about ensuring the CSDs have reconciliation rules of their records in order to prevent the unauthorised creation or deletion of securities. There are also rules that prohibit artificial creation of securities, provisional transfers of securities across CSD links and re-use of securities without client consent, or rules that require CSDs to segregate participants' securities from their own assets and to support the segregation of securities belonging to a participant's customers on the participant's books. These are important principles that could help manage failures of participants (such as that of Lehman in 2008) or of issuers (such as that of Parmalat in 2004 or of Bear Sterns in 2008). These examples are described in more detail in Annex 9. While these problems are related more to other account providers in the holding chain rather than CSDs (the possible SLD intends to address this), they are an illustration of the importance of the CPSS-IOSCO principles outlined above

· Similarly to the argument made in section 3.1.1, in a competitive environment situation (for example post-T2S or if access barriers are removed) the lack of a common prudential framework may lead to regulatory arbitrage favouring the CSD with the "softest" approach

3.3. Key driver 3: Barriers of access to/from CSDs

Access to or from CSDs in the European context is not always free or clearly defined. This is particularly important in the cross-border environment, where certain barriers of access exist. These barriers concern the access of issuers to CSDs, the access between CSDs themselves, and the access between CSDs and other market infrastructures (e.g. trading venues and CCPs)

3.3.1. Access of issuers to CSDs

This is one of the barriers to cross-border post-trading activities in the EU identified by the Giovannini reports of 2001-2003 and acknowledged by the Commission Communication on clearing and settlement of 2004. The so called "barrier 9" was initially described in the Giovannini reports in relation to two types of restrictions, that securities listed in some Member States are (a) deposited in a local settlement system and (b) registered with a local registrar. From this starting point, the Legal Certainty Group[28] identified restrictions regarding the possibility for an issuer to issue via a CSD in another Member State as well as restrictions for CSDs to accept issuances from foreign issuers. More detail on this, including examples from each category, is provided in Annex 10.

It is worth noting that these restrictions apply mainly to equities and government bonds which are tributary to corporate law or public law, whereas international corporate debt securities (the so called "Eurobonds") can generally be issued and settled relatively freely in the EU. These restrictions give rise to two main problems:

· CSDs in most Member States have a pure monopoly for the notary function of certain securities (such as equities) as they are the only available provider to issuers for the first registration of such securities

· It encourages the fragmentation of the post trading market in the EU, with all the consequences for safety and efficiency described in the section above

3.3.2. Access between the CSDs themselves

As explained in section 2.4, market participants can access a foreign (issuer) CSD (directly or indirectly) through a link between the local (investor) CSD and the issuer CSD. Such link arrangements vary depending on the degree of customisation of service offering, from "standard" links, which are no more than the participation of a CSD to another CSD through a regular account, to "interoperable" links, which are advanced forms of relationships between two (or more) CSDs with impact on all standard participants of the linked organisations[29]. Most links in the EU are standard links, with the bridge between Clearstream and Euroclear being the biggest example of an interoperable link arrangement (more details on links in Figure 5 in Annex 3).

Inter CSD access is becoming crucial for two reasons:

· The inter-linking between CSDs will significantly increase with the start of T2S

· In addition to the prudential problems analysed in section 3.2.3 above there is also no legal framework regulating access between CSDs - for instance to define under what conditions a CSD can refuse a link request from another CSD or to set non-discrimination principles. The Code of Conduct sets some general principles in this respect, but on a voluntary self-imposed basis and only for certain categories of securities, i.e. for equities. This situation contributes to the effective lack of competition between CSDs identified in the section above.

3.3.3. Access between CSDs and other market infrastructures

The smooth functioning of post trading services requires clear and defined access between the CSDs and other market infrastructures, for instance:

· Access by CSDs to transaction feeds: CSDs should be able to attract settlement volume or provide other CSD services by having access to transaction feeds, either directly from trading venues or from CCPs

· Access to CSDs by other market infrastructures: Similarly, in order to be able to provide services for securities that are centrally deposited with CSDs, other market infrastructures such as trading venues and CCPs need access to CSDs, including to the relevant data of CSDs, such as settlement data[30]

The rights of access referred to above are not guaranteed by EU or national legislation, particularly in a cross-border context. The Code of Conduct sets some general principles in this respect, but on a voluntary self-imposed basis.

3.4. How would the problems evolve without EU action

Without EU action, market competition would not adequately address the problems identified above. This is discussed below, following the same structure of the problem definition along the three drivers.

3.4.1. Different market practices for settlement 3.4.1.1. Different settlement discipline practices

There are various industry initiatives in place but with limited effects:

· Limited scope. The initiatives do not cover the full range of areas and measures that could be envisaged to improve settlement efficiency – the ECSDA survey of 2009 included in Annex 5 provides a good overview of the gaps

· Implementation plans often not available. As illustrated by Table 25 in Annex 5, most ESCB-CESR recommendations of 2009 lack concrete implementation plans

· When available, implementation plans are often delayed by national interests. For example, the ESSF[31]-ECSDA matching standards adopted in 2006[32] regarding the harmonisation of pre-settlement matching processes throughout Europe were scheduled to be implemented by the end of 2009 but this has been delayed to the end of 2011 (or at least by the time T2S is operational)

· Non-binding nature of the commitments. There is nothing that compels a CSD to honour the commitment in full

As explained in the problem definition section, the ensuing problems are likely to be increased due to T2S becoming operational in 2015, which is expected to increase cross-border transactions and will introduce a risk of regulatory arbitrage to the softest market practice.

3.4.1.2. Different settlement periods

The Harmonisation of Settlement Cycles (HSC) industry group has worked on these issues for the last two years and has come to a recommendation to harmonise settlement periods (for certain financial instruments/markets) at T+2, but there are no concrete implementation plans in place. Cost arguments by market participants may delay action for many years to come, therefore with no change to the resulting problems and consequences.

3.4.2. Different rules for CSDs

In the absence of EU action, the CSD services would continue to be defined and addressed by divergent national legislations, with the consequences for market fragmentation and lack of competition described in section 3.2.

The absence of EU action would have implications also for the powers of regulators. The intensification of cross-border securities settlement expected from T2S would not be addressed by a regulatory framework based on cooperation and information sharing between the market authorities[33].

Regarding the prudential and organisational rules for CSDs, the only common framework would be the one provided by the non-binding ESCB-CESR recommendations[34].

3.4.3. Barriers of access

In the absence of EU action, the current fragmentation and the national monopolies would remain, with all the consequences described in section 3.3. Furthermore, it could be interpreted as a "silent" confirmation of the integrated model approach whereby the country of issuance will determine the trading venue, which will determine the choice of CCP for clearing and of CSD for final settlement.

3.5. The EU's right to act and justification 3.5.1. Treaty base, competence

The legal base for the competence of the EU may derive from Article 114 of the TFEU[35] (ex Article 95 - harmonisation) and/or Article 53 of the TFEU (ex Article 47(2) – professional services). The final selection of the Treaty base will be determined depending on where the main focus of the legislation will lie.

3.5.2. Subsidiarity

According to the principle of subsidiarity (Article 5.3 of the TFEU), action on EU level should be taken only when the aims envisaged cannot be achieved sufficiently by Member States alone and can, by reason of the scale or effects of the proposed action, be better achieved by the EU. The preceding analysis has shown that:

· The problems defined above relate essentially to the cross-border European market, which is expected to increase significantly post-T2S

· The systemic nature of CSDs and their increasing interconnection in Europe (particularly post-T2S) calls for coordinated action

· Certain problems are already covered by the acquis communautaire: the Settlement Finality Directive (SFD), the Market in Financial Instruments Directive (MIFID), and the possible future Securities Law Directive (SLD). Any proposal should tie in with these EU texts

Against this background EU action appears appropriate in terms of the principle of subsidiarity.

4. Objectives 4.1. General, specific and operational objectives

The strategic objectives of this policy exercise are to tackle the three key consequences of the problems identified in the previous section by:

(1) Increasing safety of cross-border transactions

(2) Increasing efficiency of cross-border transactions

(3) Ensuring level playing field for CSD services

These strategic objectives translate into a number of specific objectives, as follows:

· Reduce complexity of cross-border settlement – this should increase both safety and efficiency of cross-border settlement

· Reduce risk of arbitrage to the "softest" market practice (in terms of settlement discipline) – this should increase the safety of settlement in general

· Ensure consistent definition of CSD services across the EU – this should improve level playing field between CSDs, as well as increase safety

· Reduce fragmentation of post trading market – this should increase both safety and efficiency of cross-border settlement

· Reduce scope for national monopolies – this should improve the level playing field for CSD services and increase competition between CSDs and between CSDs and intermediaries

These specific objectives can be achieved by a number of concrete operational objectives, which are grouped in the following three categories:

(1) Enhance framework for settlement in the EU – by improving cross-border settlement discipline and harmonizing settlement periods

(2) Introduce consistent rules for CSDs across Europe – such rules refer to both prudential and organisational rules to ensure the safety, efficiency and level playing field of CSDs and the licensing framework, to ensure the level playing field and competition among CSDs

(3) Remove barriers of access to/from CSDs – this refers to both access between issuers and CSDs as well as between the CSDs themselves and between CSDs and other market infrastructures such as trading venues and CCPs

An overview of the various objectives and their interrelations is depicted below.

Figure 4: Overview of objectives

Note: the arrows represent the key interrelationships. Most factors represented above are in fact interlinked. * refers to a competitive environment

4.2. Consistency with other EU policies

The identified objectives are coherent with the EU fundamental goals to promote a harmonious and sustainable development of economic activities, a high degree of competitiveness, and a high level of consumer protection, which includes safety and economic interests of citizens (Article 169 TFEU).

These objectives are also consistent with the reform programme proposed by the European Commission to drive the EU out of the financial crisis. As an essential element contributing to a stable financial sector, they are a prerequisite for building a sustainable recovery.[36] They are also consistent with the policies announced in the various Communications mentioned in the introduction of this report.

Last, these objectives have been scrutinised through the two recent European Commission proposals concerning “OTC derivatives, Central Counterparties and Trade Repositories” (addressing CCPs) and “Short selling” (addressing elements of settlement discipline). These objectives range themselves in the longer term objectives identified by the Settlement Finality Directive in 1998 and in the impact assessment of a possible Security Law Directive.

5. Policy Options, Analysis and Comparison

The description of each option is provided below in a box, followed by the analysis of the option. A table at the end of each section compares the options, assessing the magnitude of the impact as compared with the baseline with the following symbols: ≈ neutral, - negative, -- strongly negative, + positive, ++ strongly positive. The preferred option is highlighted.

5.1. Options for objective 1 – Enhance framework for settlement in the EU

The options below address the two key objectives identified in respect of this issue, namely improving cross-border settlement discipline and harmonizing settlement periods.

5.1.1. Options for objective 1.1 – Improve cross-border settlement discipline

Option 1.1.1 (status quo): Rely on existing industry initiatives

Section 3.5 described the shortcomings of the industry initiatives, in terms of their (1) limited scope, (2) lack of implementation plans, and (3) non-binding nature.

Option 1.1.2: Obtain additional commitments from industry

Additional commitments could be obtained from industry, for instance to set detailed standards and implementation plans based on ESCB-CESR recommendations or to develop additional standards, such as on a common definition and reporting of settlement fails.

This option would address shortcomings 1 (limited scope) and 2 (lack of implementation plans) above, but not 3 (non-binding nature). Since new standards could involve implementation costs for certain CSDs, there is likely to be certain resistance, which could lead to not all CSDs buying into the proposals, or proposals being sub-optimal in order to accommodate the "smallest common denominators", or to delays in setting or implementing proposals.

The large majority of respondents to the public consultation have endorsed the response of the HSC working group, which sees a role for legislation in this respect. Furthermore, an enhanced settlement discipline regime should accompany a transition to T+2 as fails may increase in the short run (see section 5.1.2).

Option 1.1.3: Introduce common EU principles for settlement discipline

These common principles could include a common definition and reporting of settlement fails, ex ante measures to incentivise settlement on the intended settlement date and ex post measures to penalise failed settlement. Ex ante measures could include obligations on CSDs and their participants to execute transactions as soon as funds are available and on trading venues to enable the confirmation of transactions on a same day basis. Under ex post measures, defaulting participants would be subject to, on the one hand, CSD penalties and, on the other hand, an obligation to buy in the missing securities within a certain timeframe and subject to certain penalties. Such a buy-in obligation could be implemented by a CCP, for transactions cleared by a CCP, or by a trading venue, for non-cleared transactions. More detail on such measures is provided in Annex 11, section 8.11.1.

These measures would be relatively general, with detailed technical standards to be set in secondary legislation. The buy-in measures would be closely articulated with the proposed Short Selling Regulation.

This approach would promote standardisation and safety, yet would allow innovation and flexibility in a changing market environment. It would result in implementation costs of the technical measures for certain CSDs and other market infrastructures, but such measures should be more aligned to market circumstances. This option would therefore be more proportionate to the objectives set. Certain measures, such as penalties and buy-in obligations may also have costs for those market participants who systematically fail to settle (e.g. certain short sellers), but overall investors would benefit from the increase in settlement efficiency.

This is the option favoured by the HSC working group (and endorsed by the large majority of respondents), who see a role for legislation setting out certain high level rules and requirements rather than prescriptive measures requiring market participants to carry out certain specific processes.

Option 1.1.4: Prescribe the use of certain standard processes to improve settlement efficiency

This option could address all the processes pre- and post-settlement and prescribe the way each process should be done, for instance pre-settlement matching to be done in a certain way or by a certain date.

This option would lead to similar benefits as option 1.1.3. However, it is quite likely that these benefits would come at a higher cost for several reasons:

· Prescribing a common way of organising settlement processes across the 30+ CSDs in Europe would be a very lengthy and likely impossible task, as the detailed processes differ in every country according to market practices, corporate law, securities law, etc.

· Any measures that were too prescriptive could become obsolete very quickly in the rapidly changing market environment

· Prescribing how the processes should be organised would not allow CSDs the flexibility they would enjoy under option 1.1.3

Option 1.1.5: As options 1.1.3 or 1.1.4 but for both trading and settlement

This option would aim at having a comprehensive framework for market discipline, including all the steps from trading to settlement. Any rules in this respect would apply to CSDs as well as to other players, such as trading venues, other infrastructures and market participants.

This option would have the advantage of tackling the entire trade value chain. However, it would be a very complex exercise that would increase significantly the cost on all stakeholders (market infrastructures, market participants and intermediaries) and the timeframe for design and implementation. It seems also too early to adopt such a "big bang" approach, as many of the issues have not crystallised in the public debate. It is preferable to restrict the framework to settlement discipline and reassess matters in a few years with the industry.

On the basis of the analysis above, option 1.1.3 (common principles, with detailed technical measures to be set by secondary legislation) is favoured as the most proportionate to the objectives set.

Table 1: Summary of the impact analysis for operational objective 1.1

|| Effectiveness || Efficiency || Impact on stakeholders

Option 1.1.1 (status quo) || n.a. || n.a. || n.a.

Option 1.1.2 (additional industry commitments) || (≈/+) potentially broader scope than today and more concrete implementation plans but still non-binding measures (only CSDs/market participants with positive net benefits would join) || (≈) investment costs for CSDs/market participants that choose to implement measures, but only CSDs/market participants with positive net benefits would join || (≈/+) market participants gains from increased settlement efficiency should outweigh implementation costs

Option 1.1.3 (common principles for settlement discipline) || (+) broader scope, concrete implementation plans, binding measures || (≈/-) investment costs mitigated by flexibility || (+) gains for market participants from increased settlement efficiency should outweigh costs (-) cost implications for CSDs/other market infrastructures

Option 1.1.4 (prescribe processes to increase settlement discipline) || (+) broader scope, concrete implementation plans, binding measures (but likely not more than option 1.1.3) || (-) significant investment costs, no flexibility, measures could become obsolete quickly || (+) gains for market participants from increased settlement efficiency should outweigh costs (--) significant cost implications for CSDs/other market infrastructures

Option 1.1.5 (wider market discipline) || (++) broader scope than options 1.1.3 or 1.1.4 || (--) significant investment costs for broader categories of market players || (++) higher gains for market participants from increased settlement efficiency should outweigh costs (-/--) cost implications for CSDs and other market players

5.1.2. Options for objective 1.2 – Harmonise settlement periods

Option 1.2.1 (status quo): Rely on industry initiatives

As explained in section 3.5, industry initiatives in this respect may not materialise for many years to come.

Option 1.2.2: Obtain additional commitments from industry

Since this is an objective with a binary outcome (change or no change), an intermediary solution could be to ask the industry to monitor developments in this area to assess if the problems identified are declining or increasing.

There are not likely to be any developments until T2S becomes operational in 2015, therefore there is not likely to be any action before then.

Option 1.2.3: Require the use of the same settlement period for certain instruments and markets in the EU

The alternative is therefore to introduce the requirement that the same settlement period is used for most financial instruments in the EU.[37] The timing of such a requirement should allow market infrastructures and market participants to adapt. The implementation of a common settlement period should ideally be done before T2S becomes operational (i.e. before mid-2015).

As described in section 3.1, a majority of transactions in Europe settle on T+3, with a large proportion on less than T+3. The HSC industry group has therefore considered three options, T+1, T+2 or T+3 and has done extensive work in analysing these options. The analysis below is largely based on this work. Their recommendation, as expressed in their response to the public consultation and endorsed by the large majority of respondents is for T+2.

Sub-option 1.2.3.1: Harmonisation at T+1

The T+1 option was discarded by the HSC group as not feasible, because in many CSDs in Europe the business day starts at around 7:00 pm the preceding evening, which would imply that a T+1 settlement process would start on the evening of the trade day, putting too much pressure on the back offices of market infrastructures. Furthermore, it would create significant problems for investors who use a different currency since foreign exchange spot transactions settle at T+2. Last, it would be difficult for investors in other time zones to comply with a T+1 cycle.

Sub-options 1.2.3.2 and 1.2.3.3: Harmonisation at T+2 or T+3

The T+2 and T+3 options are analysed together. As discussed in section 3.1.2, the harmonisation of settlement cycles would have a number of benefits in terms of reduced risk and cost for cross-border settlement and reduced costs associated with market claims for cross-border corporate actions. In addition, each option would have particular benefits, which are analysed in the table below, together with the costs of adopting the option.

Table 2: Benefits and costs associated with harmonisation of settlement periods

|| T+2 || T+3

Benefits || · Reduced counterparty risk (and associated market and liquidity risks) by one day for T+3 markets · Greater automation of back-office processes · Reduced annual collateral requirements by around €700million* || · Less one-off operational risk from the move since fewer markets would need to move and the settlement period would be extended · In line with major non-EU markets (see below)

Costs || · Investment (one-off) costs for more market participants than in the T+3 option, although mostly for the smaller players (see below) · A move to T+2 may increase settlement failures in the short term as back offices are adapting · No major regulatory costs, as in most countries a change in settlement cycles would not require changes in national law, but only in national securities market regulations (and the approval of the national securities regulator) · Any costs to global players from a misalignment with major non-EU markets would be marginal, as these markets may follow a T+2 move in Europe (see below) and global players have to deal with multiple settlement cycles anyway || · Increased counterparty risk (and associated market and liquidity risks) by one day for T+2 markets · Increased annual collateral requirements by around €200million* · Investment (one-off) costs for less market participants than in the T+2 option, although again mostly for the smaller players (see below) · No major regulatory costs, as for T+2 option · An important technological step back for the T+2 markets

* Based on aggregated data from several CCPs – estimated increase and, respectively, reduction in collateral that needs to be posted by participants for on-exchange transactions. The actual economic impact is only in respect of the funding cost of this collateral, therefore relatively small

As presented above, a move to T+2 would create misalignment with major non-EU markets, which settle mostly on T+3; exceptions include Hong Kong, India and Taiwan. However, this is likely to be short lived, as a move to T+2 in Europe is likely to trigger a global alignment, as acknowledged by the CEO of the US CSD in 2010[38]. Japan already announced in 2010 plans to shorten the settlement cycle for government securities to T+2.

Investment costs to market participants from any harmonisation, whether at T+2 or T+3 will likely affect only the smaller, more local players; the bigger players, who have to deal currently with multiple settlement cycles, should benefit from savings in back office costs. Between the two options, arguably more market participants would be affected by a move to T+2. However, this is marginal since, as described in section 3.1, the proportion of T+2 settlement in Europe is already significant. Both the European Fund and Asset Management Association (EFAMA) and the European Banking Federation (EBF), which represent asset managers and respectively banks, were in favour of T+2 in their responses to the public consultation.

Based on the above analysis, the T+2 option appears to have more merit as it has significant ongoing benefits for investors by reducing counterparty risk and collateral requirements, and encouraging greater automation. More generally, the harmonisation should increase the safety of cross-border settlement, reduce back-office costs for investors and intermediaries and reduce the market claims for corporate actions, which amount currently to billions of euro per year.

The main costs associated with the T+2 option are one-off - a potential increase in settlement fails in the short term and investment costs for the smaller market participants, which are only marginally higher than for a harmonisation at T+3. The first can be mitigated by improving the settlement discipline regime (section 5.1.1), while the second by allowing sufficient time for the markets to adapt to the change.

Table 3: Summary of the impact analysis for operational objective 1.2

|| Effectiveness || Efficiency || Impact on stakeholders

Option 1.2.1 (status quo) || n.a. || n.a. || n.a.

Option 1.2.2 (additional industry commitments) || (≈) no likely action soon || (≈) no likely action soon || (≈) no impact, existing problems remain

Sub-option 1.2.3.1 (harmonise at T+1) – DISCARDED || || ||

Sub-option 1.2.3.2 (harmonise at T+2) || (+) harmonisation of settlement periods (+) reduced running costs by reducing counterparty risk and collateral requirements || (-) one-off investment costs for some market participants (the more local players) (-) potential one-off operational risk from transfer || (+) benefits for market participants from reduced risk (-) investment costs for some market participants (≈) no regulatory cost for Member States

Sub-option 1.2.3.3 (harmonise at T+3) || (+) harmonisation of settlement periods (-) increased running costs by increasing counterparty risk and collateral requirements || (-) one-off investment costs for marginally less market participants than in T+2 option (≈/-) less one-off operational risk from the transfer || (-) cost to market participants from increased risk and collateral (-) investment costs for some market participants (≈) no regulatory cost for Member States

5.2. Options for objective 2 - Introduce consistent rules for CSDs

As discussed in section 3, consistent rules for CSDs can refer to both the licensing regime and prudential and organisational rules. The options below consider:

· The licensing framework, i.e. whether CSDs can provide services in other Member States and under what legal form

· The prudential, conduct of business and organisation rules applicable to CSDs

· The authorisation and supervision framework, i.e. competent authorities responsible for the authorisation (licensing) of a CSD and its ongoing supervision

5.2.1. Options for objective 2.1 – Harmonise licensing framework

Option 2.1.1 (status quo): National licences

The analysis of this option is provided in section 3.5.

Option 2.1.2: Mutual recognition of CSD services

In this option a CSD would have the freedom to provide its services abroad (in a "host" country) without the need to open an establishment there or to be otherwise regulated in the host country. As described in the problem definition, this is already the case for settlement (due to MiFID, although under certain conditions), but not for the notary function.

This option would impose no additional regulatory cost on CSDs. In theory, it could introduce more competition in the CSD market (although it would have to be accompanied by the removal of access barriers discussed in section 5.3) and therefore reduce fragmentation. However, for reasons related to national corporate law, CSDs may need to open (or maintain, in the case of groups) local subsidiaries or branches in the host countries where they offer notary and related services. Without a harmonisation of the licensing framework, the current situation of the duplication of authorisation (and supervision) procedures would be maintained. The level playing field between CSDs would therefore not increase significantly, since the services these can provide will be conditioned by the constraints of their domestic licences and any ensuing benefits, in terms of reduced costs for issuers or investors and increased safety, would therefore be limited.

In addition, without common prudential and organisational rules, this option could create a "race to the bottom", i.e. an advantage for CSDs located in a jurisdiction with the most lenient requirements.

Option 2.1.3: EU licence (and passport) for CSD services

In this option CSDs would be granted an EU licence, which would allow them to "passport" their services freely to other Member States (via an establishment in those Member States or not), without a need for duplication of authorisation and supervision.

A common EU licence and passport for CSD services would accompany cross-border establishment of CSDs and, together with a removal of barriers of access (see section 5.3) it should increase competition, with positive consequences for costs and quality of service to issuers and investors. It should also foster consolidation among CSDs since authorisation and supervision do not need duplication and should therefore reduce fragmentation in the medium to long term, with positive consequences for safety and costs. In the short term, however, it may increase fragmentation if CSDs wishing to take advantage of the opening of the market set up businesses in other Member States. This issue has been highlighted by stakeholders, particularly the regional/global intermediaries that need to access several CSDs.

This option would impose a regulatory cost on CSDs, who would need to apply for a licence (at least after a temporary grandfathering period). Increased competition may also cause some CSDs to lose market share and revenues. Intermediaries may face additional costs in the short term if fragmentation is increased, but in the long term consolidation should decrease their back office costs.

Based on the analysis above, an EU licence and passport are preferred as the best way to achieve level playing field and competition between CSDs. An order of magnitude of the potential benefits of a reduction of cross-border post trading costs in Europe is provided in section 6.2.

Table 4: Summary of the impact analysis for operational objective 2.1 (harmonise licensing framework)

|| Effectiveness || Efficiency || Impact on stakeholders

Option 2.1.1 (status quo) || n.a. || n.a. || n.a.

Option 2.1.2 (mutual recognition of services) || (≈/+) provision of services recognised cross-border but CSDs conditioned by domestic licences (≈/+) reduced costs for market participants from slightly more competition (-) increased risk (hence cost) from race to bottom || (+) no additional regulatory cost on CSDs || (≈/+) slightly more competition, potentially less cost for investors (-) increased risk (hence costs) for investors from race to bottom

Option 2.1.3 (EU licence) || (+) common licensing rules for CSDs (+) reduced ongoing cost for market participants from increased competition and reduced fragmentation in medium/long term (-) potentially increased ongoing costs for market participants from more short term fragmentation || (-) regulatory one-off cost on CSDs from applying for a licence || (+) reduced costs for market participants from increased competition and reduced fragmentation in the medium/short term should outweigh increased costs from more fragmentation in the short term (-) regulatory one-off cost on CSDs from applying for licence (-) possible loss of revenues for certain CSDs (from competition)

Sub-options of Option 2.1.3: Treatment of banking-type of ancillary services

An important question relates to the scope of ancillary services included in the licence, particularly with respect to banking/securities-type of services where the CSDs incur credit and liquidity risk. Stakeholder views diverge widely on this topic, from those who advocate a leaner regulatory structure allowing CSDs to undertake these services under one licence, to those who argue for a segregation of banking type of services in separate legal entity. A detailed analysis of different options is included in Annex 12, with a summary below.

Based on the stakeholders’ views, the following options have been considered: · One legal entity with one licence (Option A); under this option, CSDs providing banking services would not be subject to the CRD, but to a customised prudential framework in the CSD legislation · One legal entity with two licences, for CSD activities and for banking-type of activities – the latter under the CRD (Option B); this corresponds to the status quo in Member States where CSDs are allowed to provide banking services · One legal entity with two licences (as above), plus additional prudential requirements to mitigate the risk spill over from the banking activities to the CSD activities (Option C) · Two legal entities, with two separate licences (Option D), whereby the banking entity could be a general credit institution, but subject to specific prudential requirements for each securities settlement system it acts as settlement agent for

Option A would create the leanest regime for CSDs – for this reason it was supported by some CSDs and some regulators; however, it would mean creating a separate prudential framework for the same type of risks as those covered by the CRD. Option B would allow current business models to exist, while enshrining in legislation the current practice of limiting the scope of banking activities and applying stricter prudential requirements than the CRD; however, CSDs would continue to be subject to credit and liquidity risk. This option was supported mostly by the CSDs who currently have this model and their regulators. Option C is an “enhanced” Option B, whereby the spillover risk is addressed by applying stricter prudential requirements to the banking services. Finally, Option D reduces considerably the risk profile of the CSDs, but has the biggest impact on the current integrated models, mainly in terms of legal/transaction costs. This option was favoured by many CSDs’ clients, mainly the custodian banks and some regulators.

Based on the analysis in Annex 12, option D is preferred.

5.2.2. Options for objective 2.2 – Harmonise prudential and organisational rules

Option 2.2.1: rely only on CPSS-IOSCO/ESCB-CESR recommendations (status quo)

The analysis of this option is provided in section 3.5. Importantly, the status quo option is not compatible with the preferred policy option in the section 5.2.1, i.e. EU licence, since a license makes no sense without common prudential and organisational rules.

Option 2.2.2: Introduce common EU prudential and organisational rules

In this option, CSDs across the EU would be subject to common prudential and organisational rules that reflect their systemic role for the market. Importantly, these rules would also address the way CSDs conduct their business and carry out their functions, links between CSDs and would seek to harmonise the enforcement of administrative sanctions[39].

For instance, CSDs would be required to have robust governance arrangements, experienced and suitable senior management, board and shareholders and to set up user committees for each securities settlement system that represent issuers and participants. They should mitigate operational risk in order to ensure the continuity of operations, including of settlement, at all times. A related requirement to increase the safety of settlement would be that only CSDs or central banks could operate securities settlement systems.

CSDs should conduct their business in a non-discriminatory and transparent way with respect to prices and participation. They should play an important role in ensuring the integrity of a securities issue and should provide segregated accounts in order to protect participants' assets. As CSDs are becoming increasingly interconnected and this process should accelerate with the advent of T2S, strict prudential requirements should be introduced for linked CSDs, such as the setting up of identical settlement finality rules. A more detailed overview of possible rules is provided in Annex 11, section 8.11.2.

An EU licence would automatically require a common set of regulatory requirements. The harmonisation of rules has, nevertheless, merits in its own right, since it would increase level playing field (in a competitive environment such as post-T2S or with opening of access – see option 3.1.3) and increase the safety of CSDs and of their functions. Such rules would therefore complement the settlement discipline principles discussed under option 1.1.3. This option may, however, also imply costs for certain CSDs in adapting their systems. It would also have indirect effects on any custodian banks that are considering operating a securities settlement system, as they would need to set up a CSD in order to do so.

Achieving common rules can be done in different ways. Two sub-options have been considered:

· Sub-option 2.2.2.1: Introduce common prudential and organisational principles, with detailed measures to be set by secondary legislation

As with the discussion on the options on settlement discipline, this option would be beneficial in several ways: (a) it would allow flexibility in adapting detailed measures to market circumstances, (b) it would allow better alignment with international standards – the CPSS-IOSCO standards are currently under review, and (c) it would allow better involvement of ESCB in setting such measures – this is important in managing regulatory burden for CSDs, since the settlement systems they operate are overseen by central banks.

· Sub-option 2.2.2.2: Prescribe detailed common EU prudential and organisational rules

While this may allow more standardisation across the EU, it would not have all the benefits described above and thus may come at the cost of reduced innovation, increased regulatory burden on CSDs and potentially reduced competitiveness compared to third country operators.

Option 2.2.2.1 (common principles) is therefore preferred as it is more proportionate to the objectives sought.

Table 5: Summary of the impact analysis for operational objective 2.2 (harmonise prudential and organisational)

|| Effectiveness || Efficiency || Impact on stakeholders

Option 2.2.1 (status quo) || n.a. || n.a. || n.a.

Option 2.2.2.1 (common principles, standards detailed by secondary legislation) || (+) ensures consistency of rules (+) increased level playing field, reduced fragmentation || (-) regulatory burden for (some) CSDs to comply (+) compensated by better flexibility and alignment with central banks and global efforts || (+) less cost for investors from competition and less risk from reduced fragmentation (-) regulatory cost for CSDs

Option 2.2.2.2 (prescribe common rules) || (+) ensures standardisation of rules (+) increased level playing field, reduced fragmentation || (-) regulatory burden for (some) CSDs to comply (-) aggravated by no flexibility, alignment etc. || (+) less cost for investors from competition and less risk from reduced fragmentation (--) potentially more regulatory cost for CSDs

5.2.3. Options for objective 2.3 – Harmonise authorisation and supervision framework

Option 2.3.1: National authorisation and supervision (status quo)

In this option, CSDs would continue to be authorised and supervised at national level, with case-by-case cooperation between authorities in different Member States. Current examples of this include the cooperation between central banks for the authorisation and oversight of links between settlement systems and the Memorandum of Understanding for the supervisory college of the Euroclear settlement platform ESES.

In theory, authorisation and supervision could remain solely at national level even with an EU licence and passport. The main argument for this is that since fiscal responsibility in case of the failure of a CSD lies within that CSD's home Member State, authorisation and supervision should also be located there. This argument should be, however, further nuanced for CSDs. Most CSDs, unlike CCPs, have limited capital, and hence a CSD failure would cause more disruption for the CSD's participants rather than for its shareholders. But then the financial and potentially fiscal impact would be where the head offices of the CSD's participants are located, which is not necessarily the same as the head office of the CSD. Furthermore, in a cross-border context, where a CSD may serve issuers from multiple Member States or may have links with CSDs from other Member States, the failure of a CSD may spill over across borders. This option does not cater for cross-border considerations.

Option 2.3.2: National authorisation and supervision with involvement of other Member States authorities (where applicable)

Involvement of other Member States authorities should therefore be considered if the "externality" of a CSD's business justifies it. Externalities occur in particular when a CSD operates a securities settlement system subject to the law of another Member State or settles on cash accounts with a central bank established in another Member State . In this case, the oversight authority of the respective securities settlement system and the respective central bank of settlement should be consulted by the CSD's "home" competent authority. Similarly, the CSD's competent authority should consult and cooperate with the authorities of subsidiaries or branches of the CSD in other Member States.

As discussed under Option 2.3.1, an authorisation and supervision framework that includes tight cooperation between authorities across borders would have important benefits for safety, particularly in crisis situations. The larger cross-border CSDs and the authorities themselves may incur costs in setting up such a cooperation framework, however these costs are not likely to be significant as cooperation already exists in practice today in many cases.

Option 2.3.3: National authorisation and supervision with involvement of ESMA

An alternative to having authorities from other Member States directly involved would be to channel the cooperation or information exchange between authorities through ESMA. For instance, ESMA would be consulted on the different elements of externality, and would pass the information on to the relevant authorities in a standardised way. To achieve the same benefits highlighted above, ESMA would need efficient channels of communication with the different authorities.

This could be a more efficient option, since information would be transmitted to and centralised in one point. However, it may be more burdensome for national regulators as it would interpose another institution between them.

Option 2.3.4: National authorisation and supervision with involvement of other Member States authorities and of ESMA (where applicable)

This option would combine Options 2.3.2 and 2.3.3 in the following way: · The home Member State authority would consult and cooperate with authorities in other Member States as described under Option 2.3.2 · ESMA would develop standard forms, templates and procedures to streamline the information sharing and cooperation between authorities · ESMA would hold the "register" of CSDs, including a number of details for each CSD such as services provided, securities settlement systems operated, central banks and/or other settlement agents used for settlement and authorities involved in authorisation and supervision

This option would allow other Member States authorities to be directly involved in a flexible way that does not put unnecessary regulatory burden on the smaller CSDs, while ensuring a certain standardisation of this cooperation for the larger CSDs. It would therefore strike the right balance between a coordinated authorisation and supervision framework and the regulatory impact on CSDs.

Most respondents to the public consultation (including public authorities and CSDs) were generally in favour of combining national authorisation and supervision with involvement of other Member States authorities, subject to such involvement being properly differentiated according to the level of externality a CSD engages in. There was also broad agreement for the maintenance of a CSD register by ESMA.

Option 2.3.5: Authorisation and supervision by ESMA

This option is diametrically opposed to option 2.3.1 since it gives authorisation and supervision powers over CSDs to ESMA.

Central authorisation and supervision would immediately ensure a coherent application of rules (hence efficiency) and would address cross-border safety issues, particularly at times of crisis. ESMA would ensure that Member States' interests and concerns are balanced. However, this option would not align fiscal and supervisory responsibility; indeed the fiscal responsibility (for the failure of a CSD or of its participants) would be left with the Member States.

Table 6: Summary of the impact analysis for operational objective 2.3 (harmonise authorisation and supervision framework)

|| Effectiveness || Efficiency || Impact on stakeholders

Option 2.3.1 (status quo, but EU licence) || n.a. || n.a. || n.a.

Option 2.3.2 (national authorisation and supervision, involvement of other Member States authorities) || (+) involvement of other concerned authorities strengthens passport effect (+) supervisory and fiscal responsibilities aligned (-) potential divergences in application of requirements || (-) regulatory cost for some large CSDs from involvement of other authorities || (+) country with fiscal responsibility maintains authorisation and supervision power (-) regulatory cost for some CSDs

Option 2.3.3 (national authorisation and supervision, involvement of ESMA) || (+) supervisory and fiscal responsibilities aligned (+) coordination at EU level through ESMA || (≈/-) regulatory cost for some large CSD, but potentially less than in option 2.3.2 || (+) country with fiscal responsibility maintains authorisation and supervision power (≈/-) regulatory cost for some CSD

Option 2.3.4 (involvement of other Member States authorities and ESMA) || (+) involvement of other concerned authorities strengthens passport effect (+) supervisory and fiscal responsibilities aligned (+) coordination at EU level through ESMA || (-) regulatory cost for some large CSD, but potentially less than in option 2.3.2 due to coordination/ standardisation by ESMA || (+) country with fiscal responsibility maintains authorisation and supervision power (-) regulatory cost for some CSDs

Option 2.2.2.2 (ESMA authorisation and supervision) || (++) coherent application of rules and supervision, no uncertainty about cross-border provision of services (-) supervisory and fiscal responsibilities misaligned || - || (-) country with fiscal responsibility loses authorisation and supervision power

5.3. Options for objective 3 – Remove barriers of access to/from CSDs

The options below follow the structure of the chapter on the problems associated with barriers of access, namely it addresses (1) access between issuers and CSDs, and (2) access between CSDs and between CSDs and other market infrastructures.

5.3.1. Options for objective 3.1 – remove barriers of access between issuers and CSDs

Option 3.1.1 (status quo): Issuers required to use local CSD in many EU countries

The analysis of this option is provided in section 3.5.

Option 3.1.2: Introduce the right for issuers to issue securities into the CSD of their choice

This option would aim to grant issuers the freedom to issue securities into the CSD of their choice, which may be located in a different jurisdiction. This is already the case for the so-called Eurobonds, but not always for shares. There is relatively wide agreement among all stakeholders that this freedom of issuers should not prejudice the law under which the securities are constituted. This is more relevant for shares, where the national law of the issuer may impose certain requirements on the issuer CSD. CSDs should therefore not be obliged to accept any requesting issuer.

Some regulators who have responded to the public consultation have also expressed a view that this right of issuers should be without prejudice to national procedures regarding tax. In particular, CSDs often provide services in respect of withholding tax relief procedures (i.e. procedures aimed at granting withholding tax relief at source on securities income, as provided under double tax treaties or domestic law). The Commission Recommendation on withholding tax relief procedures[40] encourages Member States to allow foreign financial intermediaries that have obtained prior authorisation or approval to act as an "information agent" (reporting pooled withholding tax rate information) or "withholding agents" (authorised to assume withholding responsibilities). It is important to note that, according to the Recommendation, the authorisation/approval should be given by the source Member States (i.e. the Member State where the issuer of the securities generating income is tax resident).

This freedom of issuers to choose their CSD would increase competition among CSDs (with potential benefits for investors and issuers) and improve efficiency for cross-border issuance by shortening the holding chain that separates the issuer from the investor. It would also create economies of scale gains for CSDs (which should again translate into reduced prices for issuers and investors). However, some custodian banks have argued that this option may increase fragmentation if CSDs, in the absence of the harmonisation of corporate laws, open foreign branches in order to compete with domestic CSDs. Fragmentation would result in increased operational complexity, with negative consequences for risks and costs. This is, nevertheless, likely to be a short-term effect, as the natural long-term result in this sector driven by economies of scale should be more consolidation.

In terms of costs, CSDs may need to incur certain costs to take advantage of the new business opportunities, such as operational changes to cater for foreign corporate laws and new legal arrangements with foreign issuers. However they would obviously only do so if the benefits warranted the costs. A similar logic applies to issuers.

For the reasons above the benefits of introducing this freedom for issuers are likely to materialise quite slowly. But it is an important measure to open up the market and accompany the preferred option of an EU licence analysed in section 5.2.

Option 3.1.3: As 3.1.2 and a requirement for certain classes of securities to be represented in book-entry form

Option 3.1.2 could be rendered more effective by harmonising the form of representation of securities upon issuance, which could be done by requiring that certain classes of securities in the EU (e.g. shares and bonds admitted to trading) are represented in book-entry form. This can be done in different ways, for instance through prior immobilization of securities (such as in Germany) or through direct dematerialization (such as in France). Such securities would need to be entered in a CSD when they are traded or given as collateral. A grandfathering clause would allow sufficient time to those markets that still use paper-based securities to adapt.

This option would make the competition between CSDs more effective and therefore increase the benefits to issuers, investors and CSDs identified under option 3.1.2. The recourse to book entry is also recommended by ESCB-CESR as it would have wider benefits for settlement; it would notably reduce settlement risk since book entry securities are much easier to deliver than paper based securities and it would facilitate the reduction of the settlement period. For these reasons, most respondents to the public consultation were in favour of such a measure, with some notable exceptions in the UK market.

The market that would be most affected by this measure would indeed be the UK, where paper securities coexist with book entry securities[41]. The UK regulators, issuers and registrars have therefore advocated against this. The registrars were particularly against introducing an obligation for investors to hold securities in book entry form in a CSD if they do not wish/need to trade their securities; this may be the case of investors who may have acquired securities through an IPO or an employee share scheme. A key argument was that such investors would incur an unnecessary ongoing cost of account maintenance. In order to address this, the requirement is not for securities to be held in a CSD, but to be held in book entry form (for instance by the issuer or its registrar), which would facilitate settlement through a CSD once the security is eventually traded.

This may still result in an additional cost for issuers and registrars – on the one hand, the initial investment cost of implementing this system; on the other hand, an ongoing cost of sending regular account statements to investors (this cost would probably be picked up by the issuers). The overall cost of managing book entry securities should nevertheless be less than that of managing paper securities. No data has been available to quantify these costs. This option is favoured in order to render issuers' access to CSDs more meaningful and for the link to settlement efficiency. It would allow a reduction of settlement periods – it currently can take up to 10 days to settle trades in paper securities in the UK. It would also decrease the opportunities for fraud and the risk of losing paper certificates and it would allow a better reconciliation between the securities issued and the ones circulating. The impact on the UK market could be mitigated by setting an implementation date that allows the market to adapt.

Table 7: Summary of the impact analysis for operational objective 3.1 (remove barriers of access between issuers and CSDs)

|| Effectiveness || Efficiency || Impact on stakeholders

Option 3.1.1 (status quo, but EU licence) || n.a. || n.a. || n.a.

Option 3.1.2 (right to issue into CSD of choice) || (≈/+) removes barriers for new issuance but less effective if operational barriers of access persist (≈/+) more competition for notary services, less complexity for cross-border settlement || (+) issuers and CSDs may incur adaptation costs, but they would not do so unless there were net benefits to be gained || (≈/+) reduced cost to issuers and investors from increased competition and reduced fragmentation (-) possible loss of revenues for certain CSDs

Option 3.1.3 (as 3.1.2 and book entry form) || (+) removes also operational barriers of access and allows more economies of scale efficiencies at CSDs (≈/+) increased settlement efficiency || (≈/-) implementation costs for markets with certificated securities (UK market) || (+) reduced cost to issuers and investors from increased competition and reduced fragmentation (+) reduced settlement risk (-) potential implementation and ongoing costs for issuers and registrars (-) possible loss of revenues for certain CSDs (from competition)

5.3.2. Options for objective 3.2 – remove barriers of access between CSDs and between CSDs and other market infrastructures

Option 3.2.1 (status quo): Rely on Code of Conduct

The analysis of this option is provided in section 3.5.

Option 3.2.2: Introduce access rights between CSDs and between CSDs and other market infrastructures

This option would impose uniform requirements on CSDs and other market infrastructures regarding access. These would include general principles of access (non-discrimination and transparency), conditions when access may be refused (based on risk only), the procedure for requesting access and responding to access requests and a dispute resolution mechanism between authorities (by ESMA). The requirements would address access by CSDs to other CSDs and to transaction feeds from CCPs and trading venues.

Regarding CSD to CSD access, while all stakeholders are generally in favour of introducing access rights in legislation, many (especially CSDs and regulators) have responded that a CSD should not have the right to an "interoperability" access to another CSD. CSDs, unlike CCPs, can enable their participants to settle cross-border transactions by becoming participants in other CSDs, i.e. by setting up a "standard" link. A variation of this is a "customised" link, where a CSD develops specific features for another CSD (in line with the Code, this should be charged on a cost-plus basis). These types of links have one disadvantage compared to an "interoperability" access, in that they cannot generally ensure DVP settlement for participants. However, this problem will be solved by T2S.

The benefits of introducing access rights would be effective competition between CSDs and more fair access to business opportunities, which should potentially translate into further reduction of costs for issuers and investors, in addition to those generated by an EU licence (option 2.1.3) and by opening up the access of issuers to CSDs (option 3.1.3). The facilitation of link arrangements between CSDs may also generalise settlement in securities settlement systems and reduce the internalisation of settlement by intermediaries; as explained in section 3.2.1 this would have positive consequences for safety since securities settlement systems benefit from the SFD protection against a participant’s default.

As for costs, there should be no "unwanted" costs for CSDs since any customised component of an access should be paid for. However, the increased competition could imply loss of revenue for certain CSDs.

The obligation for other market infrastructures (trading venues, CCPs) to provide transaction feeds to all requesting CSDs should not imply significant costs for these infrastructures. However it will call into question certain business models, mainly the integrated model of trading venue/CCP/CSD.

Table 8: Summary of the impact analysis for operational objective 3.1 (remove barriers of access between issuers and CSDs)

|| Effectiveness || Efficiency || Impact on stakeholders

Option 3.2.1 (status quo) || n.a. || n.a. || n.a.

Option 3.2.2 (introduce access rights) || (+) effective market opening, fairer access to business opportunities, increased competition || (≈) no unwanted costs for CSDs or other market infrastructures || (+) potentially reduced cost for investors (-) possible loss of revenues for certain CSDs

6. Preferred Policy Options and Instruments 6.1. Preferred policy options

The preceding analysis has identified the following policy options:

Table 9: Summary of preferred policy options

Objective || Sub-objective || Preferred option

1. Enhance framework for settlement || 1.1 Improve cross-border settlement discipline || Option 1.1.3 Introduce common principles for settlement discipline, detailed standards to be set by secondary legislation

|| 1.2 Align settlement periods || Option 1.2.3.2 Harmonise settlement periods at T+2

2. Introduce consistent rules for CSDs || 2.1 Introduce consistent licensing framework || Sub-option 2.1.3 EU licence and passport for CSD services (with separation of banking-type of services in a different legal entity)

|| 2.2 Introduce consistent prudential and organisational requirements || Sub-option 2.2.2.2 Introduce common prudential and organisational principles, detailed standards to be set by secondary legislation

|| 2.3 Introduce consistent authorisation and supervision framework || Option 2.3.4 National authorisation and supervision, with involvement of other Member States authorities and ESMA (depending on element of externality of a CSD's business)

3. Remove barriers of access to/from CSDs || 3.1 Remove barriers of access between issuers and CSDs || Option 3.1.3 Introduce the right of issuers to issue securities into any CSD and the obligation to have securities represented in book entry form

|| 3.2 Remove barriers of access between CSDs and between CSDs and other market infrastructures || Option 3.2.2 Introduce access rights between CSDs and between CSDs and other market infrastructures

6.2. The cumulative impacts of the preferred policy options

As illustrated in chapter 4, many of the proposed policy solutions are interconnected and the spill-over effects between them are considerable. The best way to summarise this is to refer back to the strategic objectives set out, which can only be achieved effectively by using a combination of policy options:

· Increase safety of cross-border transactions. The harmonisation of settlement discipline (option 1.1.3) addresses this directly, but this would be more effective if settlement periods were harmonised as well (option 1.2.3.2). For instance, buy in procedures in the case of a failed trade are typically set with reference to the intended settlement date. Common prudential and organisational rules for CSDs (option 2.2.2.3) address settlement safety as well such as a DvP requirement. A harmonised authorisation and supervision framework (option 2.3.4) would increase cooperation between national authorities and therefore hopefully mitigate to a certain degree the cross-border spill-over of risk

· Increase efficiency of cross-border transactions. This is achieved by reducing the fragmentation of the market, which would require a harmonised licensing and authorisation and supervision framework for CSDs (options 2.1.3 and 2.3.4) as well as the removal of barriers of access (options 3.1.4 and 3.2.1). Incre