EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 11 July 2006  
at the request of the Cypriot Ministry of Finance 
on two draft regulatory decisions issued by the Cyprus Stock Exchange Council  
(CON/2006/37) 
 
Introduction and legal basis  
On 24 May 2006 the European Central Bank (ECB) received a request from the Cypriot Ministry of 
Finance (hereinafter the ‘consulting authority’) for an opinion on two draft regulatory decisions issued by 
the Cyprus Stock Exchange Council (hereinafter jointly referred to as the ‘draft decisions’).  
The ECB’s competence to deliv er an opinion is based on the fifth indent of Article 2(1) of Council 
Decision 98/415/EC of 29 June 1998 on the consu ltation of the European Central Bank by national 
authorities regarding draft legislative provisions1, as the draft decisions relate to payment and settlement 
systems. In accordance with the firs t sentence of Article 17.5 of the Rules of Procedure of the European 
Central Bank, the Governing Council has adopted this opinion. 
 1. Purpose of the draft decisions  
The purpose of the draft decisions is to (i) regulat e the operation of the Central Depository and Central 
Registry (CDCR) for securities trad ed on the Cyprus Stock Exchange (CSE); and (ii) govern the clearing 
and settlement of transactions in book-entry securities in the CDCR. The draft decisions, inter alia , touch 
upon the operation of investors’ securities accounts, the registration of securities with the CDCR, the trading currency for transactions in securities in the CDCR and the clearing and settlement of such 
transactions.  
 2. General observations  2.1 The ECB is pleased to note that the present cons ultation request follows the recent consultation on 
a draft law amending the Cyprus Securities and St ock Exchange (Central Depository and Central 
Securities Registry) Laws of 1996 to 2005 (hereinafter the ‘Law’) and appreciates that several of 
                                                     
 
1  OJ L 189, 3.7.1998, p. 42.  
2 the recommendations made in the ECB opinion issued on that occasion2 have been taken on board 
by the Cyprus Stock Exchange Council (herei nafter the ‘CSE Council’). Moreover, the ECB 
understands that the entry into force of the draf t decisions will signal a major overhaul of the 
operational and trading rules and regulations of the Cyprus Stoc k Exchange (CSE) and welcomes 
the opportunity to comment on the draft decisions.  
2.2 The ECB also notes that upon adoption of the eu ro in Cyprus, the CDCR will have to be assessed 
against the Eurosystem standards for the use of  EU securities settlement systems in ESCB credit 
operations (the ‘Eurosystem user standards’)3. For that reason, the ECB’ s comments in this opinion 
are without prejudice to a future assessment of the CDCR against the abovementioned standards. 
 3.  Specific observations on the dra ft decision on clearing and settlement 
Use of the euro as a trading currency 
3.1  In ECB Opinion CON/2006/9, the ECB commented on a draft provision purporting, inter alia,  to 
delegate to the CSE Council the power to designa te the currency in which transactions are to be 
conducted in the context of the planned common tr ading platform between the CSE and the Athens 
Stock Exchange (ASE). In its opinion, the ECB invited the legislator to clarify whether the purpose of the proposed amendment was to enable the C SE Council to designate the euro as a reference unit 
for transactions or to institute the euro as the settlement currency for such  transactions, noting that 
‘[w]hilst the use of the euro as a trading unit of  account in a common platfo rm raises no concern, 
its use as a settlement currency would need to take into account that, before Cyprus adopts the 
euro, it qualifies in Cyprus as a foreign currency, and thus it is subject to liquidity and credit risks. 
This may have implications for the sm ooth settlement of securities transactions’
4. 
3.2  Article 2 of the draft regulatory decision govern ing the clearing and settlement of transactions in 
book-entry securities in the CDCR (hereinafter the ‘draft decision on clearing and settlement’), entitled ‘Trading currency’, inter alia , provides that the financial value of such transactions must 
be denominated in euro
5. In this regard, the ECB draws the c onsulting authority’s attention to its 
comments in ECB Opinion CON/2006/9, as cited above. 
                                                      
2  ECB Opinion CON/2006/9 of 22 February 2006 at the reque st of the Cypriot Ministry of Finance on a draft law 
amending the Cyprus Securities and Stoc k Exchange (Central Depository and Ce ntral Securities Registry) Laws of 1996 
to 2005, available on the ECB’s website at www.ecb.int 
3  Published in 1998, the Eurosystem user  standards have been regarded as de facto common standards for EU securities 
settlement systems. Nevertheless, they are not intended to be a comprehensive set of standards for the oversight or 
supervision of securities settlement systems. The standards are available on the ECB’s website at 
http://www.ecb.int/home/ html/index.en.html. 
4  Paragraph 6.1 of ECB Opinion CON/2006/9.  
5  It is also noted that Article 4 of the draft decision on clearing and settlement does not specify the clearing and settlement  
currency. 
3 Settlement finality issues 
3.3 In ECB Opinion CON/2006/9, the ECB commented on a draft provision purporting, inter alia , to 
delegate to the CSE Council the power to determin e settlement finality issues. On that occasion, the 
ECB noted that as Cyprus has implemented the Settlement Finality Directive (SFD)6, the draft law 
could further clarify that settlement finality i ssues are governed by the national law implementing 
the SFD, and that it is only on technical issues (inc luding deadlines, transfer of funds issues, etc.) 
that the CSE Council will enjoy decision-making powers7. 
3.4  Articles 9.2 and 9.3 of the draft decision on clearing and settlement set out rules regarding the 
finality of transactions. The ECB recommends th at these should be supplemented by express 
provisions regarding the moment of entry into the system in accordance with Article 3(3) of the 
SFD.  
3.5 The ECB reminds the consulting authority of the provisions of Cypriot law implementing the SFD8 
and draws its attention to the interaction of those provisions with Article 16.6 of the draft decision 
on clearing and settlement, which, inter alia , provides that settlement of  each purchase or sale must 
be construed as final and irrevocable, subject solely  to the facility to corr ect records in the CDCR, 
as provided for in the Law and the draft regulatory decision governing the operation of the CDCR (hereinafter the ‘draft decision on the operation of the CDCR’).  
3.6  Article 16.4 of the draft decision on cleari ng and settlement sets out the modalities for the 
settlement of transactions on a delivery versus payment basis. The ECB recommends that this 
provision should be supplemented by a reference to the requirements and effects of transfers to the 
securities accounts referred to therein, which th e ECB understands to be intended as legally 
effective book-entry credits, valid erga omnes . 
 Access to the CDCR  
3.7 Article 26 of the draft decision on clearing and se ttlement provides that remote CSE members (i.e. 
members not legally established in Cyprus) may ca rry out the actions provided for in the draft 
decision on clearing and settlement through a si ngle depository acting as the remote member’s 
agent. The ECB notes that this provision is inconsistent with Articles 34 and 36 of the Markets in Financial Instruments Directive (hereinafter the ‘MiFID’)
9, pursuant to which investment firms 
                                                      
6  Directive 98/26/EC of the European Pa rliament and of the Council of 19 May 199 8 on settlement finality in payment and 
securities settlement systems (OJ L 166, 11.6.1998, p. 45). 
7  Paragraph 4.1 of ECB Opinion CON/2006/9. 
8  Law 8(I)/2003 on settlement finality in payment and securiti es settlement systems (Offici al Gazette of the Republic, 
No 3679, 31.1.2003). Also see ECB Opinion CON/2005/28 of 10 August 2005 at the request of the Central Bank of 
Cyprus on a draft law amending the Settlement Finality in Payment Systems and Securities Settlement Systems Law of 
2003.  
9  Directive 2004/39/EC of the European  Parliament and of the Council of 21 April 2004 on markets in financial 
instruments amending Council Directiv es 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European 
Parliament and of the Council and re pealing Council Directive 93/22/EEC (OJ L 145, 30.4.2004, p. 1). Directive as 
amended by Directive 2006/31/EC  (OJ L 114, 27.4.2006, p. 60). 
4 from other Member States have a right of access to central counterparty, clearing and settlement 
systems under the same conditions as the those applying to local participants10. 
 4. Specific observations on the  draft decision on the operation of the CDCR  
 Access to the CDCR 4.1 Article 2 of the draft decision on the operati on of the CDCR states that securities listed on the CSE 
must be registered with the CDCR. The ECB not es that this provision is inconsistent with 
Article 34 of the MiFID and draws the consulting au thority’s attention to its implications for the 
listing as well as for the clearing and settlement of  transactions in securities listed on the CSE, 
including those issued by non-Cypriot issuers
11. 
 Pledge of securities 4.2  Article 32 of  the draft decision on the operation of th e CDCR governs the pledge of securities. In 
this regard, the consulting authority’s attention is drawn to the the Cypriot law implementing the 
Financial Collateral Directive (FCD)
12, and governing pledge togeth er with all other financial 
collateral arrangements13. The relationship between the existing provisions of Cypriot law on 
pledge, which implement the FCD, and those set out in the draft decision on the operation of the 
CDCR should be clarified. Moreover, apparent c onflicts between the FCD and the draft decision 
should be removed, as in the case of paragraphs 3.2 and 5.1 of Article 32 of the draft decision. The 
former of these paragraphs prohibits the re-use of pledged assets, which is contrary to Article 5 of 
the FCD, while the latter contemplates a realisa tion with court approval, unlike Article 4 of the 
FCD, which does not. 
                                                      
10  In this regard, the ECB also draws the consulting author ity’s attention to the recommendations of the Giovannini Group 
on ‘Cross-Border Clearing and Settlement Arrangements in the European Union’ of November 2001 (the ‘First 
Giovannini Report’) and the ‘Second Report on EU Clearing an d Settlement Arrangements’ of April 2003 (the ‘Second 
Giovannini Report’), in particular, to the Group’s recomme ndations for the elimination of barrier 5 (‘Practical 
impediments to remote access to  national clearing and settlement systems’), ac cording to which ‘[O]perators of systems 
should seek to ensure that access to th eir systems is on the basis of non-discrimi natory criteria, and that where possible 
those accessing the system remotely are on a level footing w ith local members’ (First Giovannini Report, p. 48, Second 
Giovannini Report, p. 18). The texts of th e Giovannini Reports are available at 
http://ec.europa.eu/economy_finance/giova nnini/clearing_settlement_en.htm.   
11  In this regard, the ECB also draws the consulting authorit y’s attention to the recommendati ons of the Giovannini Reports 
and, in particular, to the Group’s recommendations for the elim ination of barrier 9 (‘Nationa l restrictions on the location 
of securities’), for the purposes of which ‘…restrictions [on the location of secur ities] can limit the choices for issuers 
when placing their securities and/or make it more complicated to hold and settle those securities in Member States other 
than the place of issuance’ (First Giovannini Re port, p. 49, Second Giovannini Report, p. 19).  
12  Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on fina ncial collateral arrangements 
(OJ L 168, 27.6.2002, p. 43). 
13  Law 43(I)/2004 on financial collateral arrangements (O fficial Gazette of the Repu blic, No 3823, 19.3.2004).  
5  
This opinion will be published on the ECB’s website.   Done at Frankfurt am Main, 11 July 2006. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET