EUROPEAN COMMISSION Brussels, 16.3.2022 SWD(2022) 75 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT REPORT

Accompanying the document Proposal for a





REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL





amending Regulation (EU) No 909/2014 as regards settlement discipline, cross-border provision of services, supervisory cooperation, provision of banking-type ancillary services and requirements for third-country central securities depositories





{COM(2022) 120 final} - {SEC(2022) 160 final} - {SWD(2022) 76 final}



Table of contents Glossary 1.Introduction: Political and legal context 1.1.Introduction 1.2.Background 1.3.CSDs in the European Union 1.4.Legal and political context 2.Problem definition 2.1.Methodology 2.2.What are the problems? 2.3.What are the problem drivers? 2.4.How will the problem evolve? 3.Why should the EU act? 3.1.Legal basis 3.2.Subsidiarity: Necessity of EU action 3.3.Subsidiarity: Added value of EU action 4.Objectives: What is to be achieved? 4.1.General objectives 4.2.Specific objectives

5.What are the available policy options? 5.1.What is the baseline from which options are assessed? 5.2.Description of the policy options 5.3.Options discarded at an early stage 6.What are the impacts of the policy options? 6.1.Impact of the policy options regarding passporting requirements 6.2.Impact of the policy options regarding cooperation between authorities 6.3.Impact of the policy options regarding provision of banking services related to settlement in foreign currencies 6.4.Impact of the policy options regarding settlement discipline 6.5.Impact of the policy options regarding third-country CSDs 7.How do the options compare? 8.Preferred package 8.1.Summary of preferred aggregated options 8.2.Combined impacts of the package 8.3.REFIT (simplification and improved efficiency) 9.How will actual impacts be monitored and evaluated? Annex 1: Procedural information Annex 2: Stakeholder consultation Annex 3: Who is affected and how? Annex 4: Analytical methods

Annex 5: Evaluation Annex 6: Detailed description of identified problem areas Annex 7: Analysis of all the options Annex 8: Graphs and figures Annex 9: description of the buy-in process



Glossary Term or acronym Meaning or definition Book-entry settlement A mechanism that enables market participants to transfer assets (e.g., securities) without the physical movement of paper documents or certificates. Buy-In A purchase of shares by a broker after a seller has failed to deliver similar shares, the original seller being charged any difference in cost. CMU Capital Markets Union Central bank money Designates the case where a Securities Settlement System settles its cash leg on cash accounts opened in the books of a central bank. Central counterparty (CCP) An entity that interposes itself, in one or more markets, between the counterparties to the contracts traded, becoming the buyer to every seller and the seller to every buyer and thereby guaranteeing the performance of open contracts. Collateral An asset or third-party commitment that is used by the collateral provider to secure an obligation to the collateral taker. Collateral arrangements may take different legal forms; collateral may be obtained using the method of title transfer or pledge. College of supervisors A supervisory college is a permanent structure comprising various authorities interested in the activities of a financial participant. The framework applicable to colleges of supervisors is enshrined in the founding Regulations for the European Supervisory Authorities. Commercial bank money Designates the case where a Securities Settlement System settles its cash leg on cash accounts that are not opened in the books of a central bank but on the books of a banking institution. Corporate action A corporate action is an event initiated by a public company that brings or could bring an actual change to the securities—equity or debt—issued by the company, such as stock splits, mergers, dividend payments. The role of the CSD is to inform CSD participants holding the respective share or bond in custody about the upcoming corporate action. Custodian or custodian bank An entity, often a credit institution, which acts as "account provider" and provides securities custody services to its customers, i.e. holding and administration of securities owned by a third party. CSD Central Securities Depository. A legal person that operates a securities settlement system and provides at least a notary service or a central maintenance service. CSDR Regulation (EU) No 909/2014 of the European Parliament and of the Council on improving securities settlement in the EU and on central securities depositories CPMI The Committee on Payments and Market Infrastructures (CPMI) is an international standard setter that promotes, monitors and makes recommendations about the safety and efficiency of payment, clearing, settlement and related arrangements, thereby supporting financial stability and the wider economy. The CPMI also serves as a forum for central bank cooperation in related oversight, policy and operational matters, including the provision of central bank services. Distributed ledger technology (DLT) Distributed ledger is used to describe a decentralised dataset architecture which allows the keeping and sharing of records in a synchronised way, while ensuring their integrity through the use of consensus-based validation protocols and cryptographic signatures. DVP Delivery versus payment. A securities settlement mechanism which links a transfer of securities with a transfer of cash in a way that the delivery of securities occurs if and only if the corresponding transfer of cash occurs and vice versa. EBA European Banking Authority ECB European Central Bank ECSDA European Central Securities Depositories Association EFAMA European Fund and Asset Management Association EEA European Economic Area ESCB European System of Central Banks ESMA European Securities and Market Authority Eurobond Originally the term Eurobond was reserved to bonds that were issued in currencies different from the currency of incorporation of the issuer. Currently, Eurobonds are issued in a limited number of jurisdictions (e.g. England and Wales, US), leading to numerous situations where the law of issuance is different from the law of the issuer. FSB The Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system. It promotes international financial stability; it does so by coordinating national financial authorities and international standard-setting bodies as they work toward developing strong regulatory, supervisory and other financial sector policies. It fosters a level playing field by encouraging coherent implementation of these policies across sectors and jurisdictions. Policies developed in the pursuit of these objectives are implemented by jurisdictions and national authorities. ICMA International Capital Market Association International Central Securities Depository (ICSD) A central securities depository (CSD) that settles domestic and international securities transactions and typically offers additional services such as securities lending and collateral management. ICSDs are usually run on direct or indirect (through correspondent banks) links to local CSDs. IOSCO The International Organization of Securities Commissions (IOSCO) is an association of organizations that regulate the world's securities and futures markets. Members are typically primary securities and/or futures regulators in a national jurisdiction or the main financial regulator from each country. Its mandate is to: ·Develop, implement, and promote high standards of regulation to enhance investor protection and reduce systemic risk ·Share information with exchanges and assist them with technical and operational issues ·Establish standards toward monitoring global investment transactions across borders and markets ISD Intended Settlement Date. Means the date that is entered into the securities settlement system as the settlement date and on which the parties to a securities transaction agree that settlement is to take place. Links Direct link: an account opened by an investor CSD in the books of an issuer CSD in order to facilitate the transfer of securities from participants in the issuer CSD to participants in the investor CSD (see also Investor CSD). Indirect link: a link between two CSDs through a non-CSD intermediary. Operated direct link: a direct link between two CSDs where a third party, typically a custodian bank, operates the account in the issuer CSD on behalf of the investor CSD. Relayed link: a contractual and technical arrangement that allows issuer and investor CSDs to hold and transfer securities through an account with a third CSD ("middle CSD"), which acts as an intermediary. Standard link: a link where the investor CSD is treated as a normal participant to the issuer CSD. Customised link: a link where the investor CSD benefits from a special access. Interoperable link: A set of arrangements/procedures that allows participants in different systems to conduct and settle payment or securities transactions across systems while continuing to operate only in their own respective system. Interoperability generally works as an improvement of classical links. Pass-on mechanism A ‘pass-on’ mechanism allows each party in the transaction chain to pass-on a buy-in notification to the party failing to them, until it reaches the original fail. A single buy-in is executed by the initiating party, and the cash differentials between each original transaction and the buy-in price is settled between each of the parties in the chain. Primary market A section of the capital market where financial instruments, stocks and bonds, are issued/ sold/ floated for the first time by companies, governments or public institutions. After issuance these instruments are traded in the secondary market. Security A fungible financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation via stock (equity); a creditor relationship by owning an entity’s bond; or rights to ownership represented by an option. Securities account at the top tier level The CSDs find themselves at the top of the securities chain, i.e. all holdings in a given financial instrument, whether by an individual or a financial institution, are ultimately kept in a securities account at the CSD. Securities Settlement System A system which allows the transfer of securities, either free of payment (FOP) or against payment (delivery versus payment). Settlement The completion of a securities transaction where it is concluded with the aim of discharging the obligations of the parties to that transaction through the transfer of cash or securities, or both. Settlement failure The inability of a participant to a Securities Settlement System to meet its settlement obligations in the Securities Settlement System. This inability may be temporary or permanent. Systemic risk The risk that the inability of one participant to meet its obligations in a system will cause other participants to be unable to meet their obligations when they become due, potentially with spill over effects (e.g. significant liquidity or credit problems) threatening the stability of or confidence in the financial system. That inability to meet obligations can be caused by operational or financial problems. Trade repository (TR) Trade repositories (TRs) centrally collect and maintain the records of derivatives under Regulation EU No 648/2012 (EMIR). TRs also centrally collect and maintain records of securities financing transactions (SFTs) under Regulation No 2015/2365, on transparency of securities financing transactions and of reuse and amending EMIR (SFTR). T2S Target2 Securities. The Eurosystem's single technical platform enabling CSDs and national central banks to provide core, borderless and neutral securities settlement services in central bank money in Europe.



1.Introduction: Political and legal context 1.1.Introduction Regulation (EU) No 909/2014 of the European Parliament and of the Council on improving securities settlement in the European Union and on central securities depositories (CSDR) is one of the key regulations adopted after the 2008 financial crisis. While central securities depositories (CSDs) were resilient, including during the 2008 financial crisis, they were not regulated consistently across the European Union (EU). This led to differences in their safety and raised level playing field concerns. Regulating CSDs was also important to complete the regulatory framework of the trading and post-trading market infrastructures, following the Market in Financial Instruments Directive (Directive 2004/39/EC), which addressed trading venues, and the European Markets Infrastructure Regulation (Regulation (EU) No 648/2012), which addressed central counterparties (CCPs) and trade repositories. Moreover, a consistent regulatory approach to settlement systems and settlement processes was important to complement and facilitate the Target2-Securities (T2S) project launched by the Eurosystem. CSDR was also the EU’s response to the call of the Financial Stability Board (FSB), on 20 October 2010, for a revision and enhancement of existing standards to ensure more robust financial market infrastructures, taking into account the global standards. CSDs are financial institutions of systemic importance for financial markets, hence it is essential that their framework remains fit for purpose CSDs play a crucial role in the primary market, by centralising the initial recording of newly issued securities (‘notary service’). They operate the infrastructure (‘securities settlement systems’) that enables the completion of a securities transaction (‘settlement’). They also maintain securities accounts that record how many securities have been issued by whom and each change in ownership (‘central maintenance service’). Over EUR 53 trillion worth of securities were held in EU securities settlement systems at the end of 2019, handling over 420 million delivery instructions for a total of turnover of over EUR 1 120 trillion. CSDs are essential for the financing of the economy. Apart from their role in the issuance process, securities collateral posted by companies, banks and other institutions to raise funds flows through securities settlement systems operated by CSDs. CSDs are also integral for the implementation of monetary policy as they settle securities in central bank monetary policy operations. Seven years after its adoption, a review of CSDR is needed to ensure it achieves its objectives while making, where possible, the framework clearer, less costly and future proof. CSDR has uniform requirements for the settlement of financial instruments and rules on the organisation and conduct of CSDs to promote safe, efficient and smooth settlement. Specifically, CSDR introduced: shorter settlement periods; settlement discipline measures (settlement fails reporting, mandatory cash penalties and ‘buy-ins’ for settlement fails); strict organisational, conduct of business and prudential requirements for CSDs; increased prudential and supervisory requirements for CSDs and other institutions providing banking services that support securities settlement; and a passport system allowing authorised CSDs to provide their services across the EU.

CSDR entered into force in September 2014; however, most of the requirements did not immediately become applicable, as CSDR empowered the Commission to adopt secondary legislation specifying the technical practicalities, leading to a phased-in schedule of certain core requirements. Certain rules, including in particular on settlement discipline, have not yet entered into force. Article 75 of CSDR requires the Commission to review and prepare a general report on a wide range of issues by 19 September 2019. Article 81(2c) of the European Securities and Markets Authority (ESMA) Regulation also requires the Commission to assess the potential supervision of third-country CSDs by ESMA. From September 2020 to August 2021, the Commission undertook an assessment of the rules in place to prepare a report. This included a targeted consultation with more than 90 contributions from a range of stakeholders, as well as reports required under Article 74 of CSDR from ESMA, in cooperation with the European Banking Authority (EBA) and national authorities. On 1 July 2021, the Commission adopted the CSDR review report. The report concluded that, in broad terms, CSDR achieves its original objectives to enhance the efficiency of settlement in the EU and the soundness of CSDs. In some areas, targeted changes could improve CSDR’s efficiency and effectiveness. Other provisions have been shown to meet their objective, or changes would be premature considering the relatively recent application of requirements. The Commission has assessed the extent to which specific policy requirements in CSDR have met their objectives in an efficient and effective way, while at the same time being coherent, relevant and providing EU added-value. This is supported by an evaluation examining the effectiveness and efficiency of CSDR in specific areas. That evaluation was performed back-to-back with the impact assessment and fed into the problem definition of the impact assessment and is presented in Annex 6. The evaluation indicates that CSDR may impose in specific areas disproportionate costs and burdens and that certain requirements may be simplified to achieve its objectives more efficiently. The CSDR review is a key action in the 2020 Capital Markets Union Action Plan for the development of a more efficient post-trading landscape in the EU. Resilient and efficient markets for settlement in the EU should remove barriers to cross-border settlement, ensure adequate powers to monitor risks and reduce administrative burden and compliance costs. As such, the costs of securities transactions should fall and trust in the securities transactions be enhanced, contributing to a better financing of the economy. Finally, the consequences of Brexit as well as areas where the review of requirements is necessary to ensure the return to long-term growth of the EU economy following the crisis resulting from the Covid-19 pandemic are also considered in the analysis. This impact assessment report concludes that further action is necessary to address the following issues: (1) burdensome and unclear passporting requirements; (2) insufficient coordination and cooperation between authorities; (3) restrictive requirements for the provision of banking services related to settlement; (4) complicated and unclear requirements for settlement discipline; and (5) insufficient reporting for third-country CSDs. This will ensure that CSDR’s objectives are achieved in a more proportionate, efficient and effective manner. This impact assessment report considers the costs and benefits of different policy options and provides comprehensive evidence that a reduction of costs and burdens can be achieved hand-in-hand with a simplification of CSDR, without compromising financial stability. 1.2.Background 1.2.1.Post-trade services A crucial element of safe and efficient capital markets is the safety and efficiency of the post-trade arrangements for securities transactions. Though largely invisible to investors, these ensure that after the trade has been carried out the buyer receives securities and the seller is paid. These services that are performed after a trade are commonly referred to as post-trade services. They typically include: ·clearing, which guarantees performance by making the CCPs buyer to every seller and seller to every buyer; ·settlement, which allows the discharge of the obligation of the parties to the transaction and the transfer of cash or securities, or both; ·asset servicing which allows the processing and exercise of rights tied to a security over its lifetime; ·post-trade reporting of individual transactions and/ or positions of nominated participants. Post-trade services are an integral part of the value chain (see Figure I), as they ensure that a securities transaction is completed, including the transfer of legal ownership of a security from one party to another, and transferring cash as payment. Post-trade services are provided by financial market infrastructures, i.e. Central Counterparties and CSDs, trade repositories, as well as by banks (including custodians). Figure I: Securities industries value chain Safe and efficient post-trading systems are essential for trust in the financial system, allowing investments to flow into the real economy, increasing competition and thereby further fostering a stronger and more resilient financial system. 1.2.2.Securities settlement

CSDR defines settlement as the completion of a securities transaction after it is concluded with the aim of discharging the obligations of the parties to that transaction through the transfer of cash or securities, or both. Timely settlement is important as it allows market participants to make contingent plans, contributing to the depth and liquidity of the financial markets and to their smooth functioning. The exchange of cash and securities is normally carried out in a Securities Settlement System (SSS) operated by a CSD. In a CSD, the buyer’s and seller’s transactions are matched, verifying the ability of the seller to deliver the securities and the ability of the buyer to pay; after that the transaction is settled discharging the parties from their obligations. However, if both the buyer and the seller of securities have accounts at the same bank, the transaction can also be settled by an internal transfer between those accounts. In such a case, the bank is acting as a settlement internaliser, which executes transfer orders on behalf of clients or on its own account other than through a securities settlement system. 1.2.3.The role of CSDs The three ‘core’ services under CSDR are: ·the ‘settlement service’: the operation of a securities settlement system, through which securities are delivered or are exchanged between buyer and sellers; ·the ‘notary service’: initial recording of securities in a book-entry system; ·the ‘central maintenance service’ – maintaining securities accounts at the top tier level. CSDR defines a CSD as a legal person that operates a securities settlement system (i.e. settlement service) and provides at least one other core service (i.e. notary service or central maintenance service). As concerns settlement, CSDs hold securities centrally in dematerialised form, i.e. electronically, to speed up settlement. The exchange of cash and securities is normally carried out electronically (although physical delivery is also still used if securities are held in physical form), using a procedure known as Delivery versus Payment (DvP). DvP ensures that neither party can end up with both the securities and the cash, and the other party with nothing. CSDs operating nationally will often have links with other CSDs to allow cross-border settlement and custody facilities. Cross-border securities settlement is sometimes complex, involving at least two CSDs and multiple intermediaries. CSDs also play a crucial role in the initial recording of newly issued securities (notary function). This generally occurs at the same time as the issuance by the issuer. These securities, once created, are usually recorded and deposited in a single CSD, the issuer CSD. This service is essential as it ensures that there are not more securities circulating than there were actually issued and entered in the account. Finally, CSDs ensure the maintenance of securities accounts that record how many securities have been issued by whom and each change in who holds those securities. These securities accounts are closely linked to the key mission of CSDs, which is to ensure through their position at the top of the holding chain that no more securities are settled than securities were actually issued. CSDs also play a crucial role for the financing of the economy. Apart from the issuance process, securities collateral posted by companies, banks and other institutions flows through securities settlement systems operated by CSDs. CSDs also play an essential role for the implementation of monetary policy by central banks as they settle securities in central bank monetary policy operations In addition to their core services, some CSDs provide ancillary services, e.g. collateral management services, maintaining shareholder registers or supporting corporate actions, that contribute to enhancing the safety, efficiency and transparency of securities markets, without exposing them to credit or liquidity risk. CSDR also allows CSDs to provide banking-type ancillary services related to core or ancillary services, i.e. providing cash accounts and accepting deposits from participants to a securities settlement system, providing cash credit, guarantees and commitments or payment services. 1.3.CSDs in the European Union 1.3.1.Market structure slowly evolving Historically, CSDs were established along national lines to provide a local venue for the issuance and settlement of securities. Today, this fragmentation remains with 26 CSDs currently authorised in the EU under Article 16 of CSDR. Nevertheless, the EU market structure is slowly evolving; end-2010 there were over 30 CSDs (including two International Central Securities Depositories (ICSDs)) operating in the EU. Most recently, in March 2021, the settlement of Irish securities migrated from UK CREST to Euroclear Bank Belgium. The migration, following the UK’s decision to leave the EU, transferred the settlement of trading activity on Euronext Dublin to a CSD located in the EU. In contrast, the US market is more concentrated and specialised with 2 CSDs. Included in the 26 CSDs are two ICSDs: Clearstream Banking in Luxembourg and Euroclear Bank in Belgium. ICSDs settle trades in international and domestic securities, usually through direct and indirect links with agents in domestic markets. Originally, ICSDs focused on settling securities transactions denominated in other currencies from where the issuer is based and CSDs focused on national markets. Today, the settlement activities of ICSDs and CSDs are more similar. CSDs operate different business models, depending on the core and ancillary services they provide. To settle trades in international and domestic currencies, ICSDs are authorised to provide ancillary banking services. The type of instruments a CSD serves does not influence its business model. All but one EU CSD settle equities transactions and all EU CSDs settle corporate debt. A significant majority of CSDs settle government debt. EU CSDs have a variety of corporate structures and ownership models. Only the Croatian, Cypriot and Maltese CSDs are majority owned by the national government, while in Hungary the central bank is the majority owner. In the case of other EU CSDs shareholders include stock exchanges, banks, national governments, central banks and other private institutions. Although specific data for EU CSDs is not available, there are indications that EU market infrastructures have enjoyed stable conditions, although less favourable than their global counterparts. Market infrastructure providers (exchanges, CCPs, CSDs) globally recovered quickly from the financial crisis with revenues growing 4% annually (2007 – 2012) and then accelerating to 10% post-crisis (2012-1017). EU providers however took longer to recover post-crisis with revenues rising only 1% over the same period. 1.3.2.Size of the market EU CSDs serve a large securities market. End-2019, EU securities were traded on 430 trading venues, including 135 regulated markets, 223 multilateral trading facilities and 72 organised trading facilities. As of end-2019, 28 000 equity and equity-like instruments were available for trading in the EEA, accounting for annual trading volumes of EUR 27 trillion. Over 170 000 bonds were available for trading in the EEA. Annual bond trading volumes amounted to EUR 101 trillion.

EU CSDs serve the growing EU capital market by handling increasing amounts of trading. In 2019, EU securities settlement systems handled more than 420 million delivery instructions worth over EUR 53 trillion of securities and representing a total turnover of over EUR 1 120 trillion. In 2014, when CSDR was adopted, EUR 43.5 trillion worth of securities were held in EU securities settlement systems, which handled over 330 million delivery instructions for a total of turnover of over EUR 850 trillion. This is a growth of 22% in value of securities held, 27% in number of delivery instructions and 32% in turnover in the period between 2014 and 2019. Despite the large number of CSDs operating in the EU, in 2019 the three largest CSDs held over 60% of all securities held in EU CSDs. This is however rather a reflection of the size and liquidity of certain EU national financial markets, rather than issues connected to market structure. 1.3.3.Main forces driving market evolution In addition to regulatory changes aimed at facilitating cross-border activity, there are economies of scale and scope, driving both consolidation of different types of post-trade services and competition among EU CSDs and the different services they offer. (a)Consolidation of the sector First, there is a strong complementary relationship between the various components of securities settlement. Economies of scope may be achieved by integrating along the value chain of securities transaction, i.e. by combining trading, clearing and settlement into one conglomerate. Consolidation between CCPs, CSDs, and stock exchanges has created EU financial market infrastructure conglomerates, e.g. the formation of Clearstream through the merger of Cedel International and Deutsche Boerse in 2012. With the acquisition of the Norwegian and Danish CSDs in 2019 and 2020 respectively, Euronext has also strengthened its presence in the CSD space. This was followed in 2020 with the acquisition of Borsa Italiana (the Italian stock exchange), MTS, where most of Italy’s sovereign debt is traded, as well as the major multi-asset clearing house, CC&G. Economies of scope could also be obtained through horizontal synergies. In 2009 Euroclear brought the Belgian, Dutch and French domestic CSDs onto a single platform, under a harmonised framework, but as separate legal entities. Nasdaq has also consolidated the three Baltic CSDs (Estonia, Lithuania and Latvia) in 2017 and the Icelandic CSD into a single legal entity in 2020. A number of integrated post-trade services groups operate in the EU post-trade market, i.e. Euroclear (bringing together the ICSD Euroclear Bank and national CSDs in Belgium, Finland, France, Ireland, the Netherlands, Sweden and the United Kingdom), Euronext (bringing together national CSDs in Portugal, Denmark, Norway and Italy), Deutsche Boerse (operating the ICSD Clearstream Luxembourg, the German CSD and LuxCSD) and Nasdaq CSD (following the merger of the regional CSDs for Lithuania, Latvia, Estonia and Iceland). (b)Emerging technological innovation The rise of new record-keeping technologies also has the potential to alter the landscape. In post-trade, distributed ledger technology (DLT) is currently considered the most promising to simplify processes, reduce costs, and increase efficiency and security. This will potentially lead to lower costs and faster settlement, transform how securities are held and recorded and challenge incumbent settlement systems. Most of the realised projects so far point to the potential for financial infrastructures to move towards real-time settlement, flatter structures, continuous operations and global reach. This is reflected in the growing application of DLT in post-trade processes, i.e. issuance and settlement of shares and bonds, data recording or the use of tokens to represent shares. Currently, applying DLT to post-trade processes has the greatest potential with respect to DvP, automation of risk management, settlement and the development of currency-substitutes as means of payment. (c)Provision of cross border services by CSDs Fostering competition, greater interoperability and better connectivity among CSDs were some of the main policy objectives of CSDR. Nevertheless, data collected by ESMA does not reflect this. EU CSDs’ cross-border activity, i.e. the CSD services provided in host Member States can be measured by (1) the use of CSD links established between EU CSDs; (2) the measurement of the services provided to participants and issuers from host Member States; and (3) T2S activity. First, a link allows a CSD to give its clients access to securities recorded and settled in another CSD. The number of links and the volumes handled by established connections measure the cross-border provision of settlement services by CSDs. In this regard, established connections are handling increasing volumes, suggesting growing cross-border activity through this channel. The value of settlement instructions settled through links with other EU CSDs increased from EUR 109 trillion in 2017 to EUR 160 trillion in 2019, a growth of 47%. The total number of settlement instructions through links almost doubled between 2017 (23 278 314 instructions) and 2019 (38 984 805 instructions). The growth in the use of links outpaced the growth in settlement instructions by EU CSDs (32% and 28% in 2014 and 2019 respectively). However, the number of CSD links has remained stable since 2017. Excluding the ICSDs which both have a very high number of links (31 for Clearstream Banking, 25 for Euroclear Bank), the average number of links per CSD is 5 links with other EU CSDs between 2017- 2020. At the same time, the total number of links for all CSDs, including links with ICSDs, increased by 14% between 2017 (121 links) and 2020 (138 links). Excluding ICSDs, the number of links rose by 28% from 64 to 82 links. The increasing traffic through links shows that such connections serve the development of cross-border settlement, but the limited increase of CSD links demonstrates that barriers to cross-border activities remain. Second, another measure of use of cross-border services are the type of CSD services, including notary and central maintenance services, provided to participants and issuers from other Member States. In 2019, the share of central maintenance and settlement services provided to participants from other Member States by EU CSDs was 37%; a slight increase compared to 2018. However, settlement activity shows that only 6 CSDs provide settlement services to more than 75% of participants from other Member States, while two-thirds of EU CSDs settle less than 50% of instructions for participants from other Member States (in value of instructions settled). A similar concentration is noted for notary and central maintenance services provided in relation to financial instruments issued by issuers from other Member States with 3 CSDs (including the two ICSDs) providing more than 80% of their services to issuers from other Member States, while most EU CSDs do not provide or dedicate less than 5% of their notary and central maintenance activity to securities issued by issuers from other Member States. Figure II: Member States in which activities of CSDs from other Member States are of substantial importance Figure III: Central maintenance services provided to participants from other Member States Source: Report to the European Commission: cross-border services and handling of applications under Article 23 of CSDR, ESMA70-156-356, 5 November 2020, par. 40. CSDs can provide all types of services, including of notary and central maintenance services, to participants and issuers from other Member States. In that case, a CSD may become of ‘substantial importance for the functioning of the securities markets and the protection of the investors’ in the host Member State which allows to estimate the progression of cross border services. There was a slight increase in the number of Member States in which the activities of CSDs from other Member States are of substantial importance and to this date, in 19 Member States there is no substantial activity from CSDs from other Member States (Figure II). In line with this trend, there has been a slight increase in the share of EU CSDs providing central maintenance (Figure III) and settlement services to participants in other Member States. Third, Target2-Securities (T2S), launched in 2015, aimed to address fragmented securities settlement in the EU and the resulting complex cross-border settlement. It offers delivery versus payment settlement in central bank money. It also provides harmonised and commoditised securities settlement to CSDs and applies a single set of rules, standards and prices to all participants. T2S facilitates cross-border settlement, resulting in increased integration of Europe’s financial markets infrastructure by: ·simplifying the purchase of securities in other EU countries; ·reducing costs of cross-border settlement;

·increasing competition among providers of post-trade services; ·pooling collateral and liquidity; ·reducing settlement risk by using central bank money for transactions on T2S. It connects 21 CSDs from 18 Member States and Switzerland. It offers settlement in Euro and Danish Krone and processes 687 476 securities transactions worth EUR 672.53 billion per day. T2S has also helped encourage harmonisation of market practices and competition in the EU. 1.4.Legal and political context 1.4.1.Legal context: Central Securities Depositories Regulation CSDR is one of the key regulations adopted by the EU following the financial crisis of 2008 to ensure that securities settlement is safe, stable and efficient. It entered into force on 17 September 2014. CSDR provides a set of common requirements for CSDs across the EU by introducing: ·shorter settlement periods; ·cash penalties and other deterrents for settlement fails; ·strict authorisation, organisational, conduct of business and prudential requirements for CSDs; ·a passport procedure allowing authorised CSDs to provide services across the EU; ·increased prudential and supervisory requirements for CSDs and other institutions providing banking services that support securities settlement; ·increased cooperation requirements for authorities across Member States with respect to CSDs providing their services in relation to financial instruments constituted under the law of a Member State other than that of their authorisation and to CSDs establishing a branch in another Member State. The CSDR legal framework also includes Level 2 and Level 3 measures (e.g. ESMA guidelines and Q&As). CSDs may also be subject to other EU legislation depending on their status, e.g. CSDs operating with a banking license are also subject to the relevant banking legislation. Moreover, they may have to comply with certain national laws in the Member State in which they are incorporated, e.g. securities, corporate or civil law. As securities settlement systems, CSDs qualify as systems under the Settlement Finality Directive and are therefore subject to the applicable national transposing laws. Finally, CSDs should also consider the International Principles for financial market infrastructures issued by the Committee on Payments and Market Infrastructures (CPMI), the International Organization of Securities Commissions (IOSCO) and the FSB. 1.4.2. Political context: Capital Markets Union (CMU), Brexit, Recovery post Covid-19 The Commission launched its follow-up CMU Action Plan to create a single market for capital across the EU. The aim is to increase investment and savings flowing throughout the EU, benefitting citizens, investors and companies, regardless of where they are located. A fully functioning and integrated market for capital will allow the EU economy to grow in a sustainable way and be more competitive.

The 2020 CMU Action Plan and the 2021 Commission Work Programme announced the Commission’s intention to come forward with a legislative proposal to amend CSDR to improve its efficiency and effectiveness (CSDR REFIT) and contribute to the development of a more efficient post-trading landscape in the EU. This follows from the work of the High Level Forum for the CMU that, amongst others, made recommendations to facilitate the emergence of a common EU CSD market. Resilient and efficient markets for settlement in the EU should remove barriers to cross-border settlement, ensure adequate powers to monitor risks and reduce administrative burden and compliance costs. As such, costs of securities transactions should fall, and trust in securities transactions rise, contributing to a better financing of the economy. More generally, any forthcoming EU legislative proposal, including on CSDR, will have to take into account, where necessary, the consequences of Brexit as well as to identify how to contribute to the return to long-term growth of the EU following the crisis resulting from the Covid-19 pandemic and to finance the EU’s environmental and digital transitions. Regarding Brexit, on 25 November 2020, the Commission adopted an equivalence decision determining that, until 30 June 2021, the regulatory and supervisory framework applicable to CSDs established in the UK is equivalent in accordance with CSDR. On 11 December 2020, ESMA announced that Euroclear UK & Ireland Limited, the UK CSD, would be recognised as a third-country CSD. ESMA’s recognition decision applied from 1 January until 30 June 2021. The aim was to give EU issuers, and in particular Irish issuers that used that CSD, sufficient time to transfer their securities to an EU CSD, a project which was completed on 15 March 2021. From its side, the UK introduced a transitional regime under which certain non-UK CSDs can offer CSD services until they are permanently recognised under the UK CSDR. As of 30 April 2021, 15 non-UK CSDs that have notified the Bank of England that they will offer CSD services in the UK under the transitional regime. In addition, the UK Treasury announced that the UK will not implement the CSDR settlement discipline regime. As concerns the Covid-19 crisis, post-trade infrastructures, and CSDs in particular, have remained resilient and continue to provide their services. Nevertheless, due to the impact of the Covid-19 pandemic on the implementation of regulatory projects and IT deliveries by CSDs and their participants, ESMA proposed postponing the date of entry into force of the Regulatory Technical Standards (RTS) on settlement discipline until 1 February 2022. Stakeholders also noted that market developments during this crisis would have been significantly worse in terms of available market liquidity if the settlement discipline was in place. In this regard, the European Parliament, in its resolution on further development of the Capital Markets Union, also invited the Commission to review the settlement discipline regime under CSDR in view of Brexit and the Covid-19 crisis. Finally, market infrastructures were also part of two recent packages published by the Commission on digital finance and on fostering openness, strength and resilience of the European economic and financial system. In September 2020, in line with the Commission priorities to make Europe fit for the digital age and to build a future-ready economy that works for people, the Commission published a New Digital Finance Package, which included a legislative proposal on a pilot regime. This proposal seeks to collect experience and to provide legal certainty and flexibility for market participants (including CSDs) who wish to operate a DLT market infrastructure, by establishing uniform requirements for operating these DLT systems. Under this pilot regime trading facilities and CSDs using DLT can develop their businesses and provide a safe environment for market participants and investors. To this end, it provides optional exemptions to certain requirements of CSDR. The New Digital Finance Package also includes a ‘Digital Operational Resilience Act' (DORA) that aims to ensure that all participants in the financial system, including CSDs, have the necessary safeguards in place to mitigate cyber-attacks and other risks. Furthermore, in January 2021, as part of a broader set of actions to strengthen the EU’s open strategic autonomy and resilience, the Commission published a communication on ‘The European economic and financial system: fostering openness, strength and resilience. This Communication sets out how the EU can reinforce its open strategic autonomy in the macroeconomic and financial fields by, inter alia, further developing EU financial market infrastructures, including CSDs, and increasing their resilience. In conclusion, this REFIT initiative should be viewed within the context of the broader agenda to make the EU markets more competitive, digital and resilient as represented by the CMU, digital and open strategic autonomy initiatives. However, developing internationally competitive CSDs is not a direct objective of CSDR per se. The main objectives of CSDR and this Review are to allow EU settlement markets to become more efficient and secure. However, market players will benefit from efficient and reliable settlement as well as increased competition in the EU capital market. This may drive the emergence of internationally competitive EU post-trade service providers. 1.4.3.Stakeholder consultation Stakeholder consultation took different forms (see Annex 3), including: ·a Commission targeted consultation between 8 December 2020 and 2 February 2021; ·ESMA reports - four reports in 2020 and 2021 were submitted to the Commission on internalised settlement, the cross-border provision of services by CSDs and the handling of applications to provide notary and central maintenance services cross-border, the provision of banking type ancillary services and the use of FinTech by CSDs. Such reports also took into account answers to ESMA surveys from national authorities, CSDs and participants; ·Meetings with Member States’ Experts, where the secretariat of the Economic and Monetary Affairs committee of the European Parliament, the ECB and ESMA were also invited, on 22 September 2020 and 15 July 2021; ·Input from the European System of Central Banks (ESCB) to the CSDR consultation process, including an anonymised and consolidated outcome of a survey conducted among CSDs. ·A meeting with Members of the European Parliament on 6 September 2021; ·Bilateral meetings with stakeholders as well as confidential information received from a wide range of stakeholders. 1.4.4. Report to the Council and the Parliament Article 75 of CSDR required the Commission to review and prepare a general report on the Regulation and submit it to the Parliament and the Council by 19 September 2019. Furthermore, Article 81(2c) of Regulation (EU) 2010/10 establishing a European Supervisory Authority (European Securities and Markets Authority), required the Commission, after consulting all relevant authorities and stakeholders, to conduct a comprehensive assessment of the potential supervision of third-country CSDs by ESMA exploring certain aspects, including recognition based on systemic importance, ongoing compliance, fines and periodic penalty payments. Taking into account that some CSDR requirements did not apply until the entry into force of the relevant regulatory technical standards in March 2017 and that some EU CSDs were only recently authorised under CSDR, the Commission report on CSDR was adopted in July 2021. The report identifies specific areas where targeted action may be necessary to ensure the fulfilment of the objectives of CSDR in a more proportionate, efficient and effective manner. The five main areas identified are the following: ·clarifying and simplifying the burdensome requirements related to the provision of services by CSDs domestically and cross-border; ·improving the supervisory convergence amongst authorities involved in CSDs’ supervision;

·facilitating the provision of banking-type ancillary services; ·reducing the disproportionate burdens and costs related to settlement discipline; ·enhancing the framework for third-country CSDs. In its report, the Commission also invited ESMA to consider whether supervisory convergence tools could be used or amendments to existing regulatory technical standards may be required to facilitate the use of technological innovation by CSDs. 2.Problem definition 2.1.Methodology The main problems assessed in this impact assessment concern areas for which an evaluation has been carried out, as well as input received from various authorities and stakeholders (see section 1.4.3). These indicate that targeted action is necessary to ensure fulfilment of the CSDR objectives more proportionately, efficiently and effectively. The impact assessment considers the costs and benefits of targeted amendments to CSDR concerning the barriers to cross-border settlement, the disproportionate compliance costs and the insufficient insight into the activities of third-country CSDs. While the definition of the problems is targeted, the impact assessment considers the cumulative impact of targeted changes as presented in section 8. A key consideration is that the application of CSDR remains work in progress. A sufficient number of EU CSDs was authorised only recently under CSDR, the regulatory technical standards specifying CSDR started applying only as of 2017 and certain core CSDR requirements (including settlement discipline) are yet to enter into application. This limits the availability of data on costs and benefits of the requirements. First, while the full impact of CSDR is still unfolding, feedback from stakeholders and public authorities indicates that CSDR has contributed to achieving its original objectives of ensuring safety of settlement and financial stability. The impact assessment therefore only considers targeted changes at this point in time. Second, certain issues raised by authorities and stakeholders are not covered in this impact assessment, because they cannot or should not at present be addressed within the context of CSDR, e.g.: a)stakeholders noted that CSDs are still subject to Member States’ national laws for issues not regulated in CSDR, such as corporate or civil law matters. This may impact their ability to offer services cross-border as they may need to set up separate operational processes and procedures to comply with the relevant host Member States’ requirements. Nonetheless, harmonisation of the relevant national laws goes beyond the scope of CSDR and therefore is not considered. b)stakeholders, including the High Level Forum on the CMU, raised concerns about CSDs’ access to central bank money which is subject to conditions set by the central bank in question; e.g. in the Euro area, the ECB sets the access conditions. For CSDs that want to settle in central bank money in a currency other than that of the jurisdiction of their authorisation (or outside of the EU), access to the respective central banks can be challenging and therefore limited. Indeed, very few EU CSDs seem to have direct access to foreign central banks; e.g. one EU CSD has locally incorporated licensed subsidiaries to obtain access to some foreign central banks (e.g. Australian, Canadian, US), however access to others remains impossible (e.g. Russia). This is particularly an issue for smaller CSDs, due to the cost and significant time the process requires. Nonetheless, due to the principle of central bank independence, CSDR cannot introduce obligations on central banks to facilitate CSDs’ access to central bank money within the EU. c)digitalisation and new technologies are transforming the EU financial system and the way it provides financial services to EU businesses and citizens. This raised questions of whether existing CSDR provisions ensure technology neutrality. The Regulation for pilot regime for market infrastructures based on DLT (see section 1.4.2), which allows DLT entities to be exempted under certain conditions from complying with certain CSDR provisions, should enable all stakeholders to gain insights into the use of DLT for market infrastructures and the legislation to adapt to the gathered experiences. It therefore seems that any fundamental changes to CSDR to realise the full potential of technology should be postponed until the lessons can be drawn from the pilot regime’s implementation. This is a view that most respondents to the targeted consultation, as well as ESMA, share. Fintech, which is an area related to the existing CSDR framework, is therefore outside of the scope of this impact assessment. d)Processes for withholding tax are a barrier for efficient EEA market infrastructures and for cross-border settlement. It was identified in the first Giovannini Report and reconfirmed in the 2020 CMU Action Plan. However, as taxation aspects cannot be dealt with in CSDR, and as the Commission plans to propose a legislative initiative for introducing a common, standardised, EU wide system for withholding tax relief at source, accompanied by an exchange of information and cooperation mechanism among tax administrations, this issue is outside the scope of this impact assessment. 2.2.What are the problems? For a detailed description of the identified problem areas see Annex 6. 2.2.1.Barriers to cross-border settlement

One of the main objectives of CSDR was to facilitate cross-border settlement in order to limit the risks and costs involved. Nevertheless, most stakeholders see limited progress in the provision of cross-border services by CSDs (see point (c) in Section 1.3.3). The evaluation, has identified three main reasons for this: (i) burdensome passporting process; (ii) insufficient cooperation between authorities; and (iii) restrictive requirements for the provision of banking services related to settlement. First, the passporting process (i.e. the special procedure under which a CSD authorised in a Member State can provide services in relation to financial instruments constituted under the law of another Member State), is burdensome. It requires, where relevant, the agreement of the host national supervisor, regarding the assessment by the CSD of the measures it intends to take to allow its users to comply with the national law referred to in Article 49(1). This partially shifted the burden from the participants to CSDs by requiring the latter to demonstrate that they have the relevant measures in place, rather than relying on users to directly ensure that the CSD they use allows them to comply with the applicable national legislation, despite the fact that it is the users’ responsibility to comply with such national legislation. The objective was to ensure that the provision of cross-border services by a CSD would not affect the application of relevant national laws. The unintended consequence was to make the passporting process burdensome, thereby deterring CSDs from expanding their activities across borders (see sections 1.3.3, 2.2.1 and 2.3.1) or leading others to stop providing cross-border services. The fact that so far there have been no refusals by host national supervisors shows that although passporting is not used as tool to protect national markets, it has added a burdensome and costly level of complexity. Simultaneously, certain third-country CSDs seem to be exempted from these requirements (See section 2.3.5), making it is easier for them to operate cross-border in the EU than for an EU CSD. Second, cooperation between authorities in home and host Member States and supervisory convergence is insufficient (see section 2.3.2). Despite the existence of provisions enabling the use of cooperative arrangements or voluntary supervisory colleges, there is no evidence of their extensive use (only one college of supervisors has been set up and no information is available to ESMA on whether the other required cooperative arrangements under CSDR have been set up). This means that the same CSD is likely to be subject to different supervisory arrangements and requirements depending on the Member States of operation (see also section 2.3.2). Third, CSDR contains strict conditions for CSDs to settle a transaction in commercial bank money (see section 2.3.3). A securities trade typically results in an obligation for the seller to deliver securities (securities leg) and a corresponding obligation for the buyer to deliver cash (cash leg). To ensure delivery of the cash, a CSD may use accounts at a central bank or commercial bank (i.e. CSDs may open accounts in their own books or in a commercial bank). Access to central banks depends on the respective central bank, brings cost and therefore requires economies of scale. Consequently, settlement in commercial bank money is sometimes the only option available for CSDs that want to settle in currencies other than that of the jurisdiction in which they are authorised (e.g. because the CSD does not have an account with the central bank of the transaction’s currency). However due to the restrictive nature of the conditions, the percentage of EEA CSDs’ settlement activity in foreign currencies (Figure V) and the level of settlement in foreign currencies remains limited. Figure V: Settlement in foreign currencies by EEA CSDs Furthermore, as seen in Figure VI, the vast majority of CSDs settle in only one or two foreign currencies. This means that issuers have a limited choice for multicurrency issuance which prevents genuine cross-border competition (especially since issuers seek one-stop-shop solutions) and the emergence of a single capital market. Figure VI: Number of CSDs per range of yearly settlement in foreign currencies 2.2.2.Disproportionate compliance costs Market participants and authorities have identified targeted areas where the CSDR compliance costs are disproportionate, because (a) legal requirements are unclear, and/or (b) they are considered excessively burdensome, and/or (c) the costs of complying with the rules appear to outweigh the potential benefits. Three areas have been identified as generating disproportionate compliance costs: passporting rules; rules on the provision of banking services related to settlement; and the settlement discipline regime. First, the CSDR passporting rules allow CSDs to provide services for financial instruments constituted under the law of any Members State, thus allowing CSDs to benefit from access to a larger market and issuers to have more choice in where they issue and hold their securities. However, the associated the legal requirements have turned out to be unclear and burdensome (see section 2.3.1). In addition, the objective difficulty to comply with the legal requirements and the subsequent threat of potential legal action, generate costs that present an unnecessary barrier to the development of CSD activities. A CSD reported confidentially that the associated internal legal support required throughout the passporting process was significant. Even if most CSDs applying for a passport to operate cross-border have been able to obtain it, stakeholders have indicated that this process is difficult, lengthy and demanding (see section 2.3.1). Second, the rules around the provision of banking services create disproportionate compliance costs for CSDs. This negatively impacts the provision of cross-border services. The lack of alternatives to settle in commercial or central bank money could undermine the safety of settlement, as transactions could be settled free of payment instead of delivery versus payment, increasing risks for the market as a whole. For a detailed explanation of specific problems faced and/ or risks created by CDS settling in commercial bank money see Annex 6. Third, certain elements of settlement discipline, although not yet applicable, would potentially create disproportionate compliance costs for CSDs and market participants. To ensure the safety of settlement, any participant in a securities settlement system should settle its obligation on the intended settlement date (ISD); a settlement fail occurs when a transaction does not settle on that date. The settlement discipline regime aims to encourage market participants to avoid settlement fails; its two main elements are the measures to prevent settlement fails (Article 6 of CSDR) and the measures to address settlement fails (Article 7 of CSDR). The latter comprise two main pillars; cash penalties and mandatory buy-ins. CSDs would be required to impose cash penalties on their participants in case of settlement fails. If despite the cash penalties, the original seller fails to deliver the securities, it will be subject to a mandatory buy-in. A buy-in provides the buyer of securities with the right to buy the securities elsewhere, cancel the original transaction and put the costs of the buy-in, as well as any price difference, with the original seller. The original objective of the settlement discipline regime as contained in the 2012 Commission proposal was mainly to harmonise the diverse market discipline measures across EU capital markets. Hence the proposed measures were general, with detailed technical standards to be set in secondary legislation. The impact assessment could not quantify ex ante the costs and benefits of these general settlement discipline measures relying rather on qualitative assessments. The final set-up of the settlement discipline regime and the associated costs and benefits, became evident to the market participants only when the 2018 regulatory technical standard (RTS) was published. Furthermore, market volatility of spring 2020 triggered reflections about the potential impact of the regime on trading conditions or ability to fulfil certain market functions. Although settlement discipline rules would incentivise improvements in settlement rates, it would also create high one-off (i.e. connecting to buy-in agents, repapering existing contracts to take account of mandatory buy-in rules) and ongoing costs (i.e. in terms of pricing and reduced liquidity of instruments potentially at risk of being bought-in or trades being abandoned or migrating to non-EU trading venues (see section 2.3.4)). Evidence provided seems to show that these costs are disproportionate and would stem both from the lack of clarity around the rules governing the process (i.e. what transactions are in-scope or how to use buy-in agents), from the framework’s impact on market conditions (deterioration of liquidity for some instruments, higher bid-ask spreads) and market participants’ trading behaviour (migration of trading from peripheral instruments to liquid instruments, doubts around the viability of the market maker role for less liquid instruments). The costs of applying in particular the rules on mandatory buy-in could outweigh their benefits for three main reasons: First, the market volatility of March/April 2020 gave stakeholders the opportunity to reflect on how the upcoming settlement discipline regime would have impacted the market. In essence, mandatory buy-ins could have exacerbated the negative impacts linked to the crisis; in particular they could have increased liquidity pressure and increased the costs of securities at risk of being bought-in. This would affect negatively market makers that take on risk onto their balance sheet to provide immediate execution to clients. They are an important source of liquidity and often offer securities they do not hold, based on the reasonable assumption of sourcing these securities when necessary. For securities not held on their balance sheet, or which cannot be readily sourced, the introduction of mandatory buy-ins would impact the ability of market makers to make markets. To adjust for the expected cost of being bought-in, market makers will have to add a premium to their prices – which will widen the bid-offer spread (which will in turn increase costs to end-investors) – or they may simply not make an offer price on an enquiry thereby deteriorating market liquidity.

Although these liquidity effects are most pronounced in choices made by market makers, all investors, even in liquid securities, could face similar trade-offs between entering into a trade (providing liquidity), the availability of the instrument and the cost of being bought-in. These impacts are likely to be reflected in behavioural change, rather than a price adjustment. Periods of market stress could be exacerbated by mandatory buy-ins as participants would have to buy back the securities that already had limited availability adding further liquidity pressure. Investors would have chased a small number of available securities, driving up prices and potentially, further driving volatility in a stressed market. Evidence provided by one bank, showed that the application of mandatory buy-ins to EU government bonds in the current liquidity context could have led to a 50%-100% increase in bid-offer spreads. Second, the settlement discipline regime could also give rise to unintended consequences for the competitiveness of the EU capital markets. Capital markets outside the EU do not have a comparable settlement discipline regime. These markets rather rely on industry-led measures, i.e. the UK announced it is not implementing the CSDR settlement discipline regime and will rely on settlement rules set by CREST, the UK-based CSD. In particular mandatory buy-ins may create an additional cost and risk for EU-settled securities that could disadvantage EU companies. Wider spreads and less liquidity will reduce the investment returns of pension funds, asset managers and, ultimately, end investors, which, according to some stakeholders, could risk driving issuance, trading and investment activity outside of the EU. Furthermore, application of mandatory buy-ins could lead to a potentially loss of counterparties and liquidity for the EU capital market. The potential negative impact on the attractiveness of the EU market would be at odds with the objectives making the EU capital market more attractive by increasing the safety of settlement. Finally, against the above arguments, it should be noted that despite the dramatic increase in trading (settlement instructions increased by 30% between 2015 – 2019 in EU CSDs) the settlement fail rate has remained relatively stable in the EU, both as a share of value and number of total transactions (See Annex 8, Figure II ). It experienced a spike for both types of instruments only during March/ April 2020 from which both have recovered (albeit more slowly in the case of equity instruments). This indicates that in normal market circumstances settlement in the EU can be relatively efficient. Quantitative evidence suggests that, in relative terms, the buy-in regime targets a small proportion of the total volume of transactions but will have an impact on the pricing and liquidity of a much larger percentage of overall transactions. Nevertheless, even if settlement efficiency in the EU seems to be stable or improving slightly, fail rates in the EU still remain higher than in, e.g. the US where about 2% of all US treasuries and mortgage backed securities transactions fail. Different levels of settlement efficiency between national capital markets can partly explain the lower overall EU settlement efficiency. 2.2.3.Insufficient insight into the activities of third-country CSDs Under CSDR, third-country CSDs providing services in the EU provide insufficient insight into their activities in relation to financial instruments constituted under the law of a Member State, in particular when they provide services under the grandfathering clause (see section 2.3.5). This leads to potential risks for the whole settlement ecosystem, and in particular on EU authorities, EU CSDs and issuers. First, EU authorities are not aware of the activities of third-country CSDs in the EEA, a fact underlined both by ESMA and several respondents to the targeted consultation. Some third-country CSDs operating in the EU are not subject to any notification requirement (see section 2.3.5). EU authorities therefore have no information on which services they provide, their volume or the Member States affected by them. This means that, if needed, neither issuers nor public authorities at national and EU level can assess the impact of these CSDs on the financial stability of the EU. Second, certain third-country CSDs follow different rules than those EU CSDs are subject to, and provide services in relation to the same financial instruments (see section 2.3.5). The lack of information on third-country CSDs’ activities may create a risk for investors in those cases where the legislation governing them does not offer the same level of protection than EU legislation would. Third, the lack of information on third-country CSDs’ activities may create a risk for investors. The Commission has not assessed the rules to which CSDs operating under the grandfathering clause are subject, despite the fact that they provide services in relation to the same financial instruments EU CSDs do (see section 2.3.5). The lack of information on those CSDs’ activities may create a risk for investors where the legislation governing them does not offer the same level of protection as EU legislation. 2.3.What are the problem drivers? 2.3.1.Burdensome and unclear passporting requirements for CSDs A core objective of CSDR was to dismantle the barriers to cross-border settlement in order for authorised CSDs to enjoy the freedom to provide services within the EU. To ensure an appropriate level of safety in the provision of services by CSDs in another Member State, CSDs are currently subject to a specific procedure in Article 23 of CSDR. Under this article, when CSDs wish to provide notary and central maintenance services in relation to financial instruments “constituted under the law of another EU Member State” or to set up a branch in another Member State a specific procedure needs to be followed, involving the approval by the host national authority. In particular, they should communicate to the competent authority of their home Member State information including, where relevant, an assessment of the measures the CSD intends to take to allow its users to comply with the national law referred to in Article 49(1). These requirement of the CSDR passporting process aimed to ensure that the relevant pieces of national legislation would be taken into account and would still be complied with. However, such requirements allow the host competent authority to verify this only once, when assessing the passporting request, and not on a continuous basis. Furthermore, the possibility to refuse the passport does not seem to have been used by host competent authorities. 26 CSDs have been authorised under CSDR, out of which 15 provide cross-border services in the EEA. Further to these first passporting procedures, the majority of stakeholders and Members States now generally agree that the passporting procedure is burdensome (one CSD even noted that it stopped providing services with respect to foreign securities in order to avoid it) and some of its requirements are unclear and could result in divergent interpretations by national authorities, thus reducing CSDs’ cross-border activity and leading to disproportionate compliance costs (see sections 2.2.1 and 2.2.2). As underlined by one stakeholder: “the rules in CSDR Article 23 – together with divergent application by National Competent Authorities (NCAs) of Article 23 and the closely related Article 49.1 list – have reduced the possibility for CSDs to offer services as Issuer CSDs for instruments issued under the law of another Member State.” The costs per passport are estimated to amount on average to ca. EUR 30 000. This means that, at least theoretically, for a CSD to be able to provide services for financial instruments constituted under the law of 26 other Member States it may be required to pay on average about EUR 780 000. Similarly, internal resources in terms of the time required to prepare an application for a passport are estimated at 1-3 months (1 FTE). At least theoretically, for a CSD to be able to provide its services throughout 26 other Member States it needs to dedicate one FTE that would have to spend between 26 and 78 months (i.e. 6.5 years).Once a passport is granted, the applicant CSD also has to continue to monitor it to ensure ongoing compliance, which also entails costs. These costs are estimated at on average ca. EUR 2 000 per passport per year. This means that, at least theoretically, when the CSD has obtained a passport in 26 other Member States it may be required to pay on average about EUR 52 000 per year. Given, amongst others, the high cost of the passport, CSDs require a minimum amount of activity in order to provide services cross-border. This means that cross-border services are generally provided to larger issuances in order to make them more economically viable, potentially limiting the access of smaller- and medium-sized companies to the benefits of the single market. The costs of passporting are less significant for authorities; ranging from ca. EUR 1 000 per passport for the home national authority to EUR 3 000 for the host national authority. This means that, at least theoretically, a CSD that would decide to passport in 26 Member States would generate estimated costs of ca. EUR 79 000.

Annex 6 provides further examples of burdensome and unclear passporting requirements. Finally, the effects of the burdensome and unclear passporting requirements are illustrated by the figures showing the slow progression of provision of cross-border services (see section 1.3). According to ESMA “there has been a limited progression of the provision of CSD services on a cross-border basis within the EU since of the entry into force since 2017 and in the context of the progressive entry into force of CSDR”. 2.3.2.Insufficient coordination and cooperation between authorities CSDR requires the cooperation of authorities that have an interest in the operations of CSDs that operate domestically and cross-border. Nonetheless, the supervisory arrangements remain fragmented and can lead to differences in the allocation and nature of supervisory powers depending on the EU CSD concerned. This in turn creates barriers to the cross-border provision of CSD services, perpetuates the remaining inefficiencies in the EU settlement market and has negative impacts on the stability of EU financial markets. Notwithstanding ESMA's competence to promote supervisory convergence, the powers of national supervisors and the requirements for CSDs are interpreted differently across the EU resulting in a significant heterogeneity in supervisory practices, in particular as regards CSDs that operate cross-border. First, insufficient cooperation between home and host supervisors prevents the creation of a single market for CSD services, as acknowledged amongst others by ESMA and the CMU High Level Forum. CSDR does not ensure the effective cooperation between home and host national supervisors for several reasons: ·formal cooperation of home and host authorities on a continuous basis (through the establishment of the so-called ‘cooperation arrangements’) is required only for CSDs that establish a branch in a host Member State or when the activities of a CSD are of substantial importance for the functioning of the securities markets and the protection of the investors in that host Member State. This means that only for certain CSDs with activities in host Member States structural and ongoing cooperation between home and host authorities is required. For other situations, home and host authorities may cooperate on an ad hoc basis on request. CSDs of substantial importance to different host Member States are subject to national supervisors’ divergent interpretations as to the content of CSDs’ reporting obligations, which can be burdensome especially for small CSDs. Furthermore, due to the absence of structured cooperation between the home and host authorities before the granting of the passport, CSDs face widely divergent interpretations of the same requirements, as illustrated by the differences in the time and cost that each passport requires (see Section 2.3.1). ·It is not specified what these cooperation arrangements should entail in practice. This means that it is up to each home supervisor to decide when setting them up. ·CSDR states that when a CSD is of substantial importance for the functioning of the securities markets and the protection of the investors in more than one host Member State, it is up to the home Member State to decide that such cooperation arrangements are to take the form of a college. To date only one college has been set up (with six authorities from four Member States, without ESMA’s participation). The experience of that home supervisor has been positive, as it serves as good forum for discussion, information exchange and enables an exchange of expertise, potentially even dividing tasks. Second, CSDR does not sufficiently consider the fact that several CSDs are part of larger groups comprising several CSDs or financial market infrastructures. CSDs in a group may outsource key IT infrastructure components, activities and processes (e.g. risk management, cyber security) to other group entities and major strategic, business, risk management decisions and governance may be established (directly or indirectly) at group level. While during the authorisation process CSDR provides for the consultation of competent authorities from other Member States where the CSD is part of a group of CSDs, the current supervisory and cooperation approach focuses on individual CSDs, and not on the group or the entity which has been outsourced to. Nonetheless, decisions made by the authority of one CSD in the group can impact the other financial market infrastructures in the group. As an example to illustrate the above, Figure III in Annex 8 includes the governance structure of one of the biggest groups of CSDs in the EU, Euroclear. Euroclear SA is the parent company for six domestic CSDs and an ICSD, Euroclear Bank. Three of those domestic CSDs (Euroclear France, Belgium and the Netherlands) use a common settlement platform (ESES) and, amongst others, use a common admission process. While the Belgian national supervisor cooperates with the French and Dutch overseers and market supervisors, this cooperation does not take place under the CSDR framework and ESMA is not involved. Finally, regarding domestic CSDs, there is insufficient cooperation and supervisory convergence amongst authorities interested in CSDs’ activities. This means that their concerns may not be sufficiently taken into account by the national authority when making decisions. One stakeholder noted that it was not easy to get a good understanding of the overall functioning of the CSD, the supervisory approach, the interpretation and application of the regulatory provisions, the aspects of concern for the competent authority, the views/opinions of the other authorities if others were involved, etc. Furthermore, some authorisation and review and evaluation processes revealed a different understanding and application of various requirements as well as different readings of background documents, which may impact the consistent application of CSDR and distort the level playing field. Additionally, while CSDR requires national supervisors to involve other relevant authorities, i.e. central banks, in the authorisation of CSDs, the former are not required to inform the latter if and how their views have been considered in the outcome of the authorisation process and if additional issues have been identified. This means that relevant central banks may not be able to express their views on newly identified issues or they may not know that their concerns have not been taken on board, in which they could adopt a more rigorous oversight approach, especially in areas of concern. 2.3.3.Restrictive requirements for provision of banking services related to settlement in foreign currencies An important element of the functioning of CSDR is the banking services that CSDs can offer to clients in addition to the core CSD services and other non-banking settlement services. As noted, the provision of banking services is a prerequisite to settle in foreign currencies, if no access to the relevant central bank is practical or available. Nonetheless, the requirements for the provision of banking-type services related to settlement are restrictive, leading to both a reduction of CSDs’ cross-border activity and to disproportionate compliance costs (see sections 2.2.1 and 2.2.2). Second, the threshold under which a commercial bank may provide banking services (i.e. the total value of cash settlement is less than 1% of the total value of all securities transactions against cash settled in the books of the CSD and does not exceed a maximum of EUR 2.5 billion per year) is considered by the majority of stakeholders, including CSDs and their association as well as a public authority, as too low for the majority of EU CSDs to be able to compete in the settlement in foreign currencies. CSDs without a banking license could increase their settlement activity in foreign currencies over a 5 year horizon to ca. 5% of their total yearly settlement activity. As an example, for smaller CSDs with lower turnover ratio, e.g. 11, the current threshold of EUR 2.5 billion settlement per year would be reached with issuance corresponding to EUR 229 million – less than half the size of a regular bond issue, leaving no possibility to offer issuance to others in the same or other currencies in commercial bank money or even allow the same entity to do other issuances. 2.3.4.Unclear and complicated requirements for settlement discipline CSDR introduced rules on settlement discipline to prevent and address failures in the settlement of securities transactions and therefore ensure the safety of settlement (see section 2.2.2). Despite the absence of experience in applying the rules, the development and specification of the framework in the relevant RTS has allowed all interested parties to better understand the regime and the challenges its application could give rise to, especially at times of crisis, e.g. the COVID-19 crisis in spring 2020. A large majority of respondents to the Commission targeted consultation (public authorities, CSDs, CCPs, banks, asset management companies, market makers, and their respective associations), considered that the settlement discipline framework should be reviewed. Member States took a similar position in the Member States' Experts Group meeting in July 2021. They almost unanimously expressed concerns about the current design of mandatory buy-ins and their influence, in particularly on trading activity, liquidity or the competitiveness of EU capital markets. ESMA also supported a delay in the application of the buy-in regime noting that “ESMA is aware of market participants’ serious difficulties regarding the implementation of the buy-in regime.”

Two main issues have been identified: the lack of clarity and the complexity/burden of the settlement discipline requirements. These drivers lead to disproportionate compliance costs, in so far as the costs of complying with the framework potentially seem to outweigh the achievable benefits (see section 5.1.4). First, the requirements of the settlement discipline regime are often unclear, creating legal uncertainty, thus increasing compliance costs. This lack of clarity is also shown by the number of Q&As received by ESMA and the Commission. Since 2017, ESMA has frequently updated its CSDR Q&As, with currently seven Q&A’s related to settlement discipline. More than 25 Q&As on settlement discipline are also currently being assessed. The need to clarify questions related to the settlement discipline regime puts an additional burden on market participants, but also the relevant authorities. This uncertainty means that companies have to obtain additional legal opinions on how the rules should be applied, to enable them to adapt existing trading and reporting procedures. Should those rules subsequently be interpreted differently, additional costs will be incurred to re-adapt. The unclear requirements are primarily linked to the scope of cash penalties and buy-in rules. One business association stated “…the different provisions of CSDR setting out the scope of the requirements such as settlement fails reporting, cash penalties or buy-ins are not always clear. This lack of legal certainty could potentially lead to reducing the efficiency in securities settlement.” ·Unclear scope of rules on cash penalties: A cash penalty applies for each day that a transaction fails to be settled after its intended settlement date. Examples of lack of clarity relate to the types of securities transactions covered and the scope of entities concerned by cash penalties. As an example, the scope of “transactions” is not defined in CSDR; however certain transactions are outside CSD participants’ control. It is therefore unclear whether such transactions should be within the scope of the cash penalty regime. This uncertainty generates costs when CSDs implement the IT systems to monitor cash penalties, requires additional legal advice and increases potential legal risks. The questions about the interpretation of CSDR stem not only from the text of the Regulation itself but also from the delegated acts; e.g. Commission Delegated Regulation (EU) 2017/389 states that, in certain circumstances, the calculation of penalties rates should use the official interest rate for overnight credit charged by the central bank issuing the settlement currency. However, in at least two Member States, it has been reported recently that central banks do not have this official rate and therefore the calculation of the penalties cannot fulfil this requirement. ·Unclear scope of rules on buy-ins: there is lack of clarity on a wide range of issues, i.e. types of securities covered, scope of entities concerned, and in-scope transactions. For example, while CSDR refers only to participants (i.e. failing participant and receiving participant), multiple terms are used in Level 2 (e.g. failing trading party, failing trading venue member, failing clearing member) which could create difficulties of interpretation and lead to legal challenges. Second, the requirements of the settlement discipline regime are often complicated and increase compliance costs. In addition to one-off costs incurred to adapt IT systems, the two examples below on contractual repapering (i.e. update of existing contracts) and the use of buy-in agents show how the actual application of the requirements could increase costs for market participants. Trading parties that settle transactions in-scope of mandatory buy-ins would need a global repapering exercise. This would ensure that appropriate contractual arrangements are in place between the relevant counterparties to guarantee effective application and enforceability of the buy-in requirements, even where some parties are located outside the EU. EU securities valued EUR 33.5 trillion and bonds valued at EUR 13.2 trillion could be subject to this exercise showing the one-off compliance costs it could generate. Data suggests that, on average, each firm would need to repaper 27 120 agreements, taking on average 10 months to complete. The scope of the repapering is however related to and reliant on the interpretation of the scope of the rules. Increased compliance costs result also from the requirement to use buy-in agents. The concerns relate mainly to the limited number of third-party buy-in agents (currently only one stakeholder has made substantial investments to comply with these rules and establish themselves as buy-in agent). This adds one-off investment and ongoing costs to trading for asset managers in terms of onboarding, connectivity, fees and collateral requirements as well as impacting best execution and adding concentration risk. In addition, some stakeholders claim that the current buy-in offering may not be compatible with the diverse needs of market participants. Therefore, certain market participants (e.g., asset managers) may have to provide the buy-in agent with sufficient liquidity even if they will use the service rarely. Due to the costs and risks linked to the role of buy-in agents, some market-makers traditionally acting as buy-in agents for specific instruments have stopped providing that service. Other concerns related to high costs, the potential risk associated with abuse of a dominant position by the agents or the difficulty to execute a buy-in for instruments with limited supply (the use of substitute instruments has been advocated in such a case). These further drive up firms’ compliance costs. 2.3.5.Insufficient reporting for third-country CSDs Under CSDR, certain third-country CSDs providing services for financial instruments constituted under the law of a Member State could benefit from a lighter regulatory regime. The insufficient reporting by third-country CSDs leads to insufficient insight into their activities (see section 2.2.3), mainly due to two factors. First, third-country CSDs that provide services in relation to financial instruments constituted under the law of a Member State under the national laws applicable before the adoption of CSDR can continue to do so until they have been recognised by ESMA (the “grandfathering clause”). The objective of that clause was to defer application of CSDR to provide CSDs with sufficient time to apply for recognition. However, even though CSDR was adopted in July 2014, the grandfathering clause still applies and does not have an end-date. This means that third-country CSDs have no incentive to apply for recognition to ESMA. To date, no third-country CSD, other than the UK CSD, has applied for recognition. Under the current regime, third-country CSDs benefiting from the grandfathering clause can indefinitely provide services in relation to financial instruments constituted under the law of a Member State even though: (a) they do not have to comply with CSDR or rules that have been considered as equivalent by the Commission and, (b) they have not been recognised by ESMA - while authorised EU CSDs with which they compete have to comply with CSDR. Third-country CSDs benefiting from the grandfathering clause are also not under any notification requirements regarding their activities in the EU. Hence, they are not required to provide any information to EU authorities. Second, settlement services are outside the scope of the CSDR third-country regime. Under CSDR, third-country CSDs that do not benefit from the grandfathering clause, may provide services in relation to financial instruments issued under the law of a Member State, including through setting up a branch, only if they comply with the CSDR third-country framework. Requirements applying to third-country CSDs differ however depending on the type of service (notary, central maintenance, settlement) they intend to provide. A recognition by ESMA is required for notary or central maintenance services; a condition of this recognition is that the Commission has adopted an equivalence decision, determining that the legal and supervisory arrangements of the third country ensure that CSDs authorised therein comply with legally binding requirements which are in effect equivalent to the requirements of CSDR. Settlement services provided by third-country CSDs do not require recognition by ESMA. Despite the fact that settlement is one of the three core services provided by CSDs, third-country CSDs may provide settlement services for securities issued under the law of a Member State without applying for recognition by ESMA. In that case, third-country CSDs do not have to comply with CSDR or at least equivalent rules nor are they required to provide any information or notification regarding their activity. They are also not subject to any type of supervisory activity by an EU supervisor. To conclude, third-country CSDs operating in the EU under the grandfathering clause or providing settlement services might not comply with CSDR or equivalent rules. National and EU authorities have very little information on the activities of these third-country CSDs, as confirmed also by ESMA. 2.4.How will the problem evolve? 2.4.1.Ongoing inefficiencies in the EU settlement market The ongoing inefficiencies in the EU settlement market stem from two main problems: barriers to cross border settlement (see section 2.2.1) and disproportionate compliance costs (see section 2.2.2). Under a baseline scenario, CSDR is unchanged, barriers to cross-border settlement through: burdensome passporting requirements; insufficient coordination among authorities; burdensome, even restrictive, requirements for the provision of banking services; and a disproportionate settlement discipline regime would remain. Competition among CSDs within the EU would not improve. For example, challenges accessing banking services and in particular settling in foreign currencies would reduce the possibility of CSDs offering multi-currency services therefore reducing their attractiveness. Consequently, cross-border investment will remain at a lower level than could otherwise be achieved, leading to a sub-optimal pan-EU settlement market.

The entry into application of mandatory buy-ins could further increase the costs for CSDs, investors and market makers (see section 2.3.4). This could lead to a reduced willingness by liquidity providers to create markets and offer prices for a security when they do not have access to inventory or for securities which cannot be readily sourced. Market makers will find price-setting complicated for these instruments as it is unclear whether the trade will be subject to a mandatory buy-in. This could also lead to increased higher bid-offer spreads for investors as market makers hedge risks related to such difficulty to set prices of less liquid instruments. This, in particular, could affect negatively less liquid instruments and even lead to a substantial drop of liquidity, as market makers withdraw from making markets for these instruments. The EU post-trade landscape will remain fragmented along national lines, impairing cross-border investment due to additional costs caused by added complexity relative to other jurisdictions, e.g. the US and the UK. Transaction costs in the EU could increase with full entry into force of the settlement discipline regime (see section 2.2.1). If nothing is done, it will continue to be easier to do business outside the EU than within the EU. Participants will increasingly be attracted to issuing their securities and settling in non-EU 27 countries as EU CSDs’ ability to offer a wide range of services including in different currencies is limited by burdensome passporting processes and restrictive requirements for the settlement in commercial bank money. In addition, lending market participants may increase the amount of stock they hold back as buffer by up to 10% to reduce the risk of buy-ins. This would represent a fall of EUR 398 billion in securities available to facilitate market liquidity and banking financing activities. Together these impacts negatively impact the safety and efficiency of EU financial markets, limiting the potential benefits of a larger-scale integrated EU market. They would be to the detriment of the EU financial system as a crucial building block of CMU would perform sub-optimally, to the detriment of EU investors and businesses. 2.4.2.Negative impacts on stability of EU financial markets The negative impacts of CSDR on the stability of EU financial markets stem from three main problems: barriers to cross border settlement (see section 2.2.1), insufficient insight on third-country CSDs activities (see section 2.2.3) and disproportionate compliance costs (see section 2.2.2). First, cross-border settlement remains difficult, limiting competition in the EU, hampering the development of CMU. Inability to ensure swift cross-border settlement may restrict activity to national capital markets, which would make them more vulnerable to country-specific asymmetric shocks that may over time endanger the stability of the EU capital market. If nothing is done, CSDs will continue to find providing cross-border services difficult. The level of cross-border activity will remain reduced, limiting competition and entrenching fragmentation of EU capital markets along national borders, potentially exposing EU capital markets to asymmetric shocks, in particular for some shallow national markets that cannot rely on abundant liquidity. Second, the insufficient insight into third-country CSDs’ activities could potentially lead to financial stability risks. EU and national authorities alike currently do not have information on most third-country CSDs activities in the EU; this means that they cannot evaluate whether any of these CSDs are important for the EU financial stability, which in itself creates a potential risk to financial stability. If nothing is done, this risk will persist. Furthermore, market participants may choose to use the services of third-country CSDs outside the transparency arrangements set by CSDR, potentially allowing for a build-up of risk that may threaten the stability of the EU capital market. Third, if no specialised credit institution can provide access to commercial bank money to CSDs under the CSDR due to disproportionate compliance costs, the risk is that non-bank CSDs may not be able to provide DvP settlement in foreign currencies to their participants. This could lead to transactions being processed free of payment instead of versus payment, leading to less safe markets and undermining the CSDR’s objective of promoting DvP settlement. The decrease in foreign currency settlement at non-bank CSDs would constitute a step backwards if it results in the settlement of these transactions outside CSDs. 3.Why should the EU act? 3.1.Legal basis CSDR has a comprehensive regulatory framework for the settlement of financial instruments in the EU as well as common rules on the organisation and conduct of CSDs to promote safe, efficient and smooth settlement. The legal basis for CSDR was Article 114 of the Treaty on the Functioning of the European Union (TFEU) as it aimed to create an integrated market for securities settlement with no distinction between national and cross-border securities transactions. Considering that this initiative proposes policy actions to allow the achievement of these objectives more effectively and efficiently, amendments to CSDR would be adopted under the same legal basis. 3.2.Subsidiarity: Necessity of EU action The review could amend certain provisions of CSDR, in particular to clarify and simplify burdensome and unclear requirements, reduce administrative burden and costs, and ensure that authorities have enough information to monitor risks. EU action should therefore ensure that CSDR’s regulatory requirements are more effective, efficient and proportionate, are applied uniformly, and guarantee a sound and consistent regulatory framework for securities settlement in the EU and the operations of CSDs, both of which are essential foundation stones for the development of CMU as well as to ensure a safe and efficient single market for financial services. 3.3.Subsidiarity: Added value of EU action The 2020 CMU