Opinion of the European Central Bank at the request of the French Ministry of the Economy, Finance and Industry under Articles 109l (2) and 109f (6) of the Treaty establishing the European Community and Article 1.1, fourth indent, of the EU Council Decision 93/717/EC on a draft Title VIII of the General Regulation of the Financial Markets Council (CON/98/52)
Date: 1998-11-18
Institutions: European Central Bank
Subjects: France, financial instrument, financial supervision, issue of securities, national law, payment system

OPINION OF THE EUROPEAN CENTRAL BANK

at the request of the French Ministry of the Economy, Finance and Industry under

Articles 109l (2) and 109f (6) of the Treaty establishing the European Community and

Article  1.1, fourth indent, of the EU Council Decision 93/717/EC on a draft Title VIII of the

General Regulation of the Financial Markets Council

CON/98/52

1.

On  10 October  1998  the  European  Central  Bank  (ECB)  received  a  request  from  the  French

Ministry of the Economy, Finance and Industry for an ECB Opinion on a draft Title VIII of the

General  Regulation  of  the  Financial  Markets  Council  (hereinafter  referred  to  as  the  “Draft

Regulation”).

2.

In  accordance  with  Article 1091 (2)  of  the  Treaty  establishing  the  European  Community

(hereinafter referred to as the “Treaty”), the ECB has taken over the advisory functions of the

European Monetary Institute (EMI), which went into liquidation upon the establishment of the

ECB  on  1 June  1998.  The  ECB’s  competence  to  deliver  an  opinion  is  based  on  Article 1.1,

fourth indent, of the Council Decision (93/717/EC) of 22 November 1993 on the consultation

of the EMI by the authorities of the Member States on draft legislative provisions, as the Draft

Regulation  contains  provisions  concerning  central  securities  depositories  and  securities

settlement systems. In accordance with Article 17.5, first sentence, of the Rules of Procedure of

the ECB, this ECB Opinion has been adopted by the Governing Council of the ECB. 

3. 

The ECB notes that the Draft Regulation supplements the legislative provisions of Article 22 of

Law 98-546  of  2 July  1998.  In  its  Opinion  (CON/98/09)  dated  19 February  1998,  the  EMI

stated that it welcomed the provisions of the said Law as  they  “will  improve  the  smooth  and

efficient  functioning  of  payment  systems  and  securities  settlement  systems”.  The  same  Law

vested  the  Financial  Markets  Council  with  regulatory  powers  in  the  fields  of  central

depositories and systems for settlement and for the delivery of financial instruments.

4. 

The  ECB’s  opinion  is  only  requested  on  Chapter 4  of  Title VIII,  which  contains  provisions

relating to (i) the central depository (“dépositaire central”) and (ii) the systems for settlement

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and  for  the  delivery  of  financial  instruments  (“systèmes  de  règlement  et  de  livraison

d’instruments financiers”). 

5.  With regard to  the  provisions  of  Section 1  concerning  the  central  depository,  Article 8-4-1  of

the  Draft  Regulation  lists  the  functions  which  the  central  depository  notably  performs.  The

ECB  notes  that  these  functions  are  explicitly  stated  as  carried  out  “within  the  scope  of  the

provisions  of  (…)  decrees 49-1105  of  4 August  1949  and  83-359  of  2 May  1983”.  Given  the

fact  that  the  two  decrees  only  refer  to  the  role  of  one  specific  French  central  depository,

Sicovam S.A., the ECB questions whether other depositories could be bound by these decrees.

Moreover, having regard to the provisions of the Law of 2 July 1998, the ECB notes that the

Law  vested  the  Financial  Markets  Council  with  the  power  to  define  the  conditions  of

authorisation  of  central  depositories,  whereas  the  Draft  Regulation  only  refers  to  the  central

depository (as opposed to Section 2 of the same Chapter 4, where reference is made to systems

for settlement and delivery). Having regard to the fact that there are at least, for the time being,

two  central  depositories  in  France  (the  Banque  de  France  being  the  central  depository  for

Treasury bills, according to Ordonnance 45-679 of 13 April 1945, although it has delegated the

account  holding  to  Sicovam  S.A.),  the  ECB  understands  that  the  function  of  a  central

depository is not legally  restricted  to  one  single  commercial  firm.  If  the  purpose  of  the  Draft

Regulation  is  to  make  it  possible  for  other  central  depositories  to  operate  under  French

jurisdiction,  one  could  question  the  need  to  maintain  provisions  relating  to  only  one  specific

depository, such as the two above-mentioned decrees.

6. 

According  to  the  list  of  functions  provided  by  Article  8-4-1,  the  function  of  the  central

depository  entails,  by  definition,  the  management  of  a  system  for  the  delivery  of  financial

instruments between the accounts it holds in the name of its members (see indents 2 and 3 of

the  list).  As  a  consequence,  the  ECB  suggests  the  following  drafting  for  Article  8-4-1,  last

paragraph: ‘The central depository may organise and manage any system the aim of which is

the delivery of financial instruments amongst its members and, moreover, if appropriate, make

the settlement of the corresponding cash in compliance with the provisions of Section 2 of this

Chapter’.

7. 

The ECB would also suggest the Financial Markets Council to develop the articulation between

Article  8-4-1-1º  (according  to  which  the  function  of  the  central  depository  consists

in:‘recording in a specific account all the financial instruments making up each issue admitted

to  its  operations’)  and  Article  8-4-1  §  2  (‘A  central  depository  may  admits  to  its  operations

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financial  instruments  not  falling  within  the  remit  referred  to  in  the  previous  paragraph,  first

indent’).

8. 

The ECB notes that, according to Article 8-3-11, Chapter 3, a central depository can be subject

to  more  obligations  than  those  stated  in  Chapter 4,  when  sub-delegated  in  the  tasks  of  a

‘registrar’.  Under  the  Draft  Regulation,  a  ‘registrar’  (“domiciliataire  de  titres  de  créance

négociables”) is a credit institution responsible for the bookkeeping of an issue of negotiable

bills – or certificates of deposit – and for the matching of the amount of the issue and the total

amount  registered  in  its  books  (Article  8-3-10).  ‘Registrars’  can  also  perform  the  function  of

transferring the rights on the bills by transfers between accounts opened in their books. Article

8-3-11 provides the possibility for the issuer of negotiable bills to transfer the responsibility of

account holding of its  issue  to  a  central  depository  and  to  delegate  the  registrar  the  power  to

give  instructions  to  the  central  depository.  In  that  case,  the  central  depository  becomes

responsible  for  the  matching  between  the  number  of  instruments  issued  and  the  number

registered in its books (Art 8-3-11). Although the provisions of Chapter 3 do not fall within the

scope of the present consultation, the ECB questions whether this transfer of account holding of

an issue preserves a direct link between  the  issuer  and  the  central  depository  and  if  adequate

procedures for safeguarding against any possible custody risk are considered.

The  ECB  also  takes  note  that  despite  the  fact  that  credit  institutions  acting  as  ‘registrars’

perform functions that could be considered as contained in the list of functions performed by a

central depository, they will not be submitted to the procedure imposed to central depositories

by Chapter 4 of the Draft Regulation.

9. 

The ECB welcomes the other provisions of Chapter 4, Section 1, of the Draft Regulation, which

specifically  purport  to  strengthen  technical  security  in  the  performance  of  the  functions  of  a

central depository (management of risks) and to improve the supervisory role of the Financial

Markets  Council  (right  of  communication  of  data).  The  ECB  invites  the  Financial  Markets

Council, when assessing applications for the status of central depository in France, to take into

account Standard 9 (backup facilities) formulated by the ESCB in the document ‘Assessment of

EU securities settlement systems against the standards for their use in ESCB credit operations’,

published in September 1998. 

10.  With  regard  to  the  provisions  of  Section 2  concerning  systems  for  settlement  and  for  the

delivery of financial instruments, the ECB welcomes the publication by the Financial Markets

Council of the procedure which it will apply in order to declare that the rules of a system are

covered by the definition given by the Law of 2 July 1998. Indeed, approval by the Financial

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Markets Council is a prerequisite for a system to benefit from the provisions of the said Law

prohibiting the bankruptcy administrator or liquidator from challenging payments and deliveries

made (Article 8-4-6 §3) and ordered (Article 8-4-11) by a participant on the day on which the

reorganisation or winding up procedures commence. 

11.  With regard to Article 8-4-5, the ECB welcomes the fact that the competences of the Financial

Markets  Council  are  recognised  as  being  conducted  without  prejudice  to  the  powers  of  the

Banque de France concerning payment systems. This flows from the fact that systems for the

delivery of securities may also provide payment (settlement) facilities. As previously expressed

in  the  EMI  Opinion  on  the  draft  law,  the  ECB  considers  it  appropriate  for  a  reference  to

Article 22 of the Statute of the European System of Central Banks and of the European Central

Bank to be included in Article 8-4-5 of the Draft Regulation. 

The ECB  notes  that,  according  to  the  French  Banking  Law  of  1984,  any  firm  that  operates  a

system  for  the  delivery  of  financial  instruments  and  that  wishes  to  provide  cash  settlement

facilities must rely on a credit institution or on the central bank for the settlement of cash, if it is

not itself authorised to operate as a credit institution. The ECB welcomes this rule as improving

the security of the relevant systems.

12.  The ECB understands that Chapter 4, Section 2, is especially dedicated to deal with systems for

settlement  and  for  the  delivery  of  financial  instruments  that  are  not  managed  by  a  central

depository. A definition of system for settlement and for the delivery of financial instruments or

a list of functions performed by such system, like what is done in Article 8-4-1 for the central

depository, seems necessary to clarify for future applicants to chose if they want to apply for

the  status  of  central  depository  or  of  system  for  settlement  and  for  the  delivery  of  financial

instruments.

13.  With regard to Article 8-4-6, as compared with Article 8-4-2, the ECB notes that the application

dossier of a central depository appears to be much more detailed than the application dossier of

a  system  for  settlement  and  for  the  delivery  of  financial  instruments.  Given  the  fact  that  the

central depository is submitted to ongoing supervision and regulatory oversight whereas only a

regulatory oversight by the Financial Markets Council is stated for systems for settlement and

for the delivery of financial instruments and, given the fact that any kind of commercial firm

can manage a system, the ECB wonders if this difference intends to reflect a different approach

in  the  level  of  risks  between  the  functions  of  central  depository  and  of  system  for  settlement

and for the delivery of financial instruments. For example, the system for settlement and for the

delivery  of  financial  instruments  should  be  asked  to  justify  to  the  Financial  Markets  Council

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how  the  function  of  the  central  depository  is  performed  for  the  securities  admitted  to  its

operations.

14.  As  mentioned  with  regard  to  central  depositories,  the  ECB  welcomes  the  provisions  of

Article 8-4-6, which specifically purport to strengthen technical security in the performance of

the  functions  of  a  system  for  settlement  and  for  the  delivery  of  financial  instruments

(management  of  risks)  and  to  improve  the  supervisory  role  of  the  Financial  Markets  Council

(right of communication of data). Once again, the ECB invites the Financial Markets Council,

when  assessing  applications  for  the  status  of  a  system  for  settlement  and  for  the  delivery  of

financial  instruments,  to  take  into  account  Standard 9  (backup  facilities)  elaborated  in  the

publication referred to in paragraph 9.

15. 

In  Article 8-4-7  (agreement  between  participants  and  securities  settlement  systems),  the  ECB

suggests  using  the  words  participation  agreement  (“convention  de  participation”)  instead  of

membership agreement (“convention d’adhésion”), to clarify the distinction with the agreement

signed between the central depository and its members.

16.  The ECB particularly welcomes Article 8-4-8, which provides that the manager of a system for

settlement and for the delivery  of  financial  instruments  shall  not  engage  in  any  other  activity

that  could  create  conflicts  of  interest  with  the  management  of  the  said  system.  The  ECB

considers  this  provision  ensures  a  level  of  security  that  goes  beyond  the  one  to  be  met  by

securities settlement systems used in ESCB credit operations.

17.  Article 8-4-10 requires any system to set up risk control measures in order to protect the rights

of  the  participants  in  the  system  in  case  of  default  in  delivery  or  settlement  by  one  or  more

other participants. The ECB understands that the only system currently operating in France that

do not fulfil this requirement will not be used for ESCB credit operations. Since the said system

does  not  currently  benefit  from  such  risk  control  measures  in  the  event  of  the  default  of  a

participant, the ECB understands that the adoption of the General Regulation will require the

manager  of  the  system  to  set  up  such  measures  as  soon  as  possible  in  order  to  decrease  the

systemic risk.

18.  The  ECB  confirms  that  it  has  no  objection  to  this  ECB  Opinion  being  made  public  by  the

competent national authorities at their discretion.

Done at Frankfurt am Main on 18 November 1998.

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The President of the ECB

[signed]

Willem F. Duisenberg