Opinion of the European Central Bank of 22 February 2006 at the request of the Cypriot Ministry of Finance on a draft law amending the Cyprus Securities and Stock Exchange (Central Depository and Central Securities Registry) Laws of 1996 to 2005 (CON/2006/9)
Date: 2006-02-22
Institutions: European Central Bank
Subjects: Cyprus, financial stability, national law, payment system, securities

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 22 February 2006 

at the request of the Cypriot Ministry of Finance 

on a draft law amending the Cyprus Securities and Stock Exchange (Central Depository and 

Central Securities Registry) Laws of 1996 to 2005 

(CON/2006/9) 

Introduction and legal basis 

On 7 February 2006 the European Central Bank (ECB) received a request from the Cypriot Ministry of 

Finance  for  an  opinion  on  a  draft  law  amending  the  Cyprus  Securities  and  Stock  Exchange  (Central 

Depository and Central Securities Registry) Laws of 1996 to 2005 (hereinafter the ‘draft law’).  

The  ECB’s  competence  to  deliver  an  opinion  is  based  on  Article  105(4)  of  the  Treaty  establishing  the 

European Community and on the fifth and sixth indents of Article 2(1) of Council Decision 98/415/EC of 

29 June  1998  on  the  consultation  of  the  European  Central  Bank  by  national  authorities  regarding  draft 
legislative provisions1, as the draft law relates to payment and settlement systems and to rules applicable 

to  financial  institutions  insofar  as  they  materially  influence  the  stability  of  financial  institutions  and 

markets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European 

Central Bank, the Governing Council has adopted this opinion. 

1  

Purpose of the draft law and general observations 

1.1  The  ECB  understands  that  the  objective  of  the  draft  law  is  to  enable  the  Central  Depository  and 

Central Registry (CDCR) for securities listed and traded on the Cyprus Stock Exchange (CSE) to 

operate more flexibly. This would be achieved by delegating to the Council of the CSE (hereinafter 

the ‘CSE Council’) the power to regulate certain technical issues relevant to the management of the 

CDCR’s business by means of ‘Regulatory Decisions’. Until now, such issues have been dealt with 

by means of either CSE ‘Council Regulations’, which are subject to the endorsement of the Cypriot 
Council  of  Ministers  and  the  approval  of  the  House  of  Representatives2  or  CSE  ‘Council 

Decisions’, which are subject to the approval of the Cyprus Securities and Exchange Commission. 

In  this  context,  the  ECB  understands  that  the  intention  underlying  the  draft  law  is  that  the  CSE 

1  
2  

OJ L 189, 3.7.1998, p. 42.  
See section 192 of the Cyprus Securities and Stock Exchange Laws of 1993 to 2005. 

 
 
 
 
                                                      
Council should have the power in future to regulate technical matters only, while other issues will 

continue to be regulated by law.  

1.2  The  ECB  notes  that  the  CSE  Council  is  responsible  for  managing  and  operating:  (i)  the  CSE,  a 

public  law-regulated  market  that  operates  subject  to  the  supervision  of  the  Cypriot  Minister  for 
Finance3;  and  (ii)  the  CDCR4,  which  operates  as  a  division  of  the  CSE  rather  than  as  an 

independent legal entity. Members of the CSE Council are designated by the Minister for Finance 
and appointed by the Council of Ministers5.  

2.   Corporate governance considerations 

2.1  The changes that the draft law introduces to the decision-making process within both the CSE and 

the CDCR have important implications for the latter’s governance and supervision, which the draft 

law  does  not  directly  address.  As  the  CDCR  is  the  central  securities  depository  (CSD)  for  all 

Cypriot book-entry securities, its governance arrangements are of a significance that goes beyond 

corporate law. The ECB therefore makes a few observations relevant to the supervision of payment 

and  securities  clearing  and  settlement  systems.  These  observations  are  also  in  the  spirit  of  the 
future implementation of Directive 2004/39/EC on markets in financial instruments6 (MiFID), and 

in  particular  of  Articles  36  to  47  thereof.  The  ECB  emphasises  these  observations  are  offered  as 

policy recommendations only, not as a statement of legal requirements.  

2.2  As  CSDs  combine  the  provision  of  final  settlement  with  the  recording  of  changes  in  legal  title 

resulting from transactions in securities, they should identify, monitor and assess sources of risk.  

2.3  Regardless of a CSD’s status under national company law or of the national corporate governance 

requirements  applicable  to  it,  a  CSD  should  adopt  the  highest  corporate  governance  standards  or 

best practices recommended for listed companies and ensure that they are effectively implemented. 

These  may  include  traditional  corporate  governance  mechanisms,  (e.g.  the  appointment  of  non-

executive  directors  and  the  use  of  specialised  board  committees,  such  as  an  audit  committee),  or 

mechanisms  specifically  developed  for  securities  settlement  systems,  (e.g.  the  use  of  board 

advisory  committees  or  public  consultation  documents).  It  is  noted  that  a  CSD  should  disclose 

adequately  its  corporate  governance  arrangements  to  enable  its  participants  and  the  competent 

public authorities to assess how to prevent, resolve or mitigate conflicts of interest among owners, 

the CSE Council and CSD participants, and how to safeguard the public interest. Finally, corporate 

3  

4  

5  
6  

Ibid,  sections  3(1)  and  (2),  read  in  conjunction  with  section  7(1).  State  supervision  is  exercised  through  the  Cyprus 
Securities and Exchange Commission. 
Ibid, section 9, read in conjunction with section 3 of the Cyprus Securities and Stock Exchange (Central Depository and 
Central  Securities  Registry)  Laws  of  1996  to  2005  (hereinafter  the  ‘CDCSR  Laws’).  Accordingly,  the  CSE  Council 
supervises their operation, manages their resources and is responsible for implementing their business strategy. 
Ibid, section 11(1).  
Directive  2004/39/EC  of  the  European  Parliament  and  of  the  Council  of  21  April  2004  on  markets  in  financial 
instruments  amending  Council  Directives  85/611/EEC  and 93/6/EEC  and  Directive 2000/12/EC  of  the  European 
Parliament and of the Council and repealing Council Directive 93/22/EEC (OJ L 145, 30.4.2004, p. 1). 

2 

 
                                                      
governance  arrangements  for  CSDs  should  be  subject  to  adequate  regulation  and  oversight. 

Regulators,  central  banks  and  competition  authorities  should  institute  policies  the  combined 

operation of which ensures that services are provided at a fair price to participants under equitable 

conditions of access.  

3 

Powers delegated to the CSE Council under the draft law 

3.1  Section 2 of the draft law amends section 2 of the CDCSR Laws entitled ‘Interpretation’ to provide 

that  ‘“Regulatory  Decision”  means  the  decision  of  the  [CSE]  Council  containing  regulatory 

content, issued in accordance with the provisions of this Law and which is published in the Official 

Gazette of the Republic’. It follows from the definition of the term ‘Regulatory Decision’ that the 

powers which the draft law confers on the CSE Council are conceived as being regulatory powers 

of general applicability and that rights and obligations imposed under Regulatory Decisions issued 
by the CSE Council would bind all regulated market participants7, not contractually, but as a matter 

of law.  

3.2  The  ECB  would  remind  the  consulting  authority  that,  in  view  of  the  obligation  incumbent  on 

Member States to consult the ECB on any draft legislative provision within its field of competence 

pursuant  to  Decision  (EC)  No  98/415,  and  taking  into  consideration  the  vague  nature  of  the 

delegation  to  the  CSE  Council,  it  will  be  necessary  to  submit  to  the  ECB  for  consultation  all 
significant secondary legislation8, including Regulatory Decisions, issued by the CSE Council on 

the basis of the powers delegated to it under the draft law before such legislation is adopted.  

4 

Scope of delegation under the draft law 

4.1   The  ECB  notes  that,  while  the  contents  of  the  Regulatory  Decisions  to  be  issued  by  the  CSE 

Council under the powers delegated to it pursuant to the draft law cannot be anticipated, several of 

the provisions of the draft law – in particular sections 13, 15, 19 and 22 – confer broad decision-

making  powers  on  the  CSE  Council  in  connection  with  matters  not  directly  related  to  the 
management and operation of the CDCR9. These powers, inter alia, affect: (i) the property rights of 

owners  of  securities  registered  with  the  CDCR;  (ii)  the  finality  of  the  settlement  of  transactions 
entered into in respect of securities listed and traded on the CSE; and (iii) financial stability10. The 

7  
8  

9  

10  

This refers to CSE Members (brokerage firms), issuers of securities listed and traded on the CSE and investors. 
The  ECB  draws  attention  to  its  ‘Guide  to  consultation  of  the European  Central Bank  by  national  authorities  regarding 
draft  legislative  provisions’  which  states  on  page  14  that  ‘[T]he  duty  of  consultation  is  not  limited  to  draft  legislative 
provisions  which  are  destined  to  be  adopted  by  a  parliament.  Decision  98/415/EC  covers  all  types  of  legally  binding 
provisions, including secondary legislation, as well as binding acts of general applicability of [national central banks] or 
supervisory authorities (where these bodies have regulatory powers)’. 
The  ECB  notes  that  section  3  of  the  CDCSR  Laws,  apparently  limits  the  CSE  Council’s  powers  to  the  ‘creation, 
management and administration of [the CDCSR]’.  
Section 19 of the draft law which, inter alia, confers on the CSE Council the power to establish and operate a ‘fund’ and 
to determine the contributions to be made by  CSE members and/or depositories and the giving of guarantees or security 
by the CSE Members and/or the depositories, to ensure the clearing and settlement of stock exchange transactions. 

3 

 
 
                                                      
ECB notes that, as Cyprus has implemented the Settlement Finality Directive (SFD)11, the draft law 

could further clarify that settlement finality issues are governed by the national law implementing 
the SFD12, and that it is only on technical issues (including deadlines, transfer of funds issues, etc.) 

that  the  CSE  Council  will  enjoy  decision-making  powers.  The  same  principle  should  apply  to 

issues affecting the property rights of CSE Members and their clients, which are already governed 

by  national  law.  Overall,  the  ECB  recommends  that  the  scope  of  delegation  to  the  CSE  Council 

should be restricted to technical issues only. 

4.2  The ECB considers that section 20 of the draft law, which empowers the CSE Council to stipulate, 

by  means  of  Regulatory  Decisions,  the  conditions  for  provision  of  the  services  of  a  custodian 

(‘depository’),  is  prima  facie  inconsistent  with  the  freedom  to  provide  services  and  the  ‘home 
country control’ principle enshrined in the Investment Services Directive (ISD)13.  

4.3  Regarding the exercise, under the draft law, of broad decision-making powers by the CSE Council, 

the ECB would also draw attention to the provisions of Articles 34, 36, 46 and 48 of the MiFID on 
regulated markets and competent authorities14. In view of the future implementation of the MiFID 

in Cyprus, certain amendments to the draft law may need to be considered.  

5. 

Assessment of the CDCR against the Eurosystem user standards 

5.1  Because Cyprus has not yet adopted the euro and the CDCR is not used for Eurosystem operations, 

the  Eurosystem  has  not  assessed  the  CDCR  against  the  Standards  for  the  use  of  EU  securities 
settlement systems in ESCB credit operations (known as the ‘Eurosystem user standards’)15.  

5.2  The ECB considers that sections 3, 5 (on the limitation of the CSE’s responsibility) and 9 of the 

draft law are prima facie inconsistent with the Eurosystem user standards. 

11  

12  

13  

14  

15  

Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and 
securities settlement systems (OJ L 166, 11.6.1998, p. 45).  
Law  8(I)/2003  on  settlement  finality  in  payment  and  securities  settlement  systems  (Official  Gazette  of  the  Republic, 
No 3679, 31.1.2003). See ECB Opinion CON/2005/28 of 10 August 2005 at the request of the Central Bank of Cyprus on 
a draft law amending the Settlement Finality in Payment Systems and Securities Settlement Systems Law of 2003.  
See  Titles  V  and  VI  of  Council  Directive  93/22/EEC  of  10  May  1993  on  investment  services  in  the  securities  field 
(OJ L 141, 11.6.1993, p. 27). Directive as last amended by Directive 2004/39/EC (OJ L 145, 30.4.2004, p. 1). Pursuant to 
the  ISD,  the  competent  home  Member  State  authorities  are  responsible  for  the  prudential  supervision  of  investment 
services firms. However, responsibility for implementing the rules of conduct and for monitoring compliance with these 
rules remains within the competence of the host Member State, which, when applying them, has to respect the principle 
of the public interest. 
The MiFID was originally intended to be transposed into national legislation after the standard period of two years from 
adoption  (April  2006).  In  June  2005,  the  Commission  presented  a  proposal  to  extend  the  transposition  deadline  for 
Member States and the compliance date for regulated firms to October 2006 and April 2007, respectively. 
Published in 1998, the Eurosystem user standards have been regarded as de facto common standards for EU securities 
settlement  systems.  Nevertheless,  they  are  not  intended  to  be  a  comprehensive  set  of  standards  for  the  oversight  or 
supervision  of  securities  settlement  systems.  The  standards  are  available  on 
the  ECB’s  website  at 
http://www.ecb.int/home/html/index.en.html. 

4 

 
 
                                                      
6. 

Additional comments  

6.1  Section 19 of the draft law amends section 24 of the CDCSR Laws entitled ‘Certain issues defined 

by  a  decision  of  the  Council’  to,  inter  alia,  provide  that  ‘(f)  …  the  currency  in  which  stock 

exchange transactions are conducted in and any other related matters regarding currency exchange 

rates’ will be determined by means of Regulatory Decisions issued by the CSE Council. The ECB 

invites the legislator to clarify in the draft law whether the purpose of this amendment is to enable 

the  CSE  Council  to  designate  the  euro  as  a  reference  unit  for  transactions  in  the  context  of  the 

planned common trading platform between the CSE and the Athens Stock Exchange, or to institute 

the euro as the settlement currency for such transactions. Whilst the use of the euro as a trading unit 

of account in a common platform raises no concern, its use as a settlement currency would need to 

take into account that, before Cyprus adopts the euro, it qualifies in Cyprus as a foreign currency, 

and  thus  is  subject  to  liquidity  and  credit  risks.  This  may  have  implications  for  the  smooth 

settlement of securities transactions. 

6.2  Whatever  the  purpose  of  the  designation  of  the  euro,  the  ECB  would  remind  the  consulting 

authority  that  the  CSE  Council’s  power  under  section  19  of  the  draft  law  to  define  ‘matters 

regarding currency exchange rates’ by means of Regulatory Decisions will become redundant (as 

far as the euro is concerned) once Cyprus has adopted the euro, and draws attention to the fact that 

the  ECB  publishes  the  euro  foreign  exchange  reference  rates  on  its  website  based  on  the  daily 

concertation procedure between central banks within and outside the European System of Central 

Banks. 

6.3  Given  the  urgency  of  the  present  consultation,  this  opinion  raises  general  issues  only.  The  ECB 

reserves the right to raise further issues on a future occasion.  

This opinion will be published on the ECB’s website. 

Done at Frankfurt am Main, 22 February 2006. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

5