Opinion of the European Central Bank of 11 July 2006 at the request of the Cypriot Ministry of Finance on two draft regulatory decisions issued by the Cyprus Stock Exchange Council (CON/2006/37)
Date: 2006-07-11
Institutions: European Central Bank
Subjects: Cyprus, financial stability, issue of securities, national law, payment system, securities

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 11 July 2006  

at the request of the Cypriot Ministry of Finance 

on two draft regulatory decisions issued by the Cyprus Stock Exchange Council  

(CON/2006/37) 

Introduction and legal basis 

On  24  May  2006  the  European  Central  Bank  (ECB)  received  a  request  from  the  Cypriot  Ministry  of 

Finance (hereinafter the ‘consulting authority’) for an opinion on two draft regulatory decisions issued by 

the Cyprus Stock Exchange Council (hereinafter jointly referred to as the ‘draft decisions’).  

The  ECB’s  competence  to  deliver  an  opinion  is  based  on  the  fifth  indent  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 decisions relate to payment and settlement 

systems. 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 decisions  

The purpose of the draft decisions is to (i) regulate the operation of the Central Depository and Central 

Registry (CDCR) for securities traded on the Cyprus Stock Exchange (CSE); and (ii) govern the clearing 

and settlement of transactions in book-entry securities in the CDCR. The draft decisions, inter alia, touch 

upon  the  operation  of  investors’  securities  accounts,  the  registration  of  securities  with  the  CDCR,  the 

trading  currency  for  transactions  in  securities  in  the  CDCR  and  the  clearing  and  settlement  of  such 

transactions.  

2. 

General observations  

2.1  The ECB is pleased to note that the present consultation request follows the recent consultation on 

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

Securities Registry) Laws of 1996 to 2005 (hereinafter the ‘Law’) and appreciates that several of 

1  

OJ L 189, 3.7.1998, p. 42.  

 
 
 
 
 
                                                      
the recommendations made in the ECB opinion issued on that occasion2 have been taken on board 

by  the  Cyprus  Stock  Exchange  Council  (hereinafter  the  ‘CSE  Council’).  Moreover,  the  ECB 

understands  that  the  entry  into  force  of  the  draft  decisions  will  signal  a  major  overhaul  of  the 

operational and trading rules and regulations of the Cyprus Stock Exchange (CSE) and welcomes 

the opportunity to comment on the draft decisions.  

2.2  The ECB also notes that upon adoption of the euro in Cyprus, the CDCR will have to be assessed 

against the Eurosystem standards for the use of EU securities settlement systems in ESCB credit 
operations (the ‘Eurosystem user standards’)3. For that reason, the ECB’s comments in this opinion 

are without prejudice to a future assessment of the CDCR against the abovementioned standards. 

3.  

Specific observations on the draft decision on clearing and settlement 

Use of the euro as a trading currency 

3.1  

In ECB Opinion CON/2006/9, the ECB commented on a draft provision purporting, inter alia, to 

delegate  to  the  CSE  Council  the  power  to  designate  the  currency  in  which  transactions  are  to  be 

conducted in the context of the planned common trading platform between the CSE and the Athens 

Stock Exchange (ASE). In its opinion, the ECB invited the legislator to clarify whether the purpose 

of the proposed amendment was to enable the CSE Council to designate the euro as a reference unit 

for transactions or to institute the euro as the settlement currency for such transactions, noting that 

‘[w]hilst the use of the euro as a trading unit of account in a common 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 it is subject to liquidity and credit risks. 
This may have implications for the smooth settlement of securities transactions’4. 

3.2   Article 2 of the draft regulatory decision governing the clearing and settlement of transactions in 

book-entry  securities  in  the  CDCR  (hereinafter  the  ‘draft  decision  on  clearing  and  settlement’), 

entitled ‘Trading currency’, inter alia, provides that the financial value of such transactions must 
be denominated in euro5. In this regard, the ECB draws the consulting authority’s attention to its 

comments in ECB Opinion CON/2006/9, as cited above. 

2  

3  

4  
5  

ECB  Opinion  CON/2006/9  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, available on the ECB’s website at www.ecb.int 
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 
the  ECB’s  website  at 
supervision  of  securities  settlement  systems.  The  standards  are  available  on 
http://www.ecb.int/home/html/index.en.html. 
Paragraph 6.1 of ECB Opinion CON/2006/9.  
It is also noted that Article 4 of the draft decision on clearing and settlement does not specify the clearing and settlement 
currency. 

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Settlement finality issues 

3.3 

In ECB Opinion CON/2006/9, the ECB commented on a draft provision purporting, inter alia, to 

delegate to the CSE Council the power to determine settlement finality issues. On that occasion, the 
ECB noted that as Cyprus has implemented the Settlement Finality Directive (SFD)6, the draft law 

could further clarify that settlement finality issues are governed by the national law implementing 

the SFD, and that it is only on technical issues (including deadlines, transfer of funds issues, etc.) 
that the CSE Council will enjoy decision-making powers7. 

3.4   Articles  9.2  and  9.3  of  the  draft  decision  on  clearing  and  settlement  set  out  rules  regarding  the 

finality  of  transactions.  The  ECB  recommends  that  these  should  be  supplemented  by  express 

provisions  regarding  the  moment  of  entry  into  the  system  in  accordance  with  Article  3(3)  of  the 

SFD.  

3.5  The ECB reminds the consulting authority of the provisions of Cypriot law implementing the SFD8 

and draws its attention to the interaction of those provisions with Article 16.6 of the draft decision 

on clearing and settlement, which, inter alia, provides that settlement of each purchase or sale must 

be construed as final and irrevocable, subject solely to the facility to correct records in the CDCR, 

as provided for in the Law and the draft regulatory decision governing the operation of the CDCR 

(hereinafter the ‘draft decision on the operation of the CDCR’).  

3.6   Article  16.4  of  the  draft  decision  on  clearing  and  settlement  sets  out  the  modalities  for  the 

settlement  of  transactions  on  a  delivery  versus  payment  basis.  The  ECB  recommends  that  this 

provision should be supplemented by a reference to the requirements and effects of transfers to the 

securities  accounts  referred  to  therein,  which  the  ECB  understands  to  be  intended  as  legally 

effective book-entry credits, valid erga omnes. 

Access to the CDCR 

3.7  Article 26 of the draft decision on clearing and settlement provides that remote CSE members (i.e. 

members  not  legally  established  in  Cyprus)  may  carry  out  the  actions  provided  for  in  the  draft 

decision  on  clearing  and  settlement  through  a  single  depository  acting  as  the  remote  member’s 

agent. The ECB notes that this provision is inconsistent with Articles 34 and 36 of the Markets in 
Financial  Instruments  Directive  (hereinafter  the  ‘MiFID’)9,  pursuant  to  which  investment  firms 

6  

7  
8  

9  

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). 
Paragraph 4.1 of ECB Opinion CON/2006/9. 
Law  8(I)/2003  on  settlement  finality  in  payment  and  securities  settlement  systems  (Official  Gazette  of  the  Republic, 
No 3679,  31.1.2003).  Also  see  ECB  Opinion  CON/2005/28  of  10  August  2005  at  the  request  of  the  Central  Bank  of 
Cyprus on a draft law amending the Settlement Finality in Payment Systems and Securities Settlement Systems Law of 
2003.  
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).  Directive  as 
amended by Directive 2006/31/EC (OJ L 114, 27.4.2006, p. 60). 

3 

 
                                                      
from  other  Member  States  have  a  right  of  access  to  central  counterparty,  clearing  and  settlement 
systems under the same conditions as the those applying to local participants10. 

4. 

Specific observations on the draft decision on the operation of the CDCR 

Access to the CDCR 

4.1  Article 2 of the draft decision on the operation of the CDCR states that securities listed on the CSE 

must  be  registered  with  the  CDCR.  The  ECB  notes  that  this  provision  is  inconsistent  with 

Article 34  of  the  MiFID  and  draws  the  consulting  authority’s  attention  to its  implications  for  the 

listing  as  well  as  for  the  clearing  and  settlement  of  transactions  in  securities  listed  on  the  CSE, 
including those issued by non-Cypriot issuers11. 

Pledge of securities 

4.2   Article 32 of the draft decision on the operation of the CDCR governs the pledge of securities. In 

this regard, the consulting authority’s attention is drawn to the the Cypriot law implementing the 
Financial  Collateral  Directive  (FCD)12,  and  governing  pledge  together  with  all  other  financial 
collateral  arrangements13.  The  relationship  between  the  existing  provisions  of  Cypriot  law  on 

pledge, which implement the FCD, and those set out in the draft decision on the operation of the 

CDCR  should be clarified. Moreover, apparent conflicts between the FCD and the draft decision 

should be removed, as in the case of paragraphs 3.2 and 5.1 of Article 32 of the draft decision. The 

former of these paragraphs prohibits the re-use of pledged assets, which is contrary to Article 5 of 

the  FCD,  while  the  latter  contemplates  a  realisation  with  court  approval,  unlike  Article  4  of  the 

FCD, which does not. 

10  

11  

12  

13  

Report, 

In this regard, the ECB also draws the consulting authority’s attention to the recommendations of the Giovannini Group 
on  ‘Cross-Border  Clearing  and  Settlement  Arrangements  in  the  European  Union’  of  November  2001  (the  ‘First 
Giovannini Report’) and the ‘Second Report on EU Clearing and Settlement Arrangements’ of April 2003 (the ‘Second 
Giovannini  Report’),  in  particular,  to  the  Group’s  recommendations  for  the  elimination  of  barrier  5  (‘Practical 
impediments to remote access to national clearing and settlement systems’), according to which ‘[O]perators of systems 
should seek to ensure that access to their systems is on the basis of non-discriminatory criteria, and that where possible 
those accessing the system remotely are on a level footing with local members’ (First Giovannini Report, p. 48, Second 
Giovannini 
at 
http://ec.europa.eu/economy_finance/giovannini/clearing_settlement_en.htm.   
In this regard, the ECB also draws the consulting authority’s attention to the recommendations of the Giovannini Reports 
and, in particular, to the Group’s recommendations for the elimination of barrier 9 (‘National restrictions on the location 
of securities’), for the purposes of which ‘…restrictions [on the location of securities] can limit the choices for issuers 
when placing their securities and/or make it more complicated to hold and settle those securities in Member States other 
than the place of issuance’ (First Giovannini Report, p. 49, Second Giovannini Report, p. 19).  
Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements 
(OJ L 168, 27.6.2002, p. 43). 
Law 43(I)/2004 on financial collateral arrangements (Official Gazette of the Republic, No 3823, 19.3.2004).  

the  Giovannini 

available 

Reports 

texts 

18). 

The 

are 

of 

p. 

4 

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

Done at Frankfurt am Main, 11 July 2006. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

5