COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on improving securities settlement in the European Union and on Central Securities Depositories (CSDs) and amending Directive 98/26/EC
Date: 2012-03-07
Institutions: European Commission
Subjects: data protection, financial institution, financial legislation, issue of securities, legal status, market capitalisation, official market, sales agent, securities, single market, stock-exchange transaction

EUROPEAN COMMISSION 

Brussels, 7.3.2012  
SWD(2012) 22 final 

COMMISSION STAFF WORKING DOCUMENT 

IMPACT ASSESSMENT 

Accompanying the document 

Proposal for a Regulation of the European Parliament and of the Council 

on improving securities settlement in the European Union and on Central Securities 
Depositories (CSDs) and amending Directive 98/26/EC 

{COM(2012) 73 final} 
{SWD(2012) 23 final} 

 
 
 
 
  
 
TABLE OF CONTENT 
1. 

Introduction and procedural issues............................................................................... 4 

1.1. 

1.2. 

1.3. 

2. 

Introduction .................................................................................................................. 4 

Impact assessment and opinion of the Impact Assessment Board............................... 5 

External expertise and consultation of interested parties............................................. 5 

Background and context............................................................................................... 6 

2.1. 

Post trading services..................................................................................................... 6 

2.2.  What are CSDs? ........................................................................................................... 6 

2.3. 

2.4. 

2.5. 

2.6. 

2.7. 

2.8. 

2.9. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

3.5. 

4. 

4.1. 

4.2. 

5. 

5.1. 

5.2. 

5.3. 

6. 

6.1. 

6.2. 

Current CSD landscape in the EU................................................................................ 8 

Other intermediaries in the post trading area ............................................................... 8 

Size of market .............................................................................................................. 9 

Costs for CSD services............................................................................................... 10 

Target2 Securities....................................................................................................... 10 

Overview of legislative framework............................................................................ 11 

Relationship with other legislative initiatives ............................................................ 11 

Problem definition...................................................................................................... 12 

Key driver 1: Different market practices on the organisation of settlement .............. 13 

Key driver 2: Different rules for CSDs ...................................................................... 15 

Key driver 3: Barriers of access to/from CSDs.......................................................... 17 

How would the problems evolve without EU action ................................................. 19 

The EU's right to act and justification........................................................................ 20 

Objectives................................................................................................................... 21 

General, specific and operational objectives.............................................................. 21 

Consistency with other EU policies ........................................................................... 22 

Policy Options, Analysis and Comparison................................................................. 23 

Options for objective 1 – Enhance framework for settlement in the EU ................... 23 

Options for objective 2 - Introduce consistent rules for CSDs .................................. 28 

Options for objective 3 – remove barriers of access to/from CSDs........................... 35 

Preferred Policy Options and Instruments ................................................................. 39 

Preferred policy options ............................................................................................. 39 

The cumulative impacts of the preferred policy options............................................ 40 

ii 

 
 
 
 
6.3. 

6.4. 

6.5. 

7. 

7.1. 

7.2. 

7.3. 

8. 

8.1. 

8.2. 

8.3. 

8.4. 

8.5. 

8.6. 

8.7. 

8.8. 

8.9. 

The preferred policy instrument................................................................................. 44 

Timing of the initiative............................................................................................... 44 

Impacts of the detailed technical rules ....................................................................... 45 

Monitoring and evaluation ......................................................................................... 45 

Objective 1 – Enhance framework for settlement...................................................... 45 

Objective 2 – Consistent rules for CSDs.................................................................... 46 

Objective 3 - Access................................................................................................... 46 

Annexes...................................................................................................................... 47 

Annex 1 – Political mandate and basis of the work programme................................ 47 

Annex 2 – External expertise ..................................................................................... 49 

Annex 3 – Data on CSDs in the EU........................................................................... 51 

Annex 4 – Additional data on CSD and custodian costs ........................................... 58 

Annex 5 – Market discipline measures and implementation plans............................ 60 

Annex 6 – Overview of settlement periods and efficiency in Europe ....................... 62 

Annex 7 – Overview of legislative framework .......................................................... 63 

Annex 8– Authorisation requirements for CSDs in EU and non EU countries ......... 65 

Annex 9 – Lehman and Bear Stern case studies ........................................................ 69 

8.10.  Annex 10 – Overview of restrictions on the choice of CSD by issuers..................... 70 

8.11.  Annex 11 – Possible principles to be proposed in legislation.................................... 74 

8.12.  Annex 12 – Options in respect of banking type of services....................................... 77 

8.13.  Annex 13 – Summary of the responses to the public consultation ............................ 88 

8.14.  Annex 14 – Glossary of terms.................................................................................... 99 

iii 

 
 
 
 
 
1. 

INTRODUCTION AND PROCEDURAL ISSUES 

1.1. 

Introduction 

Central  Securities  Depositories  (CSDs) 1  are  systemically 
important  market 
infrastructures.  Firstly,  they  intervene  throughout  the  life  span  of  securities,  from 
issuance to reimbursement. Secondly, they perform, sometimes after prior netting by 
Central Counterparties (CCPs), most of the processes that lead to the settlement of a 
transaction, i.e. the delivery of securities against cash.  

Over 330 million securities transactions were settled in the EU in 2010 by CSDs, for 
a  total  value  of  approximately  €920  trillion.    EU  CSDs  held  almost  €39  trillion  of 
securities at the end of 2010 (please see section 2.5). 

The  ECOFIN  Council  of  2  December  20082 emphasised  the  need  to  strengthen  the 
safety  and  soundness  of  securities  settlement  systems  ("SSS"  or  "settlement 
systems")  operated  by  CSDs.    More  recently,  on  20  October  2010,  the  Financial 
Stability  Board  (FSB)  called  for  more  robust  core  market  infrastructures  and  asked 
for the revision and enhancement of existing standards. The Committee on Payments 
and Settlement Systems (CPSS) of the Bank of International Settlements (BIS) and 
the International Organisation of Securities Commissions (IOSCO) are in the process 
of  finalising  draft  global  standards 3 .  These  will  replace  the  CPSS-IOSCO 
recommendations from 2001, which were adapted at European level in 2009 by the 
European  System  of  Central  Banks  (ESCB)  and  the  Committee  of  European 
Securities Regulators (CESR4). 

Securities  transactions  in  Europe  are  becoming  increasingly  cross-border  and  this 
should increase once the Target2 Securities (T2S)5 pan-European common settlement 
platform will start in 2015.  Despite this, cross-border securities settlement in Europe 
remains  complex  due  to  different  national  market  practices  regarding  settlement  as 
well  as  to  persisting  barriers  of  access.    This  has  implications  for  the  safety  and 
efficiency  of  cross-border  securities  transactions.  Various  studies  and  regulatory 
initiatives have been carried out for the last decade, spearheaded by the Lamfalussy 
report on financial services regulation in 2001.  

Political support has been demonstrated at the EU level, for instance by France and 
Germany, who invited President Barroso to consider the possibility of harmonisation 
of settlement periods, and by the ECOFIN Council, who agreed that EU legislation is 
needed  to  tackle  barriers  of  access.    The  preparation  of  a  legislative  proposal  on 
CSDs and settlement was included in the Commission's work programme for 2011. 
Further detail on the political mandate and basis of the work programme is provided 
in Annex 1 and on the timing of the proposal in section 6.4. 

1  

2  
3  
4  
5  

Any  reference  to  CSDs  in  this  document  also  covers  the  two  International  Central  Securities 
Depositories  (ICSDs),  Clearstream  Banking  Luxembourg  and  Euroclear  Bank,  when  applicable.  The 
ICSDs are a sub-category of CSDs specialised in the issuance of international bonds, commonly known 
as "Eurobonds" 
http://register.consilium.europa.eu/pdf/en/08/st16/st16212.en08.pdf  
These standards are available on http://www.bis.org/publ/cpss94.pdf and should be finalised early 2012 
Since 1 January 2011 CESR has become the European Securities Market Authority (ESMA) 
Please refer to T2S website for more details http://www.ecb.int/paym/t2s/html/index.en.html 

4 

 
 
 
 
                                                 
This report analyses the various options aiming at addressing both topics introduced 
above: (a) the safety and efficiency of cross-border settlement in Europe and (b) the 
safety and soundness of CSDs, as systemically important market infrastructures.  In 
addition, the report looks at level playing field issues, since CSDs have developed as 
natural monopolies in their domestic markets. 

1.2. 

Impact assessment and opinion of the Impact Assessment Board 

The Directorate General (DG) for Internal Market and Services is the lead DG. 

Work on the Impact Assessment started in October 2010 with three meetings of the 
Steering Group held from 10 November 2010 to 8 March 2011. The following DGs 
and  Commission  services  participated  in  the  meetings:  Competition,  Economic  and 
Monetary Affairs, Industry and Entrepreneurship, Legal Service, Secretariat General, 
Justice, Taxation and Customs Union, Energy and Climate Action.  

The report was sent to the Impact Assessment Board on 16 March 2011. The Board 
discussed the report in its hearing on 13 April 2011. The report was then resubmitted 
on  8  August  2011.    Following  the  Board's  comments,  the  following  elements  have 
been added and strengthened: 

•  A reflection of stakeholder views throughout the document 

•  More evidence of the problems, including more data on costs and safety issues in 

sections 2.6, 2.7, 3.2.3 and Annex 4 

•  More detail on each option in the description boxes, with a detailed description in 

Annex 11 

•  More analysis of the content of licence, particularly with respect to banking-type 

of ancillary services, in section 5.2.2 and Annex 12 

•  An  estimation  of  order  of  magnitude  of  overall  benefits  and  an  overview  of 

impacts on different groups of stakeholders in section 6.2 

•  A clearer and more robust monitoring and evaluation framework in section 7 

1.3. 

External expertise and consultation of interested parties 

1.3.1.  External expertise 

The  Commission  services  have  consulted  the  great  majority  of  stakeholders, 
including regulators, CSDs and CSD participants, as described in Annex 2.  

1.3.2.  Public consultation 

A  public  consultation  was  held  from  13.01.2011  to  1.03.2011,  containing  56 
questions concerning scope and definition, authorisation and supervision, access and 
interoperability,  prudential  and  organizational  requirements,  settlement  discipline, 
settlement cycles and sanctions. It received 101 answers consisting of 33 banks, 20 
public authorities, 16 CSDs, 10 other market infrastructures, 11 investors and issuers, 
and 11 other. The summary can be consulted under Annex 13. 

5 

 
 
 
 
The initiative was welcomed by almost all respondents, who shared the view of the 
consultation paper that settlement processes and CSDs play a systemically important 
role for financial markets and should be subject to proper regulation.  

2. 

BACKGROUND AND CONTEXT 

2.1. 

Post trading services 

Central  Securities  Depositaries  (CSDs)  play  a  key  role  in  the  processes  that  take 
place  between  the  conclusion  of  a  securities  transaction  (i.e.  an  initial  issuance  of 
securities6 or  a  sale  or  purchase  of  securities  on  or  off  a  trading  venues7)  and  the 
settlement  of  that  transaction  (i.e.  the  transfer  of  securities  against  cash).    These 
processes  are  typically  referred  to  as  "post  trading  services"  rendered  by  "post 
trading infrastructures".  A settlement flow could look as in Figure 1, with the caveat 
that  the  way  these  processes  are  set  up  depends  on  a  number  of  factors,  such  as 
whether the transaction is done on or off a trading venue, market convention, type of 
securities  traded,  domestic  versus  cross  border  investment,  legal  framework  and 
whether  the  trade  is  cleared  by  a  Central  Counterparty  (CCP)8 prior  to  settlement.  
These processes are also subject to dynamic change as markets evolve.  

Figure 1 describes the possible processes between the trade date (T) and the moment 
when settlement occurs in the CSD - in this example after 3 days ("T+3").  

Figure 1: Example of a settlement flow  

Trade
Trade
(T)
(T)

Trade orders
Trade orders
Trade execution
Trade execution

Verification
Verification

Clearing
Clearing

Confirmation
Confirmation
Affirmation
Affirmation
Order matching
Order matching

Trade clearance
Trade clearance
Trade netting
Trade netting
Settlement instruction
Settlement instruction
Counterparty risk
Counterparty risk
clearing
clearing

Settlement
Settlement
(T+3)
(T+3)

Transfer of securities
Transfer of securities
Transfer of money
Transfer of money
Confirmation of 
Confirmation of 
settlement
settlement

Source: based on the Oxera report, "Methodology for monitoring prices, costs and volumes of trading 
and post-trading activities", July 2007 

Around these processes, a number of services rendered either by CSDs and CCPs or 
by intermediaries (custodian banks) have evolved over time, with a view to improve 
the settlement or to optimize the use of a client's assets (see section 2.2). 

2.2.  What are CSDs? 

CSDs are essential in the post trading area, in that they ensure the initial recording as 
well  as  the  safekeeping  and  settlement  of  securities.  While  there  is  no  commonly 

6 

7 

8 

Initial issuance of securities is regulated by the Directive 2003/71/EC of the European Parliament and 
of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the 
public or admitted to trading 
Trading  venues  are  regulated  by  the  Directive  2004/39/EC  of  the  European  Parliament  and  of  the 
Council of 21 April 2004 on markets in financial instruments (MiFID) 
In  many  markets  and  for  many  transactions  CCPs  interpose  themselves  between  market  participants 
(buyers  and  sellers).    Netting  substantially  reduces  the  number  and  value  of  deliveries  and  payments 
needed  to  settle  a  given  set  of  trades  at  the  level  of  the  CSD.    CCPs  are  the  subject  to  the  proposed 
Regulation  of  15  September  2010  concerning  OTC  derivatives,  Central  Counterparties  and  Trade 
Repositories 

6 

 
 
 
 
 
                                                 
accepted definition of a CSD or of the functions they perform, there is nevertheless a 
range of functions that are performed by many CSDs. These functions can be broadly 
divided into "core" functions and "ancillary" functions, which are mostly supporting 
the core functions. 

2.2.1.  Core functions 

•  The  "notary"  function  means  the  entering  of  securities  into  book-entry.  It 
generally  occurs  at  the  same  time  as  the  issuance  by  the  issuer.  It  ascertains  the 
existence of the securities when they are brought for reimbursement upon maturity 

•  The  "settlement"  function  means  the  operation of a securities settlement  system, 
through  which  securities  are  initially  delivered  to  investors  or  are  subsequently 
exchanged between buyers and sellers (via participants to the SSS) 

•  The "central safekeeping" function means the maintenance of "top tier" accounts 

in a book entry system.   

These three core functions are offered by almost all CSDs in Europe, but variations 
exist.  In  "direct  holding"  countries  (Nordic  countries,  Cyprus,  Estonia,  Greece, 
Malta,  Romania,  Slovakia  and  Slovenia),  CSDs  are  designated  by  law  as  direct 
account  providers  for  all  investors,  including  the  ultimate  investors.  In  "indirect 
holding"  countries,  CSDs  hold  only  top  tier  accounts  for  their  participants,  who 
maintain accounts for investors further down the holding chain.  Variations may exist 
of these models. 

2.2.2.  Ancillary functions 

Ancillary services vary considerably from one country to another, and can be broadly 
divided into two categories: 

•  Ancillary functions where the CSD does not take principal risk, including: 

– 

– 

– 

– 

– 

Organising  a  securities  lending  mechanism  enabling  participants  to 
borrow securities for the purpose of fulfilling a delivery obligation  

Managing collateral 

Processing corporate actions (taxes, dividends, proxy voting) 

Maintaining the shareholder register  

Opening  "lower  tier"  securities  accounts,  either  in  direct  holding 
systems or when the CSD acts as "investor CSD" by maintaining for its 
customers securities issued in "issuer CSDs" 

7 

 
 
 
 
•  Banking/securities-type of functions where the CSD takes principal risk:  

– 

– 

Opening cash accounts and providing credit for settlement 

Pre-financing dividends and other corporate actions  

2.3. 

Current CSD landscape in the EU 

The European CSD market is very fragmented, with over 30 CSDs at the end of 2010 
(including the two ICSDs), as well as 9 central bank-operated settlement systems, the 
latter  dealing  primarily  in  government  debt.  This  is  due  to  the  initial  creation  of 
domestic  CSDs  to  serve  national  markets,  as  well  as  to  persisting  cross-border 
barriers of entry for CSDs (for certain types of securities, notably shares) – please see 
section 3.3 for more details.  An overview of ownership structure, asset coverage and 
size  of  the  different  settlement  systems  in  the  EU  is  provided  in  Annex  3.  By 
comparison,  the  US  market  is  very  concentrated,  with  only  two  CSDs,  one  for 
government securities, and the other for all other securities (see Annex 8). 

However, a first consolidation process started at the end of the 20th century with the 
creation  of  two  cross  border  groups,  each  composed  of  at  least  a  CSD  and  of  an 
ICSD. These two cross-border groups are described in Annex 3. 

2.4. 

Other intermediaries in the post trading area 

Banks  acting  as  "custodian  banks"  perform,  albeit  at  different  levels,  some  of  the 
ancillary functions performed by CSDs. For instance, they act as lower tier account 
provider,  by  simply  opening  securities  accounts  for  their  customers.  Furthermore, 
they  perform  lower  tier  settlement,  especially  when  two  customers  have  securities 
accounts with the same custodian bank (so-called "internalisation").   

CSDs  and  custodian  banks  often  compete  for  ancillary  functions.  For  cross-border 
transactions  investors  can  access  securities  in  an  issuer  CSD  by  using  either  a 
custodian bank or an investor CSD that has a link with the issuer CSD. In the most 
basic form a link means that the investor CSD participates directly to the settlement 
system of the issuer CSD, which essentially puts the investor CSD in an intermediary 
position,  similarly  to  a  custodian.  A  simple  representation  of  different  options  for 
cross-border settlement is on the right side of Figure 2 below.  Figure 5 in Annex 3 
provides a complete picture of the types of links between CSDs.   

8 

 
 
 
 
Figure 2: Examples of domestic and cross-border settlement 

Domestic settlement 

Cross-border settlement 

Is su in g
Is su in g
c o m p a n y
c o m p a n y

Iss u e r
Iss u e r
C S D
C S D

L o c a l
L o c a l
c u sto d ia n
c u sto d ia n

M a rke t  
M a rke t  
p a rtic ipa n t
p a rtic ipa n t

M ar ke t 
M ar ke t 
p a rtic ip a n t
p a rtic ip a n t

E
E
U
U
S
S
S
S

I
I

F
F
O
O
Y
Y
R
R
T
T
N
N
U
U
O
O
C
C

I
I

S
S
E
E
R
R
T
T
N
N
U
U
O
O
C
C
R
R
E
E
H
H
T
T
O
O

Issuing
Issuing
company
company

Issuer
Issuer
CSD
CSD

Local
Local
custodian
custodian

Local
Local
custodian
custodian

Local
Local
custodian
custodian

Global 
Global 
custodian
custodian

Investor 
Investor 
CSD
CSD

Investor 
Investor 
CSD
CSD

Market
Market
participant
participant

Market
Market
participant
participant

Market
Market
participant
participant

Market
Market
participant
participant

Market
Market
participant
participant

Access 
Access 
channel:
channel:

Direct access
Direct access

Local agent
Local agent

Global custodian
Global custodian

CSD
CSD

CSD-CSD link
CSD-CSD link

Source: BIS, "Cross-border securities settlement", March 2005 http://www.bis.org/publ/cpss12.pdf  

2.5. 

Size of market 

The  European  securities  market  is  by  any  measure  very  significant;  according  to 
ECB statistics9, there were over 690 million trades executed on securities exchanges 
in  the  EU  in  2010,  representing  a  total  value  of  over  €33  trillion.    The  EU  capital 
market is the second in size after the US one and represents around 30% of the global 
market (the US represents around 35% of the total10).  

According to ECB statistics, there were almost €39 trillion worth of securities in EU 
securities  settlement  systems  at  the  end  of  2010;  over  330  million  securities 
transactions11 were  settled  in  the  EU  in  2010,  for  a  total  turnover  of  approximately 
€920 trillion12 – please refer to Annex 3, Tables 13, 14 and 15. 

Cross-border activity is generally increasing in Europe, as documented by the recent 
Oxera  report13,  which  finds  that  an  increasing  proportion  of  members  on  trading 
platforms,  CCPs  and,  to  a  much  lesser  extent  CSDs  originate  from  outside  the 
domicile of these infrastructures in 2009 compared to 2006 (see Table 16 in Annex 
4).  However,  for  reasons  explained  in  section  3.3  cross-border  activity  remains 
limited  for  CSDs;  on  average  in  2009  the  proportion  of  cross-border  members  of 

9  
10  

11 

12  

13 

http://sdw.ecb.europa.eu/reports.do?node=1000001584  
According  to  the  McKinsey  "Global  Capital  Markets:  Entering  a  New  Era"  September  2009 
http://www.mckinsey.com/mgi/reports/pdfs/gcm_sixth_annual_report/gcm_sixth_annual_report_full_re
port.pdf  
The  number  of  transactions  settled  by  settlement  systems  is  substantially  lower  than  the  number  of 
trades,  as  trades  are  often  netted  (e.g.  by  Central  Counterparties)  and  sometimes  settled  without 
involvement of the CSD (e.g. by custodian banks that "internalise" settlement) 
In  contrast  to  the  number  of  transactions,  settlement  volumes  are  much  higher  than  trading  volumes 
because settlement data includes OTC transactions as well as non trading transactions, e.g. movements 
of  collateral  and  movements  within  CCPs'  accounts  or  between  individual  accounts  and  omnibus 
accounts 
Oxera carried out a study for the Commission on prices, costs and volumes of trading and post-trading 
services.    The  study  covered  18  financial  centres  classified  as  major  (France,  Germany,  Italy,  Spain, 
Switzerland  and  the  UK),  secondary  (Belgium,  Luxembourg,  the  Netherlands,  Norway,  Poland  and 
Sweden)  and  other 
Ireland  and  Portugal) 
(Austria,  Czech  Republic,  Denmark,  Greece, 
http://ec.europa.eu/internal_market/financial-markets/clearing/communication_en.htm#monitoring 

9 

 
 
 
 
 
 
 
 
 
 
 
 
                                                 
CSDs  was  only  3%  (although  the  same  proportion  by  value  of  securities  held  was 
15%, up from 12% in 2006).  

2.6. 

Costs for CSD services 

CSD costs typically represent a very small proportion of the costs associated with a 
trade.  For instance, the Oxera report shows that the CSD costs incurred by funds are 
1.5%  of  their  total  costs  of  holding  and  transacting,  excluding  fund  management.  
The rest of the costs are represented by CCPs (1%), custodians (22%), trading venues 
(4.5%), and brokers (71%).  According to the Oxera report, CSDs in Europe charge 
on  average  46  cents  per  transaction  for  settlement  and  0.0016%  per  value  of 
securities held for safekeeping. 

However,  these  costs  are  much  higher  for  cross-border  transactions.    Some  of  this 
difference  may  be  justified  by  economies  of  scale  since  cross-border  volumes  are 
lower  than  domestic  volumes.  However,  it  is  mostly  due  to  the  complexity  of 
settlement  for  cross-border  transactions,  which  involves  sometimes  long  holding 
chains  of  intermediaries  and  CSDs,  as  described  further  in  section  3.  The  gap  has 
declined since 2006 but remains significant (see Table 17 in Annex 4). 

More detailed information on CSD and custodian costs is provided in Annex 4. 

2.7. 

Target2 Securities 

The  post  trading  landscape  in  Europe  is  expected  to  change  considerably  with  the 
planned start of TARGET2-Securities (T2S) in 2015.  T2S is a project launched by 
the  Eurosystem  that  is  intended  to  create  a  technical  platform  for  pan-European 
securities settlement.  Participating CSDs14 will (at least over time) outsource the IT 
platform for settlement to T2S, while nevertheless maintaining the legal relationship 
of settlement with their customers (in the form of securities accounts) and continuing 
to  perform  their  notary,  safekeeping  and  ancillary  functions.  T2S  will  provide 
important benefits including15: 

• 

• 

• 

Reduce settlement costs, especially for cross-border settlement in Europe. T2S 
will equalise basic costs for settlement of domestic and cross-border securities 
(the current base price estimated by T2S is 15 cents per transaction16) 

Increase settlement volumes and encourage increased cross-border transactions 
in Europe since it will provide for customised solutions for cross-border links 

Stimulate  competition  for  settlement  services  between  CSDs  as  well  as 
between custodian banks since their wholesale customers are likely to wish to 
reduce their number of suppliers by seeking partners with pan-European or at 
least regional services 

14  

15  

16 

So far, 30 CSDs from across Europe have signed a Memorandum of Understanding (MoU) with T2S, 
including almost all of the CSDs in the EU as well as three from outside the EU  
For  a  full  description,  please  refer  to  the  "T2S:  Half-Way  to  Delivery"  brochure  from  Oct  2010 
(http://www.ecb.int/paym/t2s/pdf/T2S_2010_brochure.pdf ) 
Cost  efficiency  of  T2S  will  depend  on  the  volumes  of  transactions  transferred  to  T2S,  i.e.  on  the 
number of participating CSDs in T2S.  CSDs are likely to add on certain costs to the T2S base price, 
such  as  costs  for  monitoring  settlement  in  T2S,  amortisation  of  investment  costs  and  helpdesk 
functions.  A survey undertaken by T2S has shown such costs to be 7 to 24 cents per transaction 

10 

 
 
 
 
                                                 
The  T2S  Programme  Office  and  the  ECB  Services  have  expressed  their  strong 
support to the EU Commission's initiative for a legislative proposal to strengthen the 
CSDs'  legal  framework  and  harmonise  the  rules  underpinning  the  holding  and 
transfer of securities in the Union.   

2.8. 

Overview of legislative framework  

The term CSD already exists in the current legislative "acquis communautaire", but it 
is  not  defined.  Among  the  CSD  core  functions  only  the  settlement  function  is 
addressed  at  EU  level  by  the  Settlement  Finality  Directive  (SFD) 17 .  A  detailed 
overview of current EU legislation relating to CSD functions is provided in Annex 7. 

Certain elements of CSDs are also addressed by soft law: 

•  CPSS-IOSCO 

at 

level 

global 

recommendations 

and  ESCB-CESR 
recommendations at European level.  These are non-binding recommendations for 
public  authorities  (market  regulators,  banking  supervisors)  to  use  in  their 
assessment of the safety, soundness and efficiency of CSDs and of the SSS these 
operate.  In  a  more  constraining  manner,  the  ECB  imposes  similar  technical 
standards  to  CSDs  of  the  Eurozone  as  a  precondition  for  their  participation  to 
collateralisation  of  monitory  policy  operations  (remittance  of  securities  against 
credit)  

•  The  Code  of  Conduct  of  2006  defined  by  the  Industry  (the  European  CSD 
association, ECSDA, the European exchanges federation, FESE, and the European 
CCP  association,  EACH)  under  the  auspices  of  the  Services  of  the  European 
Commission.    It  provides  for  a  certain  number  of  non  discriminatory  rules  for 
access  and  interoperability  arrangements  between  market  infrastructures  (for 
equities) on a non-binding basis 

2.9. 

Relationship with other legislative initiatives 

There is currently another legislative initiative as well as a potential legal initiative 
on which the Commission services have been publicly consulting, that are related to 
the  issues  and  the  proposals  described  in  this  report  in  respect  of  CSDs  and 
settlement: 

•  The  draft  regulation  on  short  selling18 is  related  to  settlement  discipline;  Article 
13 installs penalising measures for sellers that do not deliver certain securities for 
settlement within a specific time period (buy-in, cash compensation, daily penalty 
payments  for late  settlement, trade prohibition).   This would be  extended with a 
wider scope in the settlement discipline section of the CSD legislation 

17  

18 

The  SFD  (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, as amended by Directive 2009/44/EC) 
exempts orders entered in a SSS from any retroactive cancellation by courts in case of insolvency of a 
participant. This legal “safe-harbour” avoids domino effects resulting from the blocking or cancellation 
of  payments  by  the  Judge  of  Insolvency.  The  SFD  can  of  course  not  prevent  blocking  or  delays  that 
result from an operational failure.  The SFD applies to SSS that are notified as such by Member States 
and notified to ESMA (but for instance it does not impose an obligation of notification) 
The Commission adopted on 15 September 2010 a Proposal for a Regulation on short selling and 
certain aspects of credit default swaps 
http://ec.europa.eu/internal_market/securities/docs/short_selling/20100915_proposal_en.pdf  

11 

 
 
 
 
                                                 
•  The  possible  Securities  Law  Directive  (SLD)  is  intended  to  impose  certain 
requirements  on  account  providers  at  all  levels  of  the  holding  chain  (e.g. 
reconciliation of accounts, rights of account holders etc.).  Most CSDs should be 
covered by the SLD at least for their ancillary account provider function and will 
therefore  be  subject  to  the  corresponding  requirements  (in  addition  to  the 
requirements in the CSD legislation) 

3. 

PROBLEM DEFINITION 

There  are  three  fundamental  issues  in  respect  of  post-trading  activities  in  the  EU 
which this report is addressing: higher risk for cross-border (compared to domestic) 
settlement, higher cost for cross-border settlement and unlevel playing field for CSD 
services.    These  issues  are  the  consequences  of  ultimately  three  main  drivers:  (1) 
different  market  practices  on  the  organisation  of  settlement,  (2)  different  rules  for 
CSDs across the EU, and (3) barriers of access to/from CSDs.   

The  diagram  below  provides  an  overview  of  these  drivers,  the  problems  they 
generate and the consequences of these problems. 

Figure 3: Problem tree 

Drivers
Drivers

Problems
Problems

Consequences
Consequences

Increased complexity of 
Increased complexity of 
cross-border settlement
cross-border settlement

Different market practices 
Different market practices 
on the organisation of 
on the organisation of 
settlement
settlement

Potential arbitrage to the 
Potential arbitrage to the 
“softest” market practice*
“softest” market practice*

Higher risk for cross-border 
Higher risk for cross-border 
transactions
transactions

Different rules for CSDs 
Different rules for CSDs 
across the EU
across the EU

Different definitions of CSD 
Different definitions of CSD 
services
services

Higher cost for cross-
Higher cost for cross-
border transactions
border transactions

Barriers of access to/from 
Barriers of access to/from 
CSDs
CSDs

Fragmentation of EU post 
Fragmentation of EU post 
trading market
trading market

(Virtual) monopoly of local 
(Virtual) monopoly of local 
CSD
CSD

Unlevel playing field for 
Unlevel playing field for 
competition for CSD 
competition for CSD 
services
services

Note: the arrows represent the key interrelationships.  Most factors represented above are interlinked 
* refers to a competitive environment 

12 

 
 
 
 
 
3.1. 

Key driver 1: Different market practices on the organisation of settlement  

Different  market  practices  in  respect  of  settlement  can  broadly  be  split  into  two 
categories:  (1)  different  settlement  discipline  practices,  and  (2)  different  settlement 
periods.  These issues were identified as early as 2001 by the Giovannini report19 as 
barriers  to  post-trading  activities  in  Europe  and  have  been  discussed  at  length  over 
the last decade by the various groups described in Annex 2.  Both of these issues are 
also regarded as high priority harmonisation targets by T2S, where the T2S project 
will not achieve the desired harmonisation (see Table 10 in Annex 2).   

3.1.1.  Different settlement discipline practices 

Market  discipline  refers  to  measures  that  prevent  or  address  settlement  fails20,  i.e. 
situations  when  settlement  of  a  transaction  does  not  take  place  on  the  Intended 
Settlement Date (ISD). Table 23 in Annex 5 gives an overview of such measures.  

Practices differ in the EU markets as to whether or how these measures are used: 

•  Securities borrowing is mandatory in Hungary, Poland and Spain if the settlement 
of certain on-exchange transactions is likely to fail.  The CSDs in these and other 
markets  (Germany,  Greece,  Italy)  have  made  centralised  borrowing  services 
available to their members 

•  Most  CSDs  charge  penalties  to  participants  who  fail  to  settle  on  time,  however 
these penalties differ considerably between markets as concerns the form (fee for 
recycling  or  separate  penalty),  the  type  of  transactions/securities  (generally  on-
exchange  transactions),  the  amount  (fixed  per  instruction  or  percentage  of  the 
transaction value), the type of fails (fails due to lack of securities vs. fails due to 
lack of cash), and who pays the fee (direct participant of the CSD or other parties 
further down the chain)21  

•  In  addition,  certain  markets  have  obligations  for  participants  to  buy-in  the 
securities  they  have  failed  to  deliver  on  ISD.  Buy-in  procedures  differ  widely 
between  markets  in  terms  of  timing  of  the  buy-in  obligation,  which  varies  from 
ISD+3 (Austria) to ISD+7 (Belgium, France, Nordic markets) or later (UK), and 
buy-in  penalties,  which  vary  from  20%  of  the  countervalue  or  closing  price 
(Belgium,  France)  to  100%  (Germany).  Please  see  Annex  5,  Table  24  for  an 
overview. The buy-in may be automatic/mandatory or optional, upon the request 
of the buyer. Last, while CSDs generally monitor settlement fails, the buy-ins are 
usually executed by CCPs (for CCP-cleared transactions) or could be triggered by 
exchanges  (for  other  on-exchange  transactions),  with  the  ultimate  responsibility 
borne by the defaulting market participant. 

19  

20 

21  

An industry group chaired by Alberto Giovannini was asked by the Commission to identify and propose 
solutions for cross-border barriers to clearing and settlement.  It produced two reports, in 2001 and 2003  
Settlement fails can occur for a variety of reasons, including miscommunication, operational problems, 
failure  to  receive  securities  which  are  due  to  be  delivered  from  another  trade  (in  so-called  "back  to 
back"  transactions)  or  failure  of  a  seller  that  has  sold  a  security  "short"  (i.e.  without  owning  it)  to 
borrow it to ensure delivery   
See 
http://www.ecsda.eu/site/uploads/tx_doclibrary/2011_07_07_ECSDA_Fails_Report.pdf  

the  2011  ECSDA  "Survey  on  matching  and  settlement  failures  discipline  measures" 

13 

 
 
 
 
                                                 
These differences between market practices for settlement discipline have important 
consequences for the safety and efficiency of cross-border transactions in Europe: 

•  Cross-border settlement experiences an increased number of settlement fails. An 
ICMA study from 201022 shows that the Italian CSD rate of fails for transactions 
cleared  through  an  international  CCP  during  2009-2010  was  much  higher 
(sometimes  reaching  almost  11%)  than  that  for  domestic  trades  (c.  1%), 
Settlement  fails  increase  counterparty  risk,  market  risk  and  liquidity  risk  for 
market participants. Furthermore, they create disruptions for corporate actions, for 
instance  if  a  dividend  payment  occurs  in  the  period  of  delayed  settlement  –  see 
section 3.1.2 for a more detailed discussion of corporate actions  

•  In  a  competitive  situation  where  market  participants  can  choose  their  settlement 
location (for example in the context of T2S or if access barriers are removed – see 
section 3.3), these differences could favour regulatory arbitrage strategies looking 
for the CSD with the "softest" approach   

•  Since there is no common cross-border practice for the definition, monitoring and 
reporting  of  fails,  this  affects  the  ability  of  a  market  participant,  a  CSD  or  a 
regulator  to  understand  areas  of  risk,  identify  areas  for  mitigating  measures  and 
act accordingly in a cross-border environment 

3.1.2.  Different settlement periods 

The time between a trade and the intended settlement date (settlement period) differs 
in European markets. The standard settlement period for exchanged traded shares is 
T+3  (i.e.  three  days  after  trade  date)  in  all  markets  except  Germany,  Slovenia  and 
Bulgaria,  where  it  is  T+2  (French  Parliament  has  also  announced  plans  to  move  to 
T+2  with  the  other  European  markets).    Markets  where  shares  still  exist  in  paper 
form,  for  instance  the  UK,  allow  longer  settlement  periods  for  transactions  in  such 
shares, of up to T+10.   

For government bonds/bills, corporate bonds and OTC transactions there is a broad 
diversity by market and by asset class, including some instruments that settle on T+0, 
i.e. on trade date, and others (although very few) that have a much longer settlement 
period. For this reason, the overall proportion of transactions that settle on less than 
T+3 is relatively substantial in Europe.23 Please refer to Table 26 in Annex 6 for an 
extensive list of settlement periods for different European markets.   

If  markets  are  not  connected,  these  differences  do  not  create  problems.  However, 
with  the  increase  of  cross-border  investments,  these  differences  have  a  number  of 
consequences again in terms of safety and efficiency: 

•  Differences  in  settlement  periods  increase  the  complexity  of  cross-border 
transactions  and  create  additional  operational  risks  and  back  office  costs  as  a 
standard settlement period in a national market is transferred into a non-standard 

22  

23  

"A white paper on the operation of the European repo market, the role of short-selling, the problem of 
settlement  failures  and  the  need  for  reform  of  the  market  infrastructure"  by  ICMA,  13  July  2010 
http://www.icmagroup.org/ICMAGroup/files/ac/ac9739eb-6c8b-4d0f-9f5c-d0f13e89bd8e.pdf  
Data from a few of the major European CSDs that operate in T+3 markets shows that 45% to 65% of 
the transactions they settle are settled in T+3, followed by quite a large proportion of transactions (20 to 
50%) at less than T+3 and a very small proportion that have a longer settlement period 

14 

 
 
 
 
                                                 
period  for a cross-border  transaction.  This can lead to increased  settlement  fails, 
with all the consequences discussed in the section above   

•  Funding  costs  are  increased  for  investors  buying securities  in  a  T+2  market  and 

selling them in a T+3 market 

•  Another  problem  relates  to  the  processing  of  corporate  actions,  e.g.  payment  of 
dividends. A buyer acquires the share either cum dividend (at a higher price) or ex 
dividend  (at  a  lower  price).  Post  trade  processes  in  each  market  ensure  that  the 
actual payment of the dividend arrives at the right place (the "cum" buyer or the 
"ex"  seller).  This  does  not  work  cross-border  between  national  markets  with 
different settlement periods and as a consequence, a dividend can be paid out to 
the  wrong  person.  Corresponding  compensation  payments  (so  called  "market 
claims") amount to billions of euro per year, with associated costs in the tens of 
millions of euro24 

•  More generally, longer settlement periods increase counterparty risk, i.e. the risk 

that the counterparty to a trade will default between trade and settlement 

3.2. 

Key driver 2: Different rules for CSDs 

CSDs  are  subject  to  different  authorisation  and  supervision  regimes  across  the  EU.  
An  overview  of  such  regimes  in  selected  countries  is  provided  in  Annex  8.  
Differences can be broadly divided into three categories: (1) different definitions of 
CSD services, (2) different authorisation and supervision regimes, and (3) lack of a 
common prudential framework.  

3.2.1.  Different definitions of CSD services 

Definitions of CSDs and of the CSDs' services vary considerably, for instance in the 
direct  holding systems,  the three core  functions are  not distinguished between each 
other  nor  with  the  ancillary  functions.  In  the  indirect  holding  systems  the  central 
safekeeping function is incorporated either into the notary function (France) or into 
the  settlement  function  (the  UK).  Ancillary  services  are  not  uniformly  defined  or 
recognised, especially the banking services which cannot be offered by CSDs in most 
Member  States,  while  they  form  an  integral  part  of  the  CSD  functions  in  other 
Member States (Germany, Belgium). 

These differences have consequences in terms of safety and level playing field: 

•  The lack of a common (and precise) definition of core CSD services and of who 
can/cannot  provide  such  services  can  lead  to  some  of  the  core  services, 
particularly settlement, being provided by institutions not authorised as CSDs (see 
section 2.4).  The so called "internalisation" of settlement increases counterparty 
risk since the corresponding settlements are not protected by the SFD (see section 
2.8), and liquidity risk since lower tier intermediaries cannot organise large scale 
securities lending facilities to cover for a shortfall25 

24  

25  

Reported  by  HSC  (Harmonisation  of  Settlement  Cycles  working  group)  an  industry  group 
http://ec.europa.eu/internal_market/financial-
markets/docs/cesame2/subgroup/20100921_hsc_role_en.pdf 
With respect to internalisation, the Committee of European Banking Supervisors (CEBS) concluded in 
their 2009 report following a "call for evidence" on custodian banks' internalisation of settlement that 

15 

 
 
 
 
                                                 
•  More important risk concerns, this time for the soundness of CSDs, arise from the 
ability  of  some  CSDs  to  engage  in  activities  with  higher  risk,  such  as  banking-
type of activities.  This risk is mitigated to some extent by the limitation in scope 
of these activities (essentially to deposit taking and credit granting related to the 
CSD's  core  activities)  and  by  strict  CPSS-IOSCO  requirements,  including  full 
collateralisation  of  credit.    CSDs  have  been  resilient,  including  during  the  2008 
financial  crisis,  however  the  risk  inherent  in  banking-type  of  activities  increases 
the risk profile of CSDs that undertake these activities 

•  The  lack  of  a  common  definition  also  affects  the  level  playing  field  between 
CSDs,  for  instance  between  those  who  are  allowed  to  provide  banking-type  of 
services and those who are not 

3.2.2.  Different authorisation and supervision regimes 

CSDs in the EU are regulated at national level. In some countries there is no specific 
authorisation regime for CSDs but their functions  are regulated by various national 
regulations  (Italy);  in  most  direct  holding  countries  CSDs  are  designated  by  law  to 
perform  some  core  and  ancillary  functions  such  as  registrar  and  account  providing 
(safekeeping)  functions  and  the  other  functions  are  derived  from  these  (Denmark, 
Finland,  Sweden);  in  other  countries  CSDs  are  deemed  to  have  a  banking  status 
(Germany). A detailed overview is provided in Annex 8 

These differences, coupled with the access barriers discussed in the next section, lead 
to the fragmentation of the EU post trading market described in introduction section.  
This fragmentation results in the cross-border settlement of transactions relying on a 
"spaghetti" model of links between CSDs and/or a chain of intermediaries. This has 
obvious consequences for the safety and efficiency of cross-border transactions: 

•  Cross-border  transactions  face  a  higher  degree  of  risk  inherent  in  cross-system 

links (see section 3.3 below)  

•  Costs  for  cross-border  settlement  (as  well  as  for  safekeeping)  are  higher 
(sometimes much higher) than for the same services at national level, as illustrated 
in Annex 3 or for the same services rendered by  the US DTCC26. More generally 
for  efficiency,  the  necessity  to  use  multiple  settlement  locations  in  Europe  does 
not  allow  cross-border  market  participants  to  place  their  assets  in  a  single 
"liquidity"  pool  and  have  quick  and  continuous  access  to  this  pool  in  order  to 
lower their operational costs and funding costs27  

This fragmentation of the market could theoretically be reduced through mergers of 
CSDs. A consolidation of the  CSD  landscape  has  been  observed  during  the  last  10 

the practice of internalisation is not widespread.  Nevertheless, there was great variety of responses on 
the materiality of internalisation of settlement from the point of view of the institution.  Please refer to 
http://www.eba.europa.eu/getdoc/cdc06b31-83ac-4fac-9969-a6eb265b659d/Report-on-the-outcome-of-
the-call-for-evidence-on-.aspx 
In the Commission services 2004 communication, this cost gap was found to be up to 800%; this may 
have diminished since then, but is likely to remain high. Volumes play a role for the differences as well  
This  problem  is  partially  addressed  by  common  settlement  platforms,  as  it  is  the  case  for  instance  of 
ESES the common settlement platform for the Belgian, French and Dutch CSDs of the Euroclear group 
and as it will be the case of T2S.  

26  

27  

16 

 
 
 
 
                                                                                                                                                         
years, with the emergence of two major groups around the two ICSDs (see Annex 3).  
However, this consolidation has not led to the reduction of the number of CSDs.  

3.2.3.  Lack of common prudential rules 

European CSDs lack a common prudential framework.  As described in section 2.8 
they  are  subject  to  technical  standards  by  ECB  and  to  recommendations  by  CPSS-
IOSCO and ESCB-CESR. However, due to their soft law nature, these standards and 
recommendations are implemented in different ways. This raises several problems: 

•  While there is no history of CSDs or settlement systems failing, a failure due to 
non regulated operational or financial risks would have tremendous consequences 
for  a  national  market  as  it  would  essentially  block  the  securities  market,  with 
severe  implications  for  the  ability  of  market  participants  to  honour  their 
obligations 

•  As  the  markets  are  becoming  more  integrated, link arrangements  between CSDs 
are  expected  to  increase,  especially  in  the  post-T2S  environment.  Depending  on 
their complexity and degree of integration, link arrangements can create additional 
legal  risks  arising  from  differences  between  the  laws  of  the  linked  CSDs 
concerning  netting,  finality  of  transfers,  ownership  and  collateral.    Links  also 
present  additional  operational  risks  owing  to  inefficiencies  associated  with  the 
operation of the link, especially because of variations in the settlement cycles and 
settlement  discipline  of  the  linked  systems.  Last,  links  may  create  significant 
credit  and  liquidity  risks  between  CSDs,  particularly  if  one  CSD  permits 
provisional transfers of funds or securities that may be unwound  

•  Prudential  requirements  are  also  about  ensuring  the  CSDs  have  reconciliation 
rules of their records in order to prevent the unauthorised creation or deletion of 
securities.    There  are  also  rules  that  prohibit  artificial  creation  of  securities, 
provisional  transfers  of  securities  across  CSD  links  and  re-use  of  securities 
without  client  consent,  or  rules  that  require  CSDs  to  segregate  participants' 
securities  from  their  own  assets  and  to  support  the  segregation  of  securities 
belonging  to  a  participant's  customers  on  the  participant's  books.  These  are 
important principles that could help manage failures of participants (such as that 
of  Lehman  in  2008)  or  of  issuers  (such  as  that  of  Parmalat  in  2004  or  of  Bear 
Sterns in 2008).  These examples are described in more detail in Annex 9.  While 
these  problems  are  related  more  to  other  account  providers  in  the  holding  chain 
rather  than  CSDs  (the  possible  SLD  intends  to  address  this),  they  are  an 
illustration of the importance of the CPSS-IOSCO principles outlined above 

•  Similarly  to  the  argument  made  in  section  3.1.1,  in  a  competitive  environment 
situation  (for  example  post-T2S  or  if  access  barriers  are  removed)  the  lack  of  a 
common  prudential  framework  may  lead  to  regulatory  arbitrage  favouring  the 
CSD with the "softest" approach 

3.3. 

Key driver 3: Barriers of access to/from CSDs  

Access  to  or  from  CSDs  in  the  European  context  is  not  always  free  or  clearly 
defined. This is particularly important in the cross-border environment, where certain 
barriers  of  access  exist.    These  barriers  concern  the  access  of  issuers  to  CSDs,  the 

17 

 
 
 
 
access  between  CSDs  themselves,  and  the  access  between  CSDs  and  other  market 
infrastructures (e.g. trading venues and CCPs) 

3.3.1.  Access of issuers to CSDs 

This is one of the barriers to cross-border post-trading activities in the EU identified 
by  the  Giovannini  reports  of  2001-2003  and  acknowledged  by  the  Commission 
Communication  on  clearing  and  settlement  of  2004.  The  so  called  "barrier  9"  was 
initially  described  in  the  Giovannini  reports  in  relation  to  two  types  of  restrictions, 
that  securities  listed  in  some  Member  States  are  (a)  deposited  in  a  local  settlement 
system  and  (b)  registered  with  a  local  registrar.  From  this  starting  point,  the  Legal 
Certainty  Group28 identified  restrictions  regarding  the  possibility  for  an  issuer  to 
issue via a CSD in another Member State as well as restrictions for CSDs to accept 
issuances  from  foreign  issuers.  More  detail  on  this,  including  examples  from  each 
category, is provided in Annex 10. 

It  is  worth  noting  that  these  restrictions  apply  mainly  to  equities  and  government 
bonds  which  are  tributary  to  corporate  law  or  public  law,  whereas  international 
corporate  debt  securities  (the  so  called  "Eurobonds")  can  generally  be  issued  and 
settled relatively freely in the EU. These restrictions give rise to two main problems: 

•  CSDs  in  most  Member  States  have  a  pure  monopoly  for  the  notary  function  of 
certain  securities  (such  as  equities)  as  they  are  the  only  available  provider  to 
issuers for the first registration of such securities  

•  It encourages the fragmentation of the post trading market in the EU, with all the 

consequences for safety and efficiency described in the section above 

3.3.2.  Access between the CSDs themselves 

As  explained  in  section  2.4,  market  participants  can  access  a  foreign  (issuer)  CSD 
(directly or indirectly) through a link between the local (investor) CSD and the issuer 
CSD.  Such  link  arrangements  vary  depending  on  the  degree  of  customisation  of 
service offering, from "standard" links, which are no more than the participation of a 
CSD to another CSD through a regular account, to "interoperable" links, which are 
advanced  forms  of  relationships  between  two  (or  more)  CSDs  with  impact  on  all 
standard participants of the linked organisations29.  Most links in the EU are standard 
links, with the bridge between Clearstream and Euroclear being the biggest example 
of an interoperable link arrangement (more details on links in Figure 5 in Annex 3).   

Inter CSD access is becoming crucial for two reasons: 

•  The inter-linking between CSDs will significantly increase with the start of T2S  

•  In addition to the prudential problems analysed in section 3.2.3 above there is also 
no legal framework regulating access between CSDs - for instance to define under 
what conditions a CSD can refuse a link request from another CSD or to set non-
discrimination  principles.    The  Code  of  Conduct  sets  some  general  principles  in 

28  

29 

A  group  chaired  by  the  Commission  set  up  in  2005  to  analyse  issues  of  legal  uncertainty  relating  to 
securities holding  
Please refer to the Code of Conduct signed in 2006 by FESE, EACH and ECSDA for these definitions 
(https://www.ecsda.com/portal/code_of_conduct_for_c_s/)   

18 

 
 
 
 
                                                 
this respect, but on a voluntary self-imposed basis and only for certain categories 
of  securities,  i.e.  for  equities.    This  situation  contributes  to  the  effective  lack  of 
competition between CSDs identified in the section above. 

3.3.3.  Access between CSDs and other market infrastructures  

The  smooth  functioning  of  post  trading  services  requires  clear  and  defined  access 
between the CSDs and other market infrastructures, for instance: 

•  Access  by  CSDs  to  transaction  feeds:  CSDs  should  be  able  to  attract  settlement 
volume  or  provide  other  CSD  services  by  having  access  to  transaction  feeds, 
either directly from trading venues or from CCPs 

•  Access to CSDs by other market infrastructures: Similarly, in order to be able to 
provide  services  for  securities  that  are  centrally  deposited  with  CSDs,  other 
market  infrastructures  such  as  trading  venues  and  CCPs  need  access  to  CSDs, 
including to the relevant data of CSDs, such as settlement data30 

The  rights  of  access  referred  to  above  are  not  guaranteed  by  EU  or  national 
legislation,  particularly  in  a  cross-border  context.    The  Code  of  Conduct  sets  some 
general principles in this respect, but on a voluntary self-imposed basis. 

3.4. 

How would the problems evolve without EU action 

Without EU action, market competition would not adequately address the problems 
identified  above.  This  is  discussed  below,  following  the  same  structure  of  the 
problem definition along the three drivers. 

3.4.1.  Different market practices for settlement 

3.4.1.1.  Different settlement discipline practices 

There are various industry initiatives in place but with limited effects: 

•  Limited  scope.  The  initiatives  do  not  cover  the  full  range  of  areas  and  measures 
that could be envisaged to improve settlement efficiency – the ECSDA survey of 
2009 included in Annex 5 provides a good overview of the gaps 

•  Implementation plans often not available. As illustrated by Table 25 in Annex 5, 
most ESCB-CESR recommendations of 2009 lack concrete implementation plans  

•  When  available,  implementation  plans  are  often  delayed  by  national  interests.  
For example, the ESSF31-ECSDA matching standards adopted in 200632 regarding 
the  harmonisation  of  pre-settlement  matching processes throughout  Europe were 
scheduled to be implemented by the end of 2009 but this has been delayed to the 
end of 2011 (or at least by the time T2S is operational)   

30 

31  
32  

Article 35 and 46 of MiFID grant investment firms and market operators operating an MTF the right to 
choose  a  settlement  system  of  another  Member  State  to  settle  some  or  all  of  their  trades  subject  to 
certain conditions. Similar rights do not apply to regulated markets 
European Securities Services Forum 
"Proposals to harmonise and standardise pre-settlement date matching processes throughout Europe" by 
ESSF-ECSDA, October 2006 https://www.ecsda.com/portal/news_and_events/?id=27  

19 

 
 
 
 
                                                 
•  Non-binding nature of the commitments. There is nothing that compels a CSD to 

honour the commitment in full   

As explained in the problem definition section, the ensuing problems are likely to be 
increased  due  to  T2S  becoming  operational  in  2015,  which  is  expected  to  increase 
cross-border  transactions  and  will  introduce  a  risk  of  regulatory  arbitrage  to  the 
softest market practice. 

3.4.1.2.  Different settlement periods 

The Harmonisation of Settlement Cycles (HSC) industry group has worked on these 
issues  for  the  last  two  years  and  has  come  to  a  recommendation  to  harmonise 
settlement periods (for certain financial instruments/markets) at T+2, but there are no 
concrete implementation plans in place.  Cost arguments by market participants may 
delay  action  for  many  years  to  come,  therefore  with  no  change  to  the  resulting 
problems and consequences.   

3.4.2.  Different rules for CSDs 

In  the  absence  of  EU  action,  the  CSD  services  would  continue  to  be  defined  and 
addressed  by  divergent  national  legislations,  with  the  consequences  for  market 
fragmentation and lack of competition described in section 3.2.  

The absence of EU action would have implications also for the powers of regulators. 
The  intensification  of  cross-border  securities  settlement  expected  from  T2S  would 
not  be  addressed  by  a  regulatory  framework  based  on  cooperation  and  information 
sharing between the market authorities33. 

Regarding  the  prudential  and  organisational  rules  for  CSDs,  the  only  common 
framework  would  be 
the  non-binding  ESCB-CESR 
recommendations34.   

the  one  provided  by 

3.4.3.  Barriers of access 

In the absence of EU action, the current fragmentation and the national monopolies 
would  remain,  with  all  the  consequences  described  in  section  3.3.  Furthermore,  it 
could  be  interpreted  as  a  "silent"  confirmation  of  the  integrated  model  approach 
whereby  the  country  of  issuance  will  determine  the  trading  venue,  which  will 
determine the choice of CCP for clearing and of CSD for final settlement. 

3.5. 

The EU's right to act and justification  

3.5.1.  Treaty base, competence 

The  legal  base  for  the  competence  of  the  EU  may  derive  from  Article  114  of  the 
TFEU35 (ex  Article  95  -  harmonisation)  and/or  Article  53  of  the  TFEU  (ex  Article 
47(2)  –  professional  services).  The  final  selection  of  the  Treaty  base  will  be 
determined depending on where the main focus of the legislation will lie. 

33  

34  

35  

Consistently  with  the  Treaty,  central  banks  will  focus  their  oversight  on  the  operation  of  settlement 
systems only, with a particular focus on financial stability 
The  possible  SLD,  if  adopted,  would  also  introduce  certain  requirements  in  relation  to  the  account 
providing function of CSDs, but not to their other functions (settlement, etc.) 
Treaty on the Functioning of the European Union  

20 

 
 
 
 
                                                 
3.5.2. 

Subsidiarity 

According  to  the  principle  of  subsidiarity  (Article  5.3  of  the  TFEU),  action  on  EU 
level should be taken only when the aims envisaged cannot be achieved sufficiently 
by  Member  States  alone  and  can,  by  reason  of  the  scale  or  effects  of  the  proposed 
action, be better achieved by the EU. The preceding analysis has shown that: 

•  The  problems  defined  above  relate  essentially  to  the  cross-border  European 

market, which is expected to increase significantly post-T2S   

•  The  systemic  nature  of  CSDs  and  their  increasing  interconnection  in  Europe 

(particularly post-T2S) calls for coordinated action  

•  Certain  problems  are  already  covered  by  the  acquis  communautaire:  the 
Settlement  Finality  Directive  (SFD),  the  Market  in  Financial  Instruments 
Directive (MIFID), and the possible future Securities Law Directive (SLD). Any 
proposal should tie in with these EU texts 

Against this background EU action appears appropriate in terms of the principle of 
subsidiarity. 

4. 

OBJECTIVES 

4.1. 

General, specific and operational objectives 

The  strategic  objectives  of  this  policy  exercise  are  to  tackle  the  three  key 
consequences of the problems identified in the previous section by: 

(1) 

Increasing safety of cross-border transactions  

(2) 

Increasing efficiency of cross-border transactions  

(3) 

Ensuring level playing field for CSD services 

These strategic objectives translate into a number of specific objectives, as follows: 

•  Reduce  complexity  of  cross-border  settlement  –  this  should  increase  both  safety 

and efficiency of cross-border settlement 

•  Reduce  risk  of  arbitrage  to  the  "softest"  market  practice  (in  terms  of  settlement 

discipline) – this should increase the safety of settlement in general 

•  Ensure consistent definition of CSD services across the EU – this should improve 

level playing field between CSDs, as well as increase safety  

•  Reduce  fragmentation  of  post  trading  market  –  this  should  increase  both  safety 

and efficiency of cross-border settlement 

•  Reduce  scope  for  national  monopolies  –  this  should  improve  the  level  playing 
field  for  CSD  services  and  increase  competition  between  CSDs  and  between 
CSDs and intermediaries 

21 

 
 
 
 
These  specific  objectives  can  be  achieved  by  a  number  of  concrete  operational 
objectives, which are grouped in the following three categories: 

(1) 

(2) 

(3) 

Enhance  framework  for  settlement  in  the  EU  –  by  improving  cross-border 
settlement discipline and harmonizing settlement periods 

Introduce consistent rules for CSDs across Europe – such rules refer to both 
prudential  and  organisational  rules  to  ensure  the  safety,  efficiency  and  level 
playing  field  of  CSDs    and  the  licensing  framework,  to  ensure  the  level 
playing field and competition among CSDs 

Remove barriers of access to/from CSDs – this refers to both access between 
issuers  and  CSDs  as  well  as  between  the  CSDs  themselves  and  between 
CSDs and other market infrastructures such as trading venues and CCPs 

An overview of the various objectives and their interrelations is depicted below. 

Figure 4: Overview of objectives 

Strategic
Strategic

Specific
Specific

Operational
Operational

Increase safety of cross-
Increase safety of cross-
border transactions
border transactions

Increase efficiency of 
Increase efficiency of 
cross-border transactions
cross-border transactions

Reduce complexity of 
Reduce complexity of 
cross-border settlement
cross-border settlement

Reduce risk of arbitrage to 
Reduce risk of arbitrage to 
the “softest” market 
the “softest” market 
practice*
practice*

Ensure consistent 
Ensure consistent 
definition of CSD services 
definition of CSD services 
across the EU
across the EU

Ensure level playing field 
Ensure level playing field 
for CSD services
for CSD services

Reduce fragmentation of 
Reduce fragmentation of 
post trading market
post trading market

Reduce scope for national 
Reduce scope for national 
monopolies
monopolies

Enhance framework for 
Enhance framework for 
settlement in the EU
settlement in the EU
- Settlement discipline
- Settlement discipline
- Settlement periods
- Settlement periods

Introduce consistent rules 
Introduce consistent rules 
for CSDs across the EU:
for CSDs across the EU:
- Prudential and 
- Prudential and 
organisational rules
organisational rules
- Licensing framework
- Licensing framework

Remove barriers of access 
Remove barriers of access 
to/from CSDs:
to/from CSDs:
- Access issuers-CSDs
- Access issuers-CSDs
- Access CSDs-CSDs or 
- Access CSDs-CSDs or 
CSDs-other infrastructures
CSDs-other infrastructures

Note: the arrows represent the key interrelationships.  Most factors represented above are in fact 
interlinked. * refers to a competitive environment 

4.2. 

Consistency with other EU policies 

The identified objectives are coherent with the EU fundamental goals to promote a 
harmonious  and  sustainable  development  of  economic  activities,  a  high  degree  of 
competitiveness, and a high level of consumer protection, which includes safety and 
economic interests of citizens (Article 169 TFEU).  

These  objectives  are  also  consistent  with  the  reform  programme  proposed  by  the 
European  Commission  to  drive  the  EU  out  of  the  financial  crisis.  As  an  essential 
element contributing to a stable financial sector, they are a prerequisite for building a 

22 

 
 
 
 
 
sustainable  recovery.36
various Communications mentioned in the introduction of this report.  

 They  are  also  consistent  with  the  policies  announced  in  the 

Last,  these  objectives  have  been  scrutinised  through  the  two  recent  European 
Commission  proposals  concerning  “OTC  derivatives,  Central  Counterparties  and 
Trade Repositories” (addressing CCPs) and “Short selling” (addressing elements of 
settlement  discipline).  These  objectives  range  themselves  in  the  longer  term 
objectives identified by the Settlement Finality Directive in 1998 and in the impact 
assessment of a possible Security Law Directive.  

5. 

POLICY OPTIONS, ANALYSIS AND COMPARISON 

The description of each option is provided below in a box, followed by the analysis 
of the option.  A table at the end of each section compares the options, assessing the 
magnitude of the impact as compared with the baseline with the following symbols: 
≈  neutral,  -  negative,  --  strongly  negative,  +  positive,  ++  strongly  positive.    The 
preferred option is highlighted. 

5.1. 

Options for objective 1 – Enhance framework for settlement in the EU 

The options below address the two key objectives identified in respect of this issue, 
namely  improving  cross-border  settlement  discipline  and  harmonizing  settlement 
periods.   

5.1.1.  Options for objective 1.1 – Improve cross-border settlement discipline 

Option 1.1.1 (status quo): Rely on existing industry initiatives 

Section  3.5  described  the  shortcomings  of  the  industry  initiatives,  in  terms  of  their 
(1) limited scope, (2) lack of implementation plans, and (3) non-binding nature. 

Option 1.1.2: Obtain additional commitments from industry 

Additional commitments could be obtained from industry, for instance to set detailed 
standards  and  implementation  plans  based  on  ESCB-CESR  recommendations  or  to 
develop  additional  standards,  such  as  on  a  common  definition  and  reporting  of 
settlement fails.   

This  option  would  address  shortcomings  1  (limited  scope)  and  2  (lack  of 
implementation  plans)  above,  but  not  3  (non-binding  nature).    Since  new  standards 
could  involve  implementation  costs  for  certain  CSDs,  there  is  likely  to  be  certain 
resistance, which could lead to not all CSDs buying into the proposals, or proposals 
being sub-optimal in order to accommodate the "smallest common denominators", or 
to delays in setting or implementing proposals.  

The  large  majority  of  respondents  to  the  public  consultation  have  endorsed  the 
response of the HSC working group, which sees a role for legislation in this respect.  
Furthermore,  an  enhanced  settlement  discipline  regime  should  accompany  a 
transition to T+2 as fails may increase in the short run (see section 5.1.2). 

36  

Communication for the spring European Council, Driving European recovery - COM(2009) 114 

23 

 
 
 
 
                                                 
Option 1.1.3: Introduce common EU principles for settlement discipline 

These  common  principles  could  include  a  common  definition  and  reporting  of 
settlement fails, ex ante measures to incentivise settlement on the intended settlement 
date  and  ex  post  measures  to  penalise  failed  settlement.  Ex  ante  measures  could 
include obligations on CSDs and their participants to execute transactions as soon as 
funds are available and on trading venues to enable the confirmation of transactions 
on  a  same  day  basis.    Under  ex  post  measures,  defaulting  participants  would  be 
subject to, on the one hand, CSD penalties and, on the other hand, an obligation to 
buy  in  the  missing  securities  within  a  certain  timeframe  and  subject  to  certain 
penalties.  Such a buy-in obligation could be implemented by a CCP, for transactions 
cleared by a CCP, or by a trading venue, for non-cleared transactions. More detail on 
such measures is provided in Annex 11, section 8.11.1. 

These measures would be relatively general, with detailed technical standards to be 
set in secondary legislation. The buy-in measures would be closely articulated with 
the proposed Short Selling Regulation.  

This approach would promote standardisation and safety, yet would allow innovation 
and flexibility in a changing market environment. It would result in implementation 
costs of the technical measures for certain CSDs and other market infrastructures, but 
such measures should be more aligned to market circumstances.  This option would 
therefore  be  more  proportionate  to  the  objectives  set.    Certain  measures,  such  as 
penalties  and  buy-in  obligations  may  also  have  costs  for  those  market  participants 
who  systematically  fail  to  settle  (e.g.  certain  short  sellers),  but  overall  investors 
would benefit from the increase in settlement efficiency.   

This  is  the  option  favoured  by  the  HSC  working  group  (and  endorsed  by  the  large 
majority of respondents), who see a role for legislation setting out certain high level 
rules  and  requirements  rather 
than  prescriptive  measures  requiring  market 
participants to carry out certain specific processes.  

Option  1.1.4:  Prescribe  the  use  of  certain  standard  processes  to  improve  settlement 
efficiency 

This option could address all the processes pre- and post-settlement and prescribe the 
way each process should be done, for instance pre-settlement matching to be done in 
a certain way or by a certain date.  

This option would lead to similar benefits as option 1.1.3.  However, it is quite likely 
that these benefits would come at a higher cost for several reasons: 

•  Prescribing  a  common  way  of  organising  settlement  processes  across  the  30+ 
CSDs  in  Europe  would  be  a  very  lengthy  and  likely  impossible  task,  as  the 
detailed processes differ in every country according to market practices, corporate 
law, securities law, etc.   

•  Any  measures  that  were  too  prescriptive  could  become  obsolete  very  quickly  in 

the rapidly changing market environment 

•  Prescribing  how  the  processes  should  be  organised  would  not  allow  CSDs  the 

flexibility they would enjoy under option 1.1.3 

24 

 
 
 
 
Option 1.1.5: As options 1.1.3 or 1.1.4 but for both trading and settlement 

This option would aim at having a comprehensive framework for market discipline, 
including  all  the  steps  from  trading  to  settlement.  Any  rules  in  this  respect  would 
apply  to  CSDs  as  well  as  to  other  players,  such  as  trading  venues,  other 
infrastructures and market participants. 

This  option  would  have  the  advantage  of  tackling  the  entire  trade  value  chain.  
However, it would be a very complex exercise that would increase significantly the 
cost  on  all  stakeholders 
infrastructures,  market  participants  and 
intermediaries) and the timeframe for design and implementation.  It seems also too 
early to adopt such a "big bang" approach, as many of the issues have not crystallised 
in the public debate.  It is preferable to restrict the framework to settlement discipline 
and reassess matters in a few years with the industry. 

(market 

On  the  basis  of  the  analysis  above,  option  1.1.3  (common  principles,  with  detailed 
technical  measures  to  be  set  by  secondary  legislation)  is  favoured  as  the  most 
proportionate to the objectives set.   

Table 1: Summary of the impact analysis for operational objective 1.1  

Effectiveness 

Efficiency 

Impact on stakeholders 

Option 1.1.1 (status quo) 
Option 1.1.2 (additional 
industry commitments) 

n.a. 
(≈/+) potentially broader scope 
than today and more concrete 
implementation plans but still 
non-binding measures (only 
CSDs/market participants with 
positive net benefits would 
join)  

n.a. 
(≈) investment costs for 
CSDs/market participants 
that choose to implement 
measures, but only 
CSDs/market participants 
with positive net benefits 
would join 

Option 1.1.3 (common 
principles for settlement 
discipline) 

(+) broader scope, concrete 
implementation plans, binding 
measures   

(≈/-) investment costs 
mitigated by flexibility 

Option 1.1.4 (prescribe 
processes to increase 
settlement discipline) 

(+) broader scope, concrete 
implementation plans, binding 
measures (but likely not more 
than option 1.1.3) 

(-) significant investment 
costs, no flexibility, 
measures could become 
obsolete quickly 

Option 1.1.5 (wider 
market discipline) 

(++) broader scope than 
options 1.1.3 or 1.1.4   

(--) significant investment 
costs for broader categories 
of market players 

n.a. 
(≈/+) market participants 
gains from increased 
settlement efficiency should 
outweigh implementation 
costs 

(+) gains for market 
participants from increased 
settlement efficiency should 
outweigh costs 
(-) cost implications for 
CSDs/other market 
infrastructures 

(+) gains for market 
participants from increased 
settlement efficiency should 
outweigh costs 
(--) significant cost 
implications for CSDs/other 
market infrastructures 
(++) higher gains for 
market participants from 
increased settlement 
efficiency should outweigh 
costs 
(-/--) cost implications for 
CSDs and other market 
players 

5.1.2.  Options for objective 1.2 – Harmonise settlement periods 

Option 1.2.1 (status quo): Rely on industry initiatives 

As explained in section 3.5, industry initiatives in this respect may not materialise for 
many years to come.  

Option 1.2.2: Obtain additional commitments from industry 

25 

 
 
 
 
 
 
Since  this  is  an  objective  with  a  binary  outcome  (change  or  no  change),  an 
intermediary  solution  could  be  to  ask  the  industry  to  monitor  developments  in  this 
area to assess if the problems identified are declining or increasing.   

There are not likely to be any developments until T2S becomes operational in 2015, 
therefore there is not likely to be any action before then.    

Option 1.2.3: Require the use of the same settlement period for certain instruments 
and markets in the EU 

The  alternative  is  therefore  to  introduce  the  requirement  that  the  same  settlement 
period  is  used  for  most  financial  instruments  in  the  EU.37   The  timing  of  such  a 
requirement  should  allow  market  infrastructures  and  market  participants  to  adapt.  
The  implementation  of  a  common  settlement  period  should  ideally  be  done  before 
T2S becomes operational (i.e. before mid-2015). 

As described in section 3.1, a majority of transactions in Europe settle on T+3, with a 
large proportion on less than T+3. The HSC industry group has therefore considered 
three  options,  T+1,  T+2  or  T+3  and  has  done  extensive  work  in  analysing  these 
options.  The analysis below is largely based on this work. Their recommendation, as 
expressed  in  their  response  to  the  public  consultation  and  endorsed  by  the  large 
majority of respondents is for T+2.   

Sub-option 1.2.3.1: Harmonisation at T+1 

The  T+1  option  was  discarded  by  the  HSC group  as  not  feasible,  because  in  many 
CSDs  in  Europe  the  business  day  starts  at  around  7:00  pm  the  preceding  evening, 
which would imply that a T+1 settlement process would start on the evening of the 
trade  day,  putting  too  much  pressure  on  the  back  offices  of  market  infrastructures. 
Furthermore,  it  would  create  significant  problems  for  investors  who  use  a  different 
currency  since  foreign  exchange  spot  transactions  settle  at  T+2.  Last,  it  would  be 
difficult for investors in other time zones to comply with a T+1 cycle. 

Sub-options 1.2.3.2 and 1.2.3.3: Harmonisation at T+2 or T+3 

The T+2 and T+3 options are analysed together.  As discussed in section 3.1.2, the 
harmonisation  of  settlement  cycles  would  have  a  number  of  benefits  in  terms  of 
reduced risk and cost for cross-border settlement and reduced costs associated with 
market  claims  for  cross-border  corporate  actions.    In  addition,  each  option  would 
have  particular  benefits,  which  are  analysed  in  the  table  below,  together  with  the 
costs of adopting the option. 

Table 2: Benefits and costs associated with harmonisation of settlement periods 

T+2 

T+3 

37  

The  requirement  would  apply  to  certain  instruments  (for  instance  standard  cash  trading  instruments), 
which represent  the bulk  of the  market.   Shorter  settlement periods would  nevertheless be  allowed to 
cater for the diversity of financial instruments. 

26 

 
 
 
 
 
                                                 
T+2 

T+3 

Benefits 

•  Reduced counterparty risk (and 

associated market and liquidity risks) 
by one day for T+3 markets 

•  Greater automation of back-office 

processes 

•  Reduced annual collateral 

requirements by around €700million* 

Costs 

• 

Investment (one-off) costs for more 
market participants than in the T+3 
option, although mostly for the 
smaller players (see below)  

•  A move to T+2 may increase 

settlement failures in the short term 
as back offices are adapting 

•  No major regulatory costs, as in most 
countries a change in settlement 
cycles would not require changes in 
national law, but only in national 
securities market regulations (and the 
approval of the national securities 
regulator) 

•  Any costs to global players from a 

misalignment with major non-EU 
markets would be marginal, as these 
markets may follow a T+2 move in 
Europe (see below) and global 
players have to deal with multiple 
settlement cycles anyway 

• 

• 

• 

• 

• 

Less one-off operational risk from the 
move since fewer markets would need 
to move and the settlement period 
would be extended 

In line with major non-EU markets (see 
below) 

Increased counterparty risk (and 
associated market and liquidity risks) by 
one day for T+2 markets 

Increased annual collateral 
requirements by around €200million* 

Investment (one-off) costs for less 
market participants than in the T+2 
option, although again mostly for the 
smaller players (see below) 

•  No major regulatory costs, as for T+2 

option 

•  An important technological step back 

for the T+2 markets 

* Based on aggregated data from several CCPs – estimated increase and, respectively, reduction in 
collateral that needs to be posted by participants for on-exchange transactions.  The actual economic 
impact is only in respect of the funding cost of this collateral, therefore relatively small 

As presented above, a move to T+2 would create misalignment with major non-EU 
markets,  which  settle  mostly  on  T+3;  exceptions  include  Hong  Kong,  India  and 
Taiwan.    However,  this  is  likely  to  be  short  lived,  as  a  move  to  T+2  in  Europe  is 
likely to trigger a global alignment, as acknowledged by the CEO of the US CSD in 
201038.  Japan  already  announced  in  2010  plans  to  shorten  the  settlement  cycle  for 
government securities to T+2. 

Investment costs to market participants from any harmonisation, whether at T+2 or 
T+3 will likely affect only the smaller, more local players; the bigger players, who 
have to deal currently with multiple settlement cycles, should benefit from savings in 
back  office  costs.    Between  the  two  options,  arguably  more  market  participants 
would be affected by a move to T+2. However, this is marginal since, as described in 
section 3.1, the proportion of T+2 settlement in Europe is already significant.  Both 
the European Fund and Asset Management Association (EFAMA) and the European 
Banking Federation (EBF), which represent asset managers and respectively banks, 
were in favour of T+2 in their responses to the public consultation. 

38  

In his speech to the International Securities Services Association symposium of June 2010, Donald F. 
Donahue,  the  Chairman  and  CEO  of  DTCC  stated  that  he  "anticipates  that  Europe's  consideration  of 
moving equities to T+2 will spark renewed debate on this issue in the US and elsewhere.  Because a 
reduced  settlement  cycle  clearly  reduces  risk  exposure,  I  expect  the  US  industry  will  want  to  give  it 
serious consideration, particularly in view of the volume of equity trading in the US markets." 

27 

 
 
 
 
 
                                                 
Based  on  the  above  analysis,  the  T+2  option  appears  to  have  more  merit  as  it  has 
significant ongoing benefits for investors by reducing counterparty risk and collateral 
requirements,  and  encouraging  greater  automation. 
the 
harmonisation  should  increase  the  safety  of  cross-border  settlement,  reduce  back-
office  costs  for  investors  and  intermediaries  and  reduce  the  market  claims  for 
corporate actions, which amount currently to billions of euro per year.   

  More  generally, 

The main  costs  associated with the T+2 option are one-off - a potential increase in 
settlement  fails  in  the  short  term  and  investment  costs  for  the  smaller  market 
participants, which are only marginally higher than for a harmonisation at T+3. The 
first can be mitigated by improving the settlement discipline regime (section 5.1.1), 
while the second by allowing sufficient time for the markets to adapt to the change. 

Table 3: Summary of the impact analysis for operational objective 1.2  

Option 1.2.1 (status quo) 
Option 1.2.2 (additional 
industry commitments) 
Sub-option 1.2.3.1 
(harmonise at T+1) – 
DISCARDED  

Sub-option 1.2.3.2 
(harmonise at T+2) 

Sub-option 1.2.3.3 
(harmonise at T+3) 

Effectiveness 

Efficiency 

Impact on stakeholders 

n.a. 
(≈) no likely action soon   

n.a. 
(≈) no likely action soon   

n.a. 
(≈) no impact, existing 
problems remain   

(+) harmonisation of 
settlement periods   
(+) reduced running costs by 
reducing counterparty risk 
and collateral requirements 

(-) one-off investment costs 
for some market participants 
(the more local players) 
(-) potential one-off 
operational risk from 
transfer 

(+) harmonisation of 
settlement periods   
(-) increased running costs 
by increasing counterparty 
risk and collateral 
requirements 

(-) one-off investment costs 
for marginally less market 
participants than in T+2 
option  
(≈/-) less one-off operational 
risk from the transfer 

(+) benefits for market 
participants from reduced 
risk  
(-) investment costs for some 
market participants 
(≈) no regulatory cost for 
Member States 

(-) cost to market 
participants from increased 
risk and collateral 
(-) investment costs for some 
market participants 
(≈) no regulatory cost for 
Member States 

5.2. 

Options for objective 2 - Introduce consistent rules for CSDs 

As discussed in section 3, consistent rules for CSDs can refer to both the licensing 
regime and prudential and organisational rules.  The options below consider: 

•  The  licensing  framework,  i.e.  whether  CSDs  can  provide  services  in  other 

Member States and under what legal form   

•  The prudential, conduct of business and organisation rules applicable to CSDs 

•  The  authorisation  and  supervision  framework, 

i.e.  competent  authorities 
responsible for the authorisation (licensing) of a CSD and its ongoing supervision 

5.2.1.  Options for objective 2.1 – Harmonise licensing framework 

Option 2.1.1 (status quo): National licences 

The analysis of this option is provided in section 3.5. 

Option 2.1.2: Mutual recognition of CSD services 

28 

 
 
 
 
 
 
 
 
 
 
In  this  option  a  CSD  would  have  the  freedom  to  provide  its  services  abroad  (in  a 
"host"  country)  without  the  need  to  open  an  establishment  there  or  to  be  otherwise 
regulated in the host country.  As described in the problem definition, this is already 
the case for settlement (due to MiFID, although under certain conditions), but not for 
the notary function.  

This option would impose no additional regulatory cost on CSDs. In theory, it could 
introduce  more  competition  in  the  CSD  market  (although  it  would  have  to  be 
accompanied  by  the  removal  of  access  barriers  discussed  in  section  5.3)  and 
therefore  reduce  fragmentation.  However,  for  reasons  related  to  national  corporate 
law, CSDs may need to open (or maintain, in the case of groups) local subsidiaries or 
branches in the host countries where they offer notary and related services.  Without 
a harmonisation of the licensing framework, the current situation of the duplication 
of  authorisation  (and  supervision)  procedures  would  be  maintained.  The  level 
playing  field  between  CSDs  would  therefore  not  increase  significantly,  since  the 
services  these  can  provide  will  be  conditioned  by  the  constraints  of  their  domestic 
licences and any ensuing benefits, in terms of reduced costs for issuers or investors 
and increased safety, would therefore be limited.  

In  addition,  without  common  prudential  and  organisational  rules,  this  option  could 
create  a  "race  to  the  bottom",  i.e.  an  advantage  for  CSDs  located  in  a  jurisdiction 
with the most lenient requirements. 

Option 2.1.3: EU licence (and passport) for CSD services 

In  this  option  CSDs  would  be  granted  an  EU  licence,  which  would  allow  them  to 
"passport" their services freely to other Member States (via an establishment in those 
Member  States  or  not),  without  a  need  for  duplication  of  authorisation  and 
supervision. 

A  common  EU  licence  and  passport  for  CSD  services  would  accompany  cross-
border establishment of CSDs and, together with a removal of barriers of access (see 
section 5.3) it should increase competition, with positive consequences for costs and 
quality of service to issuers and investors. It should also foster consolidation among 
CSDs  since  authorisation  and  supervision  do  not  need  duplication  and  should 
therefore  reduce  fragmentation  in  the  medium  to  long  term,  with  positive 
consequences  for  safety  and  costs.  In  the  short  term,  however,  it  may  increase 
fragmentation if CSDs wishing to take advantage of the opening of the market set up 
businesses in other Member States.  This issue has been highlighted by stakeholders, 
particularly the regional/global intermediaries that need to access several CSDs.  

This option would impose a regulatory cost on CSDs, who would need to apply for a 
licence (at least after a temporary grandfathering period).  Increased competition may 
also cause some CSDs to lose market share and revenues.  Intermediaries may face 
additional costs in the short term if fragmentation is increased, but in the long term 
consolidation should decrease their back office costs.   

Based  on  the  analysis  above,  an  EU  licence  and  passport  are  preferred  as  the  best 
way  to  achieve  level  playing  field  and  competition  between  CSDs.    An  order  of 
magnitude of the potential benefits of a reduction of cross-border post trading costs 
in Europe is provided in section 6.2. 

29 

 
 
 
 
Table  4:  Summary  of  the  impact  analysis  for  operational  objective  2.1  (harmonise 
licensing framework) 

Effectiveness 

Efficiency 

Impact on stakeholders 

Option 2.1.1 (status quo) 
Option 2.1.2 (mutual 
recognition of services) 

Option 2.1.3 (EU licence) 

n.a. 
(+) no additional regulatory 
cost on CSDs 

(-) regulatory one-off cost on 
CSDs from applying for a 
licence 

n.a. 
(≈/+) provision of services 
recognised cross-border but 
CSDs conditioned by 
domestic licences  
(≈/+) reduced costs for 
market participants from 
slightly more competition 
(-) increased risk (hence 
cost) from race to bottom 

(+) common licensing rules 
for CSDs 
(+) reduced ongoing cost for 
market participants from 
increased competition and  
reduced fragmentation in 
medium/long term 
(-) potentially increased 
ongoing costs for market 
participants from more short 
term fragmentation  

n.a. 
(≈/+) slightly more 
competition, potentially less 
cost for investors 
(-) increased risk (hence 
costs) for investors from 
race to bottom 

(+) reduced costs for market 
participants from increased 
competition and reduced 
fragmentation in the 
medium/short term should 
outweigh increased costs 
from more fragmentation in 
the short term 
(-) regulatory one-off cost on 
CSDs from applying for 
licence 
(-) possible loss of revenues 
for certain CSDs (from 
competition) 

Sub-options of Option 2.1.3: Treatment of banking-type of ancillary services 

An  important  question  relates  to  the  scope  of  ancillary  services  included  in  the 
licence,  particularly  with  respect  to  banking/securities-type  of  services  where  the 
CSDs incur credit and liquidity risk. Stakeholder views diverge widely on this topic, 
from  those  who  advocate  a  leaner  regulatory  structure  allowing  CSDs  to  undertake 
these  services  under  one  licence,  to  those  who  argue  for  a  segregation  of  banking 
type  of  services  in  separate  legal  entity.    A  detailed  analysis  of  different  options  is 
included in Annex 12, with a summary below. 

Based on the stakeholders’ views, the following options have been considered: 

•  One legal entity with one licence (Option A); under this option, CSDs providing 
banking  services  would  not  be  subject  to  the  CRD,  but  to  a  customised 
prudential framework in the CSD legislation 

•  One  legal  entity  with  two  licences,  for  CSD  activities  and  for  banking-type  of 
activities  –  the  latter  under  the  CRD  (Option  B);  this  corresponds  to  the  status 
quo in Member States where CSDs are allowed to provide banking services 

•  One  legal  entity  with  two  licences  (as  above),  plus  additional  prudential 
requirements  to  mitigate  the  risk  spill  over  from  the  banking  activities  to  the 
CSD activities (Option C) 

•  Two legal entities, with two separate licences (Option D), whereby the banking 
entity  could  be  a  general  credit  institution,  but  subject  to  specific  prudential 
requirements for each securities settlement system it acts as settlement agent for  

30 

 
 
 
 
 
 
 
 
Option A would create the leanest regime for CSDs – for this reason it was supported 
by  some  CSDs  and  some  regulators;  however,  it  would  mean  creating  a  separate 
prudential framework for the same type of risks as those covered by the CRD. Option 
B  would  allow  current  business  models  to  exist,  while  enshrining  in  legislation  the 
current  practice  of  limiting  the  scope  of  banking  activities  and  applying  stricter 
prudential requirements than the CRD; however, CSDs would continue to be subject 
to  credit  and  liquidity  risk.    This  option  was  supported  mostly  by  the  CSDs  who 
currently have this model and their regulators.  Option C is an “enhanced” Option B, 
whereby the spillover risk is addressed by applying stricter prudential requirements 
to  the  banking  services.    Finally,  Option  D  reduces  considerably  the  risk  profile  of 
the  CSDs,  but  has  the  biggest  impact  on  the  current  integrated  models,  mainly  in 
terms  of  legal/transaction  costs.  This  option  was  favoured  by  many  CSDs’  clients, 
mainly the custodian banks and some regulators. 

Based on the analysis in Annex 12, option D is preferred. 

5.2.2.  Options for objective 2.2 – Harmonise prudential and organisational rules  

Option 2.2.1: rely only on CPSS-IOSCO/ESCB-CESR recommendations (status quo) 

The  analysis  of  this  option  is  provided  in  section  3.5.  Importantly,  the  status  quo 
option is not compatible with the preferred policy option in the section 5.2.1, i.e. EU 
licence,  since  a 
license  makes  no  sense  without  common  prudential  and 
organisational rules.   

Option 2.2.2: Introduce common EU prudential and organisational rules 

In  this  option,  CSDs  across  the  EU  would  be  subject  to  common  prudential  and 
organisational rules that reflect their systemic role for the market.  Importantly, these 
rules  would  also  address  the  way  CSDs  conduct  their  business  and  carry  out  their 
functions,  links  between  CSDs  and  would  seek  to  harmonise  the  enforcement  of 
administrative sanctions39.  

For  instance,  CSDs  would  be  required  to  have  robust  governance  arrangements, 
experienced  and  suitable  senior  management,  board  and  shareholders  and  to  set  up 
user  committees  for  each  securities  settlement  system  that  represent  issuers  and 
participants.  They should mitigate operational risk in order to ensure the continuity 
of operations, including of settlement, at all times. A related requirement to increase 
the  safety  of  settlement  would  be  that  only  CSDs  or  central  banks  could  operate 
securities settlement systems.  

to  protect  participants'  assets.  As  CSDs  are  becoming 

CSDs  should  conduct  their  business  in  a  non-discriminatory  and  transparent  way 
with  respect  to  prices  and  participation.    They  should  play  an  important  role  in 
ensuring the integrity of a securities issue and should provide segregated accounts in 
order 
increasingly 
interconnected  and  this  process  should  accelerate  with  the  advent  of  T2S,  strict 
prudential requirements should be introduced for linked CSDs, such as the setting up 
of identical settlement finality rules.  A more detailed overview of possible rules is 
provided in Annex 11, section 8.11.2. 

39  

The  harmonisation  of  sanctions  principles  would  draw  from  the  December  2010  Commission 
Communication  on 
sector" 
(http://ec.europa.eu/internal_market/consultations/docs/2010/sanctions/COM_2010_0716_en.pdf) 

"Reinforcing 

sanctioning 

financial 

services 

regimes 

the 

in 

31 

 
 
 
 
                                                 
An  EU 
licence  would  automatically  require  a  common  set  of  regulatory 
requirements. The  harmonisation of rules has, nevertheless, merits in its own  right, 
since  it  would  increase  level  playing  field  (in  a  competitive  environment  such  as 
post-T2S  or  with  opening  of  access  –  see  option  3.1.3)  and  increase  the  safety  of 
CSDs and of their functions. Such rules would therefore complement the settlement 
discipline  principles  discussed  under  option  1.1.3.  This  option  may,  however,  also 
imply costs for certain CSDs in adapting their systems.  It would also have indirect 
effects on any custodian banks that are considering operating a securities settlement 
system, as they would need to set up a CSD in order to do so. 

Achieving common rules can be done in different ways.  Two sub-options have been 
considered: 

•  Sub-option  2.2.2.1:  Introduce  common  prudential  and  organisational  principles, 

with detailed measures to be set by secondary legislation 

As with the discussion on the options on settlement discipline, this option would be 
beneficial  in  several  ways:  (a)  it  would  allow  flexibility  in  adapting  detailed 
measures  to  market  circumstances,  (b)  it  would  allow  better  alignment  with 
international standards – the CPSS-IOSCO standards are currently under review, and 
(c)  it  would  allow  better  involvement  of  ESCB  in  setting  such  measures  –  this  is 
important  in  managing  regulatory  burden  for  CSDs,  since  the  settlement  systems 
they operate are overseen by central banks.  

•  Sub-option 2.2.2.2: Prescribe detailed common EU prudential and organisational 

rules 

While this may allow more standardisation across the EU, it would not have all the 
benefits  described  above  and  thus  may  come  at  the  cost  of  reduced  innovation, 
increased  regulatory  burden  on  CSDs  and  potentially  reduced  competitiveness 
compared to third country operators.   

Option 2.2.2.1 (common principles) is therefore preferred as it is more proportionate 
to the objectives sought. 

32 

 
 
 
 
Table  5:  Summary  of  the  impact  analysis  for  operational  objective  2.2  (harmonise 
prudential and organisational) 

Option 2.2.1 (status quo)  

n.a. 

n.a. 

n.a. 

Effectiveness 

Efficiency 

Impact on stakeholders 

Option 2.2.2.1 (common 
principles, standards 
detailed by secondary 
legislation) 

Option 2.2.2.2 (prescribe 
common rules) 

(+) ensures consistency of 
rules 
(+) increased level playing 
field, reduced 
fragmentation 

(+) ensures standardisation 
of rules 
(+) increased level playing 
field, reduced 
fragmentation 

(-) regulatory burden for 
(some) CSDs to comply 
(+) compensated by better 
flexibility and alignment 
with central banks and 
global efforts 

(-) regulatory burden for 
(some) CSDs to comply 
(-) aggravated by no 
flexibility, alignment etc. 

(+) less cost for investors 
from competition and less 
risk from reduced 
fragmentation 
(-) regulatory cost for CSDs 

(+) less cost for investors 
from competition and less 
risk from reduced 
fragmentation 
(--) potentially more 
regulatory cost for CSDs 

5.2.3.  Options for objective 2.3 – Harmonise authorisation and supervision framework 

Option 2.3.1: National authorisation and supervision (status quo) 

In  this  option,  CSDs  would  continue  to  be  authorised  and  supervised  at  national 
level, with case-by-case cooperation between authorities in different Member States.  
Current  examples  of  this  include  the  cooperation  between  central  banks  for  the 
authorisation  and  oversight  of 
the 
Memorandum  of  Understanding  for  the  supervisory  college  of  the  Euroclear 
settlement platform ESES.  

links  between  settlement  systems  and 

In  theory,  authorisation  and  supervision  could  remain  solely  at  national  level  even 
with  an  EU  licence  and  passport.    The  main  argument  for  this  is  that  since  fiscal 
responsibility in case of the  failure of a CSD lies within that CSD's home Member 
State,  authorisation  and  supervision  should  also  be  located  there.    This  argument 
should  be,  however,  further  nuanced  for  CSDs.  Most  CSDs,  unlike  CCPs,  have 
limited capital, and hence a CSD failure would cause more disruption for the CSD's 
participants  rather  than  for  its  shareholders.  But  then  the  financial  and  potentially 
fiscal impact would be where the head offices of the CSD's participants are located, 
which is not necessarily the same as the head office of the CSD. Furthermore, in a 
cross-border context, where a CSD may serve issuers from multiple Member States 
or may have links with CSDs from other Member States, the failure of a CSD may 
spill over across borders.  This option does not cater for cross-border considerations. 

Option  2.3.2:  National  authorisation  and  supervision  with  involvement  of  other 
Member States authorities (where applicable)  

Involvement of other Member States authorities should therefore be considered if 
the "externality" of a CSD's business justifies it. Externalities occur in particular 
when a CSD operates a securities settlement system subject to the law of another 
Member State or settles on cash accounts with a central bank established in another 
Member State. In this case, the oversight authority of the respective securities 
settlement system and the respective central bank of settlement should be consulted 
by the CSD's "home" competent authority. Similarly, the CSD's competent authority 
should consult and cooperate with the authorities of subsidiaries or branches of the 
CSD in other Member States. 

33 

 
 
 
 
 
 
 
As  discussed  under  Option  2.3.1,  an  authorisation  and  supervision  framework  that 
includes tight cooperation between authorities across borders would have important 
benefits for safety, particularly in crisis situations.  The larger cross-border CSDs and 
the  authorities  themselves  may  incur  costs  in  setting  up  such  a  cooperation 
framework,  however  these  costs  are  not  likely  to  be  significant  as  cooperation 
already exists in practice today in many cases. 

Option 2.3.3: National authorisation and supervision with involvement of ESMA 

An  alternative  to  having  authorities  from  other  Member  States  directly  involved 
would  be  to  channel  the  cooperation  or  information  exchange  between  authorities 
through ESMA.  For instance, ESMA would be consulted on the different elements 
of  externality,  and  would  pass  the  information  on  to  the  relevant  authorities  in  a 
standardised  way.    To  achieve  the  same  benefits  highlighted  above,  ESMA  would 
need efficient channels of communication with the different authorities.  

This could be a more efficient option, since information would be transmitted to and 
centralised  in  one  point.    However,  it  may  be  more  burdensome  for  national 
regulators as it would interpose another institution between them.   

Option  2.3.4:  National  authorisation  and  supervision  with  involvement  of  other 
Member States authorities and of ESMA (where applicable)  

This option would combine Options 2.3.2 and 2.3.3 in the following way: 

•  The home Member State authority would consult and cooperate with authorities in 

other Member States as described under Option 2.3.2 

•  ESMA would develop standard forms, templates and procedures to streamline the 

information sharing and cooperation between authorities 

•  ESMA would hold the "register" of CSDs, including a number of details for each 
CSD  such  as  services  provided,  securities  settlement  systems  operated,  central 
banks and/or other settlement agents used for settlement and authorities involved 
in authorisation and supervision 

This option would allow other Member States authorities to be directly involved in a 
flexible way that does not put unnecessary regulatory burden on the smaller CSDs, 
while ensuring a certain standardisation of this cooperation for the larger CSDs.  It 
would  therefore  strike  the  right  balance  between  a  coordinated  authorisation  and 
supervision framework and the regulatory impact on CSDs. 

Most respondents to the public consultation (including public authorities and CSDs) 
were  generally  in  favour  of  combining  national  authorisation  and  supervision  with 
involvement of other Member States authorities, subject to such involvement being 
properly differentiated according to the level of externality a CSD engages in.  There 
was also broad agreement for the maintenance of a CSD register by ESMA.   

34 

 
 
 
 
Option 2.3.5: Authorisation and supervision by ESMA 

This option is diametrically opposed to option 2.3.1 since it gives authorisation and 
supervision powers over CSDs to ESMA.   

Central  authorisation  and  supervision  would  immediately  ensure  a  coherent 
application of rules (hence efficiency) and would address cross-border safety issues, 
particularly at times of crisis.  ESMA would ensure that Member States' interests and 
concerns are balanced.  However, this option would not align fiscal and supervisory 
responsibility;  indeed  the  fiscal  responsibility  (for  the  failure  of  a  CSD  or  of  its 
participants) would be left with the Member States.   

Table  6:  Summary  of  the  impact  analysis  for  operational  objective  2.3  (harmonise 
authorisation and supervision framework) 

Effectiveness 

Efficiency 

Impact on stakeholders 

n.a. 

n.a. 

n.a. 

Option 2.3.1 (status quo, 
but EU licence) 
Option 2.3.2 (national 
authorisation and 
supervision, involvement 
of other Member States 
authorities) 

Option 2.3.3 (national 
authorisation and 
supervision, involvement 
of ESMA) 

Option 2.3.4 (involvement 
of other Member States  
authorities and ESMA) 

(+) involvement of other 
concerned authorities 
strengthens passport effect  
(+) supervisory and fiscal 
responsibilities aligned 
(-) potential divergences in 
application of requirements 
(+) supervisory and fiscal 
responsibilities aligned 
(+) coordination at EU level 
through ESMA 

(+) involvement of other 
concerned authorities 
strengthens passport effect  
(+) supervisory and fiscal 
responsibilities aligned 
(+) coordination at EU level 
through ESMA 

(-) regulatory cost for some 
large CSDs from 
involvement of other 
authorities 

(≈/-) regulatory cost for 
some large CSD, but 
potentially less than in 
option 2.3.2 

(-) regulatory cost for some 
large CSD, but potentially 
less than in option 2.3.2 due 
to coordination/ 
standardisation by ESMA 

Option 2.2.2.2 (ESMA 
authorisation and 
supervision) 

- 

(++) coherent application of 
rules and supervision, no 
uncertainty about cross-
border provision of services 
(-) supervisory and fiscal 
responsibilities misaligned 

(+) country with fiscal 
responsibility maintains 
authorisation and 
supervision power 
(-) regulatory cost for some 
CSDs 

(+) country with fiscal 
responsibility maintains 
authorisation and 
supervision power 
(≈/-) regulatory cost for 
some CSD 

(+) country with fiscal 
responsibility maintains 
authorisation and 
supervision power 
(-) regulatory cost for some 
CSDs 

(-) country with fiscal 
responsibility loses 
authorisation and 
supervision power 

5.3. 

Options for objective 3 – Remove barriers of access to/from CSDs 

The  options  below  follow  the  structure  of  the  chapter  on  the  problems  associated 
with  barriers  of  access,  namely  it  addresses  (1)  access  between  issuers  and  CSDs, 
and (2) access between CSDs and between CSDs and other market infrastructures. 

5.3.1.  Options for objective 3.1 – remove barriers of access between issuers and CSDs 

Option 3.1.1 (status quo): Issuers required to use local CSD in many EU countries 

The analysis of this option is provided in section 3.5. 

35 

 
 
 
 
 
Option 3.1.2: Introduce the right for issuers to issue securities into the CSD of their 
choice  

This option would aim to grant issuers the freedom to issue securities into the CSD 
of their choice, which may be located in a different jurisdiction.  This is already the 
case for the so-called Eurobonds, but not always for shares. There is relatively wide 
agreement  among  all  stakeholders  that  this  freedom  of  issuers  should  not  prejudice 
the law under which the securities are constituted. This is more relevant for shares, 
where the national law of the issuer may impose certain requirements on the issuer 
CSD.  CSDs should therefore not be obliged to accept any requesting issuer. 

Some regulators who have responded to the public consultation have also expressed 
a  view  that  this  right  of  issuers  should  be  without  prejudice  to  national  procedures 
regarding tax.  In particular, CSDs often provide services in respect of withholding 
tax  relief  procedures  (i.e.  procedures  aimed  at  granting  withholding  tax  relief  at 
source on securities income, as provided under double tax treaties or domestic law). 
tax  relief  procedures 40 
The  Commission  Recommendation  on  withholding 
encourages  Member  States  to  allow  foreign  financial  intermediaries  that  have 
obtained  prior  authorisation  or  approval  to act  as  an  "information  agent"  (reporting 
pooled  withholding  tax  rate  information)  or  "withholding  agents"  (authorised  to 
assume  withholding  responsibilities).  It  is  important  to  note  that,  according  to  the 
Recommendation, the authorisation/approval should be given by the source Member 
States (i.e. the Member State where the issuer of the securities generating income is 
tax resident).   

This  freedom  of  issuers  to  choose  their  CSD  would  increase  competition  among 
CSDs  (with  potential  benefits  for  investors  and  issuers)  and  improve  efficiency  for 
cross-border issuance by shortening the holding chain that separates the issuer from 
the investor. It would also create economies of scale gains for CSDs (which should 
again  translate  into  reduced  prices  for  issuers  and  investors).    However,  some 
custodian banks have argued that this option may increase fragmentation if CSDs, in 
the absence of the harmonisation of corporate laws, open foreign branches in order to 
compete with domestic CSDs.  Fragmentation would result in increased operational 
complexity,  with  negative  consequences  for  risks  and  costs.  This  is,  nevertheless, 
likely to be a short-term effect, as the natural long-term result in this sector driven by 
economies of scale should be more consolidation. 

In terms of costs, CSDs may need to incur certain costs to take advantage of the new 
business  opportunities,  such  as  operational  changes  to  cater  for  foreign  corporate 
laws  and  new  legal  arrangements  with  foreign  issuers.  However  they  would 
obviously only do so if the benefits warranted the costs.  A similar logic applies to 
issuers. 

For the reasons above the benefits of introducing this freedom for issuers are likely 
to materialise quite slowly.  But it is an important measure to open up the market and 
accompany the preferred option of an EU licence analysed in section 5.2.  

40 

C(2009)7924 final of 19.10.2009 

36 

 
 
 
 
                                                 
Option  3.1.3:  As  3.1.2  and  a  requirement  for  certain  classes  of  securities  to  be 
represented in book-entry form 

Option  3.1.2  could  be  rendered  more  effective  by  harmonising  the  form  of 
representation  of  securities  upon  issuance,  which  could  be  done  by  requiring  that 
certain classes of securities in the EU (e.g. shares and bonds admitted to trading) are 
represented  in  book-entry  form.    This  can  be  done  in  different  ways,  for  instance 
through  prior  immobilization  of  securities  (such  as  in  Germany)  or  through  direct 
dematerialization (such as in France). Such securities would need to be entered in a 
CSD  when  they  are  traded  or  given  as  collateral.    A  grandfathering  clause  would 
allow sufficient time to those markets that still use paper-based securities to adapt. 

This option would make the competition between CSDs more effective and therefore 
increase  the  benefits  to  issuers,  investors  and  CSDs  identified  under  option  3.1.2. 
The recourse to book entry is also recommended by ESCB-CESR as it would have 
wider  benefits  for  settlement;  it  would  notably  reduce  settlement  risk  since  book 
entry  securities  are  much  easier  to  deliver  than  paper  based  securities  and  it  would 
facilitate the reduction of the settlement period.  For these reasons, most respondents 
to  the  public  consultation  were  in  favour  of  such  a  measure,  with  some  notable 
exceptions in the UK market. 

The  market  that  would  be  most  affected  by  this  measure  would  indeed  be  the  UK, 
where  paper  securities  coexist  with  book  entry  securities 41 .  The  UK  regulators, 
issuers  and  registrars  have  therefore  advocated  against  this.    The  registrars  were 
particularly against introducing an obligation for investors to hold securities in book 
entry form in a CSD if they do not wish/need to trade their securities; this may be the 
case of investors who may have acquired securities through an IPO or an employee 
share scheme.  A key argument was that such investors would incur an unnecessary 
ongoing cost of account maintenance.  In order to address this, the requirement is not 
for securities to be held in a CSD, but to be held in book entry form (for instance by 
the issuer or its registrar), which would facilitate settlement through a CSD once the 
security is eventually traded. 

This may still result in an additional cost for issuers and registrars – on the one hand, 
the  initial  investment  cost  of  implementing  this  system;  on  the  other  hand,  an 
ongoing  cost  of  sending  regular  account  statements  to  investors  (this  cost  would 
probably  be  picked  up  by  the  issuers).    The  overall  cost  of  managing  book  entry 
securities should nevertheless be less than that of managing paper securities. No data 
has been available to quantify these costs.  This option is favoured in order to render 
issuers' access to CSDs more meaningful and for the link to settlement efficiency. It 
would allow a reduction of settlement periods – it currently can take up to 10 days to 
settle trades in paper securities in the UK.  It would also decrease the opportunities 
for  fraud  and  the  risk  of  losing  paper  certificates  and  it  would  allow  a  better 
reconciliation between the securities issued and the ones circulating. The impact on 
the UK market could be mitigated by setting an implementation date that allows the 
market to adapt.   

41  

According to the responses to the first public consultation on the SLD from 2009 (see pages 6-7 of the 
document below), in most EU countries the proportion of securities in non-book entry form is zero to 
negligible.  The notable exception is the UK. http://ec.europa.eu/internal_market/financial-
markets/docs/securities-law/first_consultation_summary_en.pdf  

37 

 
 
 
 
                                                 
Table  7:  Summary  of  the  impact  analysis  for  operational  objective  3.1  (remove 
barriers of access between issuers and CSDs) 

Option 3.1.1 (status quo, 
but EU licence) 
Option 3.1.2 (right to issue 
into CSD of choice) 

Option 3.1.3 (as 3.1.2 and 
book entry form) 

Effectiveness 

Efficiency 

Impact on stakeholders 

n.a. 

n.a. 

n.a. 

(≈/+) removes barriers for 
new issuance but less 
effective if operational 
barriers of access persist 
(≈/+) more competition for 
notary services, less 
complexity for cross-border 
settlement 

(+) removes also 
operational barriers of 
access and allows more 
economies of scale 
efficiencies at CSDs 
(≈/+) increased settlement 
efficiency  

(+) issuers and CSDs may 
incur adaptation costs, but 
they would not do so unless 
there were net benefits to be 
gained  

(≈/+) reduced cost to issuers 
and investors from increased 
competition and reduced 
fragmentation 
(-) possible loss of revenues 
for certain CSDs 

(≈/-) implementation costs 
for markets with certificated 
securities (UK market)  

(+) reduced cost to issuers 
and investors from increased 
competition and reduced 
fragmentation 
(+) reduced settlement risk 
(-) potential implementation 
and ongoing costs for 
issuers and registrars 
(-) possible loss of revenues 
for certain CSDs (from 
competition) 

5.3.2.  Options  for  objective  3.2  –  remove  barriers  of  access  between  CSDs  and  between 

CSDs and other market infrastructures 

Option 3.2.1 (status quo): Rely on Code of Conduct 

The analysis of this option is provided in section 3.5. 

Option  3.2.2:  Introduce  access  rights  between  CSDs  and  between  CSDs  and  other 
market infrastructures 

This  option  would  impose  uniform  requirements  on  CSDs  and  other  market 
infrastructures  regarding  access.    These  would  include  general  principles  of  access 
(non-discrimination  and  transparency),  conditions  when  access  may  be  refused 
(based  on  risk  only),  the  procedure  for  requesting  access  and  responding  to  access 
requests and a dispute resolution mechanism  between authorities  (by  ESMA).   The 
requirements would address access by CSDs to other CSDs and to transaction feeds 
from CCPs and trading venues. 

Regarding  CSD  to  CSD  access,  while  all  stakeholders  are  generally  in  favour  of 
introducing access rights in legislation, many (especially CSDs and regulators) have 
responded  that  a  CSD  should  not  have  the  right  to  an  "interoperability"  access  to 
another CSD. CSDs, unlike CCPs, can enable their participants to settle cross-border 
transactions by becoming participants in other CSDs, i.e. by setting up a "standard" 
link.    A  variation  of  this  is  a  "customised"  link,  where  a  CSD  develops  specific 
features  for  another  CSD  (in  line  with  the  Code,  this  should  be  charged  on  a  cost-
plus  basis).    These  types  of  links  have  one  disadvantage  compared  to  an 
"interoperability"  access,  in  that  they  cannot  generally  ensure  DVP  settlement  for 
participants. However, this problem will be solved by T2S. 

The  benefits  of  introducing  access  rights  would  be  effective  competition  between 
CSDs  and  more  fair  access  to  business  opportunities,  which  should  potentially 
translate into further reduction of costs for issuers and investors, in addition to those 

38 

 
 
 
 
 
generated by an EU licence (option 2.1.3) and by opening up the access of issuers to 
CSDs (option 3.1.3). The facilitation of link arrangements between CSDs may also 
generalise  settlement  in  securities  settlement  systems  and  reduce  the  internalisation 
of  settlement  by  intermediaries;  as  explained  in  section  3.2.1  this  would  have 
positive consequences for safety since securities settlement systems benefit from the 
SFD protection against a participant’s default. 

As  for  costs,  there  should  be  no  "unwanted"  costs  for  CSDs  since  any  customised 
component  of  an  access  should  be  paid  for.    However,  the  increased  competition 
could imply loss of revenue for certain CSDs.  

The  obligation  for  other  market  infrastructures  (trading  venues,  CCPs)  to  provide 
transaction feeds to all requesting CSDs should not imply significant costs for these 
infrastructures. However it will call into question certain business models, mainly the 
integrated model of trading venue/CCP/CSD. 

Table  8:  Summary  of  the  impact  analysis  for  operational  objective  3.1  (remove 
barriers of access between issuers and CSDs) 

Option 3.2.1 (status quo) 

n.a. 

n.a. 

n.a. 

Effectiveness 

Efficiency 

Impact on stakeholders 

Option 3.2.2 (introduce 
access rights) 

(+) effective market opening, 
fairer access to business 
opportunities, increased 
competition 

(≈) no unwanted costs for 
CSDs or other market 
infrastructures 

(+) potentially reduced cost 
for investors 
(-) possible loss of revenues 
for certain CSDs 

6. 

PREFERRED POLICY OPTIONS AND INSTRUMENTS 

6.1. 

Preferred policy options 

The preceding analysis has identified the following policy options: 

Table 9: Summary of preferred policy options 

Objective 
1. Enhance framework 
for settlement 

2. Introduce consistent 
rules for CSDs 

Sub-objective 
1.1 Improve cross-border 
settlement discipline 
1.2 Align settlement periods 
2.1 Introduce consistent licensing 
framework 

3. Remove barriers of 
access to/from CSDs 

2.2 Introduce consistent 
prudential and organisational 
requirements 
2.3 Introduce consistent 
authorisation and supervision 
framework 
3.1 Remove barriers of access 
between issuers and CSDs 

3.2 Remove barriers of access 
between CSDs and between 
CSDs and other market 
infrastructures 

Preferred option 

Option 1.1.3 Introduce common principles for settlement 
discipline, detailed standards to be set by secondary legislation 
Option 1.2.3.2 Harmonise settlement periods at T+2 
Sub-option 2.1.3 EU licence and passport for CSD services 
(with separation of banking-type of services in a different legal 
entity) 
Sub-option 2.2.2.2 Introduce common prudential and 
organisational principles, detailed standards to be set by 
secondary legislation 
Option 2.3.4 National authorisation and supervision, with 
involvement of other Member States authorities and ESMA 
(depending on element of externality of a CSD's business) 
Option 3.1.3 Introduce the right of issuers to issue securities  
into any CSD and the obligation to have securities represented 
in book entry form 
Option 3.2.2 Introduce access rights between CSDs and 
between CSDs and other market infrastructures 

39 

 
 
 
 
 
 
 
 
 
6.2. 

The cumulative impacts of the preferred policy options 

As illustrated in chapter 4, many of the proposed policy solutions are interconnected 
and the spill-over effects between them are considerable.  The best way to summarise 
this  is  to  refer  back  to  the  strategic  objectives  set  out,  which  can  only  be  achieved 
effectively by using a combination of policy options: 

•  Increase  safety  of  cross-border  transactions.    The  harmonisation  of  settlement 
discipline (option 1.1.3) addresses this directly, but this would be more effective if 
settlement periods were harmonised as well (option 1.2.3.2).  For instance, buy in 
procedures  in  the  case  of  a  failed  trade  are  typically  set  with  reference  to  the 
intended settlement date.  Common prudential and organisational rules for CSDs 
(option 2.2.2.3) address settlement safety as well such as a DvP requirement.  A 
harmonised  authorisation  and  supervision  framework  (option  2.3.4)  would 
increase cooperation between national authorities and therefore hopefully mitigate 
to a certain degree the cross-border spill-over of risk  

•  Increase efficiency of cross-border transactions.  This is achieved by reducing the 
fragmentation  of  the  market,  which  would  require  a  harmonised  licensing  and 
authorisation  and  supervision  framework  for  CSDs  (options  2.1.3  and  2.3.4)  as 
well  as  the  removal  of  barriers  of  access  (options  3.1.4  and  3.2.1).  Increased 
efficiency  requires  also  less  complexity  of  cross-border  settlement  through 
measures such as the harmonisation of settlement periods (option 1.2.3.2) 

•  Ensure level playing field for CSD services.  This requires a harmonised licensing 
and authorisation and supervision framework for CSDs (options 2.1.3 and 2.3.4), 
consistent  prudential  and  organisational  rules  (option  2.2.2.3)  as  well  as  the 
removal of barriers of access (options 3.1.4 and 3.2.2) 

In concrete terms, these combined policy options should result in: 

•  In  the  short  term,  more  competition  between  CSDs,  with  expected  benefits  for 
cross-border service quality and fees; this should translate into immediate benefits 
for issuers, but the translation of CSD fees into lower costs for investors may be 
undermined by more fragmentation in the short run 

•  In  the  medium  to  long  term,  more  consolidation  of  the  market  and  less 
fragmentation  (shorter  cross-border  holding  chains),  with  benefits  in  terms  of 
more safety and lower CSD costs for cross-border settlement; this should translate 
into lower costs along the whole post trading chain to investors 

•  Overall, the proposed policies should facilitate issuers' ability to raise capital and 
investors' ability to place their funds more safely and cost effectively, with wider 
benefits for the economy 

It is not obvious to quantify these benefits.  The Commission services draft working 
document on post-trading from 2006 estimated between €2 billion and €5 billion of 
aggregate excess cost of post-trading for investors. Furthermore, €700 million of cost 
reductions could be achieved through market consolidation. 

These numbers give an indication of orders of magnitude but are probably overstated 
due to the fact that the gap between CSD cross-border and domestic costs has already 

40 

 
 
 
 
started to decrease since 2006 (see Annex 3). Furthermore, T2S is expected to further 
reduce  both  domestic  and  cross-border  costs  (see  section  2.7).    The  T2S  economic 
impact assessment of 2008 estimates cost savings from T2S of €145 million to €584 
million. 

6.2.1. 

Impact on Member States administrations 

Impacts  on  Member  States  competent  authorities  would  be  more  of  a  regulatory 
nature  and  would  include  changes  in  securities  markets  rules  to  accommodate  the 
new  settlement  periods  and  the  new  settlement  discipline  measures  and  any 
adaptations  required  to  apply  the  cooperation  mechanisms  foreseen  for  settlement 
discipline and for authorisation and supervision. 

6.2.2. 

Impact on CSDs and other market infrastructures 

The  increased  competition  for  CSD  services  may  cause,  on  the  one  hand,  a 
“redistribution”  of  revenues  between  CSDs  and,  on  the  other  hand,  more 
consolidation in the sector (at least in the long-term).  The opening of access and the 
harmonisation of the authorisation and supervision framework may also facilitate the 
further consolidation of the existing groups. 

All  CSDs  would  probably  need  to  incur  some  compliance  costs  to  put  in  place  the 
new  regulatory  measures  -  obtaining  a 
increased  prudential  and 
organisational  rules  and  new/additional  procedures  related  to  settlement  discipline. 
While  the  first  two  areas  are  very  difficult  to  quantify,  the  impacts  of  the  last  two 
aspects could be assessed at the time when technical rules need to be adopted.  Please 
refer to section 6.4 for this.  

licence, 

The  most  affected  would  be  those  CSDs  that  currently  provide  banking  services, 
especially the two ICSDs, who would need to segregate these services into separate 
legal entities. As described in Annex 12, the cost of this segregation would be mainly 
in terms of capital and staff for the new entity and legal costs for the setting up of the 
legal relationship between the CSD and the banking entity. The banking entity could 
still  use  the  infrastructure  of  the  CSD,  thus  there  should  not  be  significant  system 
costs.  On  the  other  hand,  the  groups  to  which  these  ICSDs  belong  could  take  the 
opportunity of the new passport to transform most of their current subsidiaries into 
branches, thus reducing capital and overhead costs at the group level.  

Other  market  infrastructures  (CCPs  and  trading  venues)  would  also  incur  certain 
costs to adapt their processes to new settlement periods and discipline regimes. The 
obligation  to  provide  transaction  feeds  to  all  requesting  CSDs  should  not  imply 
significant  costs  for  these  infrastructures.  However  it  will  call  into  question  certain 
business models, mainly the integrated model of trading venue/CCP/CSD. 

6.2.3. 

Impact on intermediaries (custodian banks) 

The harmonisation of settlement periods and the consolidation of CSDs should allow 
intermediaries  to  reduce  their  back  office  costs,  at  least  in  the  long  term.    In  the 
short-term, a possible increase in the fragmentation of the CSD market may lead to 
higher  back  office  costs  for  the  intermediaries.  Some  of  the  smaller,  local 
intermediaries in markets that settle on a T+3 basis would incur investment costs to 
adapt  their  processes  and  systems  to  a  T+2  settlement  cycle;  the  more  regional, 

41 

 
 
 
 
global intermediaries should not be affected as they already have the systems to deal 
with different settlement cycles.  

The obligation to pass all transferable securities negotiated on trading venues through 
a CSD and the obligation to obtain a CSD licence to operate a securities settlement 
system  will  increase  the  costs  expected  by  those  custodian  banks  which  would  be 
interested in performing a similar function without benefiting from a CSD status. The 
development of link agreements between CSDs as well as the expected consolidation 
of  CSDs  should  generalise  the  settlement  through  SSSs  as  the  principal  way  of 
settlement even for cross-border transactions. Hence, it should make it less possible 
for  custodian  banks  to  internalise  settlements,  which,  as  described  in  section  3.2.1 
will be a benefit in terms of systemic risk.  

6.2.4. 

Impact on investors 

Investors  may  incur  adaptation  costs  too  from  a  change  of  settlement  to  T+2.  
However,  the  change  would  bring  them  benefits  too  by  reducing  counterparty  risk 
and  reducing  the  period  during  which  they  need  to  post  collateral  with  CCPs.  
Tougher  settlement  discipline  measures  would  increase  penalties  for  investors  that 
systematically  cause  settlement  fails,  particularly  the  short  sellers,  while  the  likely 
overall reduction in settlement fails would benefit the other investors.   

Investors  should  also  overall  benefit  from  a  potential  reduction  in  CSD  and 
intermediaries prices following more harmonisation and consolidation in the market; 
they would also derive benefits from an  increased centralisation of collateral.  Any 
increase in prices by other market infrastructures  due to adaptation costs should be 
marginal. 

6.2.5. 

Impact on retail investors and SMEs 

Retail  investors  who  are  active  in  the  securities  market  are  typically  not  direct 
participants  of  CSDs,  and  often  not  even  direct  clients  of  the  CSDs’  participants.  
Therefore any impact on them is likely to be very indirect and it will depend on to 
what  extent  the  net  benefits  highlighted  above  (for  instance  price  reductions  by 
CSDs) will be passed down the holding chain.  As illustrated above, any net impacts 
are likely to be positive.  There is nothing to suggest that SMEs face any particular 
disproportionate impact from the proposals set out above. 

6.2.6. 

Impact on issuers 

Issuers  should  benefit  also  from  potential  price  reductions  by  CSDs.    More 
importantly,  the  freedom  to  choose  a  CSD  should  allow  them  to  access  their 
investors more cheaply by issuing capital closer to where their investor base is, thus 
reducing  the  holding  chain  between  issuers  and  investors;  this  impact  would  be, 
however, marginal since CSD and intermediaries costs represent a small proportion 
of the trading and post-trading costs.   

The  obligation  of  dematerialisation  in  certain  countries  where  the  use  of  paper 
securities  is  still  widespread,  such  as  the  UK  may  increase  costs  for  issuers  if,  for 
instance,  issuers  (or  their  registrars)  have  to  post  regular  account  statements  to 
shareholders. 

42 

 
 
 
 
6.2.7. 

Social impact 

On  the  one  hand,  the  increased  competition  among  CSDs  may  have  direct 
employment effects if, as described in section 6.2.2, some CSDs lose revenues and 
have to downsize their operations or if CSD groups consolidate their operations and 
reduce  headcounts.  The  impact  is  not  likely  to  be  significant  as  CSDs  in  the  EU 
employ only around 6,000 staff. There may also be indirect employment effects for 
intermediaries 
increased  harmonisation  and 
consolidation of CSD services allows them to reduce their back offices.  

(e.g.  custodian  banks) 

the 

if 

However, on the other hand, the actions described above should make the prices of 
CSDs  and  of  intermediaries  more  competitive,  with  positive  effects  for  market 
participants and, eventually, end investors.  Furthermore, the overall increased safety 
of cross-border settlement and of CSDs has important social benefits, if for instance 
spill over effects in a crisis are contained. 

6.2.8.  Environmental impact 

There is nothing to suggest that there is a direct or indirect connection between the 
present subject and environmental issues.  There is therefore no likelihood of impact 
on the environment.  

6.2.9. 

Impact on third countries / impact on EU competitiveness 

Since the securities market is a global market it is important to monitor actions taken 
globally in the areas described in this report, for instance the adoption of the revised 
CPSS-IOSCO standards for market infrastructures and the plans of the major non-EU 
markets in respect of adopting a T+2 settlement period. This was discussed in section 
5.1. 

Any  policy  regarding  third  countries  must  be  mindful  of  the  various  types  of 
interaction  that  can  take  place  with  a  CSD  outside  the  EU,  including  an  EU  issuer 
issuing securities in a third country CSD and links between CSDs. The Commission 
will  therefore  need  to  develop  procedures  for  recognising  third-country  CSDs  that 
wish to offer their services to entities located in the EU. These procedures should be 
based on  at least the principles of equivalence of  rules  and  supervision in the third 
countries and of reciprocity of rights by these third countries.   

Global competition for CSD services is limited mostly to Eurobonds, where the two 
EU ICSDs compete mainly with the US and Swiss CSDs. The two ICSDs would be 
impacted  negatively  by  the  obligation  to  separate  their  banking  activities,  but  they 
would  benefit  from  the  other  positive  impacts  for  CSDs  analysed  in  section  6.2.3.  
No data is available to assess the net impact; however any non-EU CSDs wanting to 
compete for business in the EU would need to have equivalent rules. 

6.2.10.  Fundamental rights impacts 

Most of the issues described herein do not have a bearing on fundamental rights, as 
laid  out  in  the  Charter  of  Fundamental  Rights  of  the  EU  ("Charter")  and  in  the 
Communication from the Commission from October 2010 regarding the Strategy for 
the effective implementation of the Charter.  The principles of freedom to conduct a 
business (Article 16) and of right to property (Article 17) have a connection with the 
issues covered by the legislation, but there does not appear to be an impact as such. 

43 

 
 
 
 
6.2.11.  Impact on EU budget 

There is not likely to be any impact on the EU budget. 

6.3. 

The preferred policy instrument 

6.3.1.  Available policy instruments 

•  Communication, Recommendation, Directive, Regulation 

•  Encourage the private sector to pursue self-regulation  

•  Do nothing ("status quo" option) 

6.3.2.  The preferred policy instrument 

The  objectives  consist  in  (a)  harmonising  aspects  of  settlement,  (b)  introducing 
consistent  rules  for  CSDs,  and  (c)  removing  access  barriers.   A  Communication  or 
Recommendation would not have sufficient effect; they would suffer from the same 
drawbacks as relying simply on the current ESCB-CESR recommendations, as it has 
been analysed above. 

This  means  that  the  policy  choice  for  achieving  these  objectives  is  through  a 
harmonising  legal  instrument  at  the  EU  level,  for  which  there  are  essentially  two 
options, a Directive or a Regulation.  

The three objectives described in this report require absolute clarity and uniformity 
as to the scope and conditions of application throughout the EU, without exceptions 
or diverging implementations by national authorities and jurisdictions.  A regulation 
appears the most preferred policy instrument to achieve the desired objectives: 

•  Directly applicable without any delay in the whole Union after its adoption by the 

legislator 

•  Regulations  reduce  legal  uncertainty:  they  are  the  only  way  to  have  effectively 
uniform rules throughout the EU as they eliminate divergences in applicable law 
between Member States  

•  The  numerous  infringement  cases  against  Member  States  for  late,  non-  or 
incorrect transposition of directives are evidence that the transposition of EU law 
is ineffective in many instances  

•  Regulations  can  be  directly  invoked  by  the  parties  concerned  before  national 
limited 

this  applies  only 

in  very 

administrations  and  courts,  whereas 
circumstances for directives 

6.4. 

Timing of the initiative 

The timing of the initiative for 2011 is justified by several factors.  Firstly, CSDs are 
systemically  important  institutions  and  introducing  strict  prudential  requirements  at 
EU level should be a priority. This in line with the timetable for the revision of the 
CPSS-IOSCO  international standards, where draft principles were issued for public 
consultation  in  March  2011,  with  final  standards  expected  in  Q1  2012.  The  CSD 

44 

 
 
 
 
proposal  will  be  in  line  with  the  general  CPSS-IOSCO  principles  from  the  public 
consultation  document,  while  detailed  technical  measures  will  be  introduced  in 
secondary legislation, after the international standards have been finalised. 

Secondly,  regulating  CSDs  is  important  in  order  to  complete  the  regulatory 
framework of the trading and post-trading market infrastructures, following MiFID, 
which  addresses  trading  venues  and  EMIR,  which  addresses  CCPs  and  trade 
repositories.  Thirdly,  some  of  the  measures  proposed  are  important  to  accompany 
and  facilitate  the  T2S  project  launched  by  the  Eurosystem,  which  is  due  to  start  in 
2015. 

6.5. 

Impacts of the detailed technical rules 

As  already  stated,  in  some  instances  the  preferred  policy  options  represent  general 
principles.  In  order  to  make  them  operational,  detailed  rules  will  need  to  be  set  in 
secondary legislation. This is the case mainly for settlement discipline measures and 
CSD prudential rules, as described in Annex 11.  Where regulatory or implementing 
technical  standards  are  needed,  these  would  be  developed  by  ESMA 42  in  close 
cooperation  with  ESCB  within  six  months  to  one  year  from  the  adoption  of  the 
Regulation.    According  to  its  regulation  (Articles  10  and  15  of  Regulation 
1095/2010),  before  submitting  draft  standards  to  the  Commission,  ESMA  has  to 
conduct  open  public  consultations  and  analyse  the  potential  related  costs  and 
benefits.   

7. 

MONITORING AND EVALUATION 

Ex-post  monitoring  and  evaluation  of  all  new  legislative  measures  is  a  top  priority 
for  the  Commission.  Evaluations  are  generally  planned  three  to  five  years  after  the 
implementation  deadline  of  each  measure  and  assess,  among  other  things,  how 
effective and efficient the measure has been in terms of achieving the objectives set 
out  and  whether  new  measures  or  amendments  are  needed.    A  possible  monitoring 
and  evaluation  framework  for  this  initiative,  addressing  each  strategic  objective,  is 
described below.  

7.1. 

Objective 1 – Enhance framework for settlement 

Settlement  measures  should  increase  the  efficiency  of  settlement  and  facilitate 
corporate  actions,  especially  on  a  cross-border  basis.  The  following  tools  could  be 
used to monitor and evaluate this: 

•  A  report  assessing  settlement  efficiency  for  each  EU  market.    Indicators  could 
include  number  and  volume  of  settlement  fails  (differentiated  between  domestic 
and  cross-border  transactions),  volume  of  CSD  penalties,  number  of  buy-in 
procedures and number of cases of suspension of membership due to systematic 
failures  to  settle.    This  report  could  be  produced  annually  by  ESMA  based  on  a 
standardised reporting by market players to the competent authorities 

42  

Any reference in this document to ESMA is understood to take due account of limits to delegation of 
powers to regulatory agencies (like ESMA) identified by the case law of the European Court of Justice 
(Case 9/56 Meroni (1958) ECR 133)  

45 

 
 
 
 
                                                 
•  A  report  measuring  the  volume  of  market  claims.    This  could  be  done  by  an 
industry  group,  and  should  be  done  before  the  implementation  date  of  a 
harmonised settlement period as well as three years afterwards in order to allow 
comparison 

•  A  report  measuring  internalisation  of  settlement  by  custodians  outside  of 
securities settlement systems operated by CSDs. This information is important in 
terms  of  systemic  risk  and  to  help  assess  whether  EU  intervention  may  be 
necessary  in  this  respect.  This  report  could  be  produced  annually  by  ESMA  in 
cooperation with EBA based on a standardised reporting by market players to the 
competent authorities 

7.2. 

Objective 2 – Consistent rules for CSDs 

The  new  common  licensing  and  authorisation  and  supervision  framework  should 
increase level playing field and competition among CSDs, leading to a reduction in 
prices,  particularly  for  cross-border  settlement.    The  following  monitoring  and 
evaluation tools could be used: 

•  A  report  assessing  whether  cross-border  activity  is  increasing.  Indicators  could 
include number of CSD links, number of foreign participants to CSDs, volume of 
transactions  for  foreign  participants  and  numbers  of  issuers  accessing  foreign 
CSDs.    This  could  be  produced  by  ESMA  annually  based  on  a  standardised 
reporting by CSDs.   

•  A report analysing prices in the EU for the key CSD services, such as settlement 
and safekeeping for cross-border and domestic transactions.  This could be done 
by an external consultant three years after the entry into force of the Regulation, 
and the price gap could be compared with the 2009 data from the Oxera report 

The  second  report  could  also  feed  into  the  monitoring  and  evaluation  of  a  possible 
Securities Law Directive, whose objective is also, among others, to reduce prices for 
cross-border safekeeping. 

7.3. 

Objective 3 - Access 

Besides the report on cross-border activity described in section 7.2, another tool for 
evaluating the improvement of access could be a survey of CSDs, issuers and other 
market  infrastructures  to  assess  to  what  extent  the  measures  taken  have  eliminated 
barriers of access or whether obstacles (of practical or legal nature) still remain.  This 
could be undertaken by the relevant European associations three years after the entry 
into force of the Regulation. 

46 

 
 
 
 
8. 

ANNEXES 

8.1. 

Annex 1 – Political mandate and basis of the work programme  

8.1.1.  EU level 

The EU Commission services have worked on the post trading issues for more than 
10 years.  This work was endorsed by a Resolution of the European Parliament from 
2003 on a consultation by the Commission on clearing and settlement, and outlined 
by  a  Communication  from  the  Commission  to  the  Council  and  the  European 
Parliament from 2004 on clearing and settlement in the EU.  A list of these and other 
relating documents is provided below. 

•  The  Consultation  of  28  May  2002  of  the  Commission  services,  “Clearing  and 

Settlement in the European Union: Main policy issues and future challenges" 

•  The European Parliament Resolution of January 2003 on the consultation entitled 
"Clearing  and  settlement  in  the  European  Union:  main  policy  issues  and  future 
challenges" 

•  The  Communication  of  28  April  2004  from  the  Commission  to  the  Council  and 
the European Parliament – "Clearing and Settlement in the European Union - The 
way forward" 

•  The  draft  working  document  of  23  May  2006  from  the  Commission  services  on 

post-trading activities  

•  The  draft  working  document  of  24  May  2006  from  the  Commission  services  on 

"Competition in EU securities trading and post-trading. Issues Paper" 

•  Reports to ECOFIN: 

– 

– 

– 

– 

– 

27.02.2007  Commission  Staff  Working  Document  “Monitoring 
Implementation of the Code of Conduct on Clearing and Settlement”  

25.07.2007  Commission  Staff  Working  Document  “Improving  the 
Efficiency, Integration and Safety and Soundness of Cross-border Post-
trading Arrangements in Europe”   

11.03.2008  Commission  Staff  Working  Document  “Improving  the 
Efficiency, Integration and Safety and Soundness of Cross-border Post-
Trading Arrangements in Europe” (progress report) 

03.11.2008  Commission  Staff  Working  Document  “Improving  the 
Efficiency, Integration and Safety and Soundness of Cross-border Post-
Trading Arrangements in Europe” (progress report) 

06.11.2009  Commission  Staff  Working  Document  "The  Code  of 
Conduct on Clearing and Settlement: Three Years of Experience" 

More recently, political support has been demonstrated: 

47 

 
 
 
 
•  In a joint letter of 8 June 2010, Chancellor Merkel and President Sarkozy invited 
President Barroso to consider the possibility of harmonisation of the time allowed 
for securities settlement and delivery related to trading on European markets 

•  The  ECOFIN  Council  of  2  December  200843 emphasised  the  need  to  strengthen 
the  safety  and  soundness  of  securities  settlement  systems  ("SSS"  or  "settlement 
system"),  encouraged  further  progress  towards  improving  price  transparency, 
stressed the need for further progress on access and interoperability requests and 
agreed  with  the  August  2008  Legal  Certainty  Group's  assessment  that  EU 
legislation  is  needed  (the  report  tackled  legal  barriers  relating  to  post-trading, 
including barriers of access to CSDs) 

These  objectives  are  consistent  with  the  reform  programme  proposed  by  the 
European  Commission  to  drive  the  EU  out  of  the  financial  crisis.  As  an  essential 
element  contributing  to  a  stable  financial  sector,  attaining  these  objectives  is  a 
prerequisite  for  building  a  sustainable  recovery  (Communication  for  the  spring 
European Council, "Driving European recovery"). 

8.1.2. 

International level 

The need for appropriate standards for CSDs is also agreed internationally: 

•  Recommendations for settlement systems were adopted by global Central Banks 
and securities regulators (CPSS-IOSCO) as early as 200144.  These were adapted 
at European level in 200945  

•  In  its  meeting  of  20  October  2010,  the  Financial  Stability  Board  re-iterated  the 
call for updated standards for more robust core market infrastructures and asked 
for  the  revision  and  enhancement  of  existing  standards  for  financial  market 
infrastructures46.  The CPSS-IOSCO standards are therefore under review  

43  
44  

45  

46  

http://register.consilium.europa.eu/pdf/en/08/st16/st16212.en08.pdf  
Cf.  the  CPSS/IOSCO  Recommendations  for  Securities  Settlement  Systems  of  November  2001, 
currently under review 
Cf.  the  ESCB/CESR  Recommendations  for  Securities  Settlement  Systems  in  the  European  Union  of 
May 2009 
http://www.financialstabilityboard.org/press/pr_101020.pdf  

48 

 
 
 
 
 
 
                                                 
8.2. 

Annex 2 – External expertise 

The  Commission  services  have  been  engaged  in  extensive  consultations  with 
representatives  from  the  great  majority  of  stakeholders,  including  regulators,  CSDs 
and CSD participants. The interaction has taken the form of bilateral and multilateral 
meetings, for instance with the European Central Securities Depositaries Association 
(ECSDA), which represents more than 40 CSDs offering their services in Europe. 

Several working groups were created and met regularly: 

•  A Member States Working Group constituted from experts on post trading matters 
representing Member States (and including the European Central Bank (ECB), the 
European  Banking  Authority  (EBA)  and  the  European  Securities  Market 
Authority  (ESMA))  had  several  meetings  in  2010  –  2011  to  discuss  a  possible 
legislative initiative on CSDs and settlement 

•  A wider stakeholders group, EGMI (Expert Group in Market Infrastructures) was 
created in 2010 to advise the Commission services on all post trading issues. The 
group had a broad representation of the post trading market, and included experts 
from  CSDs,  CCPs,  trading  venues  and  custodian  banks.  Industry  associations  as 
well as public authorities attended the meetings as observers  

Prior  to  that,  the  Commission  services  had  worked  with  several  expert  groups  to 
address different issues in the post trading area: 

•  An industry group chaired by Alberto Giovannini was asked by the Commission 
in 2001 to identify and propose solutions for cross-border barriers to clearing and 
settlement.  The group produced two reports, in 2001 and 2003  

•  A Clearing and Settlement Advisory and Monitoring Expert group (CESAME and 
CESAME2)47,  specialised  in  advising  on  monitoring  of  the  Giovannini  barriers 
met  regularly  between  2005  and  2010  and  provided  two  reports  dealing  in 
particular with certain aspects examined under driver 1 in the problem definition.  
A  working  group  on  the  Harmonisation  of  Settlement  Cycles  (HSC)  continued 
CESAME's work on settlement periods in 2010 and 2011 

•  A Monitoring Group (MOG) focused on the monitoring of the implementation of 

the Code of Conduct met regularly between 2004 and 2010 

•  The  Legal  Certainty  Group  referred  to  above48 met  regularly  between  2005  and 
2009  and  provided  two  reports  contributing  to  the  draft  Security  Law  Directive 
but  also  dealing  with  certain  aspects  examined  under  driver  3  in  the  problem 
definition. 

The Commission services have also had extensive discussions with the ECB and the 
T2S  Programme  Office,  who  are  fully  supportive  of  this  initiative.    T2S  also 
prioritises  harmonisation  of  the  post  trading  industry  in  Europe  and  recognises  that 
the European Commission has an important role to play in areas that the T2S project 
would  not  address.    As  an  illustration,  below  is  a  table  from  T2S  showing  the 

47  
48  

http://ec.europa.eu/internal_market/financial-markets/clearing/cesame2_en.htm  
LCG reports : http://ec.europa.eu/internal_market/financial-markets/clearing/certainty_en.htm  

49 

 
 
 
 
                                                 
Giovannini post-trading barriers T2S will address. The T2S Harmonisation Steering 
Group's  rolling  list  shows  that  there  are  important  harmonisation  areas  where  the 
European Commission would need to act49. 

Table 10: Which Giovannini barriers T2S will contribute to  

Giovannini barrier 

Will T2S 
contribute in 
removing it? 

1. National differences in information technology and interfaces 

2. National clearing and settlement restrictions that require the use of multiple 
systems 

3. Differences in national rules relating to corporate actions, beneficial 
ownership and custody  

4. Absence of intra-day settlement finality 

5. Practical impediments to remote access to national clearing and settlement 
systems 

6. National differences in settlement periods  

7. National differences in operating hours/settlement deadlines 

8. National differences in securities issuance practice  

9. National restrictions on the location of securities  

10. National restrictions on the activity of primary dealers and market 
makers 

11. Domestic withholding tax regulations serving to disadvantage 
foreign intermediaries  

12. Transaction taxes collected through a functionality integrated into a 
local settlement system 

13. The absence of an EU-wide framework for the treatment of interests 
in securities  

14. National differences in the legal treatment of bilateral netting for 
financial transactions  

15. Uneven application of national conflict of law rules  

Yes 

Yes 

Yes 

Yes 

Yes 

No 

Yes 

No 

No 

No  

No 

No 

No 

No 

No 

49  

Please see: http://www.ecb.int/paym/t2s/progress/pdf/hsg/2011-t2s-harmonisation-list-rolling-version-
1-0.pdf?6caaef6c294b58485a62a8a4263ed0aa  

50 

 
 
 
 
 
                                                 
8.3. 

Annex 3 – Data on CSDs in the EU 

8.3.1.  Overview of CSDs in the EU 

MS  Category 
BG  CSD 
CSD 
CZ 
CSD 
SK 

Table 11: Non-Central Bank CSDs in the EU 
Name 
CDAD (Central Depository AD) 
CDCP (Centrálnídepozitářcennýchpapírů) 
CDCP SR 
(Centrálnydepozitárcennýchpapierov) 
CDCR (Central Depository and Central 
Registry) 
Clearstream Banking Frankfurt 
Clearstream Banking Luxembourg 
CSDL (Central Securities Depository 
Lithuania) 
Depozitarul Central 
ECSD 
Euroclear Bank 
Euroclear Belgium 
Euroclear Finland 

DE 
LU 
LT 

CY 

RO  CSD 
CSD 
EE 
ICSD 
BE 
CSD 
BE 
CSD 
FI 

CSD 

CSD 
ICSD 
CSD 

Euroclear France 
Euroclear Nederland 
Euroclear Sweden 

Euroclear UK and Ireland50 
Helex Central Securities Depository 
Iberclear 
INTERBOLSA 
KDD (KlirinškoDepotneDružbe) 

KDPW 

KELER 

LCD-DENOS 
Malta Stock Exchange / MaltaClear 

Monte Titoli 
OeKB (OesterreichischeKontrollbank) 
RM-System 
SCL Barcelona, SCL Bilbao and SCL 
Valencia51 

FR 
NL 
SE 

CSD 
CSD 
CSD 

UK 
CSD 
GR  CSD 
CSD 
ES 
CSD 
PT 
CSD 
SI 

PL 

CSD 

HU  CSD 

LV 
CSD 
MT  CSD 

IT 
AT 
CZ 
ES 

CSD 
CSD 
CSD 
CSDs of 
regional 
exchanges 

Ownership 
User-owned 
Exchange-owned 
Gov/Exchange-
owned 
Gov/Exchange-
owned 
Exchange-owned 
Exchange-owned 
Gov/Exchange-
owned 
Exchange-owned 
Exchange-owned 
User-owned 
User-owned 
User-owned 

User-owned 
User-owned 
User-owned 

User-owned 
Exchange-owned 
Exchange-owned 
Exchange- 
User-owned 

Gov/Exchange-
owned 
Gov/Exchange-
owned 
Exchange-owned 
Gov/Exchange-
owned 
Exchange-owned 
User-owned 
Exchange-owned 
Exchange-owned 

Asset coverage 
All financial instruments 
Equities, bonds 
All financial instruments 

Equities, bonds, money 
market 
All financial instruments 
All financial instruments 
All financial instruments 

Equities, bonds, funds 
All financial instruments 
All financial instruments 
Equities, bonds, funds 
Equities, bonds, money 
market, ETFs 
All financial instruments 
All financial instruments 
Equities, bonds, money 
market, ETFs 
All financial instruments 
Equities, bonds, ETFs 
All financial instruments 
All financial instruments 
Equities, bonds, money 
market, ETFs 
Equities, bonds, funds 

All financial instruments 

All financial instruments 
All financial instruments 

All financial instruments 
Equities, bonds, funds 
Equities, bonds, funds 
Equities, bonds, money 
market 

VP 
VP Lux 

DK 
LU 

CSD 
CSD 

User-owned 
User-owned 

All financial instruments 
Bonds 

Below are some comments on table 11 regarding the ICSDs and the cross-border groups to 
which they are part. 

50 
51 

Euroclear UK & Ireland is incorporated in the UK but acts as the CSD for both UK and Irish equities 
The three regional CSDs in Spain are operated by the regional exchanges, which are themselves part of 
the BME Group, owner of Iberclear 

51 

 
 
 
 
 
 
 
 
 
 
 
                                                 
ICSDs  

The two ICSDs are specialised in the issuance of international bonds, commonly known as 
"Eurobonds", i.e. issued under a standard framework (primarily aimed at attracting 
international investors) governed by a law and expressed in a currency which are generally 
different from the law and the currency of the constituency of the issuer52 53. Eurobonds are 
issued through the two European ICSDs that created the market during the 60's/70's, but are 
entered in a book entry system through a common account provider called a "common 
depository", typically a custodian bank, which acts also as issuance agent. Some tasks related 
to the notary function are therefore outsourced by the ICSDs to these common depositaries54. 
The ICSDs are also active outside the Eurobond market, for other securities such as equity. 
While for Eurobonds they act as "issuer CSD" (albeit with the particularity of a common 
depository structure), for other securities they act as traditional account providers, or so called 
"investor CSD", and they facilitate their members' transactions in securities through links with 
issuer CSDs. 

Cross-border groups  

Two (main) cross-border groups exist in Europe, which have developed around the ICSDs: 

(1) 

(2) 

The  Clearstream  group,  which  is  the  result  of  the  merger  of  Cedel  International  (an 
ICSD established in Luxembourg in 1970 by a group of global financial institutions) 
and  Deutsche  Börse  Clearing  (the  German  national  CSD).  The  group  consists  of  an 
ICSD – Clearstream Banking Luxembourg, which also operates LuxClear, the national 
CSD of Luxembourg, and a CSD – Clearstream Banking Frankfurt, which facilitates 
settlement  for  the  German  securities  market.  Since  2001  both  use  a  common  IT 
platform, Creation, to settle international securities.  Clearstream Banking Frankfurt is 
also  part  of  a  joint  venture  with  nine  other  CSDs  in  Europe  and  beyond  (Austria, 
Cyprus,  Greece,  Denmark,  Norway,  Spain,  Switzerland,  Egypt  and  South  Africa), 
Link-Up  Markets,  which  have  streamlined  communication  between  them,  offering 
customers a single point of access to these markets 

The  Euroclear  group,  which  is  the  result  of  the  acquisition  by  Euroclear  of  the 
domestic  CSDs of France,  Netherlands, Belgium,  UK  and  Ireland  (one  CSD  for  UK 
and  Ireland  operating  a  settlement  system  known  as  CREST),  Sweden  and  Finland. 
The  group  consists  of  an  ICSD  –  Euroclear  Bank,  and  the  six  national  CSDs.  Since 
2007 all (I)CSDs of the Euroclear Group operate through a single settlement engine, 
owned  by  Euroclear  SA/NV  (a  holding  company  for  all  (I)CSDs).  More  recently,  in 
2009,  a  single  settlement  platform,  ESES,  was  launched  for  the  Belgian,  Dutch  and 
French CSDs  

52  

53  

54  

Typically  a  few  jurisdictions  are  "preferred"  for  the  issuance  of  Eurobonds,  e.g.  England  &  Wales, 
Netherlands, US, Germany 
Shares  can  be  listed  on  different  markets  as  well,  but  they  are  generally  issued  in  the  law  of  the 
constituency  of  the  issuer  and  subject  only  to  secondary  listings  on  other  markets.    The  Eurobonds 
described above should not be confused with the "Eurobond", which is the term also used for the fixed 
income security to be potentially issued by the Euro zone 
However,  in  most  cases,  as  for  example  in  the  recently  adopted  framework  for  the  "new  look  global 
note", the ICSDs remain fully liable for the safekeeping of the securities subcontracted to the common 
depository 

52 

 
 
 
 
 
 
 
 
 
                                                 
Ownership 
NCB 
NCB 
NCB 
NCB 

MS  Category 
GR  NCB SSS 
BG  NCB SSS 
NCB SSS 
BE 
NCB SSS 
SK 

Table 12: Central Bank Securities Settlement Systems in the EU 
Name 
BOGS (Bank of Greece) 
GSD (Government Securities Depository) 
National Bank of Belgium 
NBS-CR (Central Register of the National 
Bank of Slovakia) 
RPW (National Bank of Poland) 
SaFIR - NBR (National Bank of Romania) 
SITEME (Banco de Portugal) 
SKD 
VNS (Bank of Latvia) 
Note (for both tables): "MS" stands for Member State of incorporation. "NCB" stands for national central bank. 
"SSS" stands for Securities Settlement System. "Gov/Exchange-owned" means the CSD is either (i) owned by an 
exchange which is itself owned by the government or (ii) owned jointly by the exchange and governmental entities 
(i.e. there is no user ownership). 

Asset coverage 
Government debt 
Government debt 
Debt instruments 
Short-term public debt 

Government debt 
Government debt 
Short-term public debt 
Short-term debt 
Debt instruments 

PL 
NCB SSS 
RO  NCB SSS 
NCB SSS 
PT 
NCB SSS 
CZ 
NCB SSS 
LV 

NCB 
NCB 
NCB 
NCB 
NCB 

Source (for both tables): EGMI 

53 

 
 
 
 
8.3.2.  Key data for EU securities settlement systems 

Table 13: Value of securities held on accounts with EU settlement systems (end of period) 
Value of securities held on accounts with CSDs (EURm) 

Belgium  

NBB SSS  
Euroclear Belgium 
Euroclear Bank 
CDA 
GSD 
Czech Republic   SKD 

Bulgaria  

RM-System 
SCP 
CDCP (formerly Univyc) 
VP 
Clearsteam Banking F'furt 
ECSD 
BOGS 
HELEX 
Iberclear 
Regional SSSs 
Euroclear France 
Monte Titoli 
CDCR 
VNS 
LCD-DENOS 
CSDL 
Clearstream Banking Lux. 
VP Lux 
KELER 
MSE 
Euroclear Netherlands 
OEKB (WSB SYSTEM) 
KDPW_stream 
RPW 
SITEME 
INTERBOLSA 
Depozitarul Central 
NBR 
Depozitarul Sibex 
KDD 
NBS-CR 
CDCP SR 
Euroclear Finland 
Euroclear Sweden AB 
Euroclear UK and Ireland 

Denmark  
Germany  
Estonia  
Greece  

Spain  

France  
Italy  
Cyprus  
Latvia  

Lithuania  
Luxembourg  

Hungary  
Malta  
Netherlands  
Austria  
Poland  

Portugal  

Romania  

Slovenia  
Slovakia  

Finland  
Sweden  
UK 
Total 
Source: ECB statistics 

2006 
301,487 
265,686 
8,031,733 
3,483 
1,511 
29,819 

54,040 
2,226 
665,884 
6,185,646 
9,183 
184,872 
158,075 
1,763,658 
64,072 
5,018,335 
2,694,506 
17,036 
390 
2,486 
12,138 
3,811,890 

106,568 
6,678 
953,849 
486,979 
193,503 
11,537 
12,409 
388,340 
- 
1,437 

2007 
335,359 
213,981 
9,114,930 
30,030 
1,636 
30,876 

59,841 
3,088 
709,129 
6,152,298 
9,379 
200,957 
196,432 
2,035,590 
69,077 
5,312,125 
2,772,118 
25,313 
335 
2,530 
12,895 
4,151,521 

120,901 
7,610 
944,604 
473,137 
236,507 
8,447 
12,935 
419,841 
31,443 
2,380 

2008 
400,998 
135,734 
8,841,368 
30,629 
1,571 
31,953 

59,771 
2,621 
622,866 
2,923,196 
6,160 
216,573 
69,287 
1,822,324 
66,203 
4,517,284 
2,732,496 
10,321 
1,518 
3,140 
9,589 
4,488,782 

94,230 
6,702 
818,967 
424,869 
151,489 
14,594 
13,150 
408,086 
14,412 
4,368 

2009 
462,052 
141,362 

2010 
482,990 
162,028 
9,610,898  10,355,961 
31,628 
2,011 
34,848 
0 

31,425 
1,539 
31,813 

62,914 
1,715 
721,142 
3,132,166 
7,210 
259,845 
84,717 
2,137,625 
67,050 
5,033,696 
2,824,788 
14,173 
705 
2,407 
10,466 
4,713,043 
36,863 
105,616 
7,435 
879,590 
463,172 
202,589 
21,569 
18,288 
471,759 
17,564 
11,202 

1,821 
827,079 
3,375,489 
7,406 
264,424 
54,922 
2,065,911 
66,872 
5,139,765 
2,971,422 
13,063 
474 
2,550 
11,554 
5,130,339 
25,300 
114,572 
8,363 
924,499 
503,340 
260,426 
25,813 
24,897 
508,763 
18,072 
15,952 
26 
22,517 

20,743 
17,880 
15,617 
17,600 
18,069 
31,634 
45,881 
313,472 
286,266 
218,446 
852,095 
1,251,618 
664,773 
3,782,994 
3,876,268 
2,134,114 
36,444,452  38,156,388  32,045,953  35,948,158  38,900,883 

28,645 
32,906 
19,426 
372,087 
726,029 
3,278,043 

22,822 
- 
25,808 
239,981 
794,353 
3,274,787 

54 

 
 
 
 
 
 
 
 
 
 
 
 
  
  
  
  
 
  
 
 
 
 
 
  
  
  
 
 
 
 
 
 
 
 
  
 
 
Table 14: Transactions processed by EU settlement systems; Number of transactions 

Belgium  

NBB SSS  
Euroclear Belgium 
Euroclear Bank 
CDA 
GSD 
Czech Republic   SKD 

Bulgaria  

RM-System 
SCP 
CDCP (formerly Univyc) 
VP 
Clearsteam Banking F'furt 
ECSD 
BOGS 
HELEX 
Iberclear 
Regional SSSs 
Euroclear France 
Monte Titoli 
CDCR 
VNS 
LCD-DENOS 
CSDL 
Clearstream Banking Lux. 
VP Lux 
KELER 
MSE 
Euroclear Netherlands 
OEKB (WSB SYSTEM) 
KDPW_stream 
RPW 
SITEME 
INTERBOLSA 
Depozitarul Central 
NBR 
Depozitarul Sibex 
KDD 
NBS-CR 
CDCP SR 
Euroclear Finland 
Euroclear Sweden AB 
Euroclear UK and Ireland 

Denmark  
Germany  
Estonia  
Greece  

Spain  

France  
Italy  
Cyprus  
Latvia  

Lithuania  
Luxembourg  

Hungary  
Malta  
Netherlands  
Austria  
Poland  

Portugal  

Romania  

Slovenia  
Slovakia  

Finland  
Sweden  
UK 
Total 
Source: ECB statistics 

2009 
337 
1,801 
38,376 
609 
9 
12 
77 
61 
1,013 
15,976 
55,853 
146 
400 
10,294 
14,907 
53 
26,639 
28,589 
379 
1 
90 
266 
16,068 
11 
4,062 
17 
4,886 
1,349 
13,974 
17 
1 
905 
1,574 
8 

251 

55 
14,258 
28,643 
56,359 
340,335 

2010 
408 
1,716 
48,218 
355 
15 
11 
34 

12,474 
11,947 
58,404 
173 
369 
8,054 
19,714 
49 
26,122 
25,906 
218 
0 
73 
262 
19,809 
13 
3,445 
24 
4,879 
1,460 
14,762 
15 
2 
960 
1,195 
11 
1 
267 

113 
5,079 
12,238 
52,084 

330,878 

Number of delivery instructions (thousands) 
2007 
302 
1,352 
40,666 
853 
7 
13 
58 
49 
791 
16,045 
67,237 
228 
442 
11,935 
17,752 
117 
34,491 
30,338 
743 
1 
81 
281 
12,781 

2006 
280 
1,203 
33,949 
689 
6 
14 
33 
130 
675 
12,099 
59,139 
117 
370 
11,441 
13,992 
152 
32,756 
28,619 
594 
1 
64 
161 
10,948 

2008 
328 
1,261 
36,993 
1,285 
16 
12 
58 
65 
1,254 
16,898 
56,014 
147 
378 
9,602 
17,097 
84 
30,384 
26,032 
442 
1 
81 
268 
15,183 

1,887 
40 
3,845 
2,462 
11,983 
29 
1 
653 

3 

538 
3 
51 
9,660 
20,414 
62,325 
323,332 

2,256 
22 
4,597 
2,136 
16,157 
14 
1 
922 
2,384 
4 

533 
3 
32 
16,088 
28,085 
66,342 
378,146 

2,567 
24 
4,399 
1,433 
10,637 
14 
1 
949 
1,896 
5 

444 
2 
20 
18,428 
32,272 
59,045 
348,027 

55 

 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
Table 15: Transactions processed by EU settlement systems; Value of delivery instructions 

Value of delivery instructions (EURbn) 

Belgium  

NBB SSS  
Euroclear Belgium 
Euroclear Bank 
CDA 
GSD 
Czech Republic   SKD 

Bulgaria  

RM-System 
SCP 
CDCP (formerly Univyc) 
VP 
Clearsteam Banking F'furt 
ECSD 
BOGS 
HELEX 
Iberclear 
Regional SSSs 
Euroclear France 
Monte Titoli 
CDCR 
VNS 
LCD-DENOS 
CSDL 
Clearstream Banking Lux. 
VP Lux 
KELER 
MSE 
Euroclear Netherlands 
OEKB (WSB SYSTEM) 
KDPW_stream 
RPW 
SITEME 
INTERBOLSA 
Depozitarul Central 
NBR 
Depozitarul Sibex 
KDD 
NBS-CR 
CDCP SR 
Euroclear Finland 
Euroclear Sweden AB 
Euroclear UK and Ireland 

Denmark  
Germany  
Estonia  
Greece  

Spain  

France  
Italy  
Cyprus  
Latvia  

Lithuania  
Luxembourg  

Hungary  
Malta  
Netherlands  
Austria  
Poland  

Portugal  

Romania  

Slovenia  
Slovakia  

Finland  
Sweden  
UK 
Total 
Source: ECB statistics 

2006 
5,993 
435 
218,551 
2 
6 
1,701 
0 
124 
155 
4,414 
41,618 
3 
5,621 
85 
81,426 

123,967 
65,549 
4 
5 
2 
6 
32,766 

577 
1 

266 
3,429 
155 
85 
128 
128 
3 

2007 
6,592 
902 
285,465 
4 
10 
1,712 
1 
5 
170 
4,348 
58,024 
8 
7,631 
121 
91,894 

153,253 
69,423 
9 
15 
4 
4 
51,971 

1,168 
1 

361 
4,153 
72 
110 
203 
203 
16 

2008 
8,300 
310 
248,791 
2 
39 
1,615 
1 
2 
208 
5,003 
62,473 
5 
8,368 
92 
75,462 

134,266 
67,195 
2 
37 
4 
5 
54,993 

968 
2 

313 
4,411 
169 
92 
149 
149 
9 

14 
512 
32 
735 
12,963 
144,548 
748,015 

23 
476 
13 
1,011 
13,971 
163,168 
918,522 

20 
528 
35 
845 
12,437 
143,687 
832,995 

2009 
7,408 
399 
215,687 
1 
20 
1,369 
1 
3 
110 
5,369 
66,722 
3 
6,485 
64 
90,814 

117,465 
72,032 
2 
6 
7 
4 
53,795 
116 
1,105 
1 
2,584 
204 
3,045 
266 
88 
121 
121 
110 

23 
- 
26 
510 
6,798 
200,083 
854,976 

2010 
9,050 
464 
277,207 
0 
39 
1,404 
0 

108 
5,821 
68,193 
1 
3,538 
45 
88,259 
64 
136,974 
77,357 
1 
0 
4 
4 
62,815 
191 
1,641 
1 
4,522 
221 
4,503 
234 
197 
151 
4 
48 
0 
24 

32 
479 
9,077 
168,065 

920,738 

56 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
8.3.3.  Overview of CSD links 

The figure below provides an overview of the types of links between CSDs in cross-
border settlement. "Direct links" are direct CSD to CSD links, "operated direct links" 
are where a third party opens an account at the issuer CSD on behalf of the investor 
CSD,  "relayed  links"  involve  at  least  three  CSDs  and  "indirect  links"  go  through  a 
local agent or global custodian55.  

Figure 5: How to execute cross-border settlement  

Issuing
Issuing
company
company

Issuer
Issuer
CSD
CSD

E
E
U
U
S
S
S
S

I
I

F
F
O
O
Y
Y
R
R
T
T
N
N
U
U
O
O
C
C

I
I

S
S
E
E
R
R
T
T
N
N
U
U
O
O
C
C
R
R
E
E
H
H
T
T
O
O

Local
Local
custodian
custodian

Local
Local
custodian
custodian

Local/global
Local/global
custodian
custodian

Local/global
Local/global
custodian
custodian

Operator
Operator

Operator
Operator

Global 
Global 
custodian
custodian

Global 
Global 
custodian
custodian

Investor 
Investor 
CSD
CSD

Investor 
Investor 
CSD
CSD

Investor 
Investor 
CSD
CSD

Intermediary 
Intermediary 
CSD
CSD

Intermediary 
Intermediary 
CSD
CSD

Intermediary 
Intermediary 
CSD
CSD

Investor 
Investor 
CSD
CSD

Investor 
Investor 
CSD
CSD

Investor 
Investor 
CSD
CSD

Market
Market
participant*
participant*

Market
Market
participant*
participant*

Market
Market
participant*
participant*

Market
Market
participant*
participant*

Market
Market
participant*
participant*

Market
Market
participant*
participant*

Market
Market
participant*
participant*

Market
Market
participant*
participant*

Market
Market
participant*
participant*

Market
Market
participant*
participant*

Access 
Access 
channel:
channel:

Direct 
Direct 
access
access

Indirect 
Indirect 
access
access

Indirect 
Indirect 
access
access

Indirect 
Indirect 
access
access

Direct 
Direct 
link
link

Operated 
Operated 
link
link

Indirect 
Indirect 
link
link

Relayed 
Relayed 
link
link

Relayed 
Relayed 
link
link

Relayed 
Relayed 
link
link

Source: National Bank of Belgium Financial Stability Review, 2006 
* The market participant may be a broker dealer, an investment firm or similar institutions 
Note: The global custodian, investor CSD or intermediary CSD could also be located in the country of 
issue 

55 

definitions, 

Eurosystem 
(the 
definitions  refer  to  Securities  Settlement  Systems,  but  the  SSSs  are  assimilated  with  the  CSDs  that 
operate them) 

http://www.ecb.int/paym/coll/coll/ssslinks/html/index.en.html 

at 

57 

 
 
 
 
 
 
 
 
 
 
 
 
                                                 
8.4. 

Annex 4 – Additional data on CSD and custodian costs  

Table  16:  Provision  of  trading  platform  and  CSD  services  for  domestic  and  cross-
border members (% by number of members)  

CSDs 

Trading platforms 

Domestic 

Cross-border 

Domestic 

Cross-border 

2006 

2008 

98 

97 

2009 

97 
Source: Oxera report, May 2011 

2 

3 

3 

65 

61 

61 

35 

39 

39 

Table 17: Relative cross-border vs. domestic CSD costs  

Clearing and settlement costs  
(€ per transaction) 

Account provision and asset servicing 
costs (bp per value of securities held) 

Cross-
border 

Ratio of cross-
border/domestic 
costs (%) 

Domestic 

Cross-
border 

Ratio of cross-
border/domestic 
costs (%) 

Domestic 

2006 

2008 

2009 

0.57 

0.46 

0.36 

2.34 

1.34 

0.96 

410 

290 

260 

Source: Oxera, based on CSD questionnaires 

0.18 

0.16 

0.16 

0.76 

0.60 

0.61 

430 

390 

380 

Table 18: Relative cross-border vs. domestic CSDs costs for equities  

Clearing and settlement costs  
(€ per transaction) 

Account provision and asset servicing 
costs (bp per value of securities held) 

Cross-
border 

Ratio of cross-
border/domestic 
costs (%) 

Domestic 

Cross-
border 

Ratio of cross-
border/domestic 
costs (%) 

Domestic 

2006 

2008 

2009 

0.39 

0.31 

0.27 

1.83 

1.01 

0.90 

480 

330 

330 

Source: Oxera, based on CSD questionnaires 

0.22 

0.21 

0.21 

0.74 

0.55 

0.67 

340 

260 

310 

Table 19: Relative cross-border vs. domestic CSDs costs for fixed income securities  

Clearing and settlement costs  
(€ per transaction) 

Account provision and asset servicing 
costs (bp per value of securities held) 

Cross-
border 

Ratio of cross-
border/domestic 
costs (%) 

Domestic 

Cross-
border 

Ratio of cross-
border/domestic 
costs (%) 

Domestic 

2006 

2008 

2009 

0.42 

0.30 

0.30 

4.00 

2.66 

1.68 

950 

900 

560 

Source: Oxera, based on CSD questionnaires 

0.13 

0.12 

0.12 

0.64 

0.57 

0.57 

500 

470 

470 

58 

 
 
 
 
 
 
 
 
 
 
 
 
Table 20: Relative cross-border vs. domestic custodian fees charged to brokers 

Clearing and settlement costs  
(indices) 

Safekeeping fees 
(indices) 

Domestic 

100 

69 

Cross-
border 

227 

292 

Ratio of cross-
border/domestic 
costs (%) 

227 

423 

Domestic 

100 

86 

Cross-
border 

157 

186 

Ratio of cross-
border/domestic 
costs (%) 

157 

216 

2006 

2009 

Source: Oxera, based on CSD questionnaires 

Table  21:  Relative  cross-border  vs.  domestic  custodian  fees  charged  to  fund 
managers 

Clearing and settlement costs  
(indices) 

Safekeeping fees 
(indices) 

Cross-
border 

Ratio of cross-
border/domestic 
costs (%) 

Domestic 

2006 

100 

176 

176 

2009 

201 
Source: Oxera, based on custodian questionnaires 

165 

82 

Domestic 

100 

161 

Cross-
border 

272 

211 

Ratio of cross-
border/domestic 
costs (%) 

272 

131 

Table 22: Relative cross-border vs. domestic custodian fees charged to custodians 

Clearing and settlement costs  
(indices) 

Safekeeping fees 
(indices) 

Cross-
border 

Ratio of cross-
border/domestic 
costs (%) 

Domestic 

2006 

100 

219 

219 

2009 

345 
Source: Oxera, based on custodian questionnaires 

131 

38 

Domestic 

100 

67 

Cross-
border 

139 

170 

Ratio of cross-
border/domestic 
costs (%) 

139 

254 

59 

 
 
 
 
 
 
 
 
 
 
8.5. 

Annex 5 – Market discipline measures and implementation plans 

Table 23: Areas and measures of market discipline 

Area 

Measures 

Early matching of instructions 

Efficient trade confirmation processes 

Early settlement on intended 
settlement date 

Efficient matching processes 

Continuous settlement throughout the day 

Promotion of early settlement through appropriate measures 

Prevention of failed settlements 

Monitoring of fails, admonitions 

Securities lending 

Buy-in at the end of the settlement date 

Settlement of failed transactions as 
soon as possible after ISD 

Penalties for late settlement 

Buy-in procedures post-ISD 

Source: ECSDA paper on "Market Discipline Regimes in Europe", September 2009 

Suspension from market activities 

Table 24: Summary of major European markets' buy-in and penalty regimes 

Market 

Buy-in deadline 

Buy-in penalties 

Fail penalties 

Austria  

ISD+3  

Up to 20% of the countervalue or 
closing price 

30bps per ISIN per day for ISD+1 & 
ISD+2, minimum €250 per fail  

Belgium  

ISD+7 (or early 
buy-in*)  

Up to 20% of the countervalue or 
closing price 

€15 + EONIA/360 (max €500) per 
ISIN per day from ISD 

France  

ISD+7 (or early 
buy-in*)  

Up to 20% of the countervalue or 
closing price 

€15 + EONIA/360 (max €500) per 
ISIN per day from ISD 

Germany  

ISD+5  

Up to 100% of the countervalue   None currently imposed  

Holland  

ISD+7 (or early 
buy-in*)  

Up to 20% of the countervalue or 
closing price 

€15 + EONIA/360 (max €500) per 
ISIN per day from ISD 

Italy  

ISD+7  

€1000 plus a variable fee of 
0.1% of cash countervalue 

€50, €150 or €200 per ISIN per day 
from ISD depending on countervalue 

Portugal  

ISD+7 (or early 
buy-in*)  

Up to 20% of the countervalue or 
closing price 

€15 + EONIA/360 (max €500) per 
ISIN per day from ISD 

Sweden  

ISD+7**  

Finland  

ISD+7**  

Denmark  

ISD+7**  

Up to 50% of the countervalue or 
closing price 

€15 + (STIBOR + 1%)/360 per ISIN 
per day from ISD 

Up to 50% of the countervalue or 
closing price 

€15 + (EONIA + 1%)/360 per ISIN 
per day from ISD 

Up to 50% of the countervalue or 
closing price 

€15 + (DK Interbank Rate + 1%)/360 
per ISIN per day from ISD 

Norway  

Broker-initiated 
ISD+8 (minimum 
guideline)***  

Based on closing price + admin 
fee 

€15 + (NIBOR + 1%)/360 per ISIN 
per day from ISD (EMCF only, 
currently no fines for OSE)***  

(*) Early buy-in can occur at the discretion of LCH.Clearnet, with official 24 hour notice  
(**) Broker-initiated S+8 buy-ins can still occur for on-exchange non-CCP eligible ISINs  
(***) Oslo Clearing proposal is S+14 buy-ins with fines set at 200 NOK + (NIBOR + 2%)/360  
Source: AFME response to CSD public consultation 

60 

 
 
 
 
Benchmarks 

Confirmation 
on T+0, at the 
latest T+1 

Matching as 
soon as 
possible 

Matching at the 
latest on ISD-1 
(for non-T+0 
settlements) 

At least one 
settlement run 
every hour 

Table 25: overview of market discipline measures and implementation plans 

Goal 

Measure 

Standards / recommendations 

Status 

Early 
matching 

Efficient trade 
confirmation 
processes 

Efficient matching 
processes 

ESCB/CESR (Recommendation 2)  No implementation plan 

available 

ESSF/ECSDA Oct 2006 

In implementation 

ESCB/CESR (Recommendation 2)  No implementation plan 

available 

ECSDA April 2004 

In implementation 

ECSDA April 2004 (Standard 6: 
"participants should be 
encouraged to settle as early as 
possible in the morning") 

ESCB/CESR (Recommendations 
3 and 8: "create incentives for 
early settlement", "promote early 
settlement through appropriate 
measures") 

ESCB/CESR (Recommendation 3: 
"The frequency, duration and 
value of failures should be 
monitored" 

ESCB/CESR (Recommendation 5: 
"Securities lending and borrowing 
should be encouraged", 
"centralised … if justified from a 
cost/benefit perspective") 

In implementation 

No implementation plan 
available 

No implementation plan 
available 

No implementation plan 
available 

Early 
settlement 

Continuous 
settlement 
throughout the day 

Promotion of early 
settlement 

Prevention 
of fails 

Monitoring of fails 

Securities lending 

Buy-in on ISD 

Penalties 

Fast 
settlement 
of fails 

Buy-in procedures 

ESSF June 2009 

In market consultation 

Buy-in on 
ISD+8 

Suspension from 
market activities 

  Source: ECSDA survey of 2009; ISD = Intended Settlement Date 

61 

 
 
 
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
 
8.6. 

Annex 6 – Overview of settlement periods and efficiency in Europe  

The table below provides an overview of settlement periods and settlement efficiency 
for selected European markets, according to the CSD Statistical Exercise undertaken 
by ECSDA in February 2010 and submitted together with the HSC working group's 
response to the public consultation. 

Table 26: Settlement periods and efficiency (November 2009 data) 

Settlement period 

Settlement efficiency 

Country 

Equities 

Bonds 

Funds 

Other  % settlement 

Austria 

Denmark 

France (ESES) 

Belgium (ESES) 

Netherlands (ESES) 

Finland 

Germany 

Greece 

Hungary 

Italy 

Norway 

Poland 

Portugal 

Romania 

Spain (CADE) 

Spain (SCLV) 

Switzerland 

Slovenia 

UK and Ireland 

T+3 

T+3 

T+3 

T+3 

T+3 

T+3 

T+2 

T+3 

T+3 

T+3 

T+3 

T+3 

T+3 

T+3 

T+3 

T+3 

T+2 

T+3 

T+3 

T+3 

T+3 

T+3 

T+3 

T+3 

T+2 

T+3 

T+2 

T+2 

T+3 

T+2 

T+3 

T+3 (T+2 
for T-bills) 

T+3 

T+3 

T+3 

T+2 

T+1 

T+3 

T+3 

T+3 

T+3 

T+3 

T+3 

T+2 

T+3 

T+3 

T+3 

T+3 

n/a 

T+3 

T+3 

T+2 

T+3 

T+3 

T+3 

T+2 

T+3 

T+3 

T+3 

T+2 

T+0 

T+3 

T+3 

Other 

T+2 

T+4 

n/a 

T+2 

T+0 

on ISD by 
volume 

95.07 

97.67 

97.92 

97.43 

97.06 

98.82 

92.66 

100.00 

90.00 

99.60 

99.07 

99.82 

94.4 

% settlement 
on ISD by 
value 

92.84 

98.91 

99.36 

96.88 

96.43 

94.60 

98.45 

99.98 

93.00 

99.06 

98.67 

99.93 

92.26 

100.00 

100.00 

99.99 

99.75 

92.73 

100.00 

92.60 

99.99 

99.67 

91.24 

100.00 

98.70 

Source: CSD Statistical Exercise, ECSDA, February 2010 
ESES = Euroclear's single settlement platform for Belgium, France and the Netherlands 
SCLV and CADE represent the two platforms operated by the Spanish CSD, Iberclear, for equities and 
respectively for central and regional government debt 
"Other" includes securities not listed as Equities, Bonds or Funds by the CSDs and may include 
Treasury-bills, other money market instruments, equity-linked products or other types of securities  

62 

 
 
 
 
 
 
 
 
 
 
 
 
 
8.7. 

Annex 7 – Overview of legislative framework 

8.7.1.  The term CSD is already mentioned in EU legislation but not defined 

•  The  Settlement  Finality  Directive  of  19  May  1998  (SFD)  refers  to  "centralised 
deposit  systems"  as  one  of  the  possible  places  of  location  of  securities  (together 
with securities accounts and registrars) that  determines  the  law  applicable  to  the 
rights relating to the securities maintained in that place. The legislator at the time 
probably  wanted  to  cover  through  this  term  part  or  all  of  the  CSD  functions 
identified  in  this  report.  The  Settlement  Finality  Directive  remains  an  essential 
step  in  the  regulation  of  CSDs,  since  it  has  created  as  from  1998  a  legal  "safe 
harbour",  whereby  all  settlement  orders  conveyed  through  a  settlement  system 
that is notified to the EU Commission are deemed irrevocable and final, even in 
case of bankruptcy of a participant who has placed an order  

•  The  term  CSD  was  mentioned  for  the  first  time  by  the  European  Parliament 
Resolution  of  January  2003  addressing  certain  issues  concerning  the  distinction 
between core functions and ancillary functions and in the Communication of the 
Commission of 2004 (both listed in Annex 1 also), which included a first attempt 
to define CSDs 

•  More  recently, 

the 

term  CSD  was  mentioned 

the  Working  Party 
Recommendation  concerning  withholding  tax  procedures  of  19  October  2009 
(WPR).  However  it  is  not  defined  and  CSDs  are  only  mentioned  among  the 
financial  intermediaries  that  should  be  subject  to  functions  concerning  the 
collection  of  withholding  tax  on  securities  held  by  non  residents  and  the 
application of tax relieves56 

in 

8.7.2. 

Some core functions are already partially covered by EU legislation 

•  The "notary" and the "central safekeeping" functions of CSDs are not defined or 
mentioned  under  EU  law.  However  both  functions  are  complementary  to  the 
possible future SLD, since they are linked to the definitions of both (1) "account 
held  securities",  which  are  created  through  the  "notary"  function,  and  (2) 
"securities accounts" which constitute the lower tiers of the "central safekeeping" 
function 

•  The  settlement  function  is  recognised  by  the  SFD.  Although  the  settlement 
function  will  be  based  on  "securities  accounts",  as  they  may  be  defined  by  the 
possible  future  SLD,  in  most  cases  these  securities  accounts  are  part  of  a 
"settlement system" as defined by Article 2(a) of the SFD. Furthermore, the SFD 
review  of  2009  recognised  a  status  of  settlement  system  operator.  However,  the 
review of 2009 has not created any authorization or supervision schemes for such 
settlement operators, nor provided any prudential and organisational rules, except 
when two settlement operators enter into interoperability arrangements 

•  Thirdly,  all  three  core  functions  are  potentially  encompassed  by  MiFID:  
(1)  article  34.2  requests  "regulated  markets"  to  let  their  members  chose  another 

56 

Since  CSDs  are  at  the  top  of  the  holding  chain  and  in  direct  contact  with  the  issuer,  they  play  an 
important role in the transfer of proceeds on securities and may themselves act as custodian banks and 
collect withholding taxes when they participate to another issuer CSD through a link agreement 

63 

 
 
 
 
                                                 
settlement  system,  if  an  appropriate  link  exists  with  the  local  system  and  if  the 
national  authority  says  it  does  not  affect  the  safe  and  smooth  functioning  of  the 
markets 
(2)  article  46  provides  for  the  right  for  "regulated  markets"  to  enter  into 
appropriate  agreements  with  settlement  systems  as  well  as  with  CCPs,  except  if 
the competent authorities object on grounds of safe and smooth functioning of the 
market or if such agreements threaten the orderly functioning of the market 

8.7.3.  Ancillary functions are already widely covered by EU legislation 

•  The registrar function is addressed indirectly by the Shareholders Rights Directive 
(SRD), which imposes specific duties to issuers that use a register of shareholders. 
In  practice  such  register  can  be  maintained  by  a  third  party,  also  known  as  the 
registrar.  In  several  countries,  especially  in  Spain  and  in  the  direct  holding 
systems the registrar is at the same time the CSD. In the UK the registrars work 
closely with the CSD 

•  The  credit  and  the  cash  management  functions  are  potentially  covered  by  the 
Capital Requirements Directive (CRD). Depending on the way the CRD has been 
transposed by member States, the performance of credit services (without taking 
deposits)  may  be  subject  to  a  banking  licence  and  the  CSD  may  therefore  be 
subject to a banking licence if it provides such services 

•  The  account  providing  function  will  be  covered  by  the  future  Securities  Law 
Directive, which envisages submitting the provision of "securities accounts" to an 
authorization and supervision scheme that will be fully integrated into the current 
MiFID  framework.  Account  providing  will  therefore  become  an  "investment 
service"  which  will  be  opened  to  a  limited  list  of  regulated  entities,  including 
credit institutions, investment firms and CSDs. 

•  The  securities  lending  function  is  already  partially  addressed  by  different 
legislation.  In  a  narrow  perspective,  from  the  market  participants'  point  of  view 
the function of securities lending is addressed by Article 12 of the draft regulation 
on short selling which requests short sellers to have appropriate arrangements in 
place  to  borrow  securities.    Furthermore,  from  a  legal  point  of  view,  securities 
lending  is  covered  by  the  Financial  Collateral  Directive  of  6  June  2002  (FCD), 
which  provides  for  a  simplified  constitution  of  financial  collateral  and  for 
protection in case of default of the collateral provider. 

64 

 
 
 
 
 
8.8. 

Annex 8– Authorisation requirements for CSDs in EU and non EU countries57 

•  In Belgium, a CSD must be properly licensed: 

– 

– 

For the notary function under the rules provided by "Royal Decree 62 
of 10 November 1967 on the facilitation of securities movement" 

For the settlement function under the rules provided by "Royal Decree of 
26  September  2005  on  the  status  of  settlement  institutions  and 
equivalent institutions".  The latter function is opened equally to credit 
institutions  (covered  by  the  Law  of  2nd  August  2002)  and  to  notary 
institutions 

•  In France, CSDs are subject to a specific authorization procedure conferred to the 
AMF. The "Règlement géneral de l'AMF" defines a list of principles according to 
which a CSD should be governed and entrusts AMF with the task to further define 
the rules  applicable  to "central  securities depositories and  operators  of  securities 
settlement  systems"  (Article  L621-9  of  the  RG).  Furthermore,    the  law  provides 
since  1981  for  a  compulsory  dematerialization  of  all  securities  (enshrined  into 
Articles  211s  of  the  Monetary  and  Financial  Code),  which  implies  that  specific 
actors such as CSDs are vested with the function to enter securities in a book entry 
form.  The  list  of  functions  attributed  to  CSDs  covers  all  core  functions  (notary, 
central  safekeeping  and  settlement)  as  well  as  a  possible  registrar  function.  It  is 
not a limitative list. Hence, theoretically a CSD may also provide other ancillary 
services, such as credit or cash accounts.  

financial 

authorities 

•  The German system lies between France and Belgium. As in France, there is no 
specific authorization regime for CSDs. The Depotgesetz58 of 1937  grants to the 
Länder 
a  CSD 
(Wertpapiersammelbanken  or  Zentralverhafter).  However,  there  is  no  specific 
definition of the CSD activity, nor particular conditions for such recognition. The 
supervisory  tasks  are  upheld  at  the  national  level  by  the  Bafin,  but  it  does  not 
publish  any  common  rulebook  for  such  supervision.  However,  CSDs  are  at  the 
same time considered as credit institutions. Therefore their authorization follows 
the classical procedure followed by applicants for a banking status.  

"recognise" 

power 

the 

to 

•  In  Italy,  similarly,  there  is  no  proper  authorization  scheme  for  CSDs,  but  their 
functions are clearly regulated by two sets of legislations. The CSD’s activities in 
general  (notary  and  settlement)  are  governed  by  a  regulation  issued  by  Consob 
and  Banca  d’Italia  (see  Consob  Regulation  No  11768/98)  which  sets  out  the 
CSD’s members, instruments and instrumental activities. However, the settlement 
function  when  it  takes  the  form  of  a  SSS  is  governed  by  a  general  regulation 
issued by Banca d’Italia, with the agreement of Consob (see the legal provision of 
8  September  2000  on  the  clearing  and  settlement  of  transactions  involving  non-
derivative financial instruments under Article 69 of the CLFI. This regulation lays 
down  the  general  framework  and  establishes  the  conditions  in  which  SSS 
activities can be managed by a private company.  

57 
58 

Information in this Annex is based mostly on the ECB Blue Book of 2007  
Gesetz über die Verwahrung und Anschaffung von Wertpapieren (last modified on 11 January 1995) 

65 

 
 
 
 
                                                 
•  In  Luxembourg  CSDs  are  not  addressed  by  legislation  and  the  competences  of 
the  CSSF  (the  Luxembourg  market  authority)  concerning  the  corresponding 
functions  are  not  detailed.  The  CSD  activity  is  therefore  rather  tributary  to 
corporate  law  concerning  issuance  of  shares,  banks  initiatives  concerning  the 
issuance of Eurobonds and their settlement (which has led to the constitution of an 
ICSD  in  Luxembourg),  existing  European  legislation,  such  as  the  SFD  and  the 
statutory role of the central bank. 

•  In the Netherlands the local CSD has been directly appointed by law and there is 
no provision providing for the possibility to authorise other CSDs, although there 
is no provision prohibiting other entities to perform the same services. Thus, the 
Securities  Giro  Transfer  Act  of  1977,  which  was  amended  to  include  registered 
rights  (dematerialised  securities)  in  the  book-entry  system,  provides  for  the 
establishment  of  a  body  responsible  for  the  safekeeping,  administration  and 
general control of the book-entry securities transfer system. This body known as 
Necigef  has  been  purchased  by  Euroclear  and  is  now  known  as  Euroclear 
Nederland.  As  part  of  the  notary  function,  the  law  provides  that  "it  sets  up 
collective  deposits  in  which  the  owners  of  securities  are  entitled  to  their 
proportionate  share".  Euroclear  Nederland  determines  which  securities  may  be 
entered  in  its  book-entry  transfer  system.  Almost  all  securities  listed  on  the 
Euronext Amsterdam stock market have been declared book-entry securities and 
are  kept  in  safe  custody  by  Euroclear  Nederland.  It  seems  that  there  is  no  such 
monopoly  as  concerns  the  settlement  which  can  be  undertaken  by  anybody, 
although in practice the de jure monopoly for the notary function has implied a de 
facto  monopoly  of  the  settlement  function.  However,  no  proper  authorization 
scheme is reported as concerns the settlement function. 

•  In  Spain  CSDs  are  subject  to  a  specific  authorization  procedure.  The  Securities 
Market  Law 59  establishes  the  general  principles  to  be  observed  by  SSSs  and 
provides  that  the  government,  on  the  basis  of  a  report  from  the  CNMV  (the 
Spanish  market  authority)  and  Banco  de  España,  may  authorise  financial 
institutions to carry out all or any of the following activities: 

– 

– 

– 

notary and central safekeeping functions are addressed by the objective 
"to keep the accounting records for book entry securities listed on stock 
exchanges  or  on  the  Public  Debt  Book-Entry  Market,  as  well  as  the 
securities  listed  on  other  secondary  markets,  when  their  governing 
bodies so request" 

settlement  function  is  addressed  by  the  obligation  to  manage  the 
settlement  and,  where  applicable,  the  clearing  of  securities  and  cash 
arising  from  ordinary  transactions  carried  out  on  those  secondary 
markets;  

other  functions  such  as  providing  technical  and  operating  services 
directly related to those functions, and any other functions that may be 
necessary  for  the  SSS  to  coordinate  its  activities  and  cooperate  with 
other  securities  recording,  clearing  and  settlement  areas  and  systems 
and to be able to participate in the latter; as well as such other functions 

59 

The securities market law 41/1999 of 24/1988 of 28 July, as amended by several laws, in particular Law 
37/1998 of 16 November and Law 44/2002 of 22 November (see Section 1.1.2) 

66 

 
 
 
 
                                                 
as may be assigned to it by the government on the basis of a report from 
the CNMV and, where applicable, from the Banco de España. However 
the same law appoints Iberclear, a state owned company resulting from 
the merger of CADE (government securities) and SCLV (private sector 
securities)  as  the  provider  of  these  functions60.  In  theory  there  is  no 
obligation  for  issuers  to  issue  through  Iberclear,  nor  through  another 
Spanish CSD, provided that such issuance is performed under Spanish 
law 61 .  However,  the  fact  that  Iberclear  is  vested  in  parallel  with  a 
registrar  function  designates  it  as  the  natural  recipient  of  any  notary 
function.  Another  specificity  of  the  Spanish  system  is  the  legal 
obligation  for  any  Spanish  SSS  to  settle  the  cash  leg  of  securities 
transactions  in  central  bank  money  through  cash  accounts  held  by 
participants with the Banco de España. 

•  In Scandinavian countries and other countries having a direct holding system 
(Slovenia and Greece), specific CSDs are designated by virtue of law to perform 
the  registrar  function  for  shares  and  the  function  of  account  providing  (VP  in 
Denmark, Euroclear Finland APK in Finland, Euroclear Sweden VPC). Although 
there is no clear monopoly for the core notary, central safekeeping or settlement 
functions,  any  applying  CSD  has  to  become  account  provider  of  all  securities 
issued under the law of these countries, which implies specific investments.  

•  In  the  UK the law does not specifically address CSDs. Instead the legislation is 
focused  on  certain  ancillary  functions  such  as  the  registrar  function,  which  is 
governed  by  the  Companies  Act  of  1985  for  certificated  securities  and  by  the 
Companies  Act  of  1989  for  uncertificated  securities.  In  application  of  the  act  of 
1989,  the  Uncertificated  Securities  Regulation  of  2001  (USR  2001)  enables 
CREST  (or  systems  such  as  CREST)  to  enter  securities  in  book  entry  form  and 
eventually  to  allow  the  transfer  of  ownership  through  book  entries  made  within 
the  CREST  system.  As  a  consequence  the  part  of  the  UK  system  served  by 
CREST  resembles  the  Scandinavian  countries:  the  core  notary  and  settlement 
functions are a consequence of the ancillary function of ownership registrar. Since 
the registrar function is not subject to specific licensing, this is the case also for 
the  subsequent  notary  and  settlement  functions.  However,  the  condition  for 
performing such notary and settlement functions is to be able to perform them in a 
dematerialised and electronic manner as provided by USR 2001 and further FSA 
regulations (i.e. USR 2003 regulating notary and settlement functions for money 
market  instruments).  CREST  maintains  the  register  of  dematerialised  securities 
that together with  the  register of certificated  securities (maintained  by  the issuer 
itself or by another registrar on its behalf) forms part of the single issuer register. 

60 
61 

Among these functions is the function of registrar of the ownership of shares puts 
According to the Legal Certainty Group first report  

67 

 
 
 
 
                                                 
•  In the US, the CSD functions are ensured by two entities: 

– 

– 

The Fedwire Securities Service is a securities settlement system provided 
by the Federal Reserve Banks for securities issued by the US Treasury, 
other  federal  agencies,  government-sponsored  enterprises  and  certain 
international organisations, such as the World Bank. 

The DTC (Deposit Trust Company) is a CSD that offers a mix of notary, 
central  safekeeping  and  settlement  functions  for  all  other  book-entry 
securities issued in the US. The DTC is a 100% subsidiary of the DTCC 
(Depository  Trust  &  Clearing  Corporation),  which  also  owns  NSCC 
(National Securities Clearing Corporation), the US CCP. DTCC is owned 
by  its  users, i.e. banks, broker/dealers, mutual funds  and other financial 
institutions.  It  operates  on  an  at-cost  basis,  returning  excess  revenues 
from transaction fees to its member firms.  DTCC's companies grew out 
of Wall Street's paperwork crisis in the late 1960s and early 1970s.  They 
were  initially  formed  to  handle  clearing  and  settlement  solely  for  the 
New York Stock Exchange and American Stock Exchanges, and later on, 
NASDAQ. Clearing and settlement in the US was highly fragmented at 
the time, with regional markets such as those in Boston, Philadelphia and 
Chicago  maintaining  separate  clearing  and  depository  businesses.  
Between  1977  and  1995  five  regional  exchanges  exited  the  business  of 
clearance,  settlement  and  custody  and  customers  consolidated  this 
activity  at  NSCC  and  DTC.  The  DTC  benefits  thus  from  a  de  facto 
monopoly, which was reinforced in 1994 by the revision of Chapter 8 of 
the Uniform Commercial Code, which works practically as a rule book of 
the DTC. 

68 

 
 
 
 
8.9. 

Annex 9 – Lehman and Bear Stern case studies 

Lehman  

The wind-down of Lehman Brothers is proving more complicated than expected by 
the  administrators.    More  than  two  years  after  the  firm  was  declared  bankrupt  the 
total  fees  for  administrators,  lawyers  and  other  parties  are  estimated  to  top  €1.4bn 
worldwide (c.€350 for the European administrators only62) and it is estimated that it 
could be 20 years before the administration is concluded. 

There are several relevant issues why this is the case: 

•  Due  to  the  unclear  methods  under  which  some  arrangements  were  made,  the 
insolvency administrator in the UK is facing significant difficulties in determining 
"who  owns  what".  To  establish  this,  one  needs  to  trace  back  the  legal 
effectiveness of several acquisitions and dispositions between the different entities 
of the Lehman group. Under the current legal regimes, this is difficult and assets 
worth several billions are still blocked in the insolvency estate 

•  A second major difficulty in the Lehman insolvency was the multiple creation of 
security  interests  (pledge  or  otherwise),  lending  or  repurchase  agreements  over 
securities  that  were  under  Lehman's  custody  and  the  consequences  of  "re-
hypothecation"  of  clients'  securities  to  third  parties  under  unclear  arrangements. 
Some of the problems observed in the Lehman case were directly connected to the 
re-use  of  securities  by  Lehman,  acting  as  a  collateral  taker.  The  Olivant  affair, 
where the latter investor was deprived from his voting rights on shares that it had 
pledged  with  Lehman,  triggered  questions  regarding  re-using  collateralised 
securities 

Bear Stearns 

During the critical winding up of Bear Stearns on 14 March 2008, an excess of 28% 
of shares in the company compared to the total actually issued was encountered. This 
obliged the Securities Investment Protection Corporation (SIPC) to reimburse all the 
investors at the nominal value of the securities.  

The causes of this excess are not clear. It may have been either: the result of naked 
short  selling  positions;  multiple  re-use  of  securities;  or  a  fault  of  the  US  system  of 
ownership  that  provides  for  a  "beneficial  ownership"  right  and  a  "securities 
entitlement" at every level in the holding chain.  Some confusion is often reported in 
this context.  

Fortunately,  Bear  Stearns  was  rescued  through  a  takeover  by  JP  Morgan  which 
bailed out the excess of securities.  

62  

From  Joint  Administrators'  progress  report  on  the  administration  process  for  Lehman  Brothers 
http://www.pwc.co.uk/eng/issues/lehmans_joint_administrators_progress_report_140409.html  

69 

 
 
 
 
                                                 
8.10.  Annex 10 – Overview of restrictions on the choice of CSD by issuers 

8.10.1.  "Exportability" and "importability" 

There  is  an  important  dichotomy  described  by  the  shorthand  of  “exportability”  and 
“importability”;  restrictions  to  the  free  choice  of  the  location  of  securities  can 
originate from two sides, because: 

•  On the one hand, the law under which securities are constituted might require that 
the  initial  entry  of  securities  into  the  structure  for  holding  and  settlement  be 
effected by a local CSD, or allow for non-legal rules to aim at such a restriction 
(restriction on exportability), or  

•  On the other hand, the law of a Member State might restrict the ability of a local 
CSD  to  make  an  initial  entry  into  the  holding  and  settlement  structures  with 
respect to securities which are constituted under the law of another Member State, 
or  allow  for  non-legal  rules  to  aim  at  such  a  restriction  (restriction  on 
importability).  

As  regards  the  existence  of  restrictions  relevant  in  the  context  of  Barrier  9,  the 
present  paper  draws  mostly  on  the  comparative  survey  undertaken  in  2006,  by  the 
Legal Certainty Group, under the rubric of Question 3863. 

8.10.2.  Restrictions regarding exportability 

Restrictions on exportability hinder an issuer's free choice of CSD. Provisions of the 
law  under  which  the  securities  are  constituted  (or  other  measures  under  that  law), 
make it impossible, cumbersome or more expensive to arrange for the securities to be 
initially entered into a holding and settlement structure which is governed by the law 
of another Member State. The Comparative Survey revealed the existence of at least 
the following categories of restrictions: 

8.10.2.1. Listing tied to local CSD 

There are many examples where the listing on the local stock exchange requires the 
securities  issue  to  be  entered  into  the  holding  and  settlement  structure  of  the  local 
CSD. This phenomenon applies to both certificated securities issues and – mainly – 
to dematerialised securities issues. 

−  In Poland, securities which are admitted to public trading have to be registered in a Polish CSD. 

−  In Finland, companies which are incorporated under Finnish law and which are listed on a Finnish 
regulated market are required to dematerialise their shares and arrange for them to be held in the 
book-entry system maintained by the Finnish CSD.  

−  Latvian Government bonds must be initially entered into the Latvian CSD. 

8.10.2.2. Settlement tied to local SSS or local registrar 

A second type of restriction of exportability is the requirement to settle acquisitions 
and dispositions exclusively through accounts which form part of the local securities 
settlement system. Similarly, in other Member States, the settlement of securities is 
tied to a local registrar. 

63 

Cf. Comparative Survey/Questionnaire, 24.04.2006, Question 38, pp. 424-438 

70 

 
 
 
 
                                                 
−  Belgian  Government  bonds  which  are  issued  in  dematerialised  form  have  to  be  kept  on  accounts 
with authorised account holders in the Belgian CSD that has been designated by law as a settlement 
organisation for these securities.  

−  In the United Kingdom, shares are constituted by a register, which must be kept within the United 

Kingdom. 

8.10.2.3. Dematerialisation tied to the local CSD 

In  some  Member  States,  dematerialisation  of  securities  is  mandatory;  in  other 
Member  States  it  is  an  option  for  the  issuer,  or  for  example  linked  to  listing  at  the 
local stock exchange. In both cases, the initial entry of the securities into the holding 
and settlement structures is often tied to the local CSD. 

−  German dematerialised Government bonds are to be issued into a "Wertpapiersammelbank" (CSD) 
in  the  meaning  of  the  German  Securities  Deposit  Act.  At  present,  only  Clearstream  Banking 
Frankfurt  and the ECB fulfil the requirements to be designated as Wertpapiersammelbank. 

−  Slovenian  dematerialised  securities  can  only  be  issued  via  registration  in  the  domestic  register, 

operated by the domestic CSD.  

−  The  recent  proposal  (2009)  for  law  reform  submitted  by  the  French  Association  of  Securities 
Professionals  reads  "toute  émission  de  valeurs  mobilières  doit  être  enregistrée  (…)  par  un 
conservateur central établi en France".  

8.10.3. Restrictions regarding importability 

Restrictions  on  importability  equally  limit  the  issuer's  choice  of  the  CSD  which 
makes the initial entry. But unlike the case of exportability, it is the law governing 
the CSD which hampers free choice by setting entry requirements which cannot be 
met, are cumbersome or more expensive to meet by foreign securities issues. 

8.10.3.1. Certification - dematerialisation 

Some  Member  States'  law  might  either  require  dematerialisation  of  all  types  of 
securities or rely on the issuance of a paper certificate for some or all types. Others 
might  give  issuers  a  choice,  or  impose  certification  for  some  types  of  assets  whilst 
making dematerialisation mandatory for others. Both debt instruments and shares are 
equally  subject  to  these  differences  regarding  dematerialisation  and  certification. 
Consequently,  when  issuing  cross-border,  the  variety  of  solutions  might  lead  to 
incompatibilities in the sense of Barrier 9. In the first possible scenario, both the law 
under  which  the  securities  are  constituted,  as  well  as  the  law  governing  the  CSD 
where  it  is  envisaged  making  the  initial  entry,  are  based  on  the  understanding  that 
securities 
of 
certification/dematerialisation is not problematic. In the second possible scenario, the 
law under which the securities are constituted requires the issuance of dematerialised 
securities irrespective of the place where the initial entry is made. The law governing 
the CSD does not recognise securities in dematerialised form; consequently, there is 
a clear Barrier 9 restriction.  

dematerialised; 

consequently, 

aspect 

the 

are 

−  If  a  Spanish  issuer  decides  to  issue  shares  in  a  foreign  country,  the  foreign  CSD  might  require 
compliance with national regulations, often entailing the issuance of a "certificate" embodying the 
number of securities issued, and following a certain format required by national rules; however, this 
type of certificate is not foreseen under Spanish law.  

−  Under  Czech  law,  there  is  the  exceptional  case  of  compulsory  dematerialisation  of  shares  in 

banking institutions; a substitute certificate for issuing abroad is not available. 

71 

 
 
 
 
The  third  scenario  is  the  inverse  case:  the  law  under  which  the  securities  are 
constituted requires issuance of securities certificates (at least in the case where the 
issue  is  to  be  initially  entered  into  holding  and  settlement  structures  abroad,  as  for 
example under Czech law). The law governing the CSD only provides for a holding 
and settlement system based on the existence of dematerialised securities. 

Admittedly,  both  the  second  and  third  scenarios  are  cases  of  restrictions  regarding 
exportability  and  importability  at  the  same  time,  as  both  jurisdictions  require  one 
form and do not accept the other.  

8.10.3.2. Risk of discrimination 

Another  restriction  of  importability  arises  where  the  law  governing  the  CSD  treats 
securities which are constituted under a different law less favourably than domestic 
securities, or there is a risk of this happening. 

−  Because it is unclear on this specific point, Polish law on trading in financial instruments might be 
interpreted in such a way that only those firms which keep securities accounts as defined under the 
Polish law are entitled to issue valid certificates to their customers. 

8.10.4.  Justification of certain restrictions? 

There  are  recurring  arguments  aiming  at  justifying  the  imposing  or  maintaining  of 
restrictions  in  relation  to  the  place  of  initial  entry  into  holding  and  settlement 
structures. 

•  First,  there  is  the  argument  that  compulsory  delivery  into  or  compulsory 
registration  with  the  national  CSD  would  guarantee  coherence  of  the  issue.  In 
particular, the risk of inflation of the number of securities or the loss of securities 
would be avoided more successfully than would be possible in a holding pattern 
which  involved  entities  spread  cross-border.  This  argument  is  also  used  in 
referring  to  specific  assets  (like  for  example  parts  in  mandatory  pension  funds), 
the  safeguarding  of  which  is  a  very  sensitive  issue.  However,  an  EU  integrated 
post-trading environment can only exist on the basis of a common high standard 
of  operational  and  legal  certainty  in  post-trading  operations.  The  risk  of  loss  of 
securities, or of similar incidents, is no more likely in some Member States than in 
others.  Not  least,  the  proposed  Securities  Law  Directive,  if  adopted,  should 
remove operational and legal inconsistencies relating to cross-border holding and 
settlement 

•  With  respect  to  Government  bonds,  there  is  the  argument  that  it  was  not 
opportune to classify measures restricting their export as restrictions in the sense 
of Barrier 9. This was because the issuer itself (the Government) chose to bind a 
securities  issue  to  a  local  CSD.  However,  it  is  not  said  that  in  all  cases  the 
authority imposing such restriction (ex: federal legislation) is the same authority 
that issues the securities (ex: municipality in case of municipal bonds).  

•  Lastly,  regarding  tax  procedures,  reference  is  often  made  to  the  crucial  role  of 
CSDs in the collection of taxes, especially withholding tax; the close interaction 
between fiscal authorities and the CSD could only be guaranteed if the CSD was 
the  local  one.  Again,  the  second  advice  of  the  Legal  Certainty  Group  advocates 
that, against the background of the principles of the internal market for financial 
services other measures (as, for example, reporting mechanisms) could be used to 

72 

 
 
 
 
achieve  an  identical  result.  Restricting  the  choice  of  issuers  and  competition 
between CSDs is unnecessary to ensure proper functioning of tax procedures 

Consequently,  in  former  times,  there  might  have  been  justified  motivations  behind 
the restrictions. However, the standard of operational and legal certainty is such that, 
in  the  modern  pan-European  post-trading  landscape,  restrictions  like  the  ones 
described above are unjustified and contrary to the principles of the internal market.  

73 

 
 
 
 
8.11.  Annex 11 – Possible principles to be proposed in legislation 

8.11.1.  Settlement discipline 

The principles in respect of settlement disciplines could refer to obligations on: 

•  CSDs and their participants to execute transactions without undue delay as soon 

as securities and funds are available 

•  CSDs  to  ensure  they  have  the  procedures  in  place  to  facilitate  settlement  on  the 

intended settlement date for their participants 

•  CSDs to promote early settlement on the intended settlement date 

•  CSDs  to  ensure  they  have  procedures  in  place  that  encourage  settlement  of 
transactions that are not settled on the intended settlement date.  Such procedures 
should foresee a sufficiently deterrent penalty mechanism  

•  Harmonised  buy-in  and  cash  compensation  obligations  to  be  introduced  for 

participants who fail to settle on the intended settlement date 

•  CSDs to put in place a system that monitors settlement fails of their participants 

•  CSDs to provide regular reports to the competent authority on settlement fails 

Detailed technical standards in respect of these measures would be set by secondary 
legislation, with involvement of ESMA and the ESCB. 

8.11.2.  Requirements for CSDs 

The principles in legislation would include mitigation measures for the risks incurred 
by the CSDs themselves as well as measures to ensure CSDs conduct their business 
and carry out their functions in a safe and efficient manner.  They would address a 
broad  spectrum  of  risks,  including  (according  to  the  CPSS-IOSCO  framework) 
systemic risk, legal risk, general business risk, investment risk and operational risk.  
The  principles  would  draw  to  a  very  large  extent  from  the  CPSS-IOSCO  draft 
recommendations; technical standards would be set later (by which time the CPSS-
IOSCO  recommendations  will  have  been  finalised)  by  secondary  legislation,  with 
involvement  of  ESMA  and  the  ESCB.  Some  principles,  for  instance  regarding 
transparency and service unbundling, would also draw from the Code of Conduct. 

The following broad categories could be included:  

Organisational requirements 

These could include: 

•  General  provisions  regarding  the  CSDs'  obligation  to  have  robust  governance 

arrangements and effective policies and procedures 

•  Requirements  regarding  suitability  and  roles  and  responsibilities  of  senior 

management and board 

74 

 
 
 
 
•  A requirement for CSDs to have user committees in place 

•  Important provisions regarding the conditions and authorisation of outsourcing of 

services or activities 

Conduct of business rules 

These could include principles about: 

•  Participation  requirements:  CSDs  should  have  publicly  disclosed  criteria  for 

participation which permit fair and open access  

•  Transparency: CSDs should disclose publicly their prices and fees, separately for 
each  service  and  account  separately  for  costs  and  revenues  of  the  services 
provided 

Requirements regarding CSDs' functions 

These  important  provisions  would  mainly  request  CSDs  to  have  appropriate  rules 
and  procedures  to  help  ensure  the  integrity  of  securities  issues  and  minimise  and 
manage risks associated with the safekeeping and transfer of securities.  They could 
include requirements for CSDs to: 

•  Ensure  the  integrity  of  the  issue  by  conducting  intraday  reconciliations  and  not 

allowing artificial creation of securities  

•  Protect  participants'  access  by  not  using  customers'  securities  for  any  purpose 
without  the  customers'  express  consent  and  by  segregating  the  assets  of  their 
customers from the CSDs' own assets (and facilitating the same, upon request, at 
the level of their customers) 

•  Ensure settlement finality on the intended settlement date 

•  Operate only designated and notified settlement systems (in the sense of the SFD) 

and have procedures in place that maximise the safety of such systems 

•  Ensure settlement on a DVP basis 

•  Settle cash payments in central bank money whenever practical and available (for 
transactions  denominated  in  the  currency  of  the  country  where  the  settlement 
takes place).  Otherwise use credit institutions that fulfil certain criteria 

•  Set up effective rules and procedures to manage a participant default 

Prudential requirements 

These  principles  would  require  CSDs  to  put  in  place  a  sound  risk  management 
framework for comprehensively managing their legal, business, operational and other 
risks.  They could include: 

•  Legal  risk:  CSDs  (and  the  settlement  systems  they  operate)  should  have  rules, 

procedures and contracts that are legally enforceable at all times 

75 

 
 
 
 
•  General  business  risk:  CSDs  should  have  sufficient  equity  or  equity  capital  to 

cover potential general business losses 

•  Operational risk: reliability of systems, business continuity plans 

•  Investment risk: CSDs should invest their resources only in cash or highly liquid 

financial instruments 

Requirements for CSD links 

CPSS-IOSCO dedicates special attention to CSD links and general principles in this 
respect could include requirements for CSDs to: 

•  Assess sources of risks from links 

•  Ensure links have a well founded legal basis that provides adequate protection to 

the CSDs and their participants 

•  Not engage in provisional transfer of securities 

76 

 
 
 
 
8.12.  Annex 12 – Options in respect of banking type of services 

A  number  of  CSDs  provide,  in  order  to  facilitate  settlement  or  other  services,  a 
limited range of banking type of services to their participants, such as providing cash 
credit or securities credit as principal and opening cash settlement accounts in their 
own books (in which case settlement is said to be done in "commercial bank money" 
and the CSD is said to act as "settlement agent"64).  These CSDs are the two ICSDs – 
Euroclear Bank and Clearstream Banking Luxembourg, which represent around 37% 
of  settlement  transactions  in  the  EU,  and  three  "national"  CSDs  –  Clearstream 
Banking  Frankfurt  of  Germany,  OEKB  of  Austria  and  Keler  of  Hungary,  which 
represent another 8%65.  All of them have (limited scope) banking licences for such 
services and perform both CSD and banking services through a single entity.  

In the other markets these services are offered by central banks – cash accounts for 
settlement (in which case settlement is said to be done in "central bank money") and 
intraday credit, although not necessarily securities lending66. This offers more safety 
to the system since central banks do not go bankrupt.  There is, however, a demand 
for the corresponding CSDs to offer such services in order to enable a more efficient 
execution of settlement and use of securities in certain cases, for instance: 

• 

• 

Central  bank  money  settlement  is  not  always  possible,  for  example  when 
settlement  happens  in  many  different  currencies  (such  as  for  Eurobonds)  or 
when not all CSD participants have access to central bank intraday liquidity or 
credit67.    In  these  instances  participants  use  cash  accounts  directly  opened  in 
the  books  of  the  CSD  that  executes  the  settlement,  and  the  respective  CSD 
generally  also  provides  credit  to  facilitate  settlement  in  an  integrated, 
automated way. CSDs generally offer this service under the same conditions as 
the central banks 

Cash  credit  facilities  offered  by  CSDs  are  sometimes  supplemented  with 
securities lending facilities, which are not necessarilly offered by central banks 
and which contribute to a reduced number  of settlement  fails, thus increasing 
settlement efficiency 

For  this  reason,  commercial  bank  money  systems  often  co-exist  with  central  bank 
money systems and this is widely recognised and accepted.  For instance, the CPSS 
report of 200368 on "The role of central bank money in payment systems" states that 
"neither  system  has  proved  sufficiently  stable  or  efficient  to  survive".    The  CPSS-
IOSCO standards also accept this by imposing an obligation of settlement in central 
bank money only when "practical and available".  

However,  a  number  of  respondents  to  the  public  consultation,  mainly  custodian 
banks and some regulators, have argued that CSDs should not be allowed to provide 

64  

65  

66  

67  
68  

Settlement is also said to be done in commercial bank money when the cash accounts for settlement are 
opened in a commercial bank rather than the CSD itself 
The two ICSDs also represent 40% of the total value of securities held on accounts in the EU at the end 
of 2010, while the other three CSDs represent another 10%.  Please see Annex 3 for more details 
In some markets, such as the UK, the central bank outsources these services to a number of commercial 
banks.  In others, a CSD may do both central bank money and commercial bank money settlement, e.g. 
Clearstream Banking Frankfurt 
In the Eurozone, Central Banks offer intraday credit only to credit institutions and to investment firms 
http://www.bis.org/publ/cpss55.pdf  

77 

 
 
 
 
                                                 
directly  neither  cash  accounts  nor  credit  services,  and  that  such  services  should  be 
segregated  in  a  separate  legal  entity.    These  arguments  are  mainly  based  on  risk  – 
since CSDs are systemically important market infrastructures, they should maintain a 
low risk profile.  Some of these respondents are, nevertheless, in favour of allowing 
the two  ICSDs to continue to  operate an integrated model,  on  the  ground  that cash 
accounts and cash credit are an integral part of the settlement activity.   

8.12.1.  Type of banking services 

There  is  relatively  wide  agreement  among  those  who  support  an  integrated  model 
that a CSD's banking type of services should be strictly related to its core or (some) 
ancillary functions.  These services are typically limited to: 

Box 1: Banking type of services undertaken by a CSD 

Banking  type  of  services  for  the  participants  of  a  securities  settlement  system  related  to  the 
settlement service, including: 

•  Providing cash accounts  

•  Accepting cash deposits  

•  Providing cash credit  

•  Lending securities  

Banking type of services for the holders of securities accounts with the CSD related to other core 
and ancillary services, including: 

•  Providing cash accounts and accepting cash deposits 

•  Lending securities  

Banking type of services facilitating the processing of corporate actions, including: 

•  Pre-financing income and redemption proceeds 

•  Pre-financing tax reclaims 

8.12.2.  Risks derived from banking services 

The  table  below  outlines  the  additional  key  risks  incurred  by  a  CSD  due  to  these 
banking  type  of  services,  the  particularity  of  such  risks  derived  from  the  limited 
nature of these services and the recommendations made by CPSS-IOSCO for CSDs 
to  mitigate  these  risks.    These  recommendations  are  on  top  of  the  normal  banking 
prudential framework.   

78 

 
 
 
 
Table 27: Overview of risks incurred by CSDs providing banking type of services 

Risk 

Particularity of risk for CSDs 

Credit risk resulting 
from granting cash 
credit to participants 

Credit facilities are limited to 
the facilitation of settlement and 
are provided on a very short 
term basis – mostly intra-day, 
but can extend to overnight or 
marginally longer periods in 
case of settlement over 
different time zones70  

Credit risk resulting 
from securities 
lending 

Securities lending to facilitate 
the delivery of securities and/or 
avoid settlement fails is also 
very short term 

The CSD may interpose itself 
as guarantor or principal 
between securities lenders and 
borrowers 

CPSS-IOSCO recommendations for 
market infrastructures69 

Full coverage of current and future 
exposures using collateral and other 
equivalent financial resources (e.g. 
Euroclear Bank as well as the 
Clearstream entities have 99% 
collateralisation) 

Use only collateral with low credit risk, 
liquidity risk and market risk  

Conservative haircuts and concentration 
limits on collateral values 

Limits on credit exposures 

As above 

Liquidity risk resulting 
from credit exposures 
and investments 

Mostly risk of spillover of an 
intra-day credit into an 
overnight credit, as described 
above 

Monitor on a daily basis the level of liquid 
assets and determine the value of 
available liquid assets taking into account 
appropriate haircuts  

Custody, and 
investment risk  

Custody risk on securities 
assets owned by CSDs, for 
instance for securities lending 

Investment risk on the 
investment of its own resources 

Identify, measure and monitor liquidity 
risk from the liquidity providers of any 
pre-funding arrangements 

Ensure sufficient liquidity in the event of 
the inability of the [one/two] participant[s] 
with the largest payment obligation[s] to 
the CSD to settle these obligations71 

Hold assets at supervised and regulated 
entities  

Ensure prompt access to assets 

Invest only in cash or in highly liquid 
financial instruments with minimal market 
and credit risk, which can be liquidated 
rapidly with minimal adverse price effect 

Concentration limits for overall credit risk 
exposures 

The key risks incurred by a CSD with banking activities are therefore (1) credit risk 
and (2) liquidity risk.  Credit risk is to a certain extent mitigated by the limited nature 
of credit – essentially intraday, and by prudential measures that are stricter than for 

69  
70  

71  

Based on draft CPSS-IOSCO recommendations, currently subject to public consultation 
The CSDs that provide these services generally discourage spill over of credit into overnight or longer 
term credit by applying very high interest rates on such credit.  The same policy is applied by central 
banks but CSDs' interest rates tend to be even more penalising.  The following data gives an indication 
of the size of credit activities of an ICSD: Euroclear Bank settles transactions amounting to some €850 
billion  each day  (2009  average) but  due  to  its  netting processes  it  only  extends  around €80 billion  in 
intra-day credit to its clients.  This balance is substantially reduced by the end of the day 
Current  CPSS-IOSCO  and  ESCB-CESR  principles  refer  to  one  participant,  whereas  the  draft  revised 
CPSS-IOSCO principles envisage the possibility of increasing this to two participants 

79 

 
 
 
 
                                                 
general banks – mainly full collateralisation of credit.  For liquidity risk, CSDs are 
required to have adequate liquidity monitoring and contingency plans, like any other 
bank, with the additional feature that such plans should cater for the situation when 
the participant with the largest payment obligation towards the CSD may not be able 
to honour this obligation. 

However, the question remains as to what extent these risks are mitigated. 

(1) Credit risk 

While  the  collateral  required  by  the  banking  CSDs  has  to  be  low  risk  collateral, 
subject  to  prudent  haircuts  (i.e.  valuation)  and  concentration  limits,  this  mitigation 
measure has its limitations: 

• 

• 

• 

• 

The range of eligible collateral is generally more extensive than that required 
by central banks 

A default by a major participant can have a significant impact on the value of 
the collateral submitted by that participant to the CSD.  Although the collateral 
should  normally  be  without  close  link  to  the  participant,  one  can  imagine  a 
situation  of  severe  market  crisis  when  the  participant's  default  leads  to  an 
overall drop in the whole market, and hence in the value of the collateral.  

Realising collateral in the case of a participant default (or in any case doing so 
quickly)  may  be  subject  to  legal  complexities,  especially  since  the  collateral 
remitted to CSDs is often a re-hypotecated collateral 

A  severe  crisis  may  also  lead  to  an  intraday  meltdown  of  the  value  of  the 
collateral.    Such  a  meltdown  has  already  occurred  several  times  in  the  past, 
such  as  during  the  crash  of  October  1987  (minus  25%  in  one  day)  or  of 
October  2008  (minus  19%)  or  more  recently  during  the  mini  crash  of  May 
2010  (minus  9%).  Haircuts  may  not  be  sufficient  to  cater  for  these  extremes 
and calling on participants to post more collateral may not solve the problem in 
the  case  of  an  intraday  crash.  The  risk  position  of  a  CSD  that  offers  intraday 
banking services is close to the risk position of a CCP, which interposes itself 
between  its  customers,  since  both  types  of  infrastructures  take  counterparty 
risks 

(2) Liquidity risk 

CPSS-IOSCO  and  ESCB-CESR  standards  recommend  that  banking  CSDs  have 
contingency plans that cater for the possible inability to pay of the largest participant; 
this may be increased to two participants in the new standards.  However, this does 
not tackle the risk of a generalisation of payment defaults due to a general liquidity 
shortage in the market in a severe crisis situation. 

In particular, the CSDs that currently offer banking services rely heavily on intraday 
overdraft lines (or, in other words, promises to pay) from their cash correspondents, 
who are for the most also their participants.  A participant's default affects therefore 
not  only  that  participant's  ability  to  pay  its  obligations  to  the  CSD  but  also  more 
generally the CSD's funding plans.  Should a major participant default, the surviving 

80 

 
 
 
 
participants may be concerned about the viability of the CSD and may therefore be 
less willing to honour their promises to provide additional liquidity. 

To conclude, the specific mitigants for the risks associated with the banking activities 
of a CSD do not eliminate these risks.  While it is true that the banking CSDs were 
not affected by the 2008 crisis or by the Lehman bankruptcy, the amounts of funds 
they handle are enormous – as an example Euroclear Bank extends on average EUR 
80  billion  of  credit  at  the  beginning  of  each  day.    This  balance  is  fully  or 
substantially  reduced  by  the  end  of  the  day,  but  major  intraday  disruptions  in  the 
financial markets can cause severe stress for the banking CSDs.  A default of a CSD 
would have dramatic consequences as it would freeze the securities market as well as 
potentially the payments market (since collateral flows through CSDs). This justifies 
a revisiting of the various options regarding such banking services, which is done in 
the next section. 

8.12.3.  Licensing options regarding banking services 

Considering the different views of stakeholders, there are several options: 

•  Allow CSDs to provide banking services in an integrated legal entity.  This could 

be done via three sub-options: 

– 

– 

– 

One licence (Option A below).  There have been responses to the public 
consultation, particularly from the smaller CSDs, that have called for a 
leaner  regulatory  structure  for  the  CSDs  that  want  to  provide  limited 
banking  services  by  not  subjecting  them  to  the  CRD  framework  but 
creating a customised set of requirements.  In this option a CSD would 
have a single licence, which would integrate both its CSD and banking 
type of activities; this would effectively mean that the CSD legislation 
would  include  a  "customised"  set  of  prudential  requirements  for  the 
banking  activities  of  a  CSD  –  this  could  be  done  on  a  self-standing 
basis, as it was  done  for payment institutions in the  Payment Services 
Directive,  or by reference to the  CRD.   In addition, the CPSS-IOSCO 
prudential 
transparency  and  unbundling 
the 
requirements  from  the  Code  of  Conduct  would  be  introduced  in 
legislation 

requirements  and 

Two  licences,  one  for  CSD  services,  one  for  banking  type  of  services 
(Option  B  below).  This  reflects  the  status  quo,  but  with  the  CPSS-
IOSCO  prudential  requirements  and  the  transparency  and  unbundling 
requirements from the Code of Conduct introduced in legislation 

Two  licences,  as  above,  but  with  additional  requirements  which  go 
beyond and/or detail further CPSS-IOSCO requirements to mitigate risk 
spill  over  (Option  C  below).    Such  additional  requirements  could 
include  a  restriction  on  providing  credit  only  to  participants  that  have 
cash  accounts  with  the  CSD,  the  automatic  reimbursement  of  intraday 
credit  and  discouragement  of  overnight  credit  through  deterrent 
sanctioning rates and an obligation for end-of-day cash balances to be 
deposited with central banks when practical and available  

81 

 
 
 
 
•  Request  segregation  of  banking  services  into  a  different  legal  entity  with  a 
banking  licence  (Option  D  below).    This  entity  would  still  have  to  comply  with 
the  additional  requirements  under  Option  C,  in  respect  of  its  activities  for  each 
settlement system it acts as settlement agent for.  

A brief overview of the different options is provided below. 

Table 28: Options in respect of banking services 

Option 

A  

B  

C  

Integrated 
vs. 
segregated 

Integrated 
model 

One vs. two 
licences 

Description 

One licence  One entity with one licence that integrates prudential 

requirements for banking services 

Limited scope of banking services  

Two 
licences, 
status quo 

Two 
licences, 
additional 
requirements 

CPSS-IOSCO prudential requirements introduced in 
legislation 

Transparency and unbundling principles introduced in 
legislation 

One entity, separate banking licence for banking activities 

Limited scope of banking services  

CPSS-IOSCO prudential requirements introduced in 
legislation 

Transparency and unbundling principles introduced in 
legislation 

One entity, banking activities subject to separate licence 

Limited scope of banking services  

CPSS-IOSCO prudential requirements introduced in 
legislation 

Transparency and unbundling principles introduced in 
legislation 

Additional requirements to mitigate risk spillover 

CSDs could opt for a segregated model (in any of the 
options above) 

D  

Segregated 
model 

Two entities, 
two licences 

Banking services segregated into separate legal entity, with 
banking licence 

Separate banking entity not subject to limited scope of 
services, but to the requirements under option C above (for 
each settlement system it acts as settlement agent for) 

These options are analysed below with reference to their effectiveness (i.e. pro's and 
con's)  as  well  as  their  efficiency  (i.e.  costs  to  stakeholders).    The  table  below 
compares the integrated model with the segregated model. 

82 

 
 
 
 
Table 29: Integrated vs. segregated model  

Integrated model (Options A, B or C)  Segregated model (Option D) 

Pro's 

Con's 

Banking activities have limited scope 
and must comply with additional 
prudential requirements (in CSD 
legislation) 

Reduced overhead costs  

Single capital requirements 

Risk spill-over from banking services to 
CSD core services: in case of 
insolvency due to the banking 
activities, risk of (partial) freeze of the 
operational activities of the CSD 

Risk of cross-subsidisation between 
CSD business (often a monopoly) and 
banking business (although this can be 
mitigated by introducing transparency 
and service unbundling requirements) 

Efficiency 

No or some regulatory change for 
CSDs with current banking licences, 
depending on which sub-option is 
chosen 

Separation of risks between CSD core 
functions and credit functions reduces risk 
spill-over: in case of insolvency of the 
banking entity, operational CSD functions 
would be out of reach of the creditors  

Banking entity still compliant with additional 
prudential requirements for settlement agents 
(in CSD legislation) 

Separation of economics between CSD and 
banking entity – eliminates risk of cross-
subsidisation (if competition problem) 

Risk of gridlock to the securities settlement 
system remains if the banking entity that has 
the cash accounts for settlement goes 
bankrupt (however, compared to the 
integrated model, no freeze to the CSD 
activities) 

The risk of spill-over is not completely 
eliminated within a group with a common 
holding structure 

Increased overhead costs and capital 
requirements 

Costly business change for the CSDs 
currently providing banking services, 
particularly the ICSDs  

Deterring for other CSDs intending to start 
banking activities  

Potential legal costs for the CSD participants 

The main arguments in the table above focus around (1) the risk of spill-over from 
the  banking  to  the  CSD  activities,  and  (2)  the  additional  costs  associated  with  a 
segregated model.  These are addressed in more detail below: 

(1) Risk spill-over 

The key disadvantage of the integrated model is that if the banking activities were to 
suffer  severe  stress,  for  instance  due  to  one  or  several  large  participants  defaulting 
(as described in the section above), this would disrupt the CSD's overall operations 
and could even cause the insolvency of the CSD.  In this case the CSD's assets would 
be  seized  by  the  insolvency  administrator  and  its  activities  would  be  frozen.    This 
process is more or less automatic depending on the insolvency law of each Member 
State.    It  is  nevertheless  likely  that  Member  States  regulators  would  try  to  find  a 
solution  in  order  to  continue  at  least  the  essential  services  of  the  CSD  but  their 
options would be limited as they may not find an immediate substitution – a firm that 
can take over both CSD and banking activities, or disentangle the activities quickly.   

The separation of banking activities addresses this problem of risk spill-over.  If the 
banking entity were to default, the activities of the CSD could continue. It would also 
be easier to develop back-up solutions that enable the quick substitution of the failing 
bank, to ensure the ongoing settlement of pending orders.    

83 

 
 
 
 
 
 
 
 
However,  the  spill-over  risk  is  fully  eliminated  only  if  the  CSD  keeps  the  whole 
securities settlement system infrastructure. If the separate bank were to maintain the 
part  of  the  infrastructure  for  the  cash  settlement,  in  a  so  called  "interfaced  model", 
the  risk  of  having  this  infrastructure  frozen  pursuant  to  a  bankruptcy  would  not  be 
eliminated.  For  the  time  being,  interfaced  models  are  only  used  in  the  context  of 
central  bank  money  settlement  and  not  in  the  situations  where  CSDs  offer  banking 
services.  

When  offering  commercial  bank  money  settlement  within  Option  D  the  existing 
infrastructures  for  commercial  bank  money  settlement  are  more  likely  to  remain 
operationally  "integrated",  whereby  only  one  entity  (typically  the  CSD)  has  the 
settlement infrastructure that operates both the securities accounts held by the CSD 
and the cash accounts held by the bank through an outsourcing arrangement.  This is 
the model currently used by the ICSDs (as well as by the domestic Euroclear CSDs 
in Belgium, France and the Netherlands).  This model is generally recognised by the 
market  as  being  more  efficient  than  the  interfaced  model.    A  CSD  wishing  to  start 
commercial  bank  money  settlement  via  a  settlement  agent  is  therefore  also  more 
likely to choose an operationally integrated model.   

In  an  operationally  integrated  model  the  settlement  bank  would  only  hold  the  cash 
accounts, not the infrastructure.  In case of a fail of the bank, the  regulators would 
have more options to find a solution (than in a fully integrated model under Options 
A. B or C), for instance by quickly transferring the cash accounts to another bank – a 
central  bank  or  a  commercial  bank.    Such  a  backup  solution  could  already  be 
identified in advance in the terms and conditions of the securities settlement system.  

(2) Additional costs 

One of the key disadvantages of the segregated model (Option D) is in respect of the 
cost of implementation.  The table below provides an overview of possible costs for 
both  CSDs  with  existing  banking  activities  and  CSDs  wishing  to  develop  such 
services. 

Table 30: Potential additional costs of segregated model  

CSDs with existing banking services 

Infrastructure 
expenses 

No additional infrastructure costs as CSDs 
are likely to retain an operationally 
integrated model 

CSDs wishing to develop banking 
services 

No significant additional costs from 
segregation, they would need 
infrastructure adjustments anyway to 
develop banking services in an 
integrated model 

Capital and 
own funds 

Two sets of capital requirements, for the 
CSD and for the banking entity, but the 
CSDs with existing banking services are 
likely to have sufficient capital, so no need 
to raise additional funds 

Two sets of capital requirements, for the 
CSD and the banking entity, but the 
CSDs likely to develop banking services 
are the larger CSDs, with sufficient 
capital 

Allocation of separate capital to the 
banking entity – minimum 5 million euro 
according to the CRD 

Allocation of separate capital to the 
banking entity – minimum 5 million euro 
according to the CRD 

No impact on the own funds requirements 
of the banking entity according to the CRD 
since these are related to the risks 
incurred  

No impact on the own funds 
requirements of the banking entity 

84 

 
 
 
 
 
Staff costs 

Legal costs 

Transaction 
costs 

CSDs with existing banking services 

No significant additional cost in an 
operationally integrated model – CRD 
requires a minimum of two directors.  The 
rest of the staff could be seconded from 
the CSD (many specialised banks, 
especially intragroup banks, run only with 
two employees) 

Legal costs for CSDs to set up the new 
legal entity and to formalise the 
contractual arrangements between the 
CSD and the new entity, between 
participants and the new entity, and for 
CSD links 

Legal costs for the CSDs' participants to 
reconsider, renegotiate and execute 
contracts with the new entity 

The setting up of new contracts between 
participants and the banking entity would 
require a renegotiation of settlement 
arrangements, which may put the CSDs in 
a weak position vis-à-vis their participants 

CSDs wishing to develop banking 
services 

No significant additional costs compared 
to the cost that would need to be 
incurred anyway to develop banking 
services 

No significant additional costs compared 
to the cost that would need to be 
incurred anyway to develop banking 
services 

No additional costs compared to the cost 
that would need to be incurred anyway 
to develop banking services 

Based on the analysis above, the main costs associated with the segregated model are 
legal/transaction costs for the CSDs who currently have banking services; the CSDs 
who  wish  to  develop  such  services  would  not  incur  significant  incremental  costs 
from setting up a segregated rather an integrated model. 

On  this  basis  Option  D  is  preferred,  as  it  mitigates  risk  spillover  from  the  banking 
activities  to  the  other  CSD  activities  and  thus  ensures  that  CSDs  have  a  low  risk 
profile more suitable for such systemically important infrastructures.  It reduces the 
probability of default of a CSD and gives the CSD and the regulators more room of 
manoever to find solutions  should the  banking activities suffer  severe stress. These 
important benefits do not appear to be outweighed by the costs associated with this 
measure. 

Furthermore,  CSDs  would  have  a  lot  to  gain  from  the  other  measures  proposed  by 
the  CSD  legislation.    They  would  benefit  from  new  cross-border  opportunities  in 
Europe to: 

•  Passport  their  services  across  Europe,  via  providing  services  directly  or  via 
branches,  without  the  need  for  further  national  authorisation.    This  would  allow 
groups such as the Euroclear group to consolidate further operationally instead of 
having to maintain subsidiaries (subject to national authorisation and supervision 
under potentially different rules) in all the countries where they operate in, as they 
do currently 

•  Access issuers in other countries directly, as issuer CSD 

•  Access CSDs in other countries via links 

•  Receive transaction feeds from trading venues and CCPs in other countries 

85 

 
 
 
 
 
8.12.4.  Sub-options of a segregated model  

Two sets of sub-options have been considered for the segregated model: 

•  Whether to allow the settlement bank to be a general bank or to require it to limit 

its activities to services for the securities settlement system(s) of a CSD 

•  Whether to require a CSD that wishes to settle in commercial bank money to use 

at least two settlement banks 

These are described in detail below. 

(a) General vs. limited scope bank 

As explained above, the CSDs currently offering banking services in the same legal 
entity  provide  only  a  limited  range  of  such  services.    The  question  arises  therefore 
whether the separate banking entity should also have a limited scope.   

The key advantages of a general bank model are five-fold: 

•  A general bank model would offer more choice for the CSDs wishing to develop 
commercial  bank  money  settlement.    Indeed,  in  a  limited  scope  bank  model  the 
CSDs  wishing  to  develop  commercial  bank  money  settlement  would  need  to 
either  set  up  a  limited  scope  bank  or  contract  an  existing  limited  scope  bank 
serving  another  CSD  –  this  would  not  be  easily  done  if  the  existing  settlement 
banks are operationally integrated with the CSDs they serve, which is the likely 
way the existing models would develop 

•  General banks are much more numerous and this offers more choice if the initial 
settlement  bank  fails:  in  this  case  a  general  bank  can  be  quickly  replaced  with 
another existing general bank, without having to set up a new limited scope bank 

•  General banks have a more diversified resource base, for instance including bank 
deposits, than a limited scope bank.  A limited scope bank would rely primarily on 
promises  from  the  CSD  participants  or  on  expensive  borrowings  from  the 
interbank market (as the current integrated banking CSDs do) 

•  A limited scope "settlement" bank is not a tested model and may not be viable 

•  A general bank model would make it easier to apply the CPSS-IOSCO principle 
of  using  two  or  more  settlement  banks  for  commercial  bank  money  settlement 
(see point b below) 

The key disadvantages of using a general bank for settlement are: 

•  A general bank may undertake a wider range of services, e.g. proprietary trading 
or significant maturity transformation services, and could therefore be potentially 
more risky than a limited scope bank, whose lending is largely intraday only. On 
the other hand, as illustrated above, the amounts of intraday lending by a limited 
scope  settlement  bank  would  be  very  significant,  while  its  resources  would  be 
rather concentrated and undiversified 

86 

 
 
 
 
•  A  general  bank,  which  acts  as  settlement  bank  for  one  or  several  CSDs,  takes 
deposits and carries out other important activities would become very significant 
and therefore would raise "too big to fail" concerns.  However, efforts are made 
internationally  and  at  EU  level  to  develop  a  crisis  management  framework  for 
banks, particularly those which are systemically important 

Based on the analysis above, a general bank seems more appropriate, particularly as 
it offers CSDs and regulators more choice to develop back-up solutions in case of a 
default. 

(b) Several settlement banks vs. one settlement bank 

The  CPSS-IOSCO  global  principles  for  financial  market  infrastructure  recommend 
that  when  such  infrastructures  (including  CSDs)  use  commercial  bank  money 
settlement,  they  should  limit  their  credit  and  liquidity  exposures  by  using,  where 
reasonable, multiple commercial settlement banks.  The principles also recognise that 
in some jurisdictions there may only be one commercial settlement bank that meets 
appropriate criteria for creditworthiness and operational reliability.   

The key advantages of using several settlement banks are therefore: 

•  Diversification of settlement risk across several banks 

•  Easier back-up alternatives in case one of the banks fails 

The key disadvantages are: 

•  Additional 

technical  complexity,  since 

to 
accommodate  transfers  in  more  than  one  bank  (but  this  is  not  likely  to  be  very 
difficult) and  legal/governance complexity if at  least two banks  outsource to  the 
CSD the operation of the cash account for settlement and of their related activities 
(credit and collateral management) 

infrastructure  would  need 

the 

•  Less  netting  efficiency:  when  settlement  is  done  via  several  settlement  agents 
there  will  be  many  cases  where  the  participants  to  a  transaction  do  not  have  an 
account  with  the  same  bank.    The  amount  of  funds  the  banks  would  need  to 
advance participants for settlement at the beginning of each day would therefore 
be higher than if there were only one settlement bank.  The different banks would 
also have an exposure on each other intraday.  On the other hand, this reduction in 
netting would bring more clarity and safety for the participants 

A  middle  ground,  which  could  be  considered  for  the  CSD  legislation,  would  be  to 
require  that  a  CSD  uses  two  or  more  settlement  banks,  but  allow  the  regulators  to 
permit the use of only one bank, if this satisfies certain criteria of risk concentration. 

87 

 
 
 
 
8.13.  Annex 13 – Summary of the responses to the public consultation  

8.13.1.  Introduction 

In  response  to  the  public  consultation  on  the  “Legislation  on  central  securities 
depositories  and  on  the  harmonisation  of  certain  aspects  of  securities  settlement  in 
the  European  Union”  held  from  13.01.2011  until  01.03.2011,  the  Commission 
received 101 contributions from stakeholders: 49 from registered organisations72, 35 
from individuals73 and 17 from public authorities. All responses are published on the 
EU Commission's website74. 

The  respondents 75 consist  of  33  banks,  16  CSDs,  6  investors,  5  issuers,  5  other 
professions, 10 other infrastructures, 20 public authorities, 4 registrars and 2 service 
providers. 

Figure 6: Overview of respondents by type  

4% 2%

32%

20%

10%

5%

5%

6%

16%

banks
CSDs
investors
issuers
other professions
other infrastructures
public authorities
registrars
service providers

The geographical distribution of the respondents is based on their address provided 
on their response. This is why some of the respondents are labelled as coming from 
outside  the  EU,  even  though  their  activity  is  partly  located  within  the  EU. 
Associations  with  an  obviously  European-wide  representation  were  included  in  the 
"EU" category.  

As  can  be  seen  in  the  table  below,  the  responses  cover  a  wide  section  of  the 
geographical scope of the EU.  

72  

73  

74  
75  

on 

the 

Register 

Registered 
of 
https://webgate.ec.europa.eu/transparency/regrin/welcome.do  
"Individuals" referred here are private organisations who failed to register, whose answers are therefore 
assumed having been sent by the individual who signed it and not by their respective organization. They 
should therefore not be confounded with natural persons acting as investors or EU citizens 
http://ec.europa.eu/internal_market/consultations/2010/securities_en.htm  
Associations are counted depending on who they represent 

representatives: 

interest 

88 

 
 
 
 
 
                                                 
Table 31: Overview of respondents by geography  

Austria 

Belgium 

Bulgaria 

Czech Republic 

Cyprus 

Denmark 

Estonia 

Finland 

France 

Germany 

Greece 

Hungary 

Italy 

Luxemburg 

5 

2 

1 

3 

1 

4 

2 

2 

8 

7 

1 

2 

2 

1 

Malta 

Netherlands 

Poland 

Portugal 

Romania 

Slovenia 

Spain 

Sweden 

UK 

Respondents covering EU 

EEA (Norway) 

Switzerland 

International 
Associations/Organisations 

2 

2 

1 

1 

1 

1 

5 

6 

17 

12 

5 

2 

5 

In  the  analysis  below,  each  respondent  is  counted  individually,  although  there  are 
some similar responses or common identities evident. Some contributions addressed 
the  questionnaire  only  partially  or  in  general  terms.  In  such  cases  their  positions, 
when expressed, were reflected in the statistics, while blank answers were counted as 
"no answer".  

8.13.2.  Short summary of findings  

The initiative to regulate CSDs was welcomed by almost all respondents, who shared 
the view of the consultation paper that CSDs play a systemically important role for 
financial  markets  and  should  be  subject  to  proper  regulation.  The  creation  of  a 
common regulatory framework for CSDs was widely seen as an important goal for 
European financial markets, as a European framework would promote the safety and 
soundness of CSDs and lead to a more competitive and robust environment for CSD 
activities.  As  to  the  scope  and  content  of  such  a  harmonisation,  the  responses 
provided a wide variety of viewpoints. 

Regarding  wider  issues  around  the  harmonisation  of  securities  settlement,  most 
respondents  agreed  that  lack  of  harmonisation  in  key  areas  of  post  trade  processes 
was  harmful  to  cross-border  investment.  Concerning  the  tools  to  overcome  lack  of 
harmonisation in this area, different views were expressed as to the role of European 
legislation in this context.   

8.13.3.  Part I: Appropriate regulatory framework for CSDs  

Scope and definitions (Questions 1-6) 

Q1.  Most  respondents  concurred  with  the  approach  suggested  in  the  Consultation 
Paper  to  define  CSDs  by  referring  to  the  functions  they  have  to  perform.  Some 
answers  expressed  concern  that  this  approach  may  make  it  difficult  to  clearly 
distinguish between entities that should be treated as CSDs and others that, although 

89 

 
 
 
 
 
 
performing similar functions, had a different role, such as custodian banks, registrars 
and other depositories. 

Q2. Regarding possible exemptions from the scope of legislation, many respondents 
agreed with the need to have at least partial exemptions for certain entities in future 
legislation,  e.g.  for  central  banks,  government  debt  offices,  registrars,  common 
depositories,  and  admitted  institutions.  It  was  often  stressed  that  these  exemptions 
should  be  narrowly,  clearly  and  objectively  defined.  A  number  of  contributions 
expressed reservations against exemptions in general, particularly against exempting 
certain institutions from obligations but not from rights. 

Q3.  With  regard  to  the  definition  of  core  CSD  functions,  the  vast  majority  of 
respondents  agreed  with  the  three  proposed  definitions.  Various  answers  suggested 
combining  the  "notary"  function  and  the  "central  safekeeping"  function  and 
redefining  this  function  more  broadly.  Other  answers  suggested  combining  in  the 
core functions  "central  safekeeping"  with "non-central safekeeping"  (from ancillary 
services) on the basis that the related prudential and conduct of business rules (e.g. 
on protection of customer assets) should in principle be the same. Some submissions 
contained concrete suggestions for re-phrasing parts of the proposed definitions with 
a view to clarify them. A non-exhaustive overview of such suggestions is provided in 
Annex 1.  

Q4.  A  number  of  views  were  expressed  as  to  the  question  of  how  many  core 
functions an entity would need to perform at a minimum in order to be qualified as a 
CSD.  A  great  number  of  combinations  were  proposed  by  stakeholders,  often 
reflecting  domestic  infrastructural  setup.  Some  stakeholders  considered  that  one 
function would suffice, with diverging views on which function should be performed 
(either  notary  function  or  settlement  function).  Others  favoured  the  performance  of 
two  functions,  with  different  views  on  the  respective  functions  to  be  performed  (a 
combination of central safekeeping and settlement, of central safekeeping and one of 
the  two  other  functions,  of  notary  and  settlement  or  of  notary  and  safekeeping). 
Others  called  for  the  performance  of  all  three  functions  by  a  CSD.  Another  view 
suggesting adding credit functions among core functions.  

Q5.  The  current  definition  of  a  'securities  settlement  system'  as  laid  down  in  the 
Settlement Finality Directive (SFD) was widely seen as being sufficient; some public 
authorities  advocated  a  review  of  the  definition  of  a  securities  settlement  system 
along the new CPSS-IOSCO definition in order to avoid any confusion with CCPs. 
Among the private sector responses, some views favoured a "stand alone" definition, 
without  reference  to  the  SFD.  A  number  of  respondents  expressed  the  view  that 
while all CSDs should operate notified systems under the SFD, not all operators of 
notified systems should qualify as a CSD. 

Q6.  Regarding  the  exercise  of  ancillary  functions  by  CSDs,  there  was  practically 
unanimity  among  respondents  that  CSDs  should  follow  a  low-risk  business  model. 
For a number of respondents, mainly the custodian banks and some regulators, this 
principle  was  interpreted  as  limiting  the  type  of  ancillary  functions  a  CSD  may  be 
able  to  perform:  a  CSD  should  not  be  allowed  to  perform  ancillary  functions  that 
carried  risks  beyond  purely  operational  risks  (banking  services,  credit,  securities 
lending). According to this group of respondents, those functions would have to be 
exercised  by  a  separate  legal  entity.  In  this  group  of  respondents,  some  made  a 
distinction  between  CSDs  and  ICSDs  and  favoured  allowing  ICSDs  to  provide 

90 

 
 
 
 
banking  services.  Others  stressed  the  need  for  CSDs  to  be  able  to  continue  viable 
business models that allowed also the pursuit of properly regulated activities beyond 
the provision of core services. On the private sector side, some respondents, mainly 
the CSDs, highlighted that the CSDs typically perform functions that take risk out of 
the market.  

Concerns were expressed that a limited list of ancillary services may hinder CSDs to 
develop future business.  These respondents favoured defining ancillary services by 
way of a principle, such as "harmonised, commoditised services improving market-
wide  safety,  efficiency  and  transparency"  (as  provided  by  some  CSDs),  and 
providing a list of services only for illustration purposes.  The same respondents also 
highlighted  that  not  all  ancillary  services  are  linked  to  core  functions,  for  instance 
collateral  management  can  be  generic  and  some  banking-type  of  services  are 
provided to facilitate ancillary rather than core services. Many respondents provided 
suggestions  for  redrafting  of  or  including  additional  ancillary  services  –  Annex  1 
provides a non-exhaustive list of such suggestions. 

Authorisation and supervision (Questions 7-15) 

Q7, 13. A number of respondents concurred with the need for a supervisory process 
that  was  effective  in  identifying  and  resolving  regulatory  issues  in  an  efficient 
manner. Some  respondents  questioned  the significance of  some of the "externality" 
cases  listed  in  the  consultation  paper  as  justifying  the  involvement  of  authorities 
from  other  Member  States  and  wanted  a  distinction  to  be  made  between  such 
authorities'  role  in  terms  of  authorisation  or  supervision,  and  between  actual 
involvement  or  just  information  sharing.  Most  public  authorities  supported  the 
competence  of  the  home  authority.  They  supported  a  sharing  of  competences 
between  regulators  notably  for  the  following  cases:  a  foreign  or  regional  SSS, 
interoperability arrangements, foreign issuances, banking activities. Some regulators 
were  opposed  to  any  form  of  college  or  supported  only  a  pure  consultative 
involvement of the host authorities. 

Q8-9. Most respondents favoured that a future CSD authorisation procedure should 
be  linked  to  the  procedure  set  out  in  the  SFD;  while  some  argued  that  the  two 
procedures were to be seen as two distinct acts, others were against a dual application 
process. Regarding the organisation of the two processes, some suggested that both 
notification  and  authorization  should  be  simultaneous.  Of  those  who  supported  a 
single  process,  views  differed  as  to  where  the  competence  for  authorisation  should 
move (to the CSD authority or the SSS authority).  

Q10.  Practically  all  respondents  favoured  the  maintenance  of  a  CSD  register  by 
ESMA. Some suggested that ESMA should also be the competent authority to which 
Member  States'  notifications  under  the  SFD  are  addressed.  Some  public  authorities 
questioned the practical benefit of such a register distinct from the SSS register while 
other  suggested  that  added  value  could  be  created  if  such  a  register  details  the 
activities  and  the  competent  authorities  for  each  CSD  in  order  to  allow  ESMA  to 
easily  monitor  a  settlement  crisis.  There  were  also  suggestions  that  ESMA  ensures 
the consistency of definitions across the Member States. 

Q11.  Respondents  expressed  a  variety  of  views  on  how  to  make  the  new  rules 
applicable  to  existing  CSDs.  Some  respondents  argued  that  there  should  be  no 
specific  phasing-in  of  new  legislation,  but  that  all  CSDs  should  be  subject  to 

91 

 
 
 
 
authorisation  under  the  new  rules  as  from  the  moment  of  entry  into  force  of 
legislation.  Others  favoured  giving  CSDs  a  limited  time-span  to  adapt  to  new 
legislation.  Some  respondents  also  favoured  a  solution  that  would  make  existing 
CSD  not  subject  to  a  new  authorisation  process,  but  to  have  the  application  of  the 
new rules phased in via the on-going supervision process. 

Q12. Views on capital requirements for CSDs varied depending on the position that 
was taken vis-à-vis ancillary services: those respondents that favoured the limiting of 
functions to non banking types services noted that this approach should be reflected 
in an appropriate capital requirement regime. Other respondents identified a need to 
coordinate  any  capital  requirement  with  existing  capital  requirements  rules  under 
banking  regulation.  Among  public  authorities,  a  majority  favoured  a  dual  regime 
inspired by CPSS-IOSCO based on a fixed method of calculation for core activities 
and  a  variable  amount  depending  on  risks  incurred  by  ancillary  activities.  Some 
suggested  that  capital  requirements  based  on  CRD  would  not  be  appropriate  to 
intraday  credit  while  others  suggested  in  the  latter  case  alternatives  to  capital 
requirements  such  as  guarantee  funds.  A  smaller  group  favoured  a  single  regime 
encompassing  all  core  and  ancillary  activities  together.  Among  the  latter  some 
suggested  that  the  CRD  serve  as  the  unique  basis  for  calculation  if  the  CSD  is 
authorised to provide banking services.  

Q14-15. Similarly, views diverged as to the scope and the effects of a CSD license. 
Those respondents in favour of limiting a CSD's activity ruled out any possibility for 
a CSD to obtain a special purpose banking licence and favoured a partial passporting 
approach  for  core  CSD  services.  Others  expressed  support  for  a  limited  purpose 
banking licence and a full passport solution.  Essentially three options were proposed 
in respect of the (limited) banking services: (1) two separate licences, one for CSD 
functions  and  another  one  for  banking  type  of  services,  (2)  one  licence  for  all 
services,  integrating  appropriate  requirements  for  banking  type  of  services  and  (3) 
two  licenses  attributed  to  two  distinct  entities.  Regarding  the  first  option,  some 
suggested that the banking license should not be CRD based. 

Access and interoperability (Questions 16-24) 

Q16.  A  majority  of  respondents  favoured  granting  market  participants  the  right  to 
access the CSD of their choice. A number of respondents called for open and non-
discriminatory  access  to  CSDs  by  market  participants,  subject  to  a  thorough  risk 
assessment of eligible participants and the existence of the necessary links between 
the CSD and other market infrastructures. 

Q17. There was also widespread support for granting issuers the right to issue their 
securities  in  the  CSD  of  their  choice,  but  that  this  should  not  be  an  obligation  for 
CSDs.  Some  respondents  pointed  out  that  for  this  right  to  be  effective,  further 
harmonisation of legal and technical rules needed to be accomplished. Others raised 
doubts  that  this  right  for  issuers  to  access  CSDs  would  have  any  practical  effect 
without a portability regime allowing straight through processing.  Indeed, there were 
comments  that  CSDs,  market  participants  and  investors  should  be  required  to 
recognise  and  facilitate  compliance  with  issuer  visibility  rights,  in  accordance  with 
the issuer's national law. 

Q18.  Regarding  corporate  law,  many  respondents  argued  that  the  issuance  of  a 
security  in  a  foreign  CSD  should  not  affect  the  relation  between  an  issuer  and  the 

92 

 
 
 
 
end-investor.  Most  public  authorities  also  insisted  that  corporate  law  be  the  law  of 
the issuer, and even proprietary law at the level of the CSD should align with issuer 
law,  at  least  for  equities.  There  were  also  comments  that  considerable  cooperation 
and  coordination  was  likely  to  be  required  from  national  regulators  in  respect  of 
these issues. 

Q19. Some respondents questioned the usefulness of split issues in terms of market 
efficiency.  Others  considered  this  to  be  a  feasible  option  if  accompanied  by 
appropriate coordination provisions.  Some CSDs expressed concern that split issues 
may  not  be  economical  and  therefore  they  should  not  be  obliged  to  accept  them. 
Some respondents also highlighted that the issuer is the party ultimately responsible 
for the integrity of the issue, although this function can be delegated. Several public 
authority invoked drawbacks such as the fact that splits reduce fungibility or that any 
authorization of splits should be subject to a prior tax and corporate law assessment 
by each Member State. However, others considered that splits might be acceptable if 
strong  reconciliation  measures  were  implemented  which  would  be  possible  only 
through interoperability  

Q20.  Access  rights  to  CSDs  –  either  by  other  CSDs  or  by  other  market 
infrastructures - were generally seen as a positive development by most respondents. 
Some considered that corresponding demands should be made subject to the business 
interests of the participants of the requesting infrastructure.  

Regarding  access  between  CSDs,  most  respondents  favoured  a  right  for  a  CSD  to 
become  a  participant  in  another  CSD  under  the  same  transparent  and  non 
discriminatory  provisions  as  other  participants  (the  so  called  "standard  access").  A 
minority  of  respondents  suggested  that  this  right  of  access  should  also  extend  to 
"custom access" and to "interoperability". 

A  number  of  respondents  cautioned  against  installing  overly  complex  rules  for 
granting access. Notably, they disagreed with some of the suggested requirements for 
access arrangements, such as harmonisation of account structures and DVP for links. 

A  number  of  respondents,  mainly  custodian  banks,  were  not  in  favour  of  CSDs 
accessing other CSDs. They favoured the segregation of "investor CSD" activity in a 
separate legal entity from the "issuer CSD" activity. It was argued that investor CSDs 
would  transform  themselves  into  global  custodians  and  add  a  new  layer  of 
intermediation. 

As  to  the  conditions  for  exercising  this  right,  a  number  of  respondents  argued  in 
favour of a right for the issuer CSD to refuse access for risk reasons. Other reasons 
for refusal cited were commercial reasons or T2S compliance.  

There were also calls that this right of access should be made available to other types 
of institutions, such as issuer agents. 

Q21-22. Similarly, most respondents favoured the right of CCPs and trading venues 
to  access  CSDs.  Some  respondents  expressed  the  view  that  participants  of  trading 
venues should be able to decide on the place of settlement. As to the conditions for 
exercising this right, some respondents wanted to make it subject to risk assessment 
or ESMA control.  

93 

 
 
 
 
Q23.  With  respect  to  the  right  of  CSDs  to  access  transaction  feeds  from  trading 
venues or CCPs, some respondents expressed concerns as to whether this right would 
be  effective  in  legislation  on  CSDs  without  formally  including  corresponding 
provisions in MiFID and the proposed regulation on CCPs. One response noted that 
the right of access should be reversed, since it should be the trading platform or the 
CCP that feeds the CSD and not the contrary. 

Some  respondents  argued  that  the  issue  is  already  sufficiently  dealt  by  MiFID  and 
EMIR, while others seemed to indicate that this right is not sufficiently granted for 
cross-border transactions. 

Regarding  the  effective  exercise  of  the  right,  some  pointed  to  the  need  for  a 
requesting  CSD  to  be  able  to  interlink  with  the  incumbent  CSD  and  highlighted 
confidentiality  issues  regarding  the  provision  of  information  regarding  all  trades  to 
the CSD. Some respondents wanted to make the exercise of the right subject to risk 
assessment or ESMA control.  

Q24. On the question of additional conditions that should be fulfilled for CSDs to be 
able to compete with incumbent CSDs, respondents mentioned access to transaction 
feeds,  basic  reference  data  that  support  transaction  feeds,  including  security  and 
market  participant  identifier,  and  access  to  central  bank  money.  Some  CSDs  also 
pointed out to access arrangements with entities potentially exempted from the CSD 
legislation. 

Prudential rules and other requirements for CSDs (Questions 25-43) 

As  a  general  remark,  many  respondents  expressed  their  preference  for  having  only 
the  principles  of  prudential  rules  spelled  out  in  primary  legislation,  leaving  the 
formulation of more detailed rules to implementing rules. Also, the point was raised 
that  duplication  with  other  initiatives,  namely  the  Securities  Law  Directive  (SLD) 
should be avoided. 

Q25. Some respondents agreed with the need to strengthen the legal framework for 
operations performed by CSDs, mentioning the examples of the timing of entry of a 
transfer order into a securities settlement system and timing of the irrevocability of 
instructions.  Several  public  authorities  were  in  favour  of  the  reinforcement  of  the 
legal framework. Some held the view that strengthening the legal framework should 
include detailed rules on links and on SSS notification, while others insisted on the 
contrary that pure legal aspects remain subject to conflict of laws. In this respect one 
authority  suggested  that  conflict  of  laws  concerning  notary/safekeeping  functions 
should  be  subject  to  "issuer  law"  and  should  therefore  differ  from  conflict  of  laws 
solutions  provided  by  the  SLD.  Some  authorities  argued  against  any  reinforcing  of 
the  legal  assessment  of  links  on  the  basis  that  this  falls  in  the  remit  of  the  central 
banks.  

Q26.  Practically  all  respondents  considered  that  a  settlement  system  operated  by  a 
CSD should be designated and notified under the SFD. This requirement was echoed 
by most public authorities. ECSDA pointed out that this is already the case for all its 
EEA members. 

Q27.  Regarding  securities  lending,  a  number  of  participants  favoured  an  obligation 
for CSDs to install securities lending  mechanisms among  its participants; however, 

94 

 
 
 
 
many CSDs argued that there is not a business case for this in smaller markets. There 
was  a  general  view  that  CSDs  should  not  be  forced  to  operate  a  securities  lending 
mechanism  acting  as  principal.  A  number  of  respondents,  mainly  custodian  banks, 
pointed  out  that  the  provision  of  securities  lending  services  as  principal  should  be 
done  by  a  separate  legal  entity  under  a  banking  licence.  Among  public  authorities, 
several  subjected  securities  lending  by  CSDs  acting  as  principal  to  appropriate 
solvency  and  liquidity  rules.  For  this  reason  several  authorities  considered  that 
securities  lending  should  only  be  optional  or  should  only  be  granted  by  CSDs  as 
facilitator. 

Q28-29. Many respondents expressed support for introducing a general requirement 
to  have  securities  available  in  book  entry  form;  a  notable  exception  was  the  UK, 
which  had  analysed  this  issue  recently  and  decided  not  to  impose  compulsory 
dematerialisation. Regarding the scope of this requirement, some advocated to apply 
it to all securities listed on regulated markets. Others saw as possible scope all CSD 
eligible securities and/or actively traded securities. There was also a suggestion for a 
narrower rule requiring issuers to pass securities through a CSD in book entry form 
"as  soon  as  the  issue  needs  to  circulate  among  financial  intermediaries".  Most 
respondents  that  favoured  a  general  requirement  for  book-entry  considered  that 
securities already issued should be phased into a new regime within a certain period 
of time.  

Q30-31.  As  concerns  Delivery  versus  Payment  (DVP)  settlement  mechanism,  a 
considerable  number  of  respondents  argued  that  the  use  of  these  mechanisms  was 
already common practice among CSDs in Europe. Some pointed out that in order to 
facilitate  links  between  CSDs  the  number  of  available  DVP  mechanisms  should  be 
limited. Most respondents saw no need for a transitional period for this requirement 
or the introduction of a guarantee fund in the interim, as all CSDs were expected to 
have DVP in place already now.  There were, however, views that Free of Payment 
and  Free  of  Cash  deliveries  should  be  allowed  as  well,  particularly  in  the  case  of 
corporate actions.  

Q32-34. A number of respondents agreed that CSDs should use central bank money 
where practicable and feasible and that this preference should be applied equally to 
all  types  of  securities.  Some  respondents,  mainly  custodian  banks  and  some 
regulators  argued  that  CSDs  should  in  principle  not  be  allowed  to  settle  in 
commercial  bank  money  and  that  commercial  bank  settlement  should  not  occur  on 
accounts opened with the CSDs. This should only be made possible via a settlement 
agent bank distinct from the CSD. These respondents also argued that any provision 
regarding settlement in commercial bank money should not form part of legislation 
on CSDs, but should be covered by banking legislation  

Q35-36.  There  was  widespread  support  regarding  rules  on  reconciliation  and 
segregation of customers' securities and the need to have an approach that would be 
synchronised with that chosen by a possible  future Securities Law Directive. Some 
respondents stressed the primary responsibility of CSDs for this task which should be 
addressed by law and not contractually. Views differed as to the degree and level of 
detail of respective legislative provisions.  

There  were  views,  mainly  from  the  CSDs,  that  segregation  should  be  imposed  at 
CSD level only and not at CSD participants' level since the CSD cannot monitor this. 
There  were  also  suggestions  that  the  CSD  legislation  should  consolidate  all  the 

95 

 
 
 
 
requirements in this respect, including those from MiFID. Concerns were also raised 
regarding national laws, i.e. that the national law of the issuer should determine the 
particular arrangements for reconciliation between the parties.  

Q37. As to operational risks, most respondents were in favour of the proposed items. 
Some stressed the need to have more safeguards in place, e.g. adequate insurance by 
CSDs to cover operational risks, availability of key systems, transparent information 
for customers about operational risks, an authorisation by the relevant authority if a 
CSD outsources its settlement function and an external audit of CSD's risk controls 
and existence of assets.  

Q38.  Regarding  governance,  most  respondents  agreed  with  the  provisions  as 
described in the consultation paper, some suggesting additional items to be included 
in  the  proposed  list.  On  the  other  hand,  some  respondents  questioned  the  need  of 
specific  measures,  i.e.  the  suitability  of  a  risk  committee  (except  for  those  CSDs 
which  perform  net  systems)  and  the  need  for  independent  directors.  A  general 
comment made by many respondents was that CSDs had a different risk profile from 
CCPs  and  therefore  needed  a  different  regime  on  governance.    Some  respondents 
who agreed with the principle of risk committees suggested that issuers should also 
be represented in such committees. Another general view related to the applicability 
of these provisions in the case of groups, e.g. that certain rules should apply only at 
group level, not at the level of each subsidiary.  

Q39-40.  Most  respondents  agreed  that  CSDs  should  be  able  to  outsource  their 
activities  without  affecting  the  proper  functioning  of  the  CSD  and  the  full 
responsibility of the CSD at any given point in time. Some respondents called for the 
involvement  of  participants  prior  to  any  major  outsourcing  decision.  A  number  of 
respondents  saw  no  need  for  exemptions  from  these  principles,  while  some  saw  an 
exemption in the context of T2S as being justified. Public authorities agreed on the 
two  principles  of  outsourcing  provided  that  the  authorization  by  competent 
authorities be limited to core functions or systematically important functions. 

Q41-42.  With  respect  to  financial  risks  directly  incurred  by  CSDs,  a  number  of 
respondents, mainly custodian banks, were critical of allowing CSDs to take on any 
of the risk described in the consultation paper. As these risks are related to banking 
activity,  some  respondents  argue  that  they  should  be  carried  out  in  a  distinct  legal 
entity  providing  banking  services.    Those  that  favoured  CSDs  providing  some 
limited  banking  services  commented  that  the  suggested  liquidity  and  credit  risk 
prudential  requirements  should  not  go  beyond  ESCB-CESR  recommendations. 
Concerning  the  exercise  of  particular  banking  activities,  some  mentioned  that 
requirements  should  be  stronger  for  securities  lending  than  for  cash  credit.  It  was 
also suggested that CSDs acting as principal should collect the cash on the accounts 
of their participants without preventing them from using such cash for making credit 
in their own name. 

Concerning  the  case  where  credit  risks  are  only  borne  by  participants,  most  public 
authorities  agreed  with  the  proposed  framework,  with  the  reservation  of  two 
authorities which did not see any case for a CSD acting as a facilitator and two other 
authorities,  which  opposed  the  requirement  for  lending  participants  to  fully 
collateralise credit. 

96 

 
 
 
 
Q43.  Regarding  price  transparency,  there  was  widespread  agreement  among 
respondents to include at least certain elements of the Code of Conduct in legislation. 
A  number  of  participants  pointed  out  that  these  elements  should  also  be  made 
applicable  for  other  infrastructures  (trading  venues,  CCPs)  by  the  relevant 
legislation. On service unbundling, some respondents supported it under a principle 
of  "non-discriminatory  pricing".  Concerning  account  separation,  a  number  of 
respondents questioned the usefulness of this procedure and underlined that it would 
be disproportionate to introduce such a requirement across all asset classes.  

8.13.4.  Part  II:  Harmonisation  of  certain  aspects  of  securities  settlement  in  the  European 

Union 

Q44.  In  general,  a  majority  of  respondents  welcomed  the  drive  towards  more 
harmonisation  of  key  post  trade  processes  in  order  to  improve  cross-border 
investment.  A  number  of  respondents  suggested  that  legislation  should  provide  a 
general framework and leave details of the harmonisation to level II legislation and 
market standardisation. Some respondents pointed out that the issue should be dealt 
through MiFID or through a text that would not take the form of a regulation.  

Q45.  Besides  the  measures  discussed  in  the  consultation  paper,  some  respondents 
identified  other  areas  where  harmonisation  may  be  beneficial,  e.g.  the  use  of 
standardised  communication  flows,  common  rules  for  middle  office  processes,  and 
removal  of  tax  and  legal  barriers.  Some  public  authorities  advocated  in  favour  of 
addressing in this legislation other aspects (e.g. legal, tax, harmonisation of customer 
interface  and  communication  protocols  as  well  as  sanctions  if  insufficiently 
addressed by short selling regulation).  

Q46. A majority of respondents welcomed a common definition of settlement fails in 
the EU.  Some respondents favoured a high level definition only. Others highlighted 
the need for properly identifying and addressing the root causes of settlement fails, 
which may be difficult especially in regard of property law aspects.  

Q47-49. Most respondents agreed that markets should have in place mechanisms to 
prevent settlement fails as much as possible and to address settlement fails once they 
have occurred in a proper manner. The measures alluded to in the consultation paper 
were widely recognised as reflecting practice in a number of markets. 

A  number  of  responses  cautioned  against  a  "one  size  fits  all"  approach  for  all 
markets.  Various  submissions  called  for  relevant  rules  to  be  formulated  by 
appropriate experts working together with ESMA. Regarding penalty regimes, some 
respondents argued that any penalty regime should aim at penalising the person that 
is  actually  responsible  for  a  fail;  the  CSDs  are  not  always  in  a  position  to  identify 
that. The point was also made that the feasibility of some measures may depend on 
the degree of liquidity in a given market. The point was also made that any regime 
should not be a source of revenue for CSDs, but that revenues be kicked backed to 
improve the system. A number of comments were made regarding detailed measures 
proposed. 

Many  respondents  also  favoured  including  such  settlement  discipline  measures  in 
this legislation rather than having some in the proposed Short Selling Regulation.  

97 

 
 
 
 
Q50-55.  A  large  majority  of  respondents  favoured  the  harmonisation  of  settlement 
periods  in  the  EU.  Most  of  them  suggested  moving  to  a  period  of  two  days  after 
completion  of  a  trade  (T+2),  while  allowing  shorter  settlement  periods  and 
exceptions. A number of responses raised concerns as to operational disruptions that 
such a move may cause for some market participants, calling for a prior cost benefit 
analysis  to  be  undertaken.  A  particular  example  was  given  for  the  UK  and  Ireland 
retail equity markets, where share certificates are still used and these can take up to 
10  days  to  settle.  As  concerns  the  scope  of  such  a  move,  many  respondents  saw  a 
most  urgent  need  for  harmonisation  for  equities  and  equity-like  products.  Some 
submissions  argued  that  there  is  a  priori  no  reason  to  exclude  any  asset  class  from 
such a move. Regarding trading venues, it was highlighted by some respondents that 
all trading venues as defined by the upcoming MiFID review should be covered. A 
number  of  respondents  stressed  the  need  for  OTC  markets  to  be  able  to  retain 
flexibility, while others favoured including OTC transactions in the scope. Regarding 
the  date  of  entry  into  force  of  a  harmonised  settlement  period,  most  respondents 
considered  that  it  should  occur  in  advance  of  the  testing  of  the  Target2-Securities 
project of the ECB in the second half of 2013  

Q56.  Most  respondents  agreed  on  the  benefit  of  having  a  harmonised  sanction 
regime. A number of responses pointed out that the issue of administrative sanctions 
should  not  be  confused  with  penalty  regimes  for  late  settlement  administered  by  a 
CSD (which are of a private nature).  Many CSDs also highlighted that CSDs should 
have the right to pass on sanctions to a supplier that has generated the problem. 

Some public authorities favoured applying sanctions at a local level or a mechanism 
of  rapid  transfer  of  securities  to  another  CSD  especially  in  case  of  insolvency  of  a 
CSD. 

98 

 
 
 
 
8.14.  Annex 14 – Glossary of terms 

Term 

Definition 

Account holder 

Account provider 

The  client  of  an  account  provider  who  holds  securities  on 
securities accounts maintained with the account provider. An 
account  holder  can  act  itself  as  an  "account  provider"  for 
another  account  holder  intervening  at  a  lower  tier  of  the 
"holding chain" (see account provider and holding chain). 

A  service  provider  that  maintains  securities  on  securities 
accounts opened either in its own name (nominee account) or 
in  the  name  of  its  account  holders  (see  account  holder  and 
holding chain).  

Book-entries 

Designates  the  records  on  securities  accounts  made  through 
book-entry methods. 

Book-entry methods  Recent  works  (Legal  Certainty  Group,  Geneva  securities 
Convention)  identify  three  main  categories  of  book  entry 
methods which are (1) "credit/debit" (2) "earmarking" and (3) 
"control agreement". 

Book-entry system 

A  system  that  enables  the  transfer  of  securities  and  other 
financial assets that do not involve the physical movement of 
paper documents or certificates. 

Central account 
provider  

Account  provider  of  top  tier  securities  accounts  for  account 
holders. 

Central bank money 
(or Central money, 
Central money 
settlement) 

Central counterparty 
(CCP) 

Designates  the  case  where  a  system  settles  its  cash  leg  on 
cash accounts that are opened in the books of a central bank. 
In most cases, central money systems are “interfaced model” 
because  a  technical  interface  must  be  created  in  order  to 
synchronize  both  the  securities  leg  and  the  cash  leg. 
However,  there  are  cases  where  the  CSD  receives  directly  a 
mandate  from  the  central  bank  to  manage  the  cash  accounts 
opened  with  the  central  bank  through  a  single  interface,  in 
which  case  the  system  works  in  central  money,  but  through 
an "integrated model". 

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. 

99 

 
 
 
 
Central Securities 
Depository (CSD) 

Collateral 

Commercial bank 
money (or 
Commercial money, 
or Commercial 
money settlement) 

An entity that: 

1) enables securities transactions to be processed and settled 
by book entry; 

2)  provides  custodial  services  (e.g.  the  administration  of 
corporate actions and redemptions); 

3)  plays  an  active  role  in  ensuring  the  integrity  of  securities 
issues. 

Securities can be held in a physical (but immobilised) form or 
in  a  dematerialised  form  (whereby  they  exist  only  as 
electronic records). 

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.  

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  which  can  be  either  a  classic  bank  or  an  (I)CSD 
when  such  an  infrastructure  is  authorized  to  open  cash 
accounts.  In  the  latter  case,  the  (I)CSD  is  called  an 
“integrated  CSD”  because  it  handles  both  the  securities  leg 
and the cash leg. 

Confirmation 

A process whereby the terms of a trade are verified either by 
directly involved market participants or by a central entity. 

Corporate action (or 
Corporate event) 

An action or event decided by the issuer of a security which 
has an impact on the holders of that security. 

This  may  be  optional,  in  which  case  those  holders  have  a 
choice  (for  example,  they  may  have  the  right  to  purchase 
more shares, subject to conditions specified by the issuer). 

Alternatively,  it  may  be  mandatory,  whereby  those  holders 
have  no  choice  (e.g.  in  the  case  of  a  dividend  payment  or 
stock  split).  Corporate  actions  can  relate  to  cash  payments 
(e.g.  dividends  or  bonuses)  or  the  registration  of  rights 
(subscription rights, partial rights, splits, mergers, etc.). 

The  risk  that  a  counterparty  will  not  settle  an  obligation  for 
full  value,  either  when  due  or  at  any  time  thereafter.  Credit 
risk  includes  pre-settlement  risk  (replacement  cost  risk)  and 
settlement risk (principal risk).  

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. 

Counterparty credit 
risk 

Custodian or 
custodian bank 

100 

 
 
 
 
Default 

Delivery versus 
payment (DVP) 

Dematerialisation 

An event stipulated in an agreement as constituting a default. 
Generally,  such  events  relate  to  a  failure  to  complete  a 
transfer  of  funds  or  securities  in  accordance  with  the  terms 
and rules of the system in question. A failure to pay or deliver 
on  the  due  date  (see  settlement  fail),  a  breach  of  agreement 
and the opening of insolvency proceedings all constitute such 
events.  

A  securities  settlement  mechanism  that  links  a  securities 
transfer  and  a  cash  transfer  in  such  a  way  as  to  ensure  that 
delivery  occurs  if  and  only  if  the  corresponding  payment 
occurs. 

Technique of representation of securities in book entry form 
consisting  in  a  one  step  creation  of  the  securities  through  a 
credit  on  the  top  tier  securities  account.  In  contrast  with  the 
"immobilisation"  technique,  the  liability  of  the  issuer  and/or 
of 
limited  by  a  global  note  (see 
the  CSD 
Immobilisation).  

is  not 

that 

certain 

jurisdictions 

the 
In 
dematerialisation technique, an excess of securities presented 
for  redemption  will  result  into  an  obligation  on  either  the 
issuer  or  the  CSD  to  reimburse  the  excess  securities  at  their 
own expense with no prorata sharing. 

adopted 

have 

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.  

Global note 

See Immobilisation. 

Gross settlement vs. 
Net settlement  

Gross  settlement:  The  delivery  and/or  settlement  of  transfer 
orders are processed one by one.  

Holding chain 

Net  settlement:  The  delivery  and/or  settlement  of  transfer 
orders are made on a net basis. 

For each issued security a chain of accounts involving at least 
one securities account maintained by an account provider and 
held by an account holder. 

(I)CSD 

Means both CSDs and ICSDs. 

Immobilisation of 
securities 

Integrated system vs. 
interfaced system 

Alternative  technique  of  representation  of  securities  in  book 
entry  form  consisting  of  two  steps:  first  the  issuance  of  a 
paper or electronic global note representing the total financial 
liability  of  the  issuer  (generally  the  nominal  value  of  the 
issuance),  then  the  credit  of  the  securities  in  a  top  tier 
securities account (see Dematerialisation).  

See Commercial bank money and Central bank money. 

101 

 
 
 
 
Intended Settlement 
Date (ISD) vs. 
Actual Settlement 
Date(ASD) 

International Central 
Securities 
Depository or ICSD, 

Interoperability 

Issue or Issuance of 
securities 

Issuer 

Intended Settlement Date: the date on which a transaction is 
due to settle. 

Actual  Settlement  Date:  the  date  on  which  the  settlement 
effectively takes place. 

A  CSD  that  was  originally  set  up  to  settle  Eurobond  trades 
and  is  now  active  also  in  the  settlement  of  internationally 
traded  securities  from  various  domestic  markets,  typically 
across currency areas. 

At present, there are two ICSDs located in the EU countries: 
Clearstream Banking Luxembourg and Euroclear Bank. 

A further particularity of ICSDs is the settlement of the cash 
leg  only  in  cash  accounts  opened  in  their  books  (see 
Commercial money).  

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. 

Depending  of  the  context,  this  term  may  cover  either  the 
decision  of  the  issuer  to  issue  securities  and  to  start  the 
relevant issuance procedure as imposed by corporate law (in 
particular  registration)  or  the  entering  of  securities  in  book 
entry form in a CSD. 

The issuer of a security including the agent mandated by the 
issuer for corporate actions purposes. 

Issuer CSD vs. 
Investor CSD  

Issuer CSD: a CSD in which securities are issued (for the first 
time).  

Links 

Investor CSD: a CSD participating to a Securities Settlement 
System operated by the issuer CSD and holding the securities 
credited  on  its  settlement  account  by  the  issuer  CSD  for  the 
account of its own customers/participants (see 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 

102 

 
 
 
 
normal participant to the issuer CSD. 

Customised link: a link where the investor CSD benefits from 
a special access. 

Interoperable link: see Interoperability. 

Process of comparing the two relevant settlement instructions 
as  provided  by  the  two  counterparties  to  ensure  that  they 
match. 

Date on which settled positions are struck in the books of the 
Issuer CSD at close of business to determine the entitlement 
to the proceeds of a corporate action. 

Matching 

Record date 

Registrar or Registry  An entity that records the ownership of securities on behalf of 
the  issuer,  irrespective  of  the  intermediary  that  actually 
maintains  the  security.  In  certain  countries  this  function  is 
performed by an agent of the issuer, in others by the CSD. 

Registration 

The documenting of the ownership of securities in the records 
of  the  issuer,  in  a  registry  or  in  a  CSD  performing  such 
ancillary function (see Registrar). 

Securities account 

An account on which securities are maintained.  

Securities Settlement 
System 

A system which allows the transfer of securities, either free of 
(delivery  versus 
payment 
payment). 

(FOP)  or  against  payment 

Segregated account  An account used for the segregation of a client's assets. 

Segregation 

Settlement 

A  method  of  protecting  a  client’s  assets  by  holding  them 
separately from those of the custodian (or other clients, as the 
case may be). 

The completion of a transaction or of processing with the aim 
of discharging participants' obligations through the transfer of 
funds  and/or  securities.  A  settlement  may  be  final  or 
provisional. 

Settlement cycle (or 
Settlement period) 

Number of business days from the trade date to the intended 
settlement date.  

Settlement failure  

Stock Split 

Systemic risk 

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. 

A corporate action in which a company's existing shares are 
divided  into  multiple  shares.  Although  the  number  of  shares 
outstanding increases by a specific multiple, the total value of 
the  shares  remains  the  same  compared  to  pre-split  amounts, 
because no real value has been added as a result of the split. 
For  example,  in  a  2  for  1  stock  split  every  shareholder  with 
one share is given an additional share. 

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, 

103 

 
 
 
 
Target2 Securities 
(T2S) 

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. 

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. T2S is schedule to go live in 2013. 

Top tier securities 
account 

The  securities  account  which  is  placed  at  the  top  of  the 
holding  chain.  It  is  the  account  into  which  the  securities  are 
put in book-entry form for the first time. 

Trade date 

Date  on  which  a  transaction  is  actually  agreed  by  the 
involved  parties  or  when  the  corresponding  orders  are 
executed,  as  opposed  to  the  settlement  or  payment  date  on 
which funds are transferred from the buyer to the seller. The 
trade  date  occurs  on  the  trading  venues,  whereas  the 
settlement date occurs within CSDs. 

Source: ECB – The Payment Systems 2009, Corporate Actions Joint Working Group Standards 2009, 
Commission Communication on Clearing and Settlement of 28 April 2004  

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