COMMISSION STAFF WORKING DOCUMENT SUMMARY OF THE 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: financial institution, financial legislation, official market, regulation of transactions, securities, single market, stock exchange, stock-exchange transaction

EUROPEAN COMMISSION 

Brussels, 7.3.2012  
SWD(2012) 23 final 

COMMISSION STAFF WORKING DOCUMENT 

SUMMARY OF THE 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) 22 final} 

 
 
 
 
  
 
COMMISSION STAFF WORKING DOCUMENT 

SUMMARY OF THE 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 

Introduction 

Any  trade  of  securities  on  or  off  a  securities  exchange  is  followed  by  a  post-trade  flow  of 
processes  that  leads  to  the  settlement  of  the  trade,  which  means  the  delivery  of  securities 
against  cash.  These  processes  are  typically  undertaken  by  so  called  "post  trading 
infrastructures", including Central Counterparties (CCPs) for clearing and Central Securities 
Depositories (CSDs) for settlement.  

CSDs  are  important  institutions  in  the  post  trading  area  in  that  they  generally  ensure  the 
recording,  safekeeping  and  settlement  of  securities  –  the  latter  by  operating  so  called 
securities  settlement  systems.  CSDs  also  play  a  crucial  role  for  the  collateral  market, 
especially  for  monetary  policy  purposes  –  almost  all  of  the  eligible  collateral  for  monetary 
policy operations in the EU, especially in the Euro area, flows through securities settlement 
systems. Securities settlement systems in the EU settled approximately €920 trillion worth of 
transactions in 2010 and were holding almost €39 trillion of securities at the end of 2010.  

CSDs are therefore systemically important for the markets they operate in, and are becoming 
more  interconnected  due  to  the  increase  in  cross-border  transactions  in  Europe;  by  some 
measures  cross-border  trading  represents  around  one  third  of  total  securities  transactions  in 
the  European  market.  CSDs,  and  post  trading  processes  in  general  will  become  even  more 
closely interconnected with the advent of Target2 Securities (T2S), a project launched by the 
Eurosystem that should provide a common platform for securities settlement in Europe (T2S 
is scheduled to start in 2015). 

The  EU  market  for  CSD  services  is  very  fragmented,  with  over  30  CSDs  and  two  ICSDs 
(International  CSDs  –  Clearstream  Banking  Luxembourg  and  Euroclear  Bank).  By 
comparison the entire US securities market is served by only two CSDs, DTC and FedWire.  

Political mandate and stakeholder consultation 

The EU Commission services have worked on post trading issues for more than 10 years. This 
work was endorsed by a Resolution of the European Parliament of 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 of 2004 on clearing and settlement 
in the EU.  

More recently, political support has been demonstrated: 

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•  In a joint letter of 8 June 2010, Chancellor Merkel and President Sarkozy invited President 

Barroso to consider the possibility of harmonisation of settlement periods in Europe; 

•  The ECOFIN Council of 2 December 2008 emphasised the need to strengthen the safety 
and soundness of securities settlement systems and agreed that EU legislation is needed to 
address legal barriers relating to post-trading, including barriers of access to CSDs. 

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

•  Recommendations  for  settlement  systems  were  adopted  by  global  banking  and  securities 
regulators  (CPSS-IOSCO)  as  early  as  2001.  These  were  adapted  by  European  regulators 
(ESCB-CESR) in 2009; 

•  In October 2010 the Financial Stability Board re-iterated the call for updated standards for 
more  robust  core  market  infrastructures,  including  CSDs,  and  asked  for  the  revision  and 
enhancement of existing standards.  

The  Commission  services  have  engaged  in  extensive  consultations  with  stakeholders, 
including  regulators,  CSDs  and  CSD  participants.  A  public  consultation  was  held  from  13 
January to 1 March 2011 and received 101 responses. 

Overview of the issues 

While  generally  efficient  and  safe  within  national  borders,  national  post-trading  systems 
combine and communicate less efficiently and less safely across borders, which means that an 
investor  faces  higher  costs  and  higher  risks  when  making  a  cross-border  investment.  For 
example, cross-border settlement costs are up to four times higher than domestic costs. 

The  impact  assessment  report  identifies  three  key  issues:  higher  risks  and  higher  costs  for 
cross-border settlement and unlevel playing field for competition for CSD services. These are 
the consequences of a number of drivers, briefly described below. 

Different market practices concerning the organisation of settlement 

(a) Different settlement discipline practices 

Practices  differ  as  to  whether  or  how  various  settlement  discipline  measures,  such  as 
promotion of early settlement, monitoring of settlement fails, incentives for timely settlement, 
penalties and buy-in obligations are used in different EU markets. This leads to an increased 
number of settlement fails for cross-border transactions and favours regulatory arbitrage (in 
particular in a competitive situation post-T2S). 

Definitions of settlement fails differ as well, thus affecting the ability of a market participant, 
a  CSD  or  a  regulator  to  understand  areas  of  risk,  identify  mitigating  measures  and  act 
accordingly, especially in a cross-border environment. 

Industry initiatives have been taken to harmonise some of these market practices, but progress 
has been relatively slow. The ESCB-CESR recommendations also include certain principles 
regarding  settlement  discipline,  however  for  the  large  majority  of  measures  there  is  no 
implementation plan. 

(b) Different settlement periods 

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Settlement  of  most  securities  transactions  does  not  happen  instantaneously,  but  generally  a 
number  of days after the trade date; most  securities in  Europe  settle on T+3  or T+2, that is 
three or respectively two days after trade date. Different settlement periods create a number of 
problems for cross-border transactions: (a) additional operational risk, (b) increased funding 
costs, for instance for investors buying securities in a T+2 market and selling them in a T+3 
market, and (c) disruptions for corporate actions by creating confusion about which investors 
are  entitled  to  dividends.  Longer  settlement  periods  cause  uncertainty  and  increased 
counterparty risk for investors. 

An  industry-led  Harmonisation  of  Settlement  Cycles  (HSC)  working  group  was  created  in 
2009  under  the  auspices  of  the  Commission  services  to  assess  the  need  for  and  preferred 
option for harmonisation. The group recommended harmonisation at T+2. 

Different rules for CSDs 

CSDs  in  the  EU  are  regulated  at  national  level  and  Member  States  have  adopted  different 
solutions for this. For instance some countries do not allow their CSDs to carry out banking 
activities while in other countries CSDs can provide certain banking services, which introduce 
additional risk into CSDs operations. 

The  ESCB-CESR  recommendations  provide  supervisors  with  guidelines  for  assessing  the 
safety, soundness and efficiency of CSDs, however these guidelines are of a general and non-
binding nature. 

The  different  rules,  coupled  with  the  barriers  of  access  described  below,  lead  to  the 
fragmentation  of  the  EU  post  trading  market.  This  fragmentation results  in the cross-border 
settlement  of  transactions  relying  on  complex  holding  chains,  with  consequences  for  the 
safety  and  efficiency  of  such  transactions.  Lack  of  efficiency  translates  into  higher  costs  for 
cross-border  settlement  when  compared  to  domestic  settlement,  as  well  as  increased 
operational and funding costs for investors who are not able to place their assets in a single 
liquidity "pool". 

The different rules and the barriers of access also contribute to the virtual monopolies enjoyed 
by  domestic  CSDs,  at  least  for  certain  services  and  securities,  such  as  notary  services  for 
equities.  

Barriers of access to CSDs 

(a) Access of issuers to CSDs 

The freedom for an issuer to choose its CSD is still limited in many Member States, especially 
as concerns equities. These restrictions contribute to a lack of competition between CSDs and 
fragmentation of the EU market, with all the consequences described above. 

(b) Access between CSDs and between CSDs and other market infrastructures 

In an increasingly cross-border environment CSDs and other market infrastructures (such as 
trading venues and CCPs) need to access each other in order to compete on a level playing 
field basis. These rights of access are not guaranteed by EU or national legislation.  

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The European associations of CSDs, exchanges and CCPs signed a Code of Conduct in 2006, 
which set some general principles in this respect, but on a voluntary self-imposed basis and 
only for equities. 

The EU's right to act  

EU action appears appropriate in terms of subsidiarity for the following reasons: 

•  The  problems  defined  above  relate  essentially  to  cross-border  issues.  Consequently,  the 
effectiveness  of  remedies  implemented  in  an  autonomous  and  uncoordinated  way  by 
individual Member States would likely be very low in a cross-border context; 

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

coordinated action; 

•  Certain  aspects  of  the  identified  problems  are  covered  by  the  existing  acquis 
communautaire,  notably  the  Financial  Collateral  Arrangements  Directive,  the  Settlement 
Finality  Directive,  the  Market  in  Financial  Instruments  Directive  and  the  Capital 
Requirements  Directive  (CRD).  Any  new  proposal  would  need  to  tie  in  perfectly  with 
these EU measures. This can be best achieved in a common effort. 

Objectives 

The goal of the impact assessment is to investigate the possibility of finding solutions at EU 
level to the problems outlined above. The strategic objectives are to increase safety, efficiency 
and  level  playing  field  for  cross-border  CSD  services.  The  report  also  defines  concrete 
operational objectives: 

(1) 

(2) 

(3) 

Enhance  framework  for  settlement  –  by  (1.1)  improving  cross-border  settlement 
discipline and (1.2) harmonising settlement periods; 

Introduce  consistent  rules  for  CSDs  across  Europe  –  by  harmonising  (2.1)  the 
licensing  framework,  (2.2)  the  prudential  and  organisational  rules,  and  (2.3)  the 
authorisation and supervision regimes of CSDs; 

Remove  barriers  of  access  to/from  CSDs  –  this  refers  to  both  (3.1)  access  between 
issuers  and  CSDs  as  well  as  (3.2)  between  the  CSDs  themselves  and  between  CSDs 
and other market infrastructures.  

Policy option(s) and instrument(s) 

The impact assessment sets out and analyses a number of policy options for each operational 
objective, and compares them against the status quo. 

(1.1)  For  cross-border  settlement  discipline,  the  following  options  have  been  considered: 
obtaining  additional  commitments  from  the  industry,  introducing  common  settlement 
principles,  prescribing  the  use  of  standard  settlement  discipline  processes  or  introducing 
measures that address the whole trading/post-trading chain. The option of introducing binding 
common principles at EU level has been retained on the basis that it promotes standardisation 
and safety, yet allows innovation and flexibility in a changing market environment. This is the 
option favoured by the HSC working group as well. 

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(1.2) For settlement periods, the options considered have been T+1, T+2 and T+3. In line with 
the HSC working group conclusion, the T+2 option appears to have more merit as it reduces 
counterparty risk and collateral requirements and it encourages greater automation; these are 
ongoing benefits, while the implementation costs for market participants are one-off and are 
only marginally higher than for a T+3 harmonisation.  

(2.1) For the licensing framework, the report compares a mutual recognition of CSD services 
across  the  EU  with  an  EU  licence  (and  passport).  An  EU  licence  (and  passport)  has  been 
retained as the best way to achieve level playing field and competition between CSDs. This is 
in line with the views of the large majority of respondents to the public consultation, although 
the views differ as to the scope of the licence, notably whether such a licence should include 
banking services, where CSDs take principal risk.  

Regarding such banking services, the report compares an integrated model, whereby a CSD 
provides certain banking services subject to stricter requirements for these services than under 
the CRD (for instance full collateralisation of credit) and a segregated model, whereby such 
banking services are provided by a separate credit institution, with no limitation on scope of 
activity,  but  subject  to  the  same  prudential  requirements  for  these  services.  The  segregated 
model has been retained on the basis that 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. This important benefit does not appear to be 
outweighed by the implementation costs of this measure, which are mainly legal/transaction 
costs for setting up a separate legal entity and renegotiating existing contracts. 

(2.2) For the prudential rules, the report considers two main options of introducing such rules: 
by introducing common principles in EU legislation, with detailed technical standards to be 
developed by ESMA in cooperation with the ESCB, or by prescribing detailed common rules 
in  legislation.  In  line  with  stakeholders'  views,  the  first  option  has  been  retained  because  it 
allows:  (a)  flexibility  in  adapting  detailed  measures  to  market  circumstances,  (b)  better 
alignment  with  international  standards,  and  (c)  involvement  of  the  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. 

(2.3) For the authorisation and supervision framework of CSDs, the report considers several 
options: national authorisation/supervision of CSDs with involvement of other Member States 
authorities, where applicable, national authorisation/supervision with involvement of ESMA, 
a combination of these two options or authorisation/supervision by ESMA. The combination 
of national/authorisation supervision with involvement of other Member States authorities and 
of ESMA has been retained on the basis that it would allow authorities to be directly involved 
in the authorisation and supervision of CSDs with cross-border activities 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.  

(3.1) Introducing a right of issuers to issue securities in the CSD of their choice contributes to 
the opening of the market provided by the EU licence. This is reinforced by an obligation that 
listed  securities  are  entered  in  book  entry  form,  which  would  also  increase  settlement 
efficiency and facilitate the shortening of settlement periods as book entry securities are much 
easier  to  deliver  than  paper  based  securities.  The  impact  on  the  few  markets  that  still  use 
paper-based securities could be mitigated by setting an implementation date that allows those 
markets to adapt.  

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(3.2)  Access  rights  between  CSDs  and  between  CSDs  and  other  market  infrastructures  are 
also important to accompany an EU licence. 

Many of these policy options are inter-related. The combined results could be: 

•  In the short term, more competition between CSDs, with expected benefits for cross-border 
service  quality  and  fees.  This  could  translate  into  immediate  benefits  for  issuers,  but  the 
translation  of  CSD  fees  into  lower  costs  for  investors  may  be  undermined  if  the 
competition results in 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  lower  risk  and  costs  for 
cross-border settlement. This could translate into lower costs along the whole post trading 
chain to investors; 

•  Overall, the proposed policies could 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  of  2006  gave  some  estimates  based  on  the  cost  differences  between  cross-
border  and  domestic  transactions  and  between  European  and  US  transactions  (derived  from 
the available studies at the time, mostly dated 2001-2004): 

•  Between €2 billion and €5 billion of aggregat

e excess post-trading cost for investors;  

•  Approximately €700 million of additional cost  reductions from market consolidation. 

These  numbers  give  an  indication  of  orders  of  magnitude  but  probably  over-estimate  the 
potential  benefits  of  legislation  today  because  the  gap  between  cross-border  and  domestic 
costs  has  decreased  and  T2S  is  expected  to  further  reduce  both  domestic  and  cross-border 
costs.  

In  view  of  the  preferred  options  and  of  the  need  to  ensure  that  the  legislative  framework  is 
applied  uniformly  throughout  the  EU,  a  Regulation  is  deemed  as  the  most  suitable  policy 
instrument to achieve the desired objectives. 

Monitoring and evaluation 

Ex-post  evaluation  of  all  policies  is  a  top  priority  for  the  Commission,  as  the  market  is 
constantly  changing.  The  evaluation  will  in  particular  test  whether  the  measures  are  still 
effective  and  efficient  against  the  objectives  developed  above.  The  report  proposes  a 
monitoring and evaluation framework that combines regular monitoring by ESMA, industry 
surveys  and  external  studies.  The  report  also  proposes  the  monitoring  of  other  areas  where 
problems were identified but EU intervention is not currently proposed, such as internalisation 
of settlement outside designated and notified settlement systems.  

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