EUROPEAN UNION: ESMA Advises Commission on Implementation of CSD Regulation

Wednesday August 5 2015

The European Securities and Markets Authority (ESMA) has delivered the Technical Advice on the level of penalties for settlement fails, and the substantial importance of a CSD for the functioning of the securities markets and the protection of the investors in a host Member State, as well as the related Impact Assessment, further to the mandate received from the European Commission to provide technical advice to assist the Commission on the possible content of the delegated acts required by two provisions of Regulation No 909/2014 of the European Parliament and of the Council of 23 July 2014 (CSDR).

Penalties for Settlement Fails
The CSDR introduces an obligation to settle instructions on the intended settlement date and provides for the application of a daily cash penalty for failed settlement instructions.

The EC has asked ESMA to provide them with technical advice on:

• the parameters for calculating the cash penalty that a CSD will normally charge for settlement fails (i.e. the basic amount of a cash penalty);
• the circumstances that may justify an increase of the basic amount of the cash penalty and the parameters for the calculation of such an increase, whilst applicable under an automated system;
• the circumstances that may justify a reduction of the basic amount of the cash penalty and the parameters for the calculation of such a reduction whilst applicable under an automated system; and
• how to adapt the parameters for the calculation of cash penalties in the context of a chain of interdependent transactions and whether there are cases where this would not be possible (e.g. the chain would not be visible).

Substantial Importance of a CSD
One of the objectives of CSDR is to complete the internal market by also fostering an internal market for CSD services. To achieve this, Article 23 CSDR allows any EU registered CSD to provide its services in any Member State of the Union (EU passport).

Article 24 CSDR provides for various cooperation measures between home and host Member States’ competent authorities where a CSD provides its services cross-border. More specifically, Article 24(4) of CSDR provides that home and host competent authorities shall establish formal cooperation arrangements for the supervision of a CSD where the activities of such CSD have become “of substantial importance for the functioning of the securities markets and the protection of the investors” in the host Member State.

In order to implement this, Article 24(7) CSDR requires the EC to adopt delegated acts concerning measures for establishing the criteria under which the operations of a CSD in a host Member State could be considered “of substantial importance for the functioning of the securities markets and the protection of the investors” in the host Member State.

The EC has asked ESMA to consider its own experience and from that of national authorities concerning the provision of CSD services and provide the EC with technical advice on:

• initial recording of securities in a book-entry system (`notary service`);
• providing and maintaining securities accounts at the top tier level (`central maintenance service`); and
• operating a securities settlement system (`settlement service`).

The EC has also asked ESMA to consider the three core services in the cases of:

• market consolidation affecting host Member States; and
• branching into host Member States.

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