The European Commission seems now to be in favour of a dedicated legislative instrument to define and regulate CSDs in the EU as outlined in the discussion paper on
‘Legislation on Central Securities Depositories’ issued on 15 July 2010. It seems that any future legislative instrument would ostensibly address:
- The definition of the core and ancillary functions of CSDs; and
- The conditions of cross-border provision of services, of establishment, access, linkage and interoperability.
On the face of it, any forthcoming EC Directive would be addressing those barriers to the efficient operation of cross-border safekeeping and settlement in the context of Target2 Securities (T2S). In particular, Giovannini Barrier 9 that advocates the abolition of all rules obliging issuers to issue through a particular CSD and, reciprocally, the abolition of all rules obliging CSDs to restrain their notary activity to sole domestic issuers. This would open up the prospect of European CSDs competing for issuers, which is problematic in itself without full harmonisation of market rules and procedures on securities issuance, corporate actions and tax.tho
However, it is the first core aim of the legislation that may prove more problematic. The standardised definition of CSD functions is difficult enough, and when the post T2S competitive landscape is factored in, the fairness and accuracy of such a definition may be fundamental to the future prosperity of European CSDs. Once T2S commoditises settlement, CSDs will also be competing with custodians further up the value chain. It has been suggested that all functions and services a CSD provides outside of the core functions defined in the legislation would need to be regulated separately. Most critically, any banking services provided by CSDs would require a banking licence, meaning that CSDs could be regulated as banks and may even be subject to international standards of risk-based capital.
Understandably, European CSDs are nervous at this proposition, complaining that the EC is restricting their ability to compete fairly with commercial banks even as the ECB is forcing them into this position through T2S. Custodians respond that CSDs are already competing for their clients unfairly based on the lighter regulatory requirements they currently experience, and in the interests of asset safety and client protection, CSDs should be supervised on a level-playing field with custodians. Whatever the outcome of the discussion, there seems to be a real danger that in the very act of trying to sharpen the distinction between CSDs and market intermediaries, the unintended consequence maybe the demise of some CSDs and the convergence of CSD/custodian roles amongst the survivors.
Jim Micklethwaite, Associate Director, Capital Market Infrastructure
jmicklethwaite@thomasmurray.com
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