ESMA focuses on automation for CSD regime

The European Securities and Markets Authority has launched a consultation on its proposed technical standards for central securities depository regulation.

The European Securities and Markets Authority (ESMA) has launched a consultation on its proposed technical standards for central securities depository (CSD) regulation.

Automation is a heavy focus of the paper, which states that CSDs should have little or no manual intervention required to process and settle trades.

“Automation may facilitate timely settlement by contributing to an efficient settlement process with lower operational risk,” ESMA said. “The submission and processing of ordinary settlement instructions, hold and release instructions and other instructions related to the settlement, should therefore be automated.”

It also states that CSDs should ensure they adopt straight through processing as another way to help reduce settlement costs, make the process more efficient and reduce operational risk.

In order to facilitate automated settlement, ESMA has outlined a number of matching fields that should be standardised by the industry, which follow harmonisation work conducted as part of the introduction of TARGET2-Securities.

A total of 11 fields will be mandatory for CSDs, including instruction type, settlement amounts with tolerance levels, and the names of counterparties.

The paper also proposes that securities depositories should introduce a set of incentives and disincentives to ensure settlement instructions are made early. By submitting instructions earlier in the trade process, errors can be more easily identifies and inconsistencies corrected before the transactions needs to be settled.

It also calls on CSDs to either operate continuous settlement or multiple batches of settlements during the day, suggesting that three batches would be suitable to enable market participants to resolve problems which prevent settlement during any given batch without waiting until the next day.

As part of the consultation, ESMA will hold a public hearing in Paris on 14 April. Responses to the paper should be made by 22 May.

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