The European Central Securities Depositaries Association (ECSDA) has slammed the level 2 text of Europe’s CSD Regulation (CSDR), estimating the implementation of the settlement discipline regime could cost €67 million.
The association, which represents CSDs such as Euroclear, Clearstream, BNY Mellon CSD, Iberclear and Monte Titoli, also criticised the regulation’s standards on record keeping, links with non-EU CSDs, and the CSDs role in buy-ins.
Europe’s regulatory authority, the European Securities and Markets Authority (ESMA), plans to harmonise settlement discipline across Europe, in which the rules consist of a comment set of measures CSDs in Europe will have to adopt to prevent and address settlement failures.
But according to the ECSDA’s estimates, collected from 19 ECSDA members, it anticipated that CSDs costs to comply with the settlement discipline rules will amount to €67 million, or €3.5 million per CSD on average.
“The settlement discipline standards being elaborated by ESMA will require considerable adaptions from CSDs and market participants, and that their impact on the efficiency and stability of post-trade processes should not be underestimated,” the ECSDA stated in its response to the CSDR consultation.
This comes at a time where international regulators, such as the International Organization of Securities Commission (IOSCO), are calling for clearing houses and CSDs to be better capitalised. For Europe's smaller CSDs, the combination of implementation costs of CSDR and IOSCO's standards on capital levels may prove too much.
The CSDR also proposes record keeping requirements, such as the implementation of legal entity identifiers (LEIs). Yet the CSD body argues these rules are too far-reaching.
“CSDs are concerned that they will not be able to impose their use by third parties, especially when these are established outside of the European Union,” it says. “There is thus a risk that CSDs will be unable to comply with the ESMA standards in practice.”
The ECSDA has called for a 24-month phased-in implementation of both recording keeping requirements and the settlement discipline regime, which will mean the rules won’t come into full effect until 2018.
In addition, the association criticised the CSDR’s standards on links between EU CSDs and non-EU CSDS.
“Expecting CSDs or intermediaries established in non-EU jurisdictions to be subject to a comparable regulatory regime… is not realistic given that European rules are among the strictest in the world…. Forcing European CSDs to discontinue existing links with non-EU CSDs would be detrimental to market integration and would not in any way enhance the safety of cross-border settlement.”
Instead, it calls for ESMA to review the text so that the technical stands take into account the need to maintain access to non-EU markets.
Finally, the ECSDA criticises the role of CSDs in relation to buy-ins. In the text, ESMA expects CSDs to perform new tasks which are not entrusted to them today, such as collecting detailed information on buy-ins, and appointing a buy-in agent.
“CSDs fear that some of these tasks might not be practically possible for them to perform, and they are also worried that these new responsibilities will unavoidably have an impact on their liability, increasing their risk profile,” ECSDA adds.
Instead, it argues buy-ins should be handled at the trading level rather than the settlement level.
After considering comments from the industry, ESMA will issue the technical standards and guidelines on CSDR in June 2015.