The European Commission yesterday published a consultation paper on harmonising Central Securities Depositories (CSDs) and other aspects of securities settlement across Europe.
These proposals were expected, since – together with the proposals for central counterparties (CCPs) and for securities law – they complete the process of putting in place a European framework for the key parts of the European market infrastructure. As is the case with CCPs, CSDs currently exist in many different forms across Europe, in some cases banks, in some cases special institutions defined by law. The proposed regulation will bring them all under a common heading and apply common standards. In practice, the new minimum standards are unlikely to imply much, if any, change for those CSDs that already operate to best international practice.
Some aspects of the proposals deserve comment, however.
Who should be covered?
Previous attempts to establish common standards for CSDs stumbled over the definition of “CSD”, in particular whether to categorise the ICSDs as CSDs or not. The “ICSDs” (international central securities depositories: Euroclear Bank and Clearstream Banking Luxembourg), are in effect the CSDs for the Eurobond market, so it might seem obvious that they should come under CSD legislation. But they also provide a much wider range of commercial services, acting in effect as global custodians for their clients entering many other markets, bringing them into direct competition with other banks.
So where to draw the line? If the ICSDs are brought within the scope of CSD regulation will this constrain their ability to compete with the non-regulated commercial banks? Alternatively, as there are two ICSDs, it could be argued that neither of them is “central” and that in practice some custodian banks, with a dominant local presence, have a more central role in their local market than either ICSD has in the Eurobond market. So perhaps a custodian bank with a dominant local presence that can internalise much local settlement across its own books should come within the scope of CSD regulation? This has been a stumbling block in the past and although the consultation document identifies the question, it is not clear that it has the answer.
Will they promote competition?
The consultation paper clearly intends to promote competition by creating a level playing field. It has proposals to create open access so users can join the CSD of their choice, so that issuers can issue into the CSD of their choice and so that CSDs can link with other CSDs of their choice. The problem is that, while the aim is commendable, it is much harder to make competition happen. There are other barriers that stand in the way of full competition, for example, the requirement to pay stamp duty on purchases of UK and Irish shares. CSD regulation cannot repeal stamp duty, but other rules on open access by CSDs remain hollow while this major barrier remains. Equally, while it is commendable to establish common ground rules for CSDs to open accounts with each other, it is impossible to legislate to make this happen. Experience with the European Code of Conduct, has shown that it is impossible to force co-operation on an unwilling partner and that even when the partners are willing regulatory obstacles can delay the process endlessly.
Should you legislate for settlement periods?
Finally, the consultation paper discusses the possibility of legislating for common settlement periods. This should be left to market practice, as legislation is much too inflexible to be able to reflect the legitimate needs of different markets to operate differently. It would be better to push this towards ESMA to oversee market practice, making an appropriate balance between cost and risk.