CSDR is made of 76 articles that aim to enhance the consistency, safety and efficiency of security settlements. With an emphasis on cross-border settlement in Europe, it introduces standards and requirements for CSDs and harmonises the disparate national regulations surrounding securities settlement standards of the CSDs in the EU. It was designed to complement existing securities regulations, such as European Market Infrastructure Regulations (EMIR) for central counterparties (CCPs) and the Markets in Financial Instruments Directive II (MiFID II).
What is a CSD and what does CSDR cover?
A CSD is an institution that holds financial instruments including mutual funds, equities, money market instruments and bonds. It also enables these instruments to be transferred electronically through records commonly referred to as “book-entry records.”
As an EU legislation, CSDR governs the manner by which CSDs and their participants operate. Guidance includes:
- A universally followed set of requirements governing CSDs and other institutions providing securities settlement services
- Requiring CSDs and CSD participants to offer their clients either one single or separate discreet accounts
- Penalties to prevent settlement fails
- Mandatory trade buy-ins of failed settlements from the fourth business day post settlement due date
- Dematerialisation of all transferable securities recorded by CSDs before trading on regulated platforms
- Providing issuers a choice of CSD regardless of EU member state. Freedom of issuance does not oblige issuers to use a CSD in the state in which they are based.
Who in the securities value chain is impacted?
While CSDR largely imposes obligations on CSDs based in the EU, these regulations also have a knock-on effect throughout the securities value chain, impacting CSD participants and their clients. Penalties can result from a lack of compliance with CSDR mandates. Because there are many shared responsibilities when it comes to CSDR, CSDs and their wider networks must take a community-approach to meeting the requirements.
What opportunities does CSDR offer the industry?
Because the impact of CSDR is industry-wide, a concerted effort is required for universal implementation. What’s more, CSDR presents much more than a compliance exercise – it is an opportunity to create sound, consistent industry best practice for achieving settlement efficiency.
Good market practice includes standardised messaging, rules and improved data quality. These elements are ultimately responsible for driving efficiency. CSDR formalises these measures to keep CSDs and their networks in check.
What challenges does CSDR pose?
There are several challenges that the industry faces when it comes to the implementation of CSDR. These include:
- the absence of a single registry of instruments that require buy-ins or result in penalties if delivery fails;
- uncertainty surrounding how CSDR would apply to non-EU states; and
- the time it could take to develop new message protocols that can be used by participants industrywide to be compliant with CSDR.
Ultimately the guidelines CSDR brings with it will prove positive to the industry. While compliance has its costs, the introduction of best operational practices offers greater settlement efficiencies and enhanced safety measures to CSDs and their counterparties.