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Summaries of EU Legislation

Improving securities settlement in the EU

SUMMARY OF:

Regulation (EU) No 909/2014 on improving securities settlement in the European Union and on central securities depositories

WHAT IS THE AIM OF THE REGULATION?

  • It aims to harmonise the timing and conduct of securities settlement in the European Union (EU) and the rules applicable to central securities depositories (CSDs)1.
  • It is designed to increase the safety and efficiency of the system, particularly for transactions within the EU.
  • The regulation has been amended several times, most recently by Regulation (EU) 2022/2554, the Digital Operational Resilience Act (known as DORA) which seeks to ensure the financial sector is able to stay resilient through a severe operational disruption (see summary).

KEY POINTS

  • The regulation notably introduces the following elements.
    • Shorter settlement periods, which should, in general, take place no later than the second business day after the trading occurs.
    • An obligation to record in book-entry2 form all transferable securities admitted to trading or traded on the trading venues.
    • Strict organisational, conduct of business and prudential requirements for CSDs.
    • A settlement discipline regime to deal with settlement failures. CSDs must operate a cash penalties system and are subject to reporting requirements regarding settlement failures. Participants are subject to mandatory buy-ins.
    • A passport system allowing authorised CSDs to provide their services across the EU, subject to certain passporting requirements.
    • Increased prudential and supervisory requirements for CSDs and other institutions providing banking-type services that support securities settlement.
  • EU Member States’ national authorities:
  • CSDs must notably:
    • have robust governance arrangements, a clear organisational structure, internal controls and sound administrative and accounting procedures;
    • ensure senior management is of sufficiently good repute and experience;
    • establish user committees for each securities settlement system they operate;
    • maintain for at least 10 years all records of their services and activities;
    • remain fully responsible for any work they outsource;
    • display transparency by publicly disclosing the prices and fees involved in the core services they provide;
    • have sufficient capital to be adequately protected against operational, legal, custody, investment and business risks;
    • secure additional authorisations before providing any banking-type ancillary services;
    • further to the adoption of DORA (amending Regulation (EU) 2022/2554), identify sources of operational risk, both internal and external, and minimise their impact also through the deployment of appropriate ICT tools, processes and policies.
  • CSDs in a non-EU country may operate in the EU, including through an EU-based branch, provided they meet certain requirements.
  • ESMA maintains a publicly available register of each authorised CSD.
  • ESMA will develop draft regulatory technical standards to specify the operational risks, other than ICT risks, faced by CSDs.
  • Member States’ competent authorities have the power to apply appropriate administrative sanctions and other measures for an infringement.
  • To have a clear and coherent legislative framework for trading and settlement, Regulation (EU) No 909/2014 relies on many of the definitions and concepts of Directive 2014/65/EU (markets in financial instruments directive (MiFID) II – see summary). The regulation was amended to take into account the change in the date of application of MiFID II. This meant that the rules set out in MiFID I (Directive 2004/39/EC) applied until the new date of entry into application of MiFID II.
  • The European Commission has also adopted several delegated acts supplementing Regulation (EU) No 909/2014:
    • Delegated Regulation (EU) 2017/389 regarding the parameters for the calculation of cash penalties for settlement fails and the operations of CSDs in host Member States;
    • Delegated Regulation (EU) 2017/390 with regard to regulatory technical standards on certain prudential requirements for central securities depositories and designated credit institutions offering banking-type ancillary services;
    • Delegated Regulation (EU) 2017/391 with regard to regulatory technical standards further specifying the content of the reporting on internalised settlements;
    • Delegated Regulation (EU) 2017/392 with regard to regulatory technical standards on authorisation, supervisory and operational requirements for central securities depositories;
    • Delegated Regulation (EU) 2018/1229 with regard to regulatory technical standards on settlement discipline, which has in turn been amended by Delegated Regulations (EU) 2020/1212, (EU) 2021/70 and (EU) 2022/1930.

FROM WHEN DOES THE REGULATION APPLY?

  • Book-entry form requirements (Article 3(1)) have applied from to transferable securities issued after that date and will apply from to all transferable securities.
  • The regulation’s settlement date rules (Article 5(2)) have applied since .
  • The settlement discipline regime (Articles 6(1) to (4) and 7(1) to (13)) has applied since .

BACKGROUND

  • Traditionally, CSDs have been regulated nationally.
  • Settlement across borders presents higher risks and costs for investors than domestic operations. At the same time, this form of transaction is increasing.
  • The main objective of the regulation is to increase the safety and efficiency of securities settlement and settlement infrastructures in the EU. It does this by providing a common set of prudential, organisational and conduct of business standards for use across the EU, which should play a crucial role in financing the economy.
  • For further information, see:

KEY TERMS

  1. Central securities depositories. Legal persons that operate a securities settlement system and provide at least services for the initial recording of securities in a book-entry system and/or for the provision and maintenance of securities accounts at the top-tier level.
  2. Book entry. Where the ownership of a security is recorded in electronic form rather than in certificate form.

MAIN DOCUMENT

Regulation (EU) No 909/2014 of the European Parliament and of the Council of on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012 OJ L 257, , pp. 1–72).

Successive amendments to Regulation (EU) No 909/2014 have been incorporated into the original text. This consolidated version is of documentary value only.

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