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Document 52012SC0023
COMMISSION STAFF WORKING DOCUMENT SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on improving securities settlement in the European Union and on Central Securities Depositories (CSDs) and amending Directive 98/26/EC
COMMISSION STAFF WORKING DOCUMENT SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on improving securities settlement in the European Union and on Central Securities Depositories (CSDs) and amending Directive 98/26/EC
COMMISSION STAFF WORKING DOCUMENT SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on improving securities settlement in the European Union and on Central Securities Depositories (CSDs) and amending Directive 98/26/EC
/* SWD/2012/0023 - COD 2012/0029 */
COMMISSION STAFF WORKING DOCUMENT SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on improving securities settlement in the European Union and on Central Securities Depositories (CSDs) and amending Directive 98/26/EC /* SEC/2012/0023 - COD 2012/0029 */
COMMISSION STAFF WORKING DOCUMENT SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the
European Parliament and of the Council on improving securities settlement
in the European Union and on Central Securities Depositories (CSDs) and
amending Directive 98/26/EC Introduction Any trade of securities on or off a
securities exchange is followed by a post-trade flow of processes that
leads to the settlement of the trade, which means the delivery of securities
against cash. These processes are typically undertaken by so called "post
trading infrastructures", including Central Counterparties (CCPs) for clearing
and Central Securities Depositories (CSDs) for settlement. CSDs are important institutions in the post
trading area in that they generally ensure the recording, safekeeping and
settlement of securities – the latter by operating so called securities
settlement systems. CSDs also play a crucial role for the collateral market,
especially for monetary policy purposes – almost all of the eligible collateral
for monetary policy operations in the EU, especially in the Euro area, flows
through securities settlement systems. Securities settlement systems in the EU
settled approximately €920 trillion worth of transactions in 2010 and were
holding almost €39 trillion of securities at the end of 2010. CSDs are therefore systemically
important for the markets they operate in, and are becoming more interconnected
due to the increase in cross-border transactions in Europe; by some measures
cross-border trading represents around one third of total securities
transactions in the European market. CSDs, and post trading processes in
general will become even more closely interconnected with the advent of Target2
Securities (T2S), a project launched by the Eurosystem that should provide a
common platform for securities settlement in Europe (T2S is scheduled to start
in 2015). The EU market for CSD services is very
fragmented, with over 30 CSDs and two ICSDs (International CSDs – Clearstream Banking
Luxembourg and Euroclear Bank). By comparison the entire US securities market
is served by only two CSDs, DTC and FedWire. Political mandate and stakeholder
consultation The EU Commission services have worked on
post trading issues for more than 10 years. This work was endorsed by a
Resolution of the European Parliament of 2003 on a consultation by the
Commission on clearing and settlement, and outlined by a Communication from the
Commission to the Council and the European Parliament of 2004 on clearing and
settlement in the EU. More recently, political support has been
demonstrated: · In a joint letter of 8 June 2010, Chancellor Merkel and President
Sarkozy invited President Barroso to consider the possibility of harmonisation
of settlement periods in Europe; · The ECOFIN Council of 2 December 2008 emphasised the need to
strengthen the safety and soundness of securities settlement systems and agreed
that EU legislation is needed to address legal barriers relating to
post-trading, including barriers of access to CSDs. The need for appropriate standards for CSDs
is also agreed internationally: · Recommendations for settlement systems were adopted by global
banking and securities regulators (CPSS-IOSCO) as early as 2001. These were
adapted by European regulators (ESCB-CESR) in 2009; · In October 2010 the Financial Stability Board re-iterated the call
for updated standards for more robust core market infrastructures, including
CSDs, and asked for the revision and enhancement of existing standards. The Commission services have engaged in
extensive consultations with stakeholders, including regulators, CSDs and CSD
participants. A public consultation was held from 13 January to 1 March 2011
and received 101 responses. Overview of the issues While generally efficient and safe within
national borders, national post-trading systems combine and communicate less
efficiently and less safely across borders, which means that an investor
faces higher costs and higher risks when making a cross-border investment. For
example, cross-border settlement costs are up to four times higher than
domestic costs. The impact assessment report identifies
three key issues: higher risks and higher costs for cross-border
settlement and unlevel playing field for competition for CSD services.
These are the consequences of a number of drivers, briefly described below. Different market practices concerning the
organisation of settlement (a) Different settlement discipline
practices Practices differ as to whether or how
various settlement discipline measures, such as promotion of early settlement,
monitoring of settlement fails, incentives for timely settlement, penalties and
buy-in obligations are used in different EU markets. This leads to an increased
number of settlement fails for cross-border transactions and favours regulatory
arbitrage (in particular in a competitive situation post-T2S). Definitions of settlement fails differ as
well, thus affecting the ability of a market participant, a CSD or a regulator
to understand areas of risk, identify mitigating measures and act accordingly,
especially in a cross-border environment. Industry initiatives have been taken to
harmonise some of these market practices, but progress has been relatively
slow. The ESCB-CESR recommendations also include certain principles regarding
settlement discipline, however for the large majority of measures there is no
implementation plan. (b) Different settlement periods Settlement of most securities transactions
does not happen instantaneously, but generally a number of days after the trade
date; most securities in Europe settle on T+3 or T+2, that is three or
respectively two days after trade date. Different settlement periods create a
number of problems for cross-border transactions: (a) additional operational risk,
(b) increased funding costs, for instance for investors buying
securities in a T+2 market and selling them in a T+3 market, and (c) disruptions
for corporate actions by creating confusion about which investors are
entitled to dividends. Longer settlement periods cause uncertainty and
increased counterparty risk for investors. An industry-led Harmonisation of Settlement
Cycles (HSC) working group was created in 2009 under the auspices of the
Commission services to assess the need for and preferred option for harmonisation.
The group recommended harmonisation at T+2. Different rules for CSDs CSDs in the EU are regulated at national
level and Member States have adopted different solutions for this. For instance
some countries do not allow their CSDs to carry out banking activities while in
other countries CSDs can provide certain banking services, which introduce
additional risk into CSDs operations. The ESCB-CESR recommendations provide
supervisors with guidelines for assessing the safety, soundness and efficiency
of CSDs, however these guidelines are of a general and non-binding nature. The different rules, coupled with the
barriers of access described below, lead to the fragmentation of the EU
post trading market. This fragmentation results in the cross-border settlement
of transactions relying on complex holding chains, with consequences for the safety
and efficiency of such transactions. Lack of efficiency translates into
higher costs for cross-border settlement when compared to domestic settlement, as
well as increased operational and funding costs for investors who are not able
to place their assets in a single liquidity "pool". The different rules and the barriers of
access also contribute to the virtual monopolies enjoyed by domestic
CSDs, at least for certain services and securities, such as notary services for
equities. Barriers of access to CSDs (a) Access of issuers to CSDs The freedom for an issuer to choose its CSD
is still limited in many Member States, especially as concerns equities. These
restrictions contribute to a lack of competition between CSDs and fragmentation
of the EU market, with all the consequences described above. (b) Access between CSDs and between CSDs
and other market infrastructures In an increasingly cross-border environment
CSDs and other market infrastructures (such as trading venues and CCPs) need to
access each other in order to compete on a level playing field basis. These
rights of access are not guaranteed by EU or national legislation. The European associations of CSDs, exchanges
and CCPs signed a Code of Conduct in 2006, which set some general principles in
this respect, but on a voluntary self-imposed basis and only for equities. The EU's right to act EU action appears appropriate in terms of
subsidiarity for the following reasons: · The problems defined above relate essentially to cross-border
issues. Consequently, the effectiveness of remedies implemented in an
autonomous and uncoordinated way by individual Member States would likely be
very low in a cross-border context; · The systemic nature of CSDs and their increasing interconnection in
Europe calls for coordinated action; · Certain aspects of the identified problems are covered by the
existing acquis communautaire, notably the Financial Collateral
Arrangements Directive, the Settlement Finality Directive, the Market in
Financial Instruments Directive and the Capital Requirements Directive (CRD).
Any new proposal would need to tie in perfectly with these EU measures. This
can be best achieved in a common effort. Objectives The goal of the impact assessment is to
investigate the possibility of finding solutions at EU level to the problems
outlined above. The strategic objectives are to increase safety, efficiency and
level playing field for cross-border CSD services. The report also defines
concrete operational objectives: (1)
Enhance framework for settlement – by (1.1)
improving cross-border settlement discipline and (1.2) harmonising settlement
periods; (2)
Introduce consistent rules for CSDs across
Europe – by harmonising (2.1) the licensing framework, (2.2) the prudential and
organisational rules, and (2.3) the authorisation and supervision regimes of
CSDs; (3)
Remove barriers of access to/from CSDs – this
refers to both (3.1) access between issuers and CSDs as well as (3.2) between
the CSDs themselves and between CSDs and other market infrastructures. Policy option(s) and instrument(s) The impact assessment sets out and analyses
a number of policy options for each operational objective, and compares them
against the status quo. (1.1) For cross-border settlement
discipline, the following options have been considered: obtaining additional
commitments from the industry, introducing common settlement principles,
prescribing the use of standard settlement discipline processes or introducing measures
that address the whole trading/post-trading chain. The option of introducing binding
common principles at EU level has been retained on the basis that it promotes
standardisation and safety, yet allows innovation and flexibility in a changing
market environment. This is the option favoured by the HSC working group as
well. (1.2) For settlement periods, the options
considered have been T+1, T+2 and T+3. In line with the HSC working group
conclusion, the T+2 option appears to have more merit as it reduces
counterparty risk and collateral requirements and it encourages greater
automation; these are ongoing benefits, while the implementation costs for
market participants are one-off and are only marginally higher than for a T+3
harmonisation. (2.1) For the licensing framework, the
report compares a mutual recognition of CSD services across the EU with an EU
licence (and passport). An EU licence (and passport) has been retained as the
best way to achieve level playing field and competition between CSDs. This is
in line with the views of the large majority of respondents to the public
consultation, although the views differ as to the scope of the licence, notably
whether such a licence should include banking services, where CSDs take
principal risk. Regarding such banking services, the report
compares an integrated model, whereby a CSD provides certain banking services
subject to stricter requirements for these services than under the CRD (for
instance full collateralisation of credit) and a segregated model, whereby such
banking services are provided by a separate credit institution, with no
limitation on scope of activity, but subject to the same prudential
requirements for these services. The segregated model has been retained on the
basis that it mitigates risk spillover from the banking activities to the other
CSD activities and thus ensures that CSDs have a low risk profile more suitable
for such systemically important infrastructures. This important benefit does
not appear to be outweighed by the implementation costs of this measure, which
are mainly legal/transaction costs for setting up a separate legal entity and
renegotiating existing contracts. (2.2) For the prudential rules, the report
considers two main options of introducing such rules: by introducing common
principles in EU legislation, with detailed technical standards to be developed
by ESMA in cooperation with the ESCB, or by prescribing detailed common rules
in legislation. In line with stakeholders' views, the first option has been
retained because it allows: (a) flexibility in adapting detailed measures to
market circumstances, (b) better alignment with international standards, and
(c) involvement of the ESCB in setting such measures – this is important in
managing regulatory burden for CSDs, since the settlement systems they operate
are overseen by central banks. (2.3) For the authorisation and supervision
framework of CSDs, the report considers several options: national
authorisation/supervision of CSDs with involvement of other Member States
authorities, where applicable, national authorisation/supervision with
involvement of ESMA, a combination of these two options or
authorisation/supervision by ESMA. The combination of national/authorisation
supervision with involvement of other Member States authorities and of ESMA has
been retained on the basis that it would allow authorities to be directly
involved in the authorisation and supervision of CSDs with cross-border activities
in a flexible way that does not put unnecessary regulatory burden on the
smaller CSDs, while ensuring a certain standardisation of this cooperation for
the larger CSDs. (3.1) Introducing a right of issuers to
issue securities in the CSD of their choice contributes to the opening of the
market provided by the EU licence. This is reinforced by an obligation that
listed securities are entered in book entry form, which would also increase
settlement efficiency and facilitate the shortening of settlement periods as
book entry securities are much easier to deliver than paper based securities.
The impact on the few markets that still use paper-based securities could be
mitigated by setting an implementation date that allows those markets to adapt.
(3.2) Access rights between CSDs and
between CSDs and other market infrastructures are also important to accompany
an EU licence. Many of these policy options are
inter-related. The combined results could be: · In the short term, more competition between CSDs, with expected
benefits for cross-border service quality and fees. This could translate into
immediate benefits for issuers, but the translation of CSD fees into lower
costs for investors may be undermined if the competition results in more
fragmentation in the short run; · In the medium to long term, more consolidation of the market and
less fragmentation (shorter cross-border holding chains), with benefits in
terms of lower risk and costs for cross-border settlement. This could translate
into lower costs along the whole post trading chain to investors; · Overall, the proposed policies could facilitate issuers' ability to
raise capital and investors' ability to place their funds more safely and cost
effectively, with wider benefits for the economy. It is not obvious to quantify these
benefits. The Commission services draft working document on post-trading of
2006 gave some estimates based on the cost differences between cross-border and
domestic transactions and between European and US transactions (derived from
the available studies at the time, mostly dated 2001-2004): · Between €2 billion and €5 billion of aggregate excess post-trading
cost for investors; · Approximately €700 million of additional cost reductions from market
consolidation. These numbers give an indication of orders
of magnitude but probably over-estimate the potential benefits of legislation
today because the gap between cross-border and domestic costs has decreased and
T2S is expected to further reduce both domestic and cross-border costs. In view of the preferred options and of the
need to ensure that the legislative framework is applied uniformly throughout
the EU, a Regulation is deemed as the most suitable policy instrument to
achieve the desired objectives. Monitoring and evaluation Ex-post evaluation of all policies is a top
priority for the Commission, as the market is constantly changing. The
evaluation will in particular test whether the measures are still effective and
efficient against the objectives developed above. The report proposes a
monitoring and evaluation framework that combines regular monitoring by ESMA,
industry surveys and external studies. The report also proposes the monitoring
of other areas where problems were identified but EU intervention is not
currently proposed, such as internalisation of settlement outside designated
and notified settlement systems.