Circular on the Implementation of the Central Securities Depositaries Regulation (EU)By Admin Admin With With 0 Comments
On the 11th of May, 2016 the MFSA issued a circular to the Financial Services Industry addressing Central Securities Depositories (‘CSDs’) and market participants on trading venues. The purpose of the circular is to provide an overview of new requirements as well as amendments to the current regulatory framework in this regard.
CSDs in Malta are regulated by the Financial Markets Act (the ‘Act’) which is supplemented by a number of legal notices. The Central Securities Depositories Regulation (the ‘Regulation’ or the ‘CSDR’) has brought about the need for certain amendments to Malta’s local legislation.
The financial crisis of 2008 led the European Commission (‘EC’) to believe that no financial product or market should remain without appropriate regulation and supervision. The goal was to harmonize CSD practices across EU Member States. In 2014 the Regulation was adopted by the European Parliament and later by the Council of the European Union. The CSDR is seen as an important development due to its positive impact on the financial system. The Regulation came into force on the 17th of September, 2014 and is directly applicable in all Member States.
The CSDR requires the European Securities and Markets Authority (‘ESMA’) to work closely with the members of the European System of Central Banks in order to prepare draft technical standards on a number of matters, namely the following: CSD Requirements; Internalized Settlement Reporting Requirements; and Settlement Discipline Measures.
The Central Securities Depositaries Regulation
The CSDR applies to the settlement of all financial instruments and activities of CSDs. One of the objectives of the CSDR is to ensure that securities settlements are carried out in a safer and more efficient manner across Member States.
The CSDR requires that any issues of EU transferable securities, which are admitted to trading or traded on trading venues, be represented in book entry form as immobilization, or, subsequent to a direct issuance, in dematerialized form. The ‘book entry form as immobilization’ has replaced the uncertified form previously found in the Act.
The Regulation requires all transactions in transferable securities executed on trading venues to be settled within the new settlement period: the transaction date plus two business days (‘T+2’) as amended from the previously used T+3 period. The benefits that this change is envisaged to achieve include having harmonization across Member States with regard to settlement discipline. The common set of rules contain measures to prevent settlement fails and to address such fails if they occur. The shortened settlement period would reduce the additional margin and liquidity that could arise during economic volatility. By moving trades more quickly to settlement, the T+2 settlement period helps reduce risk, which enables capital to be available for reinvestment as well as reduces credit and counterparty exposure.
In June of 2015, Target2 Securities (‘T2S’) – a settlement engine offering centralized delivery-versus-payment settlement in central bank money to the European market – was launched. T2S is a service operated by the Eurosystem that will be offered to CSDs. The latter will still be responsible for the legal and business relations of their clients.
The European Commission is currently in the process of endorsing the regulatory technical standards on settlement discipline under the CSDR, as issued in ESMA’s report in February of 2016. One of the CSDR’s main components is the harmonization of settlement discipline across Europe. European CSDs will have to adopt a common set of measures in order to prevent and address settlement failures.
A settlement internalizer is an institution which executes transfer orders on behalf of clients or on its own account other than through a CSD. Pursuant to the CSDR, settlement internalizers are required to report to their competent authorities, on a quarterly basis, the aggregated volume and value of all securities transactions which they settle outside of CSDs. In September of 2015, ESMA published technical standards that established requirements on how to report internalized settlements to national regulators. This was intended to allow proper risk monitoring.
Main Changes Brought About By The CSDR
Each Member State must designate the competent authority responsible for carrying out the duties for the authorization and supervision of CSDs established in its territory. In Malta’s case, the MFSA is the designated competent authority.
The CSDR allows a CSD, that is established and authorized within an EU Member State, to provide its services within the territory of the Union. This includes the possibility of setting up a branch. The process which makes this possible includes the communication of the required information between the Home Member State and the Host Member State. The CSD may begin to provide its services after three months from the date of transmission of the communication to the competent authority of the Host Member State, or as soon as there is acknowledgment of the receipt of such communication – whichever is sooner. Third-country CSDs wishing to provide their services in the territory of the Union must obtain recognition from ESMA in accordance with the CSDR.
The Act is being amended to provide for the following situations:
- Malta CSD wishing to provide its services in another EU Member State;
- EU CSD wishing to provide its services within the territory of Malta; and
- Third-country CSD wishing to provide its services within the territory of Malta.
Organizational & Capital Requirements for CSDs
At least one third (but not less than two) of the members forming the management body of a CSD must be independent. The CSD must have user committees for each securities settlement system it operates. The committees must have representatives of issuers and of participants in such securities settlement system. The records of the services and activities are to be maintained for at least ten years.
The CSD’s capital, together with retained earnings and reserves, must be proportional to the risks arising from its activities. CSDs offering banking-type ancillary services, or credit institutions designated by the CSD to offer such ancillary services, are faced with additional and exclusive capital requirements.
The Regulation differentiates between core and ancillary services. A further distinction is made with regards to ancillary services, which can be banking-type ancillary services, or non-banking type ancillary services. The latter are those which do not entail credit or liquidity risks. For a CSD to provide banking-type ancillary services it must obtain additional authorization in this regard.
Changes to the Act and Subsidiary Legislation
The Act has included the right of appeal before the Financial Services Tribunal for the CSDs. Prior to these amendments, a CSD’s right of appeal could be exercised when an application for authorization had been refused, and when authorization had been revoked. These amendments brought about the addition of the following instance for when the right of appeal can be used: When no decision is taken, in respect of an application for authorization, within six months of its submission.
The functions of a CSD have been amended to include the services listed in the annex to the CSDR. A CSD shall operate a securities settlement system as its core service, and shall in addition to this also provide at least one of the following services: The initial recording of securities in a book-entry system, or provision and maintenance of securities accounts at the top tier level.
Two legal notices – the Central Securities Depository (Authorization Requirements) Regulations) Regulations, and the Designated Financial Instruments (Revocation) Regulations – have been revoked. New subsidiary legislation deals with the penalties and sanctions which can be imposed by the MFSA in the event of non-compliance with the provisions of the Act or the Regulation.
- A public statement indicating the person responsible for the infringement and the nature of the infringement;
- An order requiring said person to cease such conduct and to desist from a repetition of that conduct;
- Withdrawal of authorization;
- Temporary or permanent ban from exercising management functions in the institutions, against any member of the institution’s management body, or other person who is held responsible;
- Maximum administrative pecuniary sanctions of at least twice the amount of the profit gained as a result of an infringement;
- Maximum administrative pecuniary sanctions of five million Euro (€5,000,000) in respect of a natural person; and
- Maximum administrative pecuniary sanctions of twenty million Euro (€20,000,000) or up to 10% of the total annual turnover, in the case of a legal person, subject to the relevant provisions with regard to the nature of such legal person.
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