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The European Securities and Markets Authority (ESMA) has published its first two reports on the implementation of the Central Securities Depositories Regulation (CSDR).
The first report, which covers central securities depositories’ (CSDs) cross-border services and handling of applications as well as internalised settlement, explained that most respondents did not detect any major variation in the provision of cross-border services since the entry into force of CSDR.
However, it suggested that respondents do foresee a potential increase in the coming years with the progressive harmonisation of the regulatory framework.
In addition, respondents said they see challenges to the development of cross-border services, such as the absence of harmonisation of securities law across the EU, and the application process to provide services in another member state as currently set out in article 23 of CSDR.
In terms of handling applications submitted in accordance with article 23(3) to (7) of CSDR, authorities and market participants agree on the complexity and lack of clarity of the application process through which CSDs have to go to be able to provide notary and central maintenance services in other member states.
ESMA notes that suggestions have been made to simplify the process, ranging from replacing it with a simple notification procedure to streamlining and clarifying certain aspects of the existing process.
Highlights include the determination of the relevant law, the assessment of the measures the CSD has to take to comply with the law of the host member state and the prerogatives of the host member state competent authority in the process.
The report on cross-border services and handling of applications highlights the findings related to the provision of services by CSDs in other member states and considers responses to the ESMA survey addressed to national competent authorities (NCAs), CSDR relevant authorities and trade associations, in June and July.
The report also uses the data collected by ESMA to determine the substantial importance of a CSD for host member states.
Despite the challenges raised by the actual process, there was no consensus among NCAs on the suggestion to substitute a mere notification process to the existing process.
Meanwhile, the second report on internalised settlement presents the findings related to the settlement activity which does not take place through a securities settlement system operated by a CSD in the European Economic Area.
It takes into account the responses to the ESMA survey on internalised settlement conducted in June and July, and also includes an analysis of the internalised settlement data based on the quarterly reports sent by settlement internalisers under article 9 of CSDR for the period Q2 2019 to Q3 2020.
Although no major risks have been identified during the period covered by the report, NCAs have identified some risks, the most common being operational risk and custody risk.
ESMA identifies that most challenges seemed to be in connection to the technical implementation of the reporting regime, which required significant IT changes at the level of settlement internalisers as well as at the level of the NCAs and ESMA.
Some of these challenges were: onboarding settlement internalisers to the NCAs’ reporting systems, and uploading the reports onto the ESMA IT system, the correct implementation of the ISO 20022 XSD/XML format by settlement internalisers and the implementation of the numerous validation rules.
In terms of measures to mitigate those risks, ESMA refers to the adequate identification of the clients’ accounts involved, and the improvement of the operational processes.
ESMA notes that the challenges encountered when implementing the internalised settlement reporting regime “seem normal” in terms of any new reporting requirements.
It explains that to support the implementation process, ESMA has provided additional clarifications through supervisory convergence measures, including the ESMA guidelines on internalised settlement reporting, as well as Q&As.
Given that this is a new reporting regime, and that data quality checks are still ongoing, ESMA acknowledged that data covering a longer period of time would be needed in order to have a clearer picture regarding internalised settlement trends.
According to ESMA, it is useful to use the existing data to set a benchmark for future assessments.
Finally, ESMA highlights the importance of continuing to monitor internalised settlement, in order to assess if this activity should be regulated in the future.
The report notes that attention would focus on the extremely-high values and volumes of internalised settlement, as well as the high level of concentration shown by the data reported by settlement internalisers under article 9 of CSDR.
ESMA suggests that, as a minimum, custodians’ clients should be informed of the risks and costs associated with the place of settlement at the level of a securities settlement system operated by a CSD versus internalised settlement.
Finally, ESMA says it expects these reports to contribute to the upcoming review of CSDR by the European Commission.
