Central Securities Depositories Regulation (CSDR)

What is CSDR?

The Central Securities Depositories Regulation (CSDR) is a key regulation by the European Union that was enacted to enhance the efficiency and safety of securities settlement and the settlement infrastructures within the EU. CSDR aims to standardize the rules for central securities depositories (CSDs) that operate securities settlement systems across Europe and introduces stringent operational requirements to improve the quality of settlement and reduce settlement fails. It covers aspects such as the authorization, supervision, and operational standards of CSDs, settlement discipline including measures to prevent and address settlement fails, and the use of securities settlement systems.

Key Features of CSDR

The CSDR introduces critical features aimed at enhancing the standardisation of securities settlements and infrastructures across EU:

Operational Requirements

Standardized Operational Requirements for CSDs

The Regulatory Technical Standards (RTS) are a set of guidelines developed for CSDs, which outline prudential requirements. The exact requirements can vary, but they typically include maintaining certain levels of capital, implementing risk management practices, and following specific operational procedures.

Settlement Discipline

Settlement Discipline Regime to address settlement fails

CSDR introduced a Settlement Discipline Regime to penalize participants that fail to fulfill their obligations. This regime operates by implementing an ad valorem charge, which is applied to the value of any securities. The value of this charge is not fixed and ranges from one basis point to a tenth of a basis point. The amount is determined by the liquidity and type of instrument.

Safety Measures

Measures for the Safety and Efficiency of securities settlement

The regulation provides a set of stringent requirements for CSDs to adhere to. These measures include risk management procedures, operational standards, and strict record-keeping. The regulation also mandates participant discipline to prevent settlement fails and introduces a settlement penalty mechanism.

CSDs Supervision

Enhanced Regulatory Oversight and supervision of CSDs

This is achieved by fostering improved cooperation between supervisors. In scenarios where a CSD operates in more than one EU member state, the regulation ensures the establishment of a college of supervisors to collectively supervise the CSD. These changes aim to maintain high levels of investor protection and market integrity.

Implications of CSDR

CSDs and participating financial institutions are required to adhere to the new standards, optimizing their settlement processes and systems to reduce the risk of settlement fails, thereby enhancing the overall stability and efficiency of the European securities markets.

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Each module in Grand.io's GRC software suite is meticulously designed to ensure thorough compliance with the CSDR regulation, addressing critical aspects such as standardized operational requirements for CSDs, the settlement discipline regime, measures to enhance the safety and efficiency of securities settlement, and reinforced regulatory oversight and supervision of CSDs.

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Frequently Asked Questions

What is the purpose of CSDR and who does it affect?

The Central Securities Depositories Regulation (CSDR) primarily aims to ensure the safety of securities settlement and financial stability. It particularly addresses issues such as barriers to cross-border settlement, disproportionate compliance costs, and insufficient insight into the activities of third-country CSDs.

CSDR primarily affects Central Securities Depositories (CSDs), which are institutions that hold and administer securities to enable securities transactions to be processed by means of book entry. However, it can also indirectly impact other financial market players and stakeholders, including public authorities, as the regulation influences the efficiency, cost and safety of securities settlement.

How does the Settlement Discipline Regime (SDR) work under CSDR?

The Settlement Discipline Regime (SDR) under the Central Securities Depositories Regulation (CSDR) is designed to reduce settlement fails and increase the efficiency of securities settlements. It operates by imposing penalties and mandatory buy-ins on failing trades.

Penalties are applied on a daily basis for each transaction that fails to settle, with different rates depending on the type of security involved. Mandatory buy-ins are required when a transaction fails to settle after a certain period, typically four business days for liquid securities and seven for less liquid ones.

What are the standardised operational requirements for CSDs under CSDR?

The Central Securities Depositories Regulation (CSDR) imposes standardised operational requirements on Central Securities Depositories (CSDs) to increase the safety, improve settlement efficiency and provide a set of common requirements for CSDs across the EU, while reducing systemic risk.

The core requirements include shorter settlement periods, cash penalties and other deterrents for settlement fails, strict authorisation, organisational, conduct of business and prudential requirements for CSDs. A passport system has been introduced allowing authorised CSDs to provide their services across the EU. Moreover, the CSDR increases prudential and supervisory requirements for CSDs and other institutions providing banking services that support securities settlement.

Lastly, it also establishes increased cooperation requirements for authorities across Member States concerning CSDs providing their services in relation to financial instruments constituted under the law of a Member State other than that of their authorisation, and to CSDs establishing a branch in another Member State.

What measures does CSDR introduce for the safety and efficiency of securities settlement?

The Central Securities Depositories Regulation (CSDR) introduces measures to increase the safety and efficiency of securities settlements. One of these measures is the obligation for all securities transactions to be recorded in book-entry form . Another measure is the 'settlement discipline', which includes rules to prevent and address settlement fails, such as mandatory buy-ins and cash penalties .

CSDR also introduces requirements for central securities depositories to have adequate organizational structures and risk management procedures . Furthermore, it sets standards for harmonizing the settlement period to T+2 days across the European Union .

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