AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Securities Settlement

On 7 March 2012, the European Commission (the Commission) published its ‘Proposal for a Regulation on improving securities settlement in the European Union and on central securities depositories (CSDs) and amending Directive 98/26/EC’ (the Proposal). This puts in place the final component of the Commission’s three-part regulatory framework on securities market infrastructures, alongside MiFID and EMIR.

The Proposal justifies the introduction of a common prudential framework because of the increased risks and costs of cross-border securities settlement which results from the fragmentation of the securities settlement market along national boundaries. In the view of the Commission, this is especially the case when such fragmentation is combined with the increasing interconnectedness of European markets, a factor which is likely to accelerate following the launch of the ‘Target2 Securities’ initiative – a project currently being established by the Eurosystem of the ECB and Eurozone central banks which is scheduled to commence in 2015 and will provide a harmonised settlement platform for heavily traded securities in Europe.

The Proposal provides: (i) a harmonised regime for securities settlement within Europe, which would apply to all issuers and market participants; and (ii) a regulatory framework for the authorisation, activities and supervision of CSDs which provide settlement services within the Union.

In particular, the Proposal’s provisions would:

  • remove paper-based securities by requiring securities to be issued in electronic book-entry form;
  • require all transferable securities admitted to trading on any regulated market, MTF or OTF (as defined under MiFID), or transferred following a financial collateral arrangement (as defined under the Collateral Arrangements Directive), to be recorded with a CSD before being traded;
  • provide a harmonised maximum settlement period of T+2;
  • boost settlement discipline by the provision of ex ante and ex post measures to facilitate early settlement and deter settlement failure;
  • introduce a common authorisation and prudential regime for CSDs, including rules on organisational and operational risk, governance, conduct of business and outsourcing;
  • provide a harmonised regime for authorised firms to ‘passport’ their services within Member States across the Union and for CSDs established in third countries to become authorised to settle transactions confirmed in Europe;
  • establish a harmonised supervisory regime for the activities of CSDs and encourage compliance through a deterrent civil sanctioning regime against legal and natural persons in breach of the Regulation.

The Proposal is currently the subject of consideration by the European Council and European Parliament. On 14 February 2013 a report of the the European Parliament ECON Committee setting out its position was tabled. An indicative date for plenary adoption of a final European Parliament text is set for 9 December 2013.  The Council, despite coming close, have not yet reached a General Approach.

It is anticipated that the resultant Regulation will enter into force twenty days following its publication in the Official Journal of the European Union, with the requirements for timely trade settlement currently set to apply from 1 January 2015 and the requirement for issued securities admitted to trading on an organised trading venue to be immobilised in book entry form set to apply from 1 January 2020.

Key Legislative Documents

Level 1

Council Presidency compromise text of CSDR (July 2013)

ECON Report on the CSDR (February 2013)

Proposal for a Regulation on improving securities settlement in the European Union and on central securities depositories (CSDs) and amending Directive 98/26/EC (March 2012)

 

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      1. AIFMD
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      4. UCITS
        1. ETFs and Structured UCITS
      5. Venture Capital
    2. US Hedge Fund Adviser Regulations
      1. Registration and Reporting
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      3. JOBS Act
    3. Asia Pacific Asset Management regulation
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      1. UK regulatory reform
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      5. IOSCO
      6. Germany
      7. CFTC Automated Trading
    4. Insurance Regulation
      1. Solvency II
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      2. Indices as Benchmarks
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        1. EU Bank Recovery and Resolution Directive
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