The European Securities and Markets Authority (ESMA) has called for the European Commission to expand the scope of the Central Securities Depository Regulation (CSDR to include greater supervision of the T2S and the third country CSD recognition regimes.
T2S is the central settlement platform for EU securities settlement operated by the Eurosystem and launched through a phased release from 2015.
In its response to the Commission’s review, ESMA highlights a need to strengthen the capacity of T2S CSDs to manage risks that derive from outsourcing settlement activities to the T2S platform.
The European watchdog says that T2S is currently monitored under a “light approach”, through provisions defined in the Principles for Financial Market Infrastructures (PFMIs) in the ECB Oversight Framework, and not through provisions directly embedded in CSDR.
ESMA believes that given the centrality of T2S to settlement operations across EU member states, it is “not appropriate” to exclude such a systemically important settlement platform completely from the scope of CSDR.
It also advises that CSDR should be amended to enable better cooperation between key participants involved in oversight of T2S settlement activities.
It specifically mentions national regulators, along with the European Central Bank as lead overseer of the T2S platform, and ESMA in providing a “supervisory convergence” role, ensuring cooperation and consistency in financial supervision across EU member states.
Against the backdrop of Brexit, ESMA has also called for the recognition regime for “third-country CSDs” (TC-CSDs) to be extended, requiring them to notify ESMA of all services that they provide in the European Economic Area (EEA).
This provision relates to the activities of non-EU CSDs that provide services into the EEA.
The regulator notes that, under current arrangements, there is no information available on the activities of TC-CSDs, either at EEA level or at national level to regulatory authorities, unless this is provided on a voluntary basis by those CSDs.
Significantly, the current TC-CSD recognition regime does not cover the provision of settlement services in the EEA. It only applies to two out of the three CSDR core services, specifically notary and central maintenance activities.
As a result, “the provision of settlement services remains invisible to the EEA supervisors,” according to ESMA. This only allows for “a very late and partial view of the activities of TC-CSDs in the EEA” and creates an unlevel playing field between third country CSDs and EEA CSDs.
To rectify this, ESMA indicates that the TC-CSD recognition regime should be extended to cover settlement services alongside notary and central maintenance services.
Perhaps surprisingly, there was little mention in the ESMA letter of its views on the CSDR settlement discipline regime, particularly the mandatory buy-in component, which is timetabled for February 2022 and has been subject to intensive industry scrutiny.
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