18 Square de Meeûs • B‐1050 Bruxelles EFAMA reply to European Commission consultation paper on Central Securities Depositories (CSDs) and on the Harmonisation of Certain Aspects of Securities Settlement in the European Union Register ID number: 3373670692‐24 EFAMA is grateful for the opportunity to comment on the Commission’s consultation paper on Central Securities Depositories (CSDs) and on the Harmonisation of Certain Aspects of Securities Settlement in the European Union. EFAMA is the representative association for the European investment management industry. It represents through its 26 member associations and 51 corporate members approximately EUR 13.5 trillion in assets under management, of which EUR 8 trillion was managed by approximately 53,000 funds at the end of 2010. Just under 36,000 of these funds were UCITS (Undertakings for Collective Investments in Transferable Securities) funds.
to EFAMA members, and found out that asset managers were in favour of harmonizing the settlement periods but had different views on the choice between T+2 and T+3 (please see attach document). As of now, we can say that a majority of our members support T+2 as settlement period target. PART I – APPROPRIATE REGULATORY FRAMEWORK FOR CSDs SCOPE AND DEFINITIONS 1. What is your opinion on a functional definition of CSDs?
EFAMA supports the proposal of the Commission to provide a definition of CSD’s following a functional approach, referring to the services that a CSD provides, provided that such definition clearly highlights that the CSD’s role is central in the organization of securities markets and that its function is of public interest.
Concerning in particular transfer agents for funds, we believe that is important to bear in mind that their function very often relates both to UCITS funds and to funds in the scope of the AIFMD (AIFs). Therefore they should both systematically be treated in the same way.
3. What is your opinion on the above description of the core functions of a CSD? 4. Which core functions should an entity perform at a minimum in order to be qualified as a CSD?
5. Should the definition of securities settlement systems be reviewed?
Most EFAMA members believe that the Commission has rightly identified the core functions of a CSD and agree, to a large extent, with the proposed description of these core functions, although they may require some further adjustments and fine‐ tuning).
Some EFAMA members, however, consider that the definition of the notarial function should be completed by the mission of control at all times that the number of securities issued (registered in the book of an issuer) equals the sum of the securities in circulation (registered for that securities issue in the books of the participants to the CSD system)
Some EFAMA members are also against the idea of including a reference to the Settlement Finality Directive in the definition of the settlement function (because of the risk of inconsistency or complication due to subsequent update) and are therefore in favor of a ‘stand‐alone’ definition. 6. What is your opinion of the above description of ancillary services of a CSD? Is the list above comprehensive? Do you see particular issues as to including one or several of them?
Most EFAMA members also support the governing principles put forward by the Commission to define the scope of Ancillary Services that a CSD would be authorized to provide and agree with the six categories of Ancillary services identified in the Consultation Paper.
exceptions being for the service of securities lending and borrowing (provided that it operates on the basis of a system organized by the CSD directly among the accounts of the members participating to the system with no exposure of the CSD) as well as services facilitating the management of corporate actions by issuers. ACCESS AND INTEROPERABILITY
16. What is your opinion about granting a right for market participants to access the CSD of their choice?
EFAMA supports the principle of the Commission following which a CSD should grant access to market participants on an open and non‐discriminatory basis. All market participants should be given the possibility to access the CSD of their choice. This would enhance the competition between CSDs and may reduce the issuance, clearing and settlement costs borne by market participants.
The introduction of MiFID in 2007 has clearly demonstrated that the creation of an open and non‐discriminatory access to new trading platforms introduced more competition and, hence, decreased the transaction costs for equities in Europe. In this context, several EFAMA members also insisted that such proposal must ensure that the law governing the CSD is totally consistent with the company and property law under which the company is constituted as it is the latter which determines the ownership rights, how the security can be transferred and the entitlements to corporate actions.
In this context, several EFAMA members also insisted that such proposal must ensure that the law governing the CSD is totally consistent with the company and property law under which the company is constituted as it is the latter which determines the ownership rights, how the security can be transferred and the entitlements to corporate actions.
17. What is your opinion on the abolition of restrictions of access between issuers and CSDs?
18. According to you, should the removal of Barrier 9 be without prejudice to corporate law? Yes? No? No opinion? Please explain why.
Most EFAMA members support the abolishing of the two types of restrictions identified as Barrier 9 in the Govannini reports. The removal of these restrictions for all types of financial instruments held by a CSD would allow issuers the freedom of choice of CSD and would therefore increase the competition and foster the development of the internal market. 20. What is your opinion on granting a CSD access rights to other CSDs and what should their scope be? 21. What is your opinion on a CCP's right of access to a CSD? 22. What is your opinion on access conditions by trading venues to CSDs? Should MiFID be complemented and clarified? Should requirements be introduced for access by MTFs and regulated markets to CSDs? Under what conditions?
23. According to you, should a CSD have a right to access transactions feeds? Yes? No? No opinion? Please explain why.
24. What kind of access rights would a CSD need to effectively compete with incumbent providers of CSD services? Should such access be defined in detail?
EFAMA would like to emphasize the need for interoperability and access rights between the various CSD’s. In order to secure such interoperability, adequate rules on data governance are of utmost importance for the proper functioning of a CSD. The operations of CSDs need to be based on globally accepted identifiers for all trades/counterparties.
In particular, the required identifier should be available on a license and fee free basis. Primarily ISO standards should be considered for this purpose. The International Securities Identification Number (ISIN) for the identification of securities/transactions. Identification of the counterparties to the trade or the underlying entities should be based exclusively on a globally agreed Legal Entity Identifier (LEI ‐ i.e. the ISO Business Identification Code (BIC) or the ISO candidate Issuer and Guarantor Identifier (IGI). Without prescribing the use of such open standards, interoperability between all market participants (e.g. exchanges, trading platform, CCPs and CSD) will not be possible.
The interoperability arrangements between all market participants should also incorporate the improvement of quality of post trade reporting. The quality of trade reporting will ultimately be improved only if the use of specified data dictionaries and semantics is required in regulation and therefore accepted by all market participants in their reporting.
OUTSOURCING
40. Should there be any other exemptions from the principle of responsibility and control of CSDs on outsourced tasks?
EFAMA agrees with the proposal that future legislation should aim at limiting outsourcing by CSD to certain tasks under specific conditions. However, it should be noted that in the context of the T2S project undertaken by the Eurosystem, the tasks of the CSDs core activities, including their notary and the record‐keeping function for issuers falls outside the scope of the T2S project, and remains attributed to each CSD which will continue to be legally responsible for opening, maintaining and closing the securities account of its users. T2S will only deliver the settlement process, which will be brought together on the single platform, while national CSDs will retain legal responsibility vis‐à‐vis end‐users (banks, investment firms). PART II – HARMONISATION OF CERTAIN ASPECTS OF SECURTIES SETTLEMENT IN THE EUROPEAN UNION
44. According to you, is the above described harmonisation of key post trade processes important for the smooth functioning of cross‐border investment? Yes? No? No opinion? If yes, please provide some practical examples where the functioning of the internal market is hampered by absence of harmonisation of key post trading processes. If no, please explain your reasoning.
EFAMA welcomes a harmonisation of key post trading processes (e.g. settlement discipline and settlement cycles).
The main reasons to support this belief are:
• Harmonization makes business easier and cheaper.
• It would introduce a standardized approach which would naturally align deliveries, support efficient cash management processes and would clearly simplify securities processing.
• It would eliminate the market risk inherent in switching positions between markets, avoiding cost of funding.
• It would help to reduce trade failure risk, claim probability, technical set‐up costs and training of human manpower. Market efficiency will increase by an overall settlement certainty across all market participants.
• Settlement of international trading on worldwide stock exchanges would be harmonized. Cross trading and arbitrage would be subject to harmonized rules. • HSC allows for easier asset disposition and transaction instructions. • A harmonisation of settlement periods will reduce the operational, counterparty and settlement risk and therefore stabilize the financial market.
The harmonisation of post trading processes requires a standardized set of data elements, message standards/communication systems and formats. We should encourage market participants to use ISO standards for the identification of securities/transactions, counterparties and accounts to the widest extent possible.
Without prescribing the use of open standards, further harmonisation in the post trading processes and interoperability between all market participants (e.g. exchanges, trading platform, CCPs and CSD) will not be possible. A further increasing in the level of automatisation will also be hampered if the market participants use different data elements in the IT‐systems.
We believe that the standardization of operational protocols will benefit the investor. In the area of messaging standards our members favor currently ISO 15022 FIN messaging standards in the clearing and settlement of securities transactions. EFAMA is very supportive in the introduction of the ISO 20022 XML based messaging standard in the financial community and among CSD’s. However, all market participants need sufficient time in order to prepare for the new ISO 20022 messaging standard.
45. Do you identify any other possible area where harmonisation of securities processing would be beneficial?
Harmonisation of securities processing would be beneficial in the following areas:
• In facilitating switching between investments which are settled under different systems.
• In standing settlement instructions (SSI). We believe that it is essential that custodians provide brokers with proper and up‐to‐date SSI, in particular the relevant account information. A global standard is needed for this communication. Our members feel it’s important to allow for the storage of SSI data in the databases that are accessible to maximum of the market participants concerned.
SETTLEMENT DISCIPLINE
46. According to you, is a common definition of settlement fails in the EU needed? Yes? No? No opinion? Please explain why. If yes, what should be the key elements of a definition?
A high level definition of a settlement fail could be necessary for market participants in order to understand areas of risk, perhaps differentiating between on‐time settlement, delayed settlement and failed settlement that interlinks with enforcement rules and penalty regimes.
47. According to you, should future legislation promote measures to reduce settlement fails? Yes? No? No opinion? If yes, how could these measures look like? Who should be responsible for putting them in place? If no, please explain.
EFAMA believes that high level rules for settlement fails might improve settlement discipline. The rules should take into account the different types of assets (fixed income and equity) and markets. We think that the final rules should be incorporated in the ESCB/CESR recommendations for Securities Settlement Systems in the EU.
In this context we would like to mention that the investment fund management companies are not direct market participants in the settlement process like CSDs, custodians, global custodians and broker/dealers. Investment fund management companies, fund administrators and investment managers rely in the settlement process on the information received from broker and dealers. Funds use custodians in order to fulfill their settlement obligations in time. We recommend that the handling of settlement fails should exclusively occur between the investment manager, broker/dealer and the custodians, and should not involve the end investor.
However, we believe that the proportion of failed settlements is very small, and firms need to have incentives for good behavior, but also there should be penalties for deliberate or persistent offenders. 48. What do you think about promoting and harmonising these ex‐ante measures via legislation?
EFAMA is supportive of measures that would improve settlement discipline. We believe that hamonising these ex‐ante measures should be incorporated in the ESCB/CESR recommendations.
Asset Management companies across Europe rely in the matching and settlement process on information received from their broker/dealers and custodians. Therefore we feel that any ex‐ante measures for settlement discipline should firstly aim to incentivise the early settlement between broker/dealers and custodians.
49. What do you think about promoting and harmonising these ex‐post measures via legislation?
We believe that hamonising these ex‐post measures should be incorporated in the ESCB/CESR recommendations and should not be subject to a separate regulatory proposal by the Commission. 50. According to you, is there a need for the harmonisation of settlement periods? Yes? No? No opinion? Please explain why. We support harmonisation of settlement periods for reasons explained in question 44. We also support the principle of reduced settlement periods. But reducing settlement periods may also result in a higher incidence of failed trades, which of course is not desirable. And differences in national public holidays across Member States add another complexity, which is compounded when settlement periods are reduced. 51. In what markets do you see the most urgent need for harmonisation? Please explain giving concrete examples. We believe that cash equities and bonds should firstly be subject to a harmonization. There are the most important asset classes.
52. What should be the length of a harmonised period? Please explain your reasoning.
EFAMA members welcome the harmonisation of settlement periods in the EU. Harmonisation of settlement periods will reduce operational risk such as trade failures and claim management. A harmonisation of settlement periods will also reduce the counterparty and settlement risk in the post trade area.
A majority of our members support T+2 as settlement period target.
However, investment fund management companies should retain the flexibility to clear, settle and hold fund units and shares outside the CSD, as is the case today. However, different ways of communication between asset managers, broker/dealers and custodians could hinder the settlement on T+2. Settlement on T+2 could be difficult in markets that require a registration procedure (e.g. Spain, Greece) or which require automatic buy‐in on T+3 or one day after. Therefore market rules and procedures in such markets need to adapt to the T+2 settlement requirements.
We think that all trading facilities should be subject to a harmonized settlement period approach in order to have a level playing field for all market participants.
54. What types of transactions should be covered by a harmonisation? Please explain your reasoning.
EFAMA believes that all DVP‐transactions and FOP‐trades should be covered by a harmonisation.
55. What would be an appropriate time span for markets to adapt to a change? Please Explain
The appropriate time span should be in line with the implementation of T2S, before the implementation of the testing period for T2S.
56. According to you, how should the principles examined in the communication on sanctions apply in the CSD and securities settlement environment?
As stated earlier, we are not convinced that harmonised penalties would necessarily improve settlement discipline. But we would support strong supervisory enforcement sanctions for deliberate and persistent offenders.
