On 9 July 2024, the European Securities and Markets Authority (ESMA) launched three consultations on Level 2 aspects of the Central Securities Depositories Regulation (CSDR) Refit.

The consultations relate to:

1. Draft regulatory technical standards (RTS) and implementing technical standards (ITS) on the review and evaluation process

• The CSDR Refit introduces changes to the review and evaluation process which CSDs are subject to under the CSDR, including alleviating the requirement on annual frequency for the process, strengthening the process consultation of relevant authorities and extending the range of authorities that receive the results of the processes.
• The draft technical standards specify:
  • The information that CSDs are to provide to their NCA for the purposes of the periodic review and evaluation process;
  • The information that NCAs are to supply to relevant authorities, ESMA and, where applicable, the college of supervisors on the results of the review and evaluation process;
  • The information that the NCAs of CSDs belonging to groups are to supply one another; and
  • The standard forms, templates and procedures for the provision of the information.

2. Draft RTS on the information notified by third-country CSDs

• The CSDR Refit mandates ESMA to draft RTS in relation to the information that third-country CSDs will be required to notify to ESMA and submit to ESMA and NCAs when providing notary services, central maintenance and/or settlement services in relation to financial instruments constituted under the law of an EU Member State.
• The draft RTS specifies:
  • The notification timing and reporting periods for notary and central maintenance services; and
  • The information to be notified for notary and central maintenance services.

3. Technical Advice on the scope of the Settlement Discipline Regime (SDR)

• The CSDR Refit empowers the European Commission to adopt delegated acts specifying the underlying causes of settlement fails that are considered as not attributable to the participants in the transaction and the circumstances in which operations are not considered as trading. ESMA is requested to provide Technical Advice to assist the European Commission in preparing the delegated act.
• In summary, ESMA proposes the following:
  • Exclude the following underlying causes of settlement fails from the SDR:

1. ISIN suspension from settlement due to a reconciliation issue under Article 65 (2) and (6) of the RTS on CSD Requirements;
2. ISIN suspension from trading, such as under Article 32(1), Article 52(1), Article 69(2) of MiFID II, or Article 40(1) of MiFIR;
3. Cash settlement outside the securities settlement system operated by the CSD, provided the relevant payment system is closed for settlement on that particular day; and
4. Technical impossibilities at the CSD level that prevent settlement, such as a failure of the infrastructure components, a cyber-attack, network problems or IT system issues.

• Classify the following as circumstances in which operations are not considered as trading and exempt them from cash penalties and mandatory buy-ins:

1. Free-of-payment securities transfers related to collateral (de)mobilisation at CSDs;
2. Market claims and corporate actions on stock, including cash distributions, securities distributions and reorganisations;
3. Technical creation of securities, involving transfers from CSD issuance accounts to issuer's CSD accounts;
4. Creation and redemption of fund units on the primary market, excluding ETFs; and
5. Realignment operations.

The consultations close on 9 September 2024. ESMA expects to publish its final report and submit its Technical Advice on the scope of the SDR to the European Commission by 31 December 2024. ESMA expects to publish its final report and submit the draft technical standards on the review and evaluation process and the information to be notified by third-country CSDs to the European Commission for endorsement by 17 January 2025.

If you have any questions regarding the consultation, please contact Aniqah Rao.