Improving securities settlement in the EU

SUMMARY OF:

Regulation (EU) No 909/2014 on improving securities settlement in the European Union and on central securities depositories

WHAT IS THE AIM OF THE REGULATION?

It aims to harmonise the timing and conduct of securities settlement in the European Union (EU) and the rules applicable to central securities depositories (CSDs)*.
It is designed to increase the safety and efficiency of the system, particularly for transactions within the EU.
The regulation has been amended several times, most recently by Regulation (EU) 2022/2554, the Digital Operational Resilience Act (known as DORA) which seeks to ensure the financial sector is able to stay resilient through a severe operational disruption (see summary).

KEY POINTS

The regulation notably introduces the following elements.
- Shorter settlement periods, which should, in general, take place no later than the second business day after the trading occurs.
- An obligation to record in book-entry* form all transferable securities admitted to trading or traded on the trading venues.
- Strict organisational, conduct of business and prudential requirements for CSDs.
- A settlement discipline regime to deal with settlement failures. CSDs must operate a cash penalties system and are subject to reporting requirements regarding settlement failures. Participants are subject to mandatory buy-ins.
- A passport system allowing authorised CSDs to provide their services across the EU, subject to certain passporting requirements.
- Increased prudential and supervisory requirements for CSDs and other institutions providing banking-type services that support securities settlement.
EU Member States’ national authorities:
- authorise and supervise CSDs, and review and evaluate them on an annual basis at least;
- exchange information and cooperate with each other and the European Securities and Markets Authority (ESMA).
CSDs must notably:
- have robust governance arrangements, a clear organisational structure, internal controls and sound administrative and accounting procedures;
- ensure senior management is of sufficiently good repute and experience;
- establish user committees for each securities settlement system they operate;
- maintain for at least 10 years all records of their services and activities;
- remain fully responsible for any work they outsource;
- display transparency by publicly disclosing the prices and fees involved in the core services they provide;
- have sufficient capital to be adequately protected against operational, legal, custody, investment and business risks;
- secure additional authorisations before providing any banking-type ancillary services;
- further to the adoption of DORA (amending Regulation (EU) 2022/2554), identify sources of operational risk, both internal and external, and minimise their impact also through the deployment of appropriate ICT tools, processes and policies.
CSDs in a non-EU country may operate in the EU, including through an EU-based branch, provided they meet certain requirements.
ESMA maintains a publicly available register of each authorised CSD.
ESMA will develop draft regulatory technical standards to specify the operational risks, other than ICT risks, faced by CSDs.
Member States’ competent authorities have the power to apply appropriate administrative sanctions and other measures for an infringement.
To have a clear and coherent legislative framework for trading and settlement, Regulation (EU) No 909/2014 relies on many of the definitions and concepts of Directive 2014/65/EU (markets in financial instruments directive (MiFID) II – see summary). The regulation was amended to take into account the change in the date of application of MiFID II. This meant that the rules set out in MiFID I (Directive 2004/39/EC) applied until the new date of entry into application of MiFID II.
The European Commission has also adopted several delegated acts supplementing Regulation (EU) No 909/2014:
- Delegated Regulation (EU) 2017/389 regarding the parameters for the calculation of cash penalties for settlement fails and the operations of CSDs in host Member States;
- Delegated Regulation (EU) 2017/390 with regard to regulatory technical standards on certain prudential requirements for central securities depositories and designated credit institutions offering banking-type ancillary services;
- Delegated Regulation (EU) 2017/391 with regard to regulatory technical standards further specifying the content of the reporting on internalised settlements;
- Delegated Regulation (EU) 2017/392 with regard to regulatory technical standards on authorisation, supervisory and operational requirements for central securities depositories;
- Delegated Regulation (EU) 2018/1229 with regard to regulatory technical standards on settlement discipline, which has in turn been amended by Delegated Regulations (EU) 2020/1212, (EU) 2021/70 and (EU) 2022/1930.

FROM WHEN DOES THE REGULATION APPLY?

Book-entry form requirements (Article 3(1)) have applied from 1 January 2023 to transferable securities issued after that date and will apply from 1 January 2025 to all transferable securities.
The regulation’s settlement date rules (Article 5(2)) have applied since 1 January 2015.
The settlement discipline regime (Articles 6(1) to (4) and 7(1) to (13)) has applied since 1 February 2022.

BACKGROUND

Traditionally, CSDs have been regulated nationally.
Settlement across borders presents higher risks and costs for investors than domestic operations. At the same time, this form of transaction is increasing.
The main objective of the regulation is to increase the safety and efficiency of securities settlement and settlement infrastructures in the EU. It does this by providing a common set of prudential, organisational and conduct of business standards for use across the EU, which should play a crucial role in financing the economy.
For further information, see:
- Central securities depositories (CSDs) (European Commission)
- Central securities depositories (European Securities and Markets Authority).

KEY TERMS

Central securities depositories. Legal persons that operate a securities settlement system and provide at least services for the initial recording of securities in a book-entry system and/or for the provision and maintenance of securities accounts at the top-tier level.

Book entry. Where the ownership of a security is recorded in electronic form rather than in certificate form.

MAIN DOCUMENT

Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012 OJ L 257, 28.8.2014, pp. 1–72).

Successive amendments to Regulation (EU) No 909/2014 have been incorporated into the original text. This consolidated version is of documentary value only.