The new framework for central securities depositories (CSD) provides for the rule that without prejudice to the corporate law under which the securities are constituted, an issuer will have the right to arrange for its securities to be recorded in any CSD established in any Member State. A CSD conducting business in different jurisdictions is obliged, however, to identify and mitigate the risks arising from any potential conflicts of laws across jurisdictions.
CSDs, EMIR, MiFID/MiFIR – three pillars for the new regulatory framework for financial infrastructure
Proposal for a Regulation of the European Parliament and of the Council on improving securities settlement in the European Union and on central securities depositories (CSDs) and amending Directive 98/26/EC of 7 March 2012 (COM(2012) 73 final 2012/0029 (COD) – hereinafter: ‘draft CSD Regulation’) represents another major step of European legislators in their task to set up a new, more safe and efficient regulatory framework for financial infrastructure.
There has been envisioned an important role for the said new provisions since they are intended to complete the regulatory framework for securities market infrastructures, alongside MiFID (Markets in Financial Instruments Directive) and EMIR (European Markets Infrastructure Regulation) - see: answer to question MEMO/12/163 of 7 March 2012.
It follows that the new design for the uniform European financial regulatory framework will be founded on three main types of institutions operating securities market infrastructures:
- Trading venues - that is, regulated exchanges, MTFs (multilateral trading facilities), OTFs (organised trading facilities), where the trading of securities takes place. These are regulated by MiFID.
- Central counterparties (CCPs) – responsible for clearing of securities transactions. These will be regulated by the Regulation on OTC (over the counter) derivatives, central counterparties and trade repositories (EMIR); and
- CSDs - responsible for settlement of securities transactions. These will be regulated by the proposed Regulation on CSDs.
Regulation on CSDs and Emission Registry Regulation – mutually overlapping?
Emission allowances as the potential financial instruments under new MiFID II classification need to be taken into account in this new CSDs scheme, even if only mentioned due to separate mechanisms for registering emissions units (Registry Regulation).
The said conflict has been resolved in the draft CSDs Regulation rather definitely by stating in Article 1(3):
‘This Regulation is without prejudice to provisions of Union legislation concerning specific financial instruments, in particular Directive 2003/87/EC.’
Usually, when legislators do not exactly know what are inter-dependencies between the two legislative acts, they insert provision that the said instruments are ‘without prejudice’ to each other. It seems that this is the case also with the draft CSD Regulation and the Emission Registry Regulation.
The draft CSD Regulation mentions emission allowances in few places. Firstly, it defines 'emission allowances' as ‘any units recognised for compliance with the requirements of Directive 2003/87/EC.’
In the preamble to the said legal instrument the mention of emission allowances appears in recital 12 in the following expression:
‘In order to ensure the safety of settlement, any participant to a securities settlement system buying or selling certain financial instruments, namely transferable securities, money-market instruments, units in collective investment undertakings and emission allowances, should settle its obligation on the intended settlement date.’ (in that regard see also Article 5(1) of the draft CSD Regulation);
‘One of the most efficient ways to address settlement fails is to require failing participants to be subject to a buy-in, whereby the securities which ought to be delivered must be bought in the market after the intended settlement date and delivered to the receiving participant. This Regulation should provide for uniform rules concerning certain aspects of the buy-in transaction for all transferable securities, money-market instruments, units in collective investment undertakings and emission allowances, such as the timing, notice period, pricing and penalties.’
But the relations identified between the CSDs framework and emissions legal infrastructure seem rather casual and need further assessments and analysis.
The field for potential interesting considerations could be for instance Article 46 of the draft CSD Regulation (Applicable law to proprietary aspects) – see box.
Article 46 of the draft CSD Regulation
(Applicable law to proprietary aspects)
1. Any question with respect to proprietary aspects in relation to financial instruments held by a CSD shall be governed by the law of the country where the account is maintained.
2. Where the account is used for settlement in a securities settlement system, the applicable law shall be the one governing that securities settlement system.
3. Where the account is not used for settlement in a securities settlement system, that account shall be presumed to be maintained at the place where the CSD has its habitual residence as determined by Article 19 of Regulation (EC) No 593/2008 of the European Parliament and the Council.
4. The application of the law of any country specified in this Article shall comprise the application of the rules of law in force in that country other than its rules of private international law.
The rule established by the said provision prescribing to apply the law of the country where the account is maintained to any question with respect to proprietary aspects in relation to financial instruments held by a CSD resembles Article 10(5) of the Registry Regulation (which stipulates: ‘Accounts shall be governed by the laws and fall under the jurisdiction of the Member State of their administrator and the units held in them shall be considered to be situated in that Member State’s territory) and also Article 9 (Conflict of laws) of the Financial Collateral Directive (see: Extending Financial Collateral Directive to spot emissions allowances trade – why not?).
Managing the conflicts of rules
The draft CSD Regulation provides for the rule that without prejudice to the corporate law under which the securities are constituted, an issuer will have the right to arrange for its securities to be recorded in any CSD established in any Member State. A CSD conducting business in different jurisdictions is obliged, however, to identify and mitigate the risks arising from any potential conflicts of laws across jurisdictions.
Interoperable securities settlement systems and CSDs that use a common settlement infrastructure should also establish identical moments of:
(a) entry of transfer orders into the system;
(b) irrevocability of transfer orders;
(c) finality of transfers of securities and cash.