MFSA Issues Circular to the Financial Services Industry on the Implementation of the Central Securities Depositaries Regulation (EU)

The Malta Financial Services Authority (‘MFSA’) has issued a circular addressed to Central Securities Depositaries (‘CSDs’) and market participants on trading venues, with the aim of providing an overview of the latest requirements and amendments as a result of the new Central Securities Depositories Regulation (‘CSDR’), which came into force on the 17th of September 2014.

Subject Matter and Scope

The CSDR intends to:

1. provide uniform requirements for the settlements of financial instruments in the EU, and
2. implement rules on the organization and conduct of CSDs to promote safe, efficient and smooth settlement throughout all EU Member States.

All financial instruments and activities of CSDs will fall under the remit of the CSDR unless the Regulation provides otherwise.

Settlement Periods

Until recently, in most European markets including Malta, the settlement period for securities was the transaction date plus three business days, also known as T+3. The European Commission has decided to shorten this period to the transaction date plus two days, or T+2. This is expected reduce the additional margin and liquidity needs which may occur during periods of economic volatility. It will also help to reduce counterparty risk by moving trades more quickly to settlement, and eliminating counterparty exposure. The settlement period T+2 became effective as of 1st January 2015.

The CSDR also aims to harmonise settlement disciplines across Europe. This will be done by implementing a common set of measures which European CSDs will need to adopt so as to address and prevent settlement failures. In addition, the CSDR requires settlement internalisers to report the aggregated volume and value of all securities transactions which are settled by them outside of the CSDs to their Competent Authorities (in Malta this will be the MFSA) on a quarterly basis.

Provision of Services in another Member State

A CSD wishing to provide services within the territory of another Member State shall provide the necessary information to the competent authority of the home member state. The CSDR allows third-country CSDs to provide services within the territory of the European Union.

Passporting of services provided by a CSD will nevertheless need to adhere to the requirements of the Regulation. Amendments to the Financial Markets Act (‘FMA’) have been implemented to cater for the following situations:

1. A CSD authorised in Malta wishing to provide services within the territory of another EU Member State;
2. A CSD authorised in an EU Member State wishing to provide its services within the territory of Malta;
3. A CSD authorised within a third country wishing to provide its services within the territory of Malta.

Organisational Requirements for CSDs

CSDs must have robust governance arrangements which include a clear organisational structure. It must establish user committees for each securities settlement system it operates. Records on the services and activities are to be maintained for a period of at least ten years. The CSDR also requires that capital together with retained earnings and reserved of a CSD shall be proportional to the risks stemming from the activities of the CSD.

Provision of Banking-type Ancillary Services for CSD Participants

The CSDR sets out detailed requirements for the provision of banking type ancillary services for CSD participants. These provisions deliver a legal framework to govern the provision of commercial bank money settlement by CSDs to their participants. A CSD shall not itself provide any banking-type ancillary services unless it has obtained additional authorization to provide such services.

Changes in Local Legislation

The CSDR has brought about a number of changes to both the Financial Markets Act (‘FMA’) and also to related subsidiary legislations:

Changes to the Financial Markets Act

1. Right of Appeal
   Prior to these amendments, a CSD had a right of appeal when an application for authorization had been refused and when authorization had been revoked. In addition to these two cases, a CSD shall now also enjoy a right of appeal where no decision is taken, within six months of its submission, in respect of an application for authorization which contains all the information required under the provisions in force.
2. Functions of a Central Securities Depository
   Prior to these amendments the FMA included a non-exhaustive list of functions. This provision has been amended and the functions of a CSD shall include the services listed in the Annex to the CSDR. At its core services, a CSD shall operate a securities settlement system and shall in addition also provide at least one of the following services:

1. initial recording of securities in a book-entry system, or
2. provision and maintenance of securities accounts at the top tier level

New Subsidiary Legislation dealing with Administrative Penalties and Sanctions

A new legal notice under the FMA will be issued which deals with penalties which can be imposed by the MFSA by notice and without recourse to a court hearing in the event of contravention or non compliance with the FMA or the Regulation. Penalties include maximum administrative pecuniary sanctions of 5 million Euro (€5,000,000) for natural persons, and a maximum of twenty million Euro (€20,000,000) or up to 10% of total annual turnover for legal persons.

The MFSA Circular can be found here.