Central securities depositories and reform of the settlement process

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Abstract: The organisation and regulation of the European securities clearing and settlement business is again up for reform. The present dispersed European landscape calls for more integration as part of the formation of a European capital market, as proposed by the European Commission. These reforms would result in legislative changes, some of which are analysed in this paper, having raised active interest in the financial world: a new technique of dealing with settlement finality, proposing a mandatory buy-in tool as an effective instrument against settlement fails, and an analysis of settlement internalisation, which has risen to levels that, according to the Commission, might ‘undermine confidence in the CSD function’ and in the markets. On the two topics of settlement finality and settlement fails, data has now become available and is included. The third item analyses the use of distributed ledger technology (DLT) in the settlement infrastructure. As part of its work stream on digital finance, the Commission has published a proposal — as a ‘pilot project’ — for a regulation dealing with the main items that have to be adapted upon the introduction of DLT in the existing securities settlement system (SSS) and multilateral trading facility (MTF) segments of the market. For central securities depository (CSD) using DLT, the existing regulation would remain applicable, but the operations would be exempted from numerous requirements applicable today. The impact on the markets will have to be closely monitored, hence the Commission’s ‘pilot project’. The European Central Bank (ECB) has already formulated its position of cautious optimism.

Keywords: improving finality by mandating a buy-in agent; the internalisation of transactions; the use of distributed ledger technology for market infrastructure; positions of Commission and ECB

Eddy Wymeersch is Professor Emeritus for the Ghent Law Faculty. He is a former financial supervisor in Belgium (CBFA), Europe (CESR) and internationally (PIOB). He studied at Ghent University and Harvard Law School and has written extensively on company law and financial regulation.