EUROPEAN UNION: ESMA Updates the CSDR Q&AS

Friday July 12 2019

On 11^th July 2019, the European Securities and Markets Authority (ESMA) updated its Questions and Answers (Q&As) regarding the implementation of the Central Securities Depository Regulation (CSDR).

The updated Q&As provide answers to questions regarding practical issues on the implementation of the new CSDR regime. The latest CSDR Q&As clarify aspects regarding the scope of internalised settlement reporting, namely:

• investment firms are not required to report in case they do not execute transfer orders themselves, which they forward in their entirety to a custodian, irrespective of whether the custodian is established in the EEA or not; and
• trade netting as such does not qualify as internalised settlement.

Q&As are an important tool to promote common supervisory approaches and practices in the application of CSDR. This document is aimed at national competent authorities under the Regulation to ensure that, in their supervisory activities, their actions are converging along the lines of the responses adopted by ESMA.

It should also help investors and other market participants by providing clarity on CSDR requirements.

Background

The aim of CSDR is to harmonise certain aspects of the settlement cycle and settlement discipline and to provide a set of common requirements for CSDs operating securities settlement systems across the EU. ESMA will continue to develop Q&As on the CSDR in the coming months and will review and update them where required.

Internalised Settlement Questions 1 – Scope

Question: Should an investment firm report client orders where the corresponding settlement instructions are forwarded in their entirety to a custodian? What if the custodian is established outside the EEA?

Answer: An investment firm does not need to report client orders where the investment firm does not execute the corresponding settlement instructions itself, which are forwarded in their entirety to a custodian. Even if the custodian is established outside the EEA and, as such, would not be required to report under Article 9 of CSDR, there remains no obligation for the investment firm to report as the investment firm does not execute the transfer orders itself, and, therefore, it does not fall under the definition of settlement internaliser as specified in point 11 of Article 2(1) of CSDR.

Question: Should an investment firm that does not hold any client assets and that performs trade netting in order to reduce the amount of settlement instructions be considered as a settlement internaliser in the meaning of the CSDR, and therefore be required to comply with the reporting obligations pursuant to Article 9 of CSDR?

Answer: No, given that, for an investment firm that does not provide safekeeping and administration of financial instruments for the account of clients, including custodianship, trade netting as such does not qualify as execution of transfer orders, and, therefore, in such a case, the investment firm does not fall under the definition of settlement internaliser as specified in point 11 of Article 2(1) of CSDR.

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