Responding to a call for evidence on the European Union regulatory framework for financial services, ECSDA (European Central Securities Depositaries Association) says it has identified several areas where the quality of law-making can be improved in relation to post trade services and the activities of central securities depositories in particular.
The following recommendations suggest five targeted actions to support the Capital Markets Union for securities settlement.
One, the European Commission should reconsider its approach on impact assessments to add a stronger focus on the impact of legislative proposals on economic growth and job creation. Some of the requirements imposed by recent EU legislation on post trade generate considerable cost and complexity without any evidence that they will solve existing malfunctions or significantly enhance market safety. The impact of new legislation on the real economy and on the competitiveness of the EU should be systematically included in impact assessments – and should be considered as a key criterion for determining the preferable options.
Two, the “Level 1” and “Level 2” processes should be reviewed to avoid unnecessary technical details in binding legislation and to support more consistency between both levels. In theory, the adoption of Level 2 legislation should make the law-making process more efficient and should provide for more flexibility when technical rules have to be adapted to reflect market reality. In practice, however, the interaction between Level 1 and Level 2 is far from optimal. Legislative reviews often require both Level 1 and Level 2 rules to be amended, rather than the Level 2 alone. This lack of flexibility has the potential to cause major implementation problems, as well as unnecessary costs and complexity for EU market players.The CSD Regulation settlement discipline regulatory technical standards are a good illustration of these problems. Looking into the future, the EU Commission should focus more on the quality of the rules adopted, and should seek to reduce the quantity of details in binding legislation. Highly technical aspects are often best addressed at supervisory (rather than regulatory) level.
Three, law-makers should focus on avoiding overlapping requirements and the inconsistent use of terminology across sectorial pieces of EU law. The lack of cross-references and the use of inconsistent terminology creates legal uncertainty and implementation problems. The notions of “custody” and “safekeeping”, for example, appear in several pieces of EU law without always being clearly and explicitly defined. This ambiguity is especially problematic when seeking to determine the applicability of AIFMD requirements to CSDs.
Four, the EU legislator should avoid imposing requirements indirectly via regulated entities, especially when those regulated entities do not have the means to force third parties to comply with the applicable EU rules. The CSD Regulation for instance (both in Level 1 and Level 2) has introduced obligations on CSD clients, issuers of securities and transfer agents, although the supervisory framework in the CSDR is solely concerned with CSDs. This is problematic because these entities may not even have a contractual relationship with a CSD.
Finally, EU law should allow for more calibration of the requirements as regards smaller and less systemically important infrastructures. The focus of the Capital Markets Union (CMU) action plan on SMEs is very welcome, but the same objective of proportionality should extend to requirements on financial institutions. In the EU, many CSDs are small and medium size enterprises, and the requirements imposed on them by the CSD Regulation of September 2014 are sometimes excessively burdensome given their low risk profile compared with larger, more complex and more interconnected infrastructures. This is the case of CSD capital requirements and governance requirements, for example.
The full response can be read on the ECSDA website.