Response to consultation on Regulatory Technical Standards on on the threshold of activity at which Central Securities Depositories (CSDs) providing ‘banking-type ancillary services’
Q1. Do you agree with the proposed approach for determining the threshold referred to in Art. 54(5) of the CSDR?
Euronext considers that the EBA proposal for the revision of the thresholds is based on sound principles. We welcome the intent to balance risk management with the needs of market evolution and to overcome the inefficiencies that currently exist. As recognized by EBA in the consultation paper, we believe that the future methodology should be risk based, in that it should consider how and to what extent operations taken below the threshold might change the risk profile of the parties involved. Proportionality is also a key feature, contrary to the one-size-fits-all approach, as set out in the former CSDR framework, that was not suited to account for different needs that non-banking CSDs face to provide settlement in foreign currency.
However, we believe that there are still elements that hinder the effective adjustment of the thresholds to the market environment.
Notably, the proposed absolute threshold of EUR 6.25 billion (no more than 2.5% of the total value of cash settlement in the books of the CSD) is still too small and replicates the issues of the previous framework that was not appropriate for all markets and asset classes. These thresholds would essentially not allow non-banking CSDs to offer the requested service, since they do not allow the CSD to reach the volumes justifying investments in a CeBM solution.
Indeed, assuming a turnover ratio of 0.5, the issuance in non-euro currency would be up to 9 bn EUR, which covers only a small portion of the required need. This approach particularly affects the issuance of debt programs which are deliberately designed to allow maximum flexibility on issuance currencies and would therefore require higher thresholds.
Since an absolute threshold would not be sufficient to accommodate the needs of different asset classes, we recommend only applying a relative CoBM settlement threshold.
Considering the above, Euronext believes that an appropriate threshold should be set at 5,5% per year as this would accommodate the current market needs. In this respect we would appreciate the opportunity to support EBA analysis with further quantitative data, where needed.
We are convinced that such an increase of the relative threshold combined with sound operational arrangements for CoBM could be beneficial for market integration and will also meet the criteria referred to in paragraph 9 of Article 54 CSDR, for the following reasons.
With regard to the implications for market stability, the positive effect that a substantial increase of the thresholds could have on the concentration risk should not be underestimated. It is worth noting that in a scenario where more CSDs are able to provide services in foreign currencies, the overall risk will diminish with the shift from a concentrated to a diversified environment. Additionally, the diversification of players offering these services does not entail per se a risk of substitution of central bank money with commercial bank money as the demand for settlement in foreign currency is driven by other exogenous factors as explained later. Further, it is unlikely that the increase of thresholds will bring a change in the systemic importance of CSDs considering that the participants will still use ICSDs especially for settlement in specific asset classes (US activities in ETF and Eurobonds are concentrated in ICSDs).
Furthermore, in order to ensure that an increase of the threshold does not result in additional systemic risk nor for CSDs nor for their participants, mitigation measures could be established such as specific requirements related to the risk profile of the credit institutions used by CSDs. For instance: being subject to European oversight and with high long terms issuance rating (e.g. higher than Aa2/A+). Furthermore, operational arrangements that would be established with the credit institutions acting as settlement agents for the cash leg in foreign currencies should ensure that the CSD is not exposed to any credit or liquidity risk (for further detail on the operational arrangement please see our response to Q2).
From a broader policy perspective, it should be considered that the demand to use CoBM in foreign currency is driven by funding and trading needs, and does not depend on the number of players offering this service. Funding needs in foreign currencies – supported by bonds and equity issuances – are linked to the market structure – i.e. economies with a big share of import/export outside Europe have higher non-domestic funding needs – and on the sectors that are dominant in such local economy. As regards trading needs, it is worth to recall, for instance, the ETF use case where 45 % of European ETF OTC flow is settled in USD and is currently concentrated in the ICSDs. Therefore, considering the drivers of the market demand, we believe that the increase in competition in the offering of CoBM will not cause a shift of settlement in non-domestic currencies.
In addition, the increase of thresholds that would allow non-banking CSDs to access CoBM will not replace the general obligation to provide settlement in central bank money under article 40 of CSDR which mandates central bank money settlement in euros, whilst CoBM in foreign currencies would remain under the acceptable range defined by the threshold that would not be significant or systemically relevant if compared with the amount of CoBM provided by CSDs with banking licenses.
Therefore, we believe that the proposed increase of threshold would simply allow more players to offer CoBM settlement in foreign currency and would not pose a real risk of an unintended shift from settlement in central bank money to settlement in commercial bank money.
Likewise, the increase of the threshold would not alter the level playing field among CSDs, in particular in respect of CSDs holding a banking license (e.g. ICSDs) as the economics of their business cases are not comparable. The offer of multi-currency CoBM settlement is concentrated in a few CSDs holding a banking license. Banking-CSDs support the financial and compliance costs of the authorization which are counterbalanced by the possibility to harvest additional profits deriving from banking-related activities, such as management of liquidity deriving from cash deposits for CoBM. On the contrary, non-banking CSDs would need to engage with credit institutions acting as settlement agents for the cash leg in foreign currencies. Under this business and operational model non-banking CSDs would not be able to generate further profits deriving from other banking-related activities, thus ensuring a level playing field.
The increase of the threshold would simply allow non-banking CSDs to develop further issuance and settlement services in non-domestic currencies, attracting foreign issuers and investors from third countries for the benefit of the growth of all markets. This would allow the non-banking CSDs to further scale up their issuance services without unduly changing their risk profile, the overall systemic risk or affecting the level playing field.
Q2. Do you think that other elements should be taken into account in the proposed approach? If yes, which ones?
Euronext believes that the proposed methodology is not proportionated where CoBM settlement in foreign currency is provided according to an operational model which does not imply the provision of the full list of banking-type ancillary services and does not alter the risk profile of the CSDs or of the designated credit institutions as described below.
Description of the model
The non-banking CSDs appoint a credit institution to settle cash payments in a currency different from the Euro, not accepted by T2S, through cash accounts opened by CSDs participants directly or indirectly with the credit institution.
CSDs participants with direct access must open an account for each of the eligible currencies other than the Euro and can use the non-Euro currency settlement system by sending the instructions to the CSD which in turn instructs the accounts with the credit institution.
In this scenario, the non-banking CSD is connected with the designated credit institution through operational arrangements and therefore is not exposed to any credit o liquidity risk whilst both the designated credit institution and CSDs participants are already subject to prudential requirements (CRR). It should be also noted that appropriate operational arrangements could be established between the credit institution and the CSDs to manage the settlement of the cash leg and of the securities leg, to avoid the increase of settlement risk for CSDs participants.
Considering the above we recommend to review the approach and to identify a calculation method for appropriate risk management and prudential requirements which is more proportionate and calibrated on the basis of the operational model used by the CSD.
Q3. Do you agree with the proposed levels set out in the proposed approach for the different parameters?
Please refer to Q2
Q4. Do you agree with the proposed basic risk management and prudential requirements? If no, please provide rationale and an alternative proposal.
Please refer to Q1 and Q2
Q5. Do you agree with the proposed level of settlement activity, which determines whether only basic or both basic and advanced risk management and prudential requirements are applied?
Please refer to Q1 and Q2
Q6. Do you agree with the proposed advanced risk management and prudential requirements? If no, please provide rationale and an alternative proposal.
Please refer to Q1 and Q2