Article 46(4) of CSDR foresees that financial resources of the CSD that have not been invested in cash or in highly liquid financial instruments with minimal market and credit risk are not taken into account for the purposes of capital eligible to cover capital requirements (they are not considered to be eligible capital). In practice, this means that when calculating the value of eligible capital, any asset of the CSD that does not fulfil these requirements is fully written-off by the CSD, and its value is reduced to zero. This is a prudent approach that reflects the risk profile of CSDs. However, there may be a lack of clarity on if CSDs are required to apply risk weights to such fully written-off assets. It would be disproportionate to require a CSD to fully write-off an asset and to simultaneously apply a risk weight to that asset using its (previous) fair value. An appropriate parallel can be found in CRR, specifically in Article 113 (1) of CRR, which states that risk weights shall be applied to all exposures (exposures are defined as an asset or off-balance sheet item), unless deducted from own funds. The capital adequacy ratio is calculated as eligible capital divided by risk-weighted assets. In the context of banks, essentially, risk-weighted assets are loans and other assets of a bank, weighted (that is, multiplied by a percentage factor) to reflect their respective level of risk of loss to the bank. As such, the greater the amount of higher risk assets and loans that a bank has, the higher its risk-weighted assets, and therefore, the higher the amount of capital the bank must have in order to meet minimum capital adequacy ratios. If a value of an asset is reduced to zero, this asset is fully written off from eligible capital. This is equivalent to a total loss on this asset and reduces the value of the CSD’s eligible capital by that full amount. Therefore, as the full loss of this asset is already assumed by legislation for CSD’s, it is not necessary to assess the likelihood of a loss for the CSD for that asset by using risk-weights. Therefore, any fully written-off assets (including material assets) should not be included in the calculation of the value of the CSD’s risk-weighted assets. 

In the context of maintaining a level playing field between non-banking and banking CSDs, the current provisions of Article 54(3) of CSDR-a (that are applied to CSDs that provide banking-type ancillary services) state: “In the case of conflicting provisions laid down in this Regulation, in Regulation (EU) No 575/2013 and in Directive 2013/36/EU, the CSD referred to in point (a) of the first subparagraph shall comply with the stricter requirements on prudential supervision. The regulatory technical standards referred to in Articles 47 and 59 of this Regulation shall clarify the cases of conflicting provisions.”

This is a choice previously made by the legislators, which goes beyond the specific issue that we raised. However, for this specific issue, when applying CRR, a “banking” CSD would either apply a risk weight to an exposure, or it would deduct this exposure from own funds. It would not do both. Even for exposures where CRR foresees a risk weight of 1 250%, institutions subject to CRR still have a choice at their disposal – they can either apply the risk weight of 1 250% to the exposure, or as an alternative under Article 36(1) point (k) of CRR and Article 90 of CRR, they can deduct the exposure [to which a risk-weight of 1 250% is applied] from own assets. Please note that CRR does not foresee the use of this risk weigh for the whole exposure, but only a part of it (which exceeds 15 % of eligible capital). Even if this amount, when multiplied by 1 250%, exceeds the original amount of the total exposure, under CRR, the “banking” CSD would still be able to deduct the exposure fully, without applying the risk-weight. This leads to an equivalent outcome as for non-banking CSD’s under CSDR. 

Therefore, we also believe that this interpretation would not lead to an unlevel playing field between banking and non-banking CSD’s, but would ensure it. 

For example, if a non-banking CSD owns its office buildings  (land  and property  used  for the purpose of its own activities), this results in a risk  weight of  100%  for assets  (as  per Art. 134(1) of the CRR). 

However, while the CSD cannot take this investment (i.e. the CSDs office building) into account for the purposes of Article 47(1) of CSDR, this is not considered a deduction in the context of CRR (CRR doesn’t foresee deductions for tangible assets). It means that CSDs needs to calculate capital requirements for physical assets, such as buildings and for other investments that are not eligible, according to Article 46 of CSDR (therefore not included in the assets available to cover capital requirements), which leads to a quasi-double counting of risk, with assets (in this case, tangible assets) excluded from eligible capital (Article 46(3) in relation to Article 47(1) of CSDR) being included in the calculation of risk exposure (Article 113 of CRR with no exclusion in Article 36(1) of CRR). We find this to be problematic, as non-banking CSDs should not be subject to more burdensome requirements than banks for the same categories of assets.

Therefore, one possible interpretation of the applicable requirements would be that tangible assets, while not subject to deductions under CRR, need to be mandatorily 'filtered out' of a CSD’s capital under Article 47(1) of CSDR and should also be subject to a risk weight of 100%. This interpretation leads to a significant divergence in the approach used for banking and non-banking CSDs, and puts non-banking CSDs at a distinct disadvantage, with no risk based arguments. 

As far as we are aware, there is no Q&A issued on this topic, either be the Commission or by EBA.