The Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012 (CSDR) took effect on 17 September 2014.
The goal of the CSDR is to harmonise the European requirements for the provision of services by central securities depositories and to facilitate the settlement of securities, in particular by harmonising the rules of settlement followed on the European markets.
CSDR - who is concerned?
The requirements imposed by the Regulation apply both to central securities depositories which provide services in the European Union and, directly or indirectly, to members of securities settlement systems operated by such CSDs.
CSDR defines a central securities depository (CSD) as a legal person that operates a securities settlement system and provides the service of initial recording of securities in a book-entry system and/or providing and maintaining securities accounts at the top tier level.
Authorisation as a CSD
According to CSDR, a CSD may only be operated by an authorised CSD operator. The authority competent to issue such authorisation to Krajowy Depozyt Papierów Wartościowych (KDPW) is the Polish Financial Supervision Authority (Komisja Nadzoru Finansowego, KNF). To be authorised, a CSD must fulfil the requirements under CSDR, including organisational requirements, operational requirements, and prudential requirements.
The specific requirements are laid down in the supplementing and implementing regulations which provide the regulatory technical standards (RTS) and the implementing technical standards under CSDR.
According to the CSDR, KDPW was required to apply for the authorisation as a CSD within six months after the entry into force of the regulatory technical standards (RTS) on requirements for central securities depositories (the regulatory technical standards referred to in Article 69(2) CSDR were published in the EU Official Journal on 10 March 2017 and came into force on 30 March 2017). KDPW presented an application for authorisation as a central securities depository to the Polish Financial Supervision Authority on 29 September 2017. The Polish Financial Supervision Authority confirmed that KDPW’s application was complete on 12 September 2019. The Polish Financial Supervision Authority issued its decision authorising KDPW under CSDR on 3 March 2020, confirming that KDPW fulfils the European Union’s single legal requirements for central securities depositories.
Scope of the authorisation
KDPW has been authorised to provide all core services, including in particular the recording of securities, operating a depository system and a securities settlement system. Given KDPW’s role on the Polish capital market, the authorisation is key to all market participants. To align with the CSDR requirements, KDPW has implemented a package of systemic modifications in a range of projects.
CSDR settlement discipline requirements
A key part of the modifications relates to settlement discipline requirements (Article 6 and 7 CSDR). The requirements apply to KDPW and to KDPW’s participants. In particular, they include modifications to the processing of buy-ins, fees for settlement fails, valuation of securities, monitoring of settlement fails, the matching of instructions, the hold-release functionality, partial settlement, and tolerance limits. The alignment with such requirements under CSDR is required to be implemented no later than the effective date of the applicable settlement discipline regulations, i.e., 24 months after the publication of the relevant technical standards on settlement discipline. The standards were published on 13 September 2018 and were to come into force on 14 September 2020. With a view to the ESMA announcement of 28 August 2020 concerning the postponement of the date of coming into force of Commission Regulation 2018/1229, published on 13 September 2018 and containing the technical standards on settlement discipline, until 1 February 2022 (the date was initially postponed from 13 September 2020 to 1 February 2021 after recent amendments) and following consultations with representatives of the Chamber of Brokerage Houses and the Board of Depositary Banks in the first half of September 2020, KDPW have decided to split the settlement discipline project into two phases.
In Phase 1, completed on 19 April 2021, the following functionalities supporting settlement discipline have been implemented:
- changes to the tolerance level functionality;
- changes to the cancellation of settlement instructions;
- modifications to partial settlement functionalities; as well as modifications to the processing of the settlement instruction field "Place of clearing".
In the second phase, to be completed on 1 February 2022, the following functionalities will be introduced in the KDPW Group IT systems:
- a new system of cash penalties for late settlement, including mechanisms for the redistribution of cash penalties to counterparties by KDPW and KDPW_CCP;
- mechanisms for monitoring of participants’ timely settlement and assessment of settlement efficiency and mechanisms for supervisory reporting of settlement discipline;
- modifications to the existing hold-release mechanism.
In addition, changes will be implemented to the processing of settlement orders relating to post-trade settlements; the changes follow from discussions in working groups aiming to improve the processing of instructions delivered by participants’ clients, in particular allowing instructions not to be marked with a specific code related to post-trade settlement (market code XPXX in the KDPW system).
- the planned scope and timetable of modifications of the IT systems to be taken in order to implement the CSDR provisions