The European Securities and Markets Authority (ESMA) published a report on central securities depositories (CSDs) covering two topics: the cross-border provision of services and the handling of passporting requests between 2020 through to end of 2022.
The report noted that all CSDs have foreign participants, with a clear dichotomy between international CSDs (ICSDs) with a significantly higher average of foreign participants (1,371.5 in 2022) compared to domestic participants (59.5 in 2022), and CSDs other than ICSDs, with a slightly higher average of domestic participants (33.1 in 2022) than foreign participants (31 in 2022).
When expecting an increase of certain services only, CSDs mentioned notary services as well the provision of services such as corporate action execution, collateral availability, billing service processes and adoption of global messaging standards
In the survey, several factors considered as contributing to the increase of cross-border services were identified, some which were of a regulatory nature (interpretation of CSDR by authorities, differences between national laws, access to non-domestic central banks) and others related more to the market itself or to its organization (e.g. T2S, financial innovation, role of global custodians in cross-border settlement, etc.).
T2S is also mentioned by an authority as an “enabler of cross-border settlements”, through the joining of more CSDs including the ICSD Euroclear Bank which will automatically increase the number of links between T2S CSDs. Furthermore, the delivery of the Eurosystem Collateral Management System (ECMS) should contribute to facilitating the circulation of collateral for Eurosystem credit operations based on the existing collateral mobilization channels.
Trade associations mentioned on-going efforts to improve settlement connectivity and collateral mobility between the ICSDs and T2S, mentioning that Euroclear Bank joining T2S could increase the mobility of assets across the two systems, which could be complemented with discussions at industry level to reduce the remaining differences in timing and methodology. CSDs and NCAs however note the importance of relayed links to use T2S and settle on the Bridge, e.g. via CSDs connected to T2S and part of a group linked to the Bridge. One CSD also notes that moving towards compatibility between T2S and ‘the Bridge’ could lead to second-order effects on their compatibility with other issuer CSDs.
Some market participants mentioned an unlevel playing field between global custodians and CSDs which may be detrimental to the development of cross-border services by CSDs, as global custodians are not subject to the Central Securities Depositories Regulation (CSDR).
Respondents point out to the less strict rules that apply to custodians in many areas (e,g banking services, as global custodians can grant credit lines, pre-fund corporate actions). This competition appears likely to remain detrimental in particular to the smaller-scale CSDs for the provision of cross-border services: indeed, global custodians can also offer a gateway to investors to settle in a multitude of countries and currencies including many markets where CSDs have difficulties to provide services mainly due to their obligation to settle in central bank money or to become a CSD authorised to provide banking-type ancillary services.
By contrast, the global custodians with significant scale can connect directly to T2S (as ‘directly connected participants’) to offer a single connectivity point to all T2S markets, enabling them to limit their network costs over the long term. Trade associations also caution against a confusion between the roles of investor CSDs, local settlement agents (sub-custodians), and global custodians and their diverse service offerings. Some respondents also highlight some unfair competition e.g. for CSDs offering intermediary services such as collateral management. This is considered an example of an unlevel playing field with competitors not applying the same set of rules.
A trade association however also emphasized that CSDs, as market infrastructure, and custodians, as providers of services mainly to nondomestic or third-country investors, both play different, but essential, roles for the EU financial markets.