European Commission Public Consultation on CSDs and the harmonisation of certain aspects of securities settlement in the EU

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1 February 2011 European Commission Public Consultation on CSDs and the harmonisation of certain aspects of securities settlement in the EU Reply from NASDAQ OMX The NASDAQ OMX Group, Inc. delivers trading, exchange technology and public company services across six continents, with more than 3,600 listed companies. NASDAQ OMX offers multiple capital raising solutions to companies around the globe, including its U.S. listings market, NASDAQ OMX Nordic, NASDAQ OMX Baltic, NASDAQ OMX First North, and the U.S. 144A sector. The company offers trading across multiple asset classes including equities, derivatives, debt, commodities, structured products and exchange-traded funds. NASDAQ OMX technology supports the operations of over 70 exchanges, clearing organizations and central securities depositories in more than 50 countries. NASDAQ OMX Nordic and NASDAQ OMX Baltic are not legal entities but describe the common offering from NASDAQ OMX exchanges in Helsinki, Copenhagen, Stockholm, Iceland, Tallinn, Riga, and Vilnius. The Baltic Markets also offer Clearing, Settlement and Depository services within the Central Securities Depositories in Estonia and Latvia, wholly owned by the local exchanges and is also a qualified owner of the Lithuanian CSD. Additionally the CSDs manage individual persons pension account registers and securities account registers through agreements with the Estonian and Latvian governments. NASDAQ OMX Iceland also operates a Central Securities Depository. NASDAQ OMX is pleased for the opportunity to respond to this consultation, which includes a number of proposals having the potential to change very significantly the European post-trading landscape. We acknowledge that our response will be published. 1. Information on the respondent Name and address of the respondent, including relevant contact details: NASDAQ OMX, Stockholm, Sweden,

2 Number in the Interest Representative Register of the Commission: - Field of activity of the respondent: Exchange trading, listing, exchange technology, public company services, market data, central counterparty clearing, central securities depository. 2. General remarks NASDAQ OMX welcomes the Commission s consultation and believes that the creation of a common regulatory framework will assist the development of the CSD industry in Europe as it responds to the challenges of structural and regulatory changes at the trading and post-trading level, substantive legal reform of securities law, and the development of the T2S platform. Given these challenges, NASDAQ OMX believes that any future consistent regulatory structure needs to ensure that CSDs can continue to develop their core and ancillary services in order to provide standard, harmonised, commoditised services to the EU financial markets. NASDAQ OMX supports the Commission s aim to mitigate risks to the greatest extent possible. NASDAQ OMX notes that CSDs are currently regulated intensively through national rules, European rules (SFD, ESCB/CESR recommendations) and international best practice standards (industry standards, CPSS/IOSCO recommendations). They are also supervised and overseen by national competent authorities and central banks. The Commission should also note that CSDs and ICSDs served the market well during a period of sever market stress, handling record volumes securely and effectively and handling the bankruptcy of major market participants in an efficient way. This demonstrates that the current regulatory framework has operated effectively across the EU and forms a sound basis for developing a consistent EU legal regime for CSDs. We also believe that the objectives of MiFID, namely the protection of investors (securities account holders), should not extend to CSDs which do not provide investor services that require the protection of MiFID. CSDs should be explicitly exempted from MiFID and the relevant regulatory requirements should be covered in CSD legislation instead. Finally, NASDAQ OMX finds that the CSD legislation should contain a section with third country provisions that ensures (i) that EU CSDs can offer services outside the EU on a level playing field with non-eu providers, and (ii) that non-eu providers wishing to enter the EU are subject to similar requirements as EU providers. 2(28)

3 3. Scope and definitions 1. What is your opinion on a functional definition of CSDs? NASDAQ OMX supports the principle of a functional definition of CSDs and believes that all entities performing CSD-style functions, as will be defined in the legislation, should be subject to similar regulatory requirements. 2. What is your opinion on the scope of the possible legislation and providing for any exemptions (such as for central banks, government debt management offices, transfer agents for UCITS, registrars, account operators)? For a functional definition to be meaningful, exemptions must be strictly limited and clearly justified on the basis of objective criteria (e.g. that the exempted entities are already submitted to equivalent requirements under a different regulatory regime). However, the suggestion made by the European Commission that some entities like central banks performing CSD services, government debt management offices and registrars could be exempted from the obligations falling on CSDs in the future legislation, while benefiting from the rights granted by such legislation, would clearly create a market distortion and prevent the establishment of a level playing field. Neither the referenced Treaty provisions (Articles 127 and 123) nor UCITS nor any other existing relevant provisions constitute a framework for the provision of CSD functions through the institutions mentioned. As a result, market participants when receiving CSD services from such institutions would be exposed to a less regulated entity than would be the case if these institutions were also subject to CSD legislation. Exempted entities could benefit from an unfair competitive advantage while allowing CSD functions to be performed outside of the harmonised EU regulatory framework. Same business should be subject to the same regulation. NASDAQ OMX therefore strongly recommends that the rights foreseen in the legislation should be conditional upon fulfilling the corresponding obligations. 3. What is your opinion on the above description of the core functions of a CSD? NASDAQ OMX acknowledges that CSDs typically perform at least three functions which tend to be broadly described under the terms notary, settlement and safekeeping. We understand the Commission s approach to make a distinction between core and ancillary services. We agree that there are a number of functions that can be seen to be the core functions of CSDs as they represent a common denominator of services offered by all EU CSDs. For markets 3(28)

4 or financial instruments for which these core services are not performed by current CSDs, a decision will need to be made on whether and how they should be included in the legislation. The Commission runs the risk of excluding some CSDs from the scope of the legislation if it defines core functions narrowly, and if it requires all core functions to be undertaken at all times by any CSD. The complexity and variety of the services offered by CSDs across Europe mean that not all undertake the same functions. NASDAQ OMX thus encourages the Commission to adopt a flexible approach to definitions. In addition to the defined core functions, CSDs will also perform a number of other services that are generally (but not always) related to these core functions. While these services can be seen as ancillary in an EU context, for some Member States, a number of these services may currently be seen as core. This is particularly true in the Scandinavian and Nordic Countries as well as Greece, Cyprus and Romania where registration and issuer services are often delivered through the CSD as a requirement under national law. There is currently no distinction between core and ancillary functions in national law, and the concepts to be introduced in European legislation must take into account that these functions are often difficult to distinguish clearly in practice. In particular, NASDAQ OMX believes that the proposed definition of the notary function may fall too narrow and may not necessarily reflect today s reality of the function (e.g. separate account for issuer is not necessarily the case). We would suggest that the definition of notary is focused on: initial representation and subsequent maintenance of securities (regardless of their form i.e. certificated or dematerialised) initial credits and subsequent credits or debits to securities accounts. This function is performed on the basis of: (a) the information provided by the issuer or its agent; and/or (b) the number of registered or physical securities on deposit with the CSD directly or indirectly where that CSD assumes liability for the integrity of the issue. Such a definition would best reflect the common characteristics of the notary function provided by European CSDs and would generally distinguish them from other market infrastructures and banks. Therefore, entities intending to perform the notary function should be requested to apply for an authorisation as CSD besides being designated as an SSS. We would suggest changing the definition of central safekeeping to safekeeping : "Account providing and administration of financial instruments at the top tier of a book entry system." 4(28)

5 The term central does not bring any further precision into this discussion, and should therefore, be avoided. In relation to settlement NASDAQ OMX notes that the proposed definition is not really functional. However, we could agree with it while pointing out that not all providers of settlement services are designated SSS under the SFD today. In addition, most CCPs were designated as SSS under SFD. Therefore, further assessment will be necessary in order to determine the impact of having a CCP carrying out a CSD core function. Some further analysis may be needed to determine whether the notary and central safekeeping functions could be combined given that there does not appear to be specific regulatory requirements in the proposed legislation for each function. This approach would require the addition of custody as a new core function for CSDs defined as: Maintenance of securities on behalf of others via access or interoperability arrangements, including through the provision or maintenance of securities accounts and corporate action administration In any event, NASDAQ OMX would like to stress that it is not its intention that custodians are covered under the CSD legislation. 4. Which core functions should an entity perform at a minimum in order to be qualified as a CSD? NASDAQ OMX would like to stress that its answer to this question is highly dependent on the final definitions of core functions that will be adopted by the Commission. As a general rule, NASDAQ OMX believes that a CSD licence should allow a CSD to undertake the core functions listed above, as well as the ancillary services defined in question 6, provided that it meets the relevant regulatory requirements. Even if a CSD does not currently perform all core functions as defined, we believe it should be licensed as a CSD, but not obliged to perform all of the core functions (on condition of course that it satisfies the related prudential and conduct of business requirements). 5. Should the definition of securities settlement systems be reviewed? NASDAQ OMX sees no need to review the Settlement Finality Directive (SFD) at this stage. We find that the issue referred to in the consultation document (As a matter of fact, there is no SSS in Europe that has been effectively constituted as an arrangement between participants) can be overcome via common sense interpretation. Most of the existing arrangements are based on the 5(28)

6 structure whereby participants are contractually bound by the system rules - as such this structure could well be viewed as an arrangement between participants. However, an important prudential requirement for being authorised as a CSD should be that the entity is designated as SSS under the SFD. In particular, this would guarantee that all CSDs apply the governing law rule of the SFD. This rule stipulates that the governing law of the settlement arrangement is the law of a Member State chosen by the participants. We are of the opinion that the governing law of the SSS of the CSD should not to be a matter of choice, but rather should be legally stipulated as the law of the Member State of the CSD s incorporation to ensure more clarity/safety for the systems concerned. MiFID s approach with regard to the regulated markets governing law (public law of the home Member State of the regulated market) could be taken into account. 6. What is your opinion of the above description of ancillary services of a CSD? Is the list above comprehensive? Do you see particular issues as to including one or several of them? NASDAQ OMX finds that the Commission's proposed list of six categories of ancillary services is a good basis for discussion, which needs to be further refined. In order to avoid an overly prescriptive regulation and to allow for innovation, the legislation should include a set of broad principles that characterise the ancillary services of CSDs, i.e.: Ancillary services should deliver harmonised, commoditised services improving market wide safety, efficiency and transparency. The above principles would be easier to implement than the ones suggested by the Commission: For example the focus on low risk business is understandable and acceptable to all CSDs but it is unclear how such a principle will be defined. We would suggest that any ancillary service is subject to the regulatory approach within the legislation which by definition is designed to regulate the risk appetite of the CSDs. In addition, the focus on ancillary services having a clear connection with core services may be too restrictive. A more detailed illustrative list of actual services (which, by definition, cannot be exhaustive in a fastmoving market) could be provided in an annex as an illustration of the variety of services that can be (but are not always) provided by CSDs under the new European authorisation regime. We would suggest the below list as a first basis to illustrate the potential array of services that would comply with the above principles: 6(28)

7 Securities administration functions (sometimes called asset servicing ), e.g. processing of interests or dividend distribution, voting, share split, tax services; Collateral management services, e.g. collateral allocation and valuation, repo, triparty collateral management services for central banks, CCPs ; Escrow services; Securities lending and borrowing services, e.g. to increase settlement efficiency or to cover short sales; Special purpose banking (see question 14 below), e.g. providing cash accounts for settlement and accepting cash deposits from its participants, safekeeping or asset servicing purposes, providing credit to participants of a securities settlement system; Services provided to issuers, e.g. maintaining a shareholders /investors register, keeping a central register of subscription applications (known also as book building) for initial public offerings (IPOs), amending subscription applications as per allocation rules or instructions from issuers or its agents, and ultimately crediting of newly issued instruments to subscribers against or free of payment; General meeting services, typically including registration of shareholders and counting of votes; Order routing and processing, fee collection and processing, as well as related reporting; Organisation of the issue and redemption of UCITS and other fund types (e.g. pension funds); Allocation and management of ISIN (International Securities Identification Number) codes and other similar codes; Management of guarantees for the securities kept in the system; Services related to exercising pre-emptive rights; Additional IT services which have a connection with the core functions of a CSD. As an example from existing local legislation dealing with the ancillary services we have copied 216 of the Estonian Securities Market Act that lists the services that the operator of the securities settlement system (including CSD if so authorised) is entitled to provide: 216. Activities of system operator (1) An activity licence issued to a system operator grants only the following rights: 1) to keep account of claims to be settled and obligations to be performed through the system on the basis of transfer orders (clearing); 2) to arrange and ensure on a regular basis the settlement of claims and the performance of obligations arising on the basis of transfer orders, including the settlement thereof (settlement); 3) to enter into contracts to arrange for payment of monetary obligations related to the execution of transfer orders with the administrator of the payment system prescribed in the Credit Institutions Act or, if the system operator holds a relevant activity licence, to maintain the settlement accounts of the members of the system to arrange for payment of monetary obligations; 7(28)

8 4) to make enquiries necessary to conduct securities transactions, and to give orders to the registrar of the Estonian Central Register of Securities (hereinafter in this Part registrar) to make entries in accordance with legislation, the system rules and the contracts entered into by the system operator; 5) to make enquiries necessary to conduct securities transactions, and to give orders to the payment system to perform acts in accordance with legislation, the system rules and the contracts entered into by the system operator; 6) to establish and manage guarantee funds necessary for the operation of the system, for ensuring performance of the obligations of the members of the system and for managing the risks arising from the operation of the system; 7) to take over claims and obligations arising from securities transactions in the cases and pursuant to the procedure prescribed in the system rules. (2) In addition to the provisions of subsection (1) of this section, a system operator has the right to: 1) provide the services of a paying agent in making payments related to securities. For the purposes of this Act, a paying agent is a representative of an issuer who acts as an intermediary for payments made with respect to securities; 2) engage in lending and guarantee transactions of both securities and money; 3) provide services related to foreign currency exchange; 4) provide other services and conduct other transactions or acts which are necessary to arrange for performance of or to guarantee transfer orders. 4. Authorisation and ongoing supervision of CSDs 7. According to you, could the abovementioned cases impact a future regime of authorisation and supervision? Yes? No? No opinion? Please explain why. Are there other cases which could have an influence on a future regime of authorisation and supervision? The proposed list of cases which would impact the authorisation and supervision of CSDs is driven by a theoretical economic approach which argues that any externality requires the involvement of the relevant external regulator. This would create an excessively burdensome regulatory framework for CSDs (and regulators) requiring all CSDs to operate a variety of large colleges to handle the various types of externality identified by the Commission. NASDAQ OMX would advocate a more risk-based approach, where external regulators are involved only where there is a potential increase in risk which extends beyond the borders of the home regulator. In particular, NASDAQ OMX has concerns about the following areas of externality suggested by the Commission. (1) The issuance of securities by an issuer from a different jurisdiction than the CSD : NASDAQ OMX understands why the Commission has suggested that the issuance of a foreign security into a local CSD might require the approval of the regulatory authorities of the issuer. However, the suggestion is too simplistic and ignores the varieties of securities issuance in the EU. 8(28)

9 For instance, debt securities are already today subject to European and international issuance. The choice by an issuer of a European or international CSD service provider does not have any particular impact on the issuer s risk profile, and we do not see which risks would mandate a local supervisor of the issuer to participate in the supervision of a foreign CSD. The issue with equities is slightly more complex and is connected to national corporate and tax law. NASDAQ OMX accepts that the regulatory authority overseeing a securities issuer may in case the issuer decides to issue equity shares into a foreign CSD need to ensure that the issuer has dealt with the necessary legal analysis in a satisfactory manner. But we do not think that this requires any regulatory action over the CSD itself. The responsibility for compliance with its national law remains with the issuer. Regulatory attention on this issue may depend on the scope of barrier 9 - namely whether the freedom of choice is extended to equity instruments of "traded issuers only" (refers to shares traded on regulated markets and MTFs) or include also non-traded equity instruments. The wider the scope the longer the list of complexities (e.g. the CSDs need to handle wider spectrum of limited liability companies) that need to be handled on a regulatory, legislative and supervisory fronts. (2) "The participation of a member from a different jurisdiction to the settlement function operated by a CSD": Currently CSDs provide a variety of services to both domestic, European and international customers in a variety of securities under the basis of home country authorisation and regulation. Customers are generally free to open accounts with a CSD of their choice under the Treaty. And CSDs are able to open accounts with other CSDs in order to provide local access to foreign securities in their domestic market, again under home country authorisation and regulation. Given the importance of non-domestic clients for most CSDs and the fact the EU Commission wishes to further encourage the free access to CSDs by participants from all Member States, it is clearly undesirable to involve a multiplicity of authorities just because a CSD services non-domestic participants. NASDAQ OMX accepts however that regulators should exchange information on the number of remote participants, and links. This requires arrangements between regulators which should not increase the regulatory burden on CSDs. (3) "The conclusion of access and interoperability arrangements between CSDs and/or other financial market infrastructures": NASDAQ OMX would like to stress the difference between "standard access", as defined in the European Code of Conduct, and real "interoperability" (see also our answer to question 20). Standard access (i.e. the right to open an account with another CSD) is the most common form of link between CSDs and does not require any special authorisation. Interoperability arrangements, on the other hand, are more complex reciprocal arrangements (e.g. 9(28)

10 the bridge between the two ICSDs) and could potentially require the involvement of more than one supervisory authority. As to access by CSDs to transaction feeds of trading venues and CCPs (as defined by the Code), NASDAQ OMX believes that only the CSD s home regulator should be involved. NASDAQ OMX therefore recommends deleting the words "access and" from the proposed requirement as well as and/or other financial market infrastructures. (4) "The settlement in a currency different from the currency of the Member State of the CSD": Today, many CSDs offer settlement services in more than one currency. We do not believe that accepting a currency as a settlement currency increases the risks faced by the country issuing that currency. If the settlement takes place in central bank money, the CSD is not exposed to any risks related to activities performed in view of facilitating the settlement of the cash leg of the transaction. CSDs offering multi-currency settlement in commercial bank money will have a banking license or arrange the settlement by usage of the services of authorized credit institutions that are subject to home Member State prudential supervision. We see no reason why the current authorisation and supervision arrangements would need to be altered. (5) "Performing settlement through a common IT platform between CSDs of different Member States": NASDAQ OMX does not believe that the use of a common IT platform requires thee establishment of a regulatory college. To do so would require all CSDs joining T2S (potentially over 25) to be regulated and authorised by a college of 25 regulators. This seems inefficient and costly for all CSDs and all regulators. On page 12 of the Consultation document reference is made to the supervision of a common IT platform. The entity to which a CSD outsources a core or ancillary service does not require financial services supervision. The obligation to comply with regulatory requirements in the legislation and any subsequent level 2 measures remain with the CSD that has undertaken the outsourcing. NASDAQ OMX recognises that regulators and national central banks (NCBs) may wish to construct a specific oversight framework for T2S but this should not form part of the CSD legislation itself (since T2S is not a CSD). 10(28)

11 8. What other elements should be submitted as part of the initial application procedure by a CSD? NASDAQ OMX notes that the list of financial instruments covered by a CSD s service and the list of currencies for which services are offered is constantly evolving to reflect market demand. As a result, the fact that a CSD only intends to cover certain instruments and/or currencies at the moment of its initial authorisation should not prevent it from being able to expand the scope of its services at a later date (subject to approval by its regulator, if applicable). We do not believe that any other elements should be submitted as part of the initial application procedure. 9. According to you should the authorisation procedure of a CSD be distinct from the designation and notification procedure under Art. 10 of the SFD? Yes? No? No opinion? Please explain why. Although designation and notification procedure under Art. 10 of the SFD should remain distinct from the authorisation procedure of a CSD under the new legislation, NASDAQ OMX agrees that the designation as an SSS should be a condition for the authorisation as a CSD. NASDAQ OMX hopes that a dual application process is not required. 10. What is your view on establishing a register for CSDs? NASDAQ OMX has no objections to the establishment by ESMA of a central register of authorised CSDs under the new EU regime. We recommend that the register should be simple and transparent, providing the list of all entities authorised as CSDs in the EU (similarly to the MiFID database for organised trading venues available on ESMA s public website). 11. What is your view on the above proposal for a temporary grandfathering rule for existing CSDs? NASDAQ OMX supports the principle of a grandfathering clause for existing CSDs in the different Member States. NASDAQ OMX is however unclear how temporary grandfathering would operate. We would recommend that grandfathering replaces the initial authorisation of existing CSDs and that the rules contained in the new legislation are used, following the reasonable transition period, for ongoing supervision. 11(28)

12 12. According to you, does the above approach concerning capital requirements, suit the diversity of CSDs? Yes? No? No opinion? Please explain why. NASDAQ OMX supports the Commission s proportional approach regarding capital requirements for CSDs. The level of capital requirements should be proportionate to the risks addressed (taking into account, for instance, the fact that the risk profile of CSDs is very different from that of CCPs and banks, being primarily exposed to operational, rather than counterparty, risk). 13. According to you, should the competent authorities have the above mentioned powers? Yes? No? No opinion? Please explain why. In principle, NASDAQ OMX supports a harmonisation of securities regulators powers across the single market. 14. Would a special purpose banking license be appropriate for "banking type services"? NASDAQ OMX believes that the legislation should enable Member States regulators to license CSDs in such a way that ensures continuity with existing regulatory arrangements and provides a level playing field for incumbent and potentially new CSDs. The basis for this would be founded on two key aspects: (i) designation and licensing of CSDs to perform existing core and ancillary CSD functions as defined in the legislation; and, where required (ii) the provision of CSD-specific banking-type services where the CSD is already, or will be, subject to a banking license. Regulatory requirements here could be delivered primarily through relevant provisions in the CRD. In respect of CSD-specific baking services (point (ii) above), NASDAQ OMX believes that two alternative options can be considered for allowing CSDs to provide limited commercial bank money services to facilitate the settlement and custody process. (i) The first option would be to allow authorised CSDs to apply for a separate banking license under existing banking legislation (i.e. the CRD). The combination of the two licences would limit the banking services that a CSD could offer to those listed in the CSD legislation (facilitating asset servicing and settlement). Banking regulation would be delivered through the CRD and not the CSD legislation. 12(28)

13 (ii) The second option would be for the CSD legislation to include a special purpose banking license for authorised CSDs and the relevant regulatory requirements for that licence. In any event, the most important policy objectives should remain a level playing field between CSDs across Member States (without allowing national regulators to restrict banking passports and create competitive distortions, see question 15) and the possibility for CSDs to offer optimised settlement services responding to the needs of their clients. 15. Which of these three passporting options would you support? Full passporting? Limited passporting? Opt out regime? Please explain why. NASDAQ OMX supports a full passport for CSD core and ancillary services under the new EU authorisation regime. In practice, not all CSDs will provide the full array of services foreseen in our answer to question 6, but leaving the possibility for Member States to opt out of the common regime, or even part of it, would considerably weaken the benefits of the upcoming legislation and could lead to individual markets operating protectionist policies by declining to allow other CSDs to provide services in their Member State. 5. Access and interoperability 16. What is your opinion about granting a right for market participants to access the CSD of their choice? We agree that rights of access to market participants should be covered in the CSD legislation. CCPs (where they open an account in a CSD) and CSDs (where they open an account in another CSD) are treated in the same way as other participants. We believe that the Code of Conduct of 2006 should form the basis of all regulation in respect of access and interoperability. However, the legislation should explicitly state that is not obligatory for the CSD to contract with every legal entity that requests access. A CSD should only be obliged to offer the custody function and the settlement function to any account provider (as defined in the upcoming SLD, including CSDs), CCP and trading venue. It should be entitled to non-discriminatorily exclude any other type of account holder (UCITS, insurance companies, any kind of institutional investors...). 13(28)

14 In recognition of potential legal uncertainty especially with respect to foreign issuers, the CSD should be entitled to refuse offering services to issuers on a case-by-case transparent basis. ESCB/CESR recommendation 14 probably forms a suitable basis for the legislation. CSDs should have objective and publicly disclosed criteria for participation that permit fair and open access/ Rules and requirements that restrict access should be aimed at controlling risk. 17. What is your opinion on the abolition of restrictions of access between issuers and CSDs? NASDAQ OMX supports the removal of barrier 9 as comprehensively as possible in order to give eligible issuers the opportunity of choosing the CSD into which they wish to issue their securities. The removal of barrier 9 should mean two things: (1) the abolition of existing rules which force issuers to issue through a particular CSD, offering more choice for issuers (and investor access to share issues), and (2) the abolition of existing rules obliging CSDs to restrain their notary activity to domestic issuers. Such provisions would contribute to stimulate competition between CSDs. NASDAQ OMX believes however, that considerable more work is needed from the Commission on the corporate law and fiscal implications of such a move. We are sceptical whether the removal of barrier 9 can be achieved without significant corporate law and fiscal harmonisation. The costs of free choice for issuers may be high and complex to implement, both for CSDs and for issuers. For example, record dates used to determine dividend and other distributions depend on relevant corporate law rules and are not harmonised across Member States. In some countries, securities are available in physical form which may require the new CSD to set up and manage vaults. NASDAQ OMX finds that fully dematerialised CSDs should not be obliged to accept securities in physical form. The new CSD may also need to develop specific procedures for withholding tax processing, etc. The success of the removal of Giovannini barrier 9 is very much dependent on the level of harmonisation that is achieved in other areas. It may therefore take many years before the removal of this barrier is achieved. Further, we think that careful considerations should be given to the scope of instruments: namely whether the freedom of choice is extended to equity instruments of "traded issuers only" (refers to shares traded on regulated markets and MTFs) or include also non-traded equity instruments. The wider the scope the longer the list of complexities and practical challenges (e.g. the CSDs need to handle wider spectrum of limited liability companies) that need to be handled on a regulatory, legislative and supervisory fronts. 14(28)

15 In practice, the below conditions would need to be fulfilled to ensure that the abolition of restrictions of access between issuers and CSDs reap the expected benefits and allow for fair competition: The implementation of rules related to importability and exportability of securities has to be simultaneous to prevent that a CSD may attract foreign issuers, while its local issuers are not yet allowed to move out of the CSD because its Member State has not yet removed the local barriers in full. ESMA could play a role in assessing and monitoring the removal of barriers; Existing restrictions should be lifted not only for newly issued but also for existing securities; Access to the relevant trade feeds and CCP feeds must be made available simultaneously with the removal of the barrier; In case exemptions are granted to entities performing the notary function, such entities should not benefit from an unfair competitive advantage and be able to attract issuance at the detriment of CSDs operating under the EU legal framework; It should be ensured that CSDs competing for the same issue have to apply the same requirements (as determined by the legal regime governing the issue, see question 18) and that CSDs currently subject to strict liabilities as part of the notary function are not at a competitive disadvantage compared to CSDs not subject to such liabilities. 18. According to you, should the removal of Barrier 9 be without prejudice to corporate law? Yes? No? No opinion? Please explain why. First of all, it must be noted that barrier 9 is mostly an issue for equity instruments. In fact, the constraints affecting the place of issue of shares, compared to debt instruments, are not due to historical reasons but rather reflect the complexity of the entitlements related to equity ownership (including information rights, voting rights, economic rights etc.). In contrast, debt (even in structured form or synthetic products) is much easier to register, evidence and transfer. Today, it is not uncommon for foreign debt instruments to be issued in a CSD operating under a different legal regime from that of the securities issue. It will therefore be important to ensure that any provisions of the CSD legislation aiming to remove barrier 9 do not have unintended consequences on the fixed income market and do not create unnecessary complexity for the issue of debt instruments in nondomestic CSDs. Equities are affected not only by corporate law, but also by all national legal requirements affecting securities holdings more generally, in the design of book entry registries (including procedures, effects and responsibilities). The current diversity in the national legal environment of the Member States (corporate law, property law, but also tax laws, insolvency law and other regulatory 15(28)

16 requirements) poses a number of challenges when importing or exporting securities to a nondomestic CSD 1. It will be important to ensure that the procedures for the initial book entry, the subsequent transfer of securities, or the exercise of rights arising from those securities are consistent with the applicable legal system governing the securities issue. In practice, not all CSDs are required to verify compliance with national laws when creating new securities. Those entrusted with this obligation typically have to validate a number of parameters (e.g. checking public deeds, commercial registries, statutory provisions, authorisations ) before the initial registration of the securities. Achieving a level playing field thus requires all CSDs competing for a given securities issuance to be subject to the same constraints in relation to this specific issuance. The same principle would also apply with third countries (non-eea Member States). 19. How could the integrity of an issue be ensured in the case of a split of an issue? The example of the Eurobond market shows that split issues can be well managed when there is full interoperability between the issuer (I)CSDs and procedures are in place for re-alignment. However, even if an issue split is technically feasible, there will not always be a business case for it, mostly because of the costs and complexity involved in such a construction. We have seen no demand at all from our local issuers to split their equities between CSDs. Regional link arrangements between local CSDs (e.g. in Baltic States) seem to be enough to ensure sufficient exposure to investors from various Member States. Introduction of T2S is likely to reduce the potential adverse effects of barrier 9 even further. If the Commission feels that such a right is essential then CSDs will wish to retain the right to decide whether or not to accept a given securities issue based on their own business case. 20. What is your opinion on granting a CSD access rights to other CSDs and what should their scope be? On the issue of links between CSDs, NASDAQ OMX believes that it is extremely important to reflect the definitions agreed in the 2007 Access & Interoperability Guidelines of the Code of Conduct. In particular, the Commission should make a clear distinction between standard access, customised access and interoperable links. Standard access is a right and should be unrestricted, whereas customised access is a conditional right subject to the conditions described in the Access & Interoperability Guideline. In order to 1 The future SLD will only partly harmonise the legal effects deriving from securities holdings and it will not address the matter of who an issuer should regard as the holders of its securities. 16(28)

17 ensure that the access rights are effectively implemented, the European Commission might consider whether to reflect these conditions in level 2 technical standards. Regarding the points listed by the Commission under section 3.4 of the consultation (page 18), NASDAQ OMX would stress that ESCB/CESR Recommendation 19 provides for a comprehensive examination of the risk mitigation elements that should be found in links (both direct and indirect) and in interoperability. NASDAQ OMX would recommend that these issues should be covered in level 2 legislation. In addition, NASDAQ OMX has the following observations on the Commission s assessment of links on page 18. (1) All CSDs participating into an interoperable arrangement or a multilateral common settlement platform should use the same rules concerning the moment of entry of transfer orders and moment or irrevocability : NASDAQ OMX agrees that a harmonisation of rules concerning the moment of entry of transfer orders into a CSD is beneficial when CSDs operate on a common settlement platform. ECSDA Working Group 3 on settlement and related processes is currently examining the issue. (2) CSD securities account structures should be harmonised : Given that CSD account structures are inextricably linked to national securities and corporate law (which will not be harmonised by the Settlement Finality Directive) NASDAQ OMX believes that such harmonisation is not feasible to achieve. NASDAQ OMX would like to point out that so called direct holding markets (DHM) have proved to be highly efficient in many respect, including the following: a) We see that DHM offers high level of investor protection: good evidence to that is our experience from the financial crisis in Iceland, where 95% of all the issued securities in Icelandic CSD were held on beneficial owner accounts. Due to the fact there was never any uncertainty of ownership even though many of the banks had gone bankrupt. We were also able to take control over the accounts immediately and deliver them to new account operators within hours; b) DHMs often offer increased level of transparency - that makes it easier for competent authorities to perform their supervisory function and investigations. The same applies for tax authorities. c) DHMs are proven to be very efficient at serving issuer's needs which includes processing of corporate actions, availability of shareholders information. 17(28)

18 It would be unthinkable if DHMs should be forced to take steps towards changing existing and well proven account structures merely because of access or interoperability arrangement with a CSD that operates non-dhm model. (3) Ensure that the regulatory framework of the issuer CSD does not prevent the investor CSD to open omnibus accounts in the books of the Issuer CSD : NASDAQ OMX welcomes and fully supports this proposal which will enable all CSDs to open omnibus accounts with every other CSD therefore facilitating cross-border settlement. (4) Links between CSDs should permit intraday DvP settlement : We find this requirement far too prescriptive. NASDAQ OMX would like to point out that most links between CSDs based on standard access are free of payment (FoP). (5) Future legislation should provide rights of access for different arrangements [ ] and subsequent point on the Remuneration of access for different arrangements : As stated above, NASDAQ OMX supports using the Code of Conduct Access & Interoperability Guideline to describe access rights and the conditions underlying these (which might be included in level 2 technical standards). The Guideline also clearly states that, since customised access benefits the requesting CSD and has no impact on the standard participants of the receiving CSD, the receiving CSD should be compensated by the requesting CSD on a cost-plus basis unless bilaterally agreed otherwise (see also Chapter 4 of the Guideline on the Business Case). 21. What is your opinion on a CCP's right of access to a CSD? A CCP should have the right to choose a settlement location in line with the Code of Conduct Access & Interoperability Guideline. This is covered by EMIR. A CCP must also have a reciprocal obligation to provide a feed of transactions to a requesting CSD. This is not covered by EMIR. 22. What is your opinion on access conditions by trading venues to CSDs? Should MiFID be complemented and clarified? Should requirements be introduced for access by MTFs and regulated markets to CSDs? Under what conditions? A trading venue should have the right to choose a settlement location. NASDAQ OMX believes that the MiFID review should include provisions on access rights which are fully consistent and reciprocal with EMIR and the future CSD legislation. The best way to ensure consistent and transparent provisions on access and interoperability is to draft all relevant legal provisions using the same terminology and principles, as contained in the Access & Interoperability Guideline. 18(28)

19 23. According to you, should a CSD have a right to access transactions feeds? Yes? No? No opinion? Please explain why. Competition between CSDs depends on CSDs right of access to trade feeds and CCP feeds. It is therefore, crucial that the provisions of the future CSD legislation clearly state the right of access to transaction feeds by CSDs, in line with the Code of Conduct, the provisions being currently discussed in the context of the EMIR proposal, and MiFID. 24. What kind of access rights would a CSD need to effectively compete with incumbent providers of CSD services? Should such access be defined in detail? See our answer to question Prudential rules and other requirements 25. Do you think that the legal framework applicable to the operations performed by CSDs needs to be further strengthened? Member States should ensure that their legal framework is consistent with ESCB/CESR Recommendation In particular should all settlement systems operated by CSDs be subject to an obligation of designation and notification? NASDAQ OMX agrees that all SSSs should be designated and notified under the SFD, as is the case today for majority of CSDs operating in the EEA. 27. What do you think of the general elements of these requirements, particularly with respect to the obligation for CSDs to facilitate securities lending and the obligation of counterparties to securities loans to put in place adequate risk controls? NASDAQ OMX believes that the current ESCB-CESR recommendations, which encourage the use of securities lending facilities to improve settlement efficiency, are sufficient. We strongly object that securities lending and borrowing facilities should be mandated by law, given that there has to be an economic case for the development of such facilities, and given the different needs of different markets. For many CSDs, the cost of developing centralised automated securities lending and borrowing might be prohibitive in the absence of market demand, and the facilitation - 19(28)

20 depending on how facilitation as such will be defined - of bilateral lending transactions can present a more practical alternative. The Commission should note that, where automated stock lending services require the CSD to take credit risk, this changes the risk profile of the CSD significantly, since the service guarantees the return to the lent securities to the lender. NASDAQ OMX therefore suggests that each market should remain free to choose whether central or bilateral securities lending is the most appropriate solution, and sees no need for legislative action in this area. 28. What do you think about the requirement for issuers to pass their securities through a CSD into a book entry form? If such an obligation were considered, which securities should it concern? Only listed securities? All securities with an ISIN code? Only equities? Eligibility approach? We fully support the move towards full dematerialisation of securities and book entry settlement. But we believe that it is for Member States to decide upon the way in which securities should be held (immobilised, dematerialised or optional models). This issue is not covered by the SLD. 29. What is your opinion with respect to grandfathering? If a requirement is adopted for issuers to pass their securities through a CSD into a book entry form, a temporary grandfathering should indeed be considered for existing securities. However, permanent grandfathering would leave many CSDs having to deal with parallel mechanisms for handling securities. As stated in our answer to the previous question, we believe that this issue is primarily to be addressed by Member States. 30. What do you think about the requirements above for DVP? Do you see any issues in respect of the different DVP models? NASDAQ OMX sees no need for introducing a requirement for DvP in legislation. We strongly believe that the current definitions of DvP settlement (BIS Report of 1992, and ESCB-CESR) should be maintained. Not only are the definitions of DvP models too technical to be introduced in level 1 legislation, but it is also unclear why this would be needed at all, given that all EU CSDs currently offer DvP to their clients. It is important to acknowledge that FoP transfers, like DvD ( delivery versus delivery ) or payment instructions, are different types of instruction from and next to DvP transfers and as such are necessary for all kinds of standard operations, such as account allocations and portfolio movements. 20(28)

21 31. What are your particular views on the grandfathering principle coupled with the requirement for the introduction of a guarantee fund? NASDAQ OMX would like to insist that the guarantee fund provisions included in the EMIR proposal are not appropriate in the context of CSDs. 32. What do you think about a preference of settlement in central bank money? Should such a preference be applied equally to all types of securities? As the Commission indicates, there are circumstances where central bank money is neither practical nor feasible. This can be the case in an environment when the transaction involves a cross-border element (in terms of counterparties, currencies and securities). In addition, not all counterparties have direct access to a central bank account and will use a commercial intermediary to manage the central bank money settlement. This is recognised in the CPSS/IOSCO Standards and the ESCB/CESR Recommendations and NASDAQ OMX sees no evidence for changing this approach, since CSDs and ICSDs have operated efficiently and effectively over the last few years of significant market stress. NASDAQ OMX agrees that central bank money should be used whenever practical and feasible ; this language is consistent with ESCB/CESR and also with the current text of EMIR in relation to the settlement of CCP feeds. NASDAQ OMX also supports the principle that (where both settlement in central banks money and commercial bank money is offered by a CSD) clients should be able to choose how they wish to settle for given transactions (see also our answer to question 14). 33. Do you think that the principles outlined above could be transposed in future legislation? NASDAQ OMX believes that the current recommendations on the use of central bank money (ESCB-CESR) are sufficient and that any legislative provisions should remain at a high level (stating that, as a principle, central bank money should be used whenever practical and feasible ). More detailed requirements should be contained in Level What is your opinion about the extent of the requirements that should be imposed when commercial bank money is used? NASDAQ OMX believes that any such requirements should not be addressed in level 1 legislation given the level of technicalities involved. Technical standards (level 2) or recommendations would be 21(28)