2. Authorisation and ongoing supervision of CSDs. 4. Prudential rules and other requirements for CSDs

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1 COMMENTS BY THE CNMV ADVISORY COMMITTEE ON THE EUROPEAN COMMISSION'S CONSULTATION DATED 13 JANUARY 2011 REGARDING CENTRAL SECURITIES DEPOSITORIES (CSDS) AND ON THE HARMONISATION OF CERTAIN ASPECTS OF SECURITIES SETTLEMENT IN THE EUROPEAN UNION The CNMV's Advisory Board (or Committee) has been set by the Spanish Securities Market Law as the consultative body of the CNMV. This Committee is composed by market participants (members of secondary markets, issuers, retail investors, intermediaries, the collective investment industry, etc) and its opinions are independent from those of the CNMV. The European Commission is preparing a proposal to regulate Central Securities Depositories (CSD) and harmonise certain aspects of securities settlement in the European Union. For these purposes, on 13 January 2011 it issued a public consultation on the main aspects of that regulation. The consultation is structured as follows: Part 1: Appropriate regulatory framework for CSDs 1. Scope and definitions 2. Authorisation and ongoing supervision of CSDs 3. Access and interoperability 4. Prudential rules and other requirements for CSDs Part 2: Harmonisation of certain aspects of securities settlement in the EU 1. Settlement discipline 2. Harmonisation of settlement periods 3. Sanctions The CNMV Advisory Committee considers that the European Commission is right to pursue an appropriate regulatory framework for CSDs and harmonisation of certain aspects of securities settlement systems. To date, what little regulation exists in the European Union on CSD is distributed between the Settlement Finality Directive 98/26 and isolated references in MiFID. 1

2 PART I APPROPRIATE REGULATORY FRAMEWORK FOR CSDs 1. Scope and definitions (1) What is your opinion on a functional definition of CSDs? This Advisory Committee agrees that a functional approach should be adopted when defining and regulating the activities of CSDs. In fact, this approach should guide all articles of the new legislation, not just the definition of CSDs. In particular, the importance of this approach is noted in our replies to questions 3, 4, 14 and 15. As to the definition of CSD, it will depend on how CSD functions are defined. Once those functions are defined, any party wishing to provide one or more of them must be bound by the requirements of the planned regulation. Moreover, this approach is particularly appropriate when addressing the issue of cross border provision of services (i.e. passporting). This Committee also considers it important to avoid uncoordinated overlap of regulations. Such overlap may arise from the proposal in the draft Securities Law Directive (SLD) to amend MiFID so as to classify the maintenance of securities accounts as an investment service. (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)? Any exceptions should be limited and clearly justified. Otherwise, the functional approach of the planned legislation would be undermined. To safeguard competition, government entities providing services that are classified as CSD services should be subject to obligations that mirror the rights of the other CSDs (e.g. right of access) in exactly the same terms as their competitors. (3) What is your opinion on the above description of the core functions of a CSD? Broadly speaking, the description reflects the essential services currently provided by CSDs. It is hard for any single wording to reflect the various business models applied by CSDs. It is important to highlight the responsibility assumed by an entity providing notary functions. The future CSD regulation may be an optimal legal instrument for harmonising differences between national legislations that put CSDs operating in the more demanding jurisdictions at a disadvantage. (4) Which core functions should an entity perform at a minimum in order to be qualified as a CSD? Rather than determining the minimum basic service(s) that a CSD must provide in order to qualify as such, it should be established clearly that any entity wishing to provide any of the three basic services must obtain a CSD licence. This is an intrinsic part of the proposed functional approach. In this respect, it would be advisable to clarify whether other institutions not subject to the CSD regulation will be authorised to provide any of three basic services. 2

3 (5) Should the definition of securities settlement systems be reviewed? We see no need to review the definition of securities settlement systems contained in the Settlement Finality Directive. Even where European settlement systems were not established by means of agreements among members, the definition of settlement system under the Finality Directive has been applied without objection in the relevant cases and has proven to be useful and stable since its promulgation in (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? The list of ancillary services to be provided by a CSD is reasonable. In any event, such ancillary services must be passported so that a passported CSD can provide them without any restrictions due to the place of effective delivery within the European Union. As regards services under heading (6) Non central safekeeping of financial instruments, it is essential to avoid any overlap between MiFID and the CSD regulation. 2. Authorisation and ongoing supervision of CSDs (7) According to you, could the above mentioned 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 that may impact the authorisation and supervision of CSDs is driven by an economic and theoretical approach which argues that any externality requires the participation of a relevant "external" regulator. This would create an excessively burdensome regime for CSDs (and regulators) by requiring that all CSDs operate under a variety of modes that enable them to address the different types of externality identified by the Commission. It would be possible to design a risk based approach that takes account of whether there is a potential increase in risk that extends beyond the reach of the national regulator. In particular, the following: (1) The issuance of securities by an issuer from a different jurisdiction than the CSD.XXX.The presence of an element external to the legislation applicable to CSDs justifies the reflection raised by the Commission. However, the potential involvement of the regulatory authority from another member state should be analysed with caution so as to avoid simplifications that ignore the variety of cases that may arise. For example, bonds are currently issued on a European or international basis. Whether the issuer chooses a European or international CSD has no impact on the issuer's risk profile and we see no risks which might require the issuer's local supervisor to participate in supervising a foreign CSD. The issuance of equity securities is more complex and is connected with national tax and company law. We accept that the regulatory authority supervising the issuance of shares may (in the event that the issuer decides to issue shares at a foreign CSD) need to assure itself that 3

4 the issuer satisfactorily fulfils the necessary legal analyses. However, we do not consider it necessary to demand any regulatory action over the CSD. It is the issuer's responsibility to fulfil the national legislation. (2) "The participation of a member from a different jurisdiction to the settlement function operated by a CSD". At present, CSDs provide a variety of services to domestic, European and international clients for a range of securities under the authorisation and supervision of the national regulator. In general, clients are free to open accounts at the CSD which they choose under the Treaty. And CSDs may open accounts at other CSDs in order to provide local access to foreign securities in their domestic markets, under the home country's authorisation and regulation. Given the importance of non domestic clients for nearly all CSDs and the fact that the European Commission wishes to further extend free access to CSDs on the part of participants throughout the European Union, it is clearly counter productive to involve multiple authorities when a CSD provides services to non domestic participants. Nevertheless, it is appropriate that regulators should exchange information about the number of remote participants. (3) "The conclusion of access and interoperability arrangements between CSDs and/or other financial market infrastructures". It is important to highlight the difference between standard access as defined in the European Code of Conduct and real interoperability. Under standard access (e.g. the right to open an account at another CSD), the authorisation procedure does not differ significantly from that of ordinary participation. In contrast, interoperability agreements are more complex reciprocal agreements (e.g. the bridge between two ICSDs) and may potentially require the participation of more than one supervisory authority. Therefore, we recommend eliminating the words access and for the proposed requirement. (4) "The settlement in a currency different from the currency of the Member State of the CSD". At present, many CSDs offer settlement in more than one currency. Acceptance of settlement in a foreign currency does not appear to increase the risks of that currency's issuing country. If settlement takes place in central bank money, the CSD is not exposed to any risk in connection with activities performed to facilitate settlement of the cash leg of the transaction. CSDs that offer settlement in a number of currencies in central bank money may choose to obtain a bank charter or use a settling bank. In the first case, they must fulfil all the capital and liquidity requirements. Just like any other bank, they would be subject to supervision in their home member state. We see no reason why the current authorisation and supervision regimes should be changed. (5) Performing settlement through a common IT platform between CSDs of different Member States : In these circumstances, we believe that regulators and central banks should exercise strict supervision of such platforms, as is the case at present with the ESES platform operated by three CSDs. This should also apply to the T2S platform, where the appropriate Chinese walls should be established at the central banks. (8) What other elements should be submitted as part of the initial application procedure by a CSD? 4

5 We have not identified any other elements that should be submitted as part of the initial application procedure. Regarding those mentioned in the consultation paper, it should be considered that the list of the types of securities in which the CSD plans to offer services or the list of currencies in which it plans to settle cash would be determined by demand from participants; accordingly, the types of securities or the currencies listed in the initial application should not limit the possibility of extending the list in the future. (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. The procedure for authorisation of a CSD should be distinguished from the designation and notification procedure for the settlement system(s) managed by the CSD, although designation of the settlement system should be a condition for authorisation of the CSD. The distinction between the two procedures is justified by the difference between definition of CSD and settlement system and, therefore, of their essential functions. (10) What is your view on establishing a register for CSDs? The Committee agrees with the idea that the ESMA should keep a central registry of authorised CSDs whose content should be public. (11) What is your view on the above proposal for a temporary grandfathering rule for existing CSDs? The Committee supports a temporary grandfathering rule for existing CSDs in the various member states since its entails recognition of the reality existing prior to approval of the new regulation. However, this should not mean an a priori, indefinite guarantee of all current activities of the CSDs; rather, they should be bounded on the basis of the activities allowed for CSDs, within a sufficiently long transition period. Moreover, this automatic recognition of CSDs that are operating prior to the entry into force of the new regulation should allow those CSDs whose activities are limited by unharmonised national legislation to commence the activities that they wish under this same automatic notification regime and, therefore, avoid the standard authorisation process. (12) According to you, does the above approach concerning capital requirements, suit the diversity of CSDs? Yes? No? No opinion? Please explain why. The European Commission's comments in the consultation about the capital requirements for a CSD appear to provide appropriate coverage for the various types of CSDs on the basis of the services they provide and the risks they assume. However, this Committee considers that it would be advisable for the new regulation to establish a minimum level of capital above which each CSD's capital requirements would be set on the basis of the services they offer and the securities they handle. (13) According to you, should the competent authorities have the above mentioned powers? Yes? No? No opinion? Please explain why. The Committee supports harmonisation of the powers held by competent authorities throughout the European Union. 5

6 (14) Would a special purpose banking license be appropriate for "banking type services"? The Committee considers it a priority that CSDs be able to compete in the range of services they provide in the European Union member states, whether by inclusion of a special purpose banking license within the CSD Regulation or through the possibility of obtaining a banking license (which may be confined to specific activities). Moreover, as set out in the response to question (6) above, the Committee understands that the unique nature of this service would require a regulatory framework different from that of MiFID. (15) Which of these three passporting options would you support? Full passporting? Limited passporting? Opt out regime? Please explain why. In order to guarantee competition between CSDs, it is essential to provide full passporting of CSDs' entire activity, both principal and the ancillary, including banking type services. Therefore, this Committee chooses the full passporting" option and disagrees with limited passporting and opt out regime". However, oversight should be provided to ensure that activities for which a CSD is not authorised are not passported. 3. Access and Interoperability (16) What is your opinion about granting a right for market participants to access the CSD of their choice? The Committee agrees that the right of market participants to access the CSD of their choice, as set out in MiFID, should be enshrined in the CSD Regulation, in line with the content of recommendation 14 of the ESCB CESR Recommendations for Securities Settlement Systems. (17) What is your opinion on the abolition of restrictions of access between issuers and CSDs? This is a complex issue. The different treatment of debt securities when compared with equities in the context of inclusion in a CSD governed by legislation other than that under which the securities were issued highlights the need for a careful analysis of the various legislative systems involved and of their compatibility. In general, such compatibility is reasonably obtained in the case of debt securities, given the low level of complexity of the rights that they grant their holders. However, in the case of shares, the analysis of restrictions must consider that the shareholder owns a set of rights including the following: ownership of an aliquot of the company's capital, political and economic rights, and rights to information, which are enforceable vis à vis the company, other shareholders and even third parties. National legislation generally maintains appropriate coordination between the law on capital companies (with specific regulation of shares) and the legislation governing book entry securities. In Spain, the design of the book entry security registers (entry procedure, effects of inscriptions, functions and responsibilities of the entity in charge) is underpinned by the general legal framework (mercantile, tax and regulatory regimes). In this way, the procedures for entry and accounting transfer, and the exercise of rights, and their civil and mercantile effects between the parties and vis à vis third parties are made coherent. This coherence, which provides legal certainty, may be threatened if a security (a share, in this case) is entered in a CSD whose applicable legislation is not coordinated with the legislation 6

7 governing the issuance of such securities. In Europe, there are CSDs that check compliance with certain requirements prior to first entering a security, and that assume strict responsibilities in this connection, while there are other CSDs which confine themselves to receiving the minimum information describing an issue, without assuming any liability with regard to the existence, legality or regularity of such issue. It is worth noting that the proposed Legislation on Legal Certainty on Securities Holdings and Dispositions will partly harmonize some of the effects arising from the ownership of securities. However, the scope of the proposal expressly excludes the question as to who should be recognised by the issuer at the owner of a security. Absent harmonisation of all of the effects of the inscription of an issue and of the functions and responsibilities of the CSD with respect to an issue which it registers, the possibilities noted in the consultation become complex. The consultation paper expresses this same view when it makes it clear that the elimination of such restrictions would be "without prejudice to company law"; in practical terms, that is tantamount to saying that applicable company law will prevail; considering the legislation applicable to book entry securities, that merely highlights the disparity of applicable regimes. An alternative approach for enabling the issuer of shares to choose the CSD where the shares are to be registered could consist of the national regulator requiring that the issuer make additional checks to ensure that the registry of the issue at that CSD has legal effects for the owner that are analogous to those that would arise under domestic legislation or, at least, that it does not reduce or significantly alter the legal protection afforded to the owner of the securities. (18) According to you, should the removal of Barrier 9 be without prejudice to corporate law? Yes? No? No opinion? Please explain why. This Committee considers that the CSD regulation should not take steps to remove Barrier 9. In any case, such measures should conform to the framework of the Securities Law Directive. (19) How could the integrity of an issue be ensured in the case of a split of an issue? This Committee considers that the specific cases of split of an issue between two or more CSDs should consider the responses to the foregoing questions. (20) What is your opinion on granting a CSD access rights to other CSDs and what should their scope be? All issues relating to access between market structures were analysed in the Access and Interoperability Guideline in the framework of the European Code of Conduct. The Guideline is a valuable reference with regard to the terminology and the principles that should govern access between infrastructures. It establishes three types of access: standard, customised, and interoperability. Standard access is a right provided on the same terms and conditions as provided to any other standard participant of the receiving CSD. Customised access is a conditional right, since the receiving CSD needs to develop special functions for the requesting organisation; accordingly, the request will be analysed and acted upon, or limited if it requires excessive use of resources. Interoperability is also a right conditional upon agreements to be established between the CSDs. 7

8 Whenever the receiving CSD must undertake developments or investments to cater for the request from another CSD, the Guideline establishes that the receiving CSD must be compensated on a cost plus basis unless bilaterally agreed otherwise. Another fundamental aspect to consider is the recognition of a principle of strict reciprocity in CSD access, as set out in article 50 of the Guideline. Finally, the list of the points set out on page 18 includes the following: "CSD securities account structures should be harmonised". The structure of the accounts in which book entry securities are kept and the legal effects and presumptions deriving from the ownership of such accounts are elements defined by each country's legislation; accordingly, it is difficult to imagine that they can be harmonised at this time. (21) What is your opinion on a CCP's right of access to a CSD? A CCP must be entitled to access the CSD where it is going to settle its transactions, provided that it fulfils the requirements established for this purpose, as set out in the Access and Interoperability Guideline. Likewise, the CCP is obliged to provide a transaction feed to a requesting CSD in the conditions established in the Access and Interoperability Guideline. (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? Trading systems should have access to the CSD to settle their transactions. Rights of access between infrastructures should be covered in a consistent manner in the MiFID, EMIR and the future CSD regulation. To that end, it is suggested that the terminology and principles contained in the Access and Interoperability Guideline be applied. (23) According to you, should a CSD have a right to access transactions feeds? Yes? No? No opinion? Please explain why. It is important that the future regulation provide CSDs with access to transaction feeds as provided in the Access and Interoperability Guideline. As discussed above, access between infrastructures should be covered in a consistent manner in the regulations applicable to each one (MiFID, EMIR and the future CSD regulation). (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? In order to be able to compete, CSDs must have access to transaction feeds from the trading systems and CCPs, as provided in the Code of Conduct. 8

9 4. Prudential rules and other requirements for CSDs (25) Do you think that the legal framework applicable to the operations performed by CSDs needs to be further strengthened? The legal framework governing CSDs will be strengthened, in the international aspect, by the existence of the Settlement Finality Directive, the future CSD Regulation, and the Securities Directive. Nevertheless, the Committee considers it essential that this strengthening of the legal framework to provide greater legal certainty in cross border transactions should not impair the certainty provided by national legislations. Consequently, the Committee considers it of vital importance to protect the workings of the CSDs as settlement system operators, and the balances of securities which they maintain. Particular legal certainty is required with regard to the law that will be applicable to this system, so as protect it from the risk of being governed by a plethora of applicable legislation. All securities accounts held in the accounting register where the settlement processes are conducted must be subject to a single set of legislation, which must apply to the balances and to acts of disposition of same. This means that securities balances held by participants in the settlement system (as defined in Directive 98/26/EC) are subject to the system law, also in their capacity as account providers. (26) In particular should all settlement systems operated by CSDs be subject to an obligation of designation and notification? The Committee agrees that securities settlement systems managed by CSDs should be designated and notified in accordance with the provisions of the Settlement Finality Directive. (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? Securities lending is a tool of vital importance for avoiding settlement failures. However, the Committee considers that this regulation should not impose on the CSD the obligation to implement such a mechanism. The decision to implement it and the specific design should be governed by the legislation of the member states or even depend on the decision of the CSD. (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? The Committee supports the idea that securities registered in a CSD be obligatorily represented by book entries. That obligation should apply as broadly as possible. 9

10 (29) What is your opinion with respect to grandfathering? Securities admitted before the regulation comes into force could be grandfathered, but they should at least be immobilised so as to be treated as book entries within the CSD. (30) What do you think about the requirements above for DVP? Do you see any issues in respect of the different DVP models? The DVP principle should be included, as appropriate, in the part on harmonisation of certain aspects relating to securities settlement. We do not understand the reference to "Free of Payment" transactions unless as are an exception to the DVP principle. This principle should apply in transactions that require an exchange of securities and cash between counterparties (ESCB CESR Recommendation 7), so that transactions "Free of Payment" remain on the margin of that principle. (31) What are your particular views on the grandfathering principle coupled with the requirement for the introduction of a guarantee fund? We do not understand the relationship established between the existence or otherwise of the DVP principle, on the one hand, and the guarantee systems managed by some CSDs (e.g. IBERCLEAR) in markets where there is no CCP and in which the guarantee arrangements (in CESR ESCB parlance) are related to counterparty risk management and not to DVP settlement, whether gross or net. (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? The Committee agrees that central bank money should be used wherever that is possible. (33) Do you think that the principles outlined above could be transposed in future legislation? The regulation should include only high level rules in this respect. Every CSD offering settlement in commercial money can do so either directly (by obtaining a banking licence) or indirectly (through an agreement with a settling bank). In either case, the Committee considers that the principles described above are acceptable. (34) What is your opinion about the extent of the requirements that should be imposed when commercial bank money is used? As discussed in reply to the preceding question, the regulation should consider only high level rules in this respect, leaving more technical requirements for level 2. 10

11 (35) What do you think about the rules above? and (36) Are further rules needed in order to ensure reconciliation and segregation? The Committee agrees with the rules on reconciliation and segregation of accounts set out in the consultation paper. (37) Do you think that these six basic principles cover sufficiently operational risks? Yes. (38) What do you think about the eight principles above, particularly with respect to board composition and the need for a risk committee? The Committee agrees that CSDs' governance structure must be transparent and that the principles detailed in the consultation should apply to all CSDs, regardless of their ownership structure. However, the regulation should contain the general principles so that each member state has flexibility to apply them on the basis of the CSD's size and activities. For example, there are CSDs that are part of a group which has a group level risk committee, and this option should not be limited by regulation. (39) According to you, should CSDs be subject to a principle of full responsibility and control on outsourced tasks? Yes? No? No opinion? Please explain why. This Committee agrees that the CSD should take fully responsibility and exercise full control over outsourced tasks. (40) Should there be any other exemptions from the principle of responsibility and control of CSDs on outsourced tasks? The principle of responsibility referred to in the preceding question should not admit any exceptions based on the service provider's ownership structure. This type of exception is set out only in the regulations on CSDs, but not in the regulations on any other market infrastructure. (41) What is your opinion on the above prudential framework for risks directly incurred by CSDs? The Committee considers that the prudential framework described in the consultation is reasonable. (42) What do you think about the principles above? [credit risk controls when CSDs act as facilitators] We do not understand fully what the European Commission means when referring to CSDs acting as "facilitators". 11

12 (43) What do you think about including these elements of the Code in legislation? [price transparency and service unbundling] The Code of Conduct applies to such aspects as price transparency and outsourcing of services to facilitate a situation of competition, increase clients' freedom of choice, and provide relevant information about the prices and services offered. The Code was signed by the organisations representing all the infrastructures that offer post trade services (FESE, ECSDA and EACH). If the Commission decided to include price transparency and service unbundling in the CSD regulation, they should be confined exclusively to general principles, without considering specific issues such as the need to publish examples of price application. It is also necessary to consider the possibility of including those elements in the regulations applicable to all posttrade infrastructures (not just CSDs). PART II HARMONISATION OF CERTAIN ASPECTS OF SECURITIES SETTLEMENT IN THE EUROPEAN UNION (44) According to you, is the above described harmonisation of key post trade processes important for the smooth functioning of cross border investment? Yes? No? No opinion? If yes, please provide some practical examples where the functioning of the internal market is hampered by absence of harmonisation of key post trading processes. If no, please explain your reasoning. The Committee's opinion is that harmonisation of post trade processes is necessary for proper functioning of cross border investment, particularly in the areas identified by the European Commission. (45) Do you identify any other possible area where harmonisation of securities processing would be beneficial? No. 5. Settlement discipline (46) According to you, is a common definition of settlement fails in the EU needed? Yes? No? No opinion? Please explain why. If yes, what should be the key elements of a definition? The Committee agrees on the need for a common definition of settlement fail. This would provide certainty as to the moment when a settlement instruction is deemed to have failed in the various systems, and would enable their efficiency to be compared by a common yardstick. The definition should address the time when a settlement instruction is deemed to have failed. Some systems use the idea of "intended settlement date", beyond which counterparties are given an extra period in which to deliver before a settlement fail is declared. Failure by the buyer or seller to deliver on the "intended settlement date" should be classified as a settlement fail. 12

13 Moreover, it should be determined whether non delivery of securities or cash on the "intended settlement date", before or after application of the systems' resolution mechanisms, should be considered as a settlement fail. (47) According to you, should future legislation promote measures to reduce settlement fails? Yes? No? No opinion? If yes, how could these measures look like? Who should be responsible for putting them in place? If no, please explain. The Committee considers that European regulation should take steps to reduce settlement fails. However, as the consultation notes, such measures should be general (high level rules) since their application in each market should depend on its structure, the type of transactions which it settles, and the parties bound to comply. (48) What do you think about promoting and harmonising these ex ante measures via legislation? As discussed in the preceding reply, European regulation should promote high level rules to avoid settlement fails. The specifics of those measures should be established taking account of each market's structure; therefore, it would be advisable to establish them at national level under Europe wide standards or recommendations. (49) What do you think about promoting and harmonising these ex post measures via legislation? See reply to question Harmonisation of settlement periods (50) According to you, is there a need for the harmonisation of settlement periods? Yes? No? No opinion? Please explain why. This Committee considers that it is necessary to harmonise settlement cycles so that crossborder settlement is actually comparable to domestic settlement. However, the cycle should be established by the industry, not by European regulation. (51) In what markets do you see the most urgent need for harmonisation? Please explain giving concrete examples. Harmonisation of settlement cycles should extend to all markets and securities, although it appears to be more necessary in equities, where differences in cycles may affect the course of financial transactions. (52) What should be the length of a harmonised period? Please explain your reasoning. Transactions in equity markets (both regulated markets and MTFs) should be settled at T+2 provided that shortening the settlement cycle does not come at the expense of a significant increase in settlement fails. If that were the case, then the settlement cycle should be T+3. 13

14 Given the diversity of platforms and trading systems, it is considered that equities should always be settled in the standard T+N, regardless of the trading venue, so as to maintain neutrality between trading venues and methods. Also, given the increasing trend towards globalisation, it would also be advisable to promote standard harmonisation between the large financial centres in America, Europe, Asia, etc. Fixed income transactions arranged on trading platforms are generally settled at T+3, in line with the standard for equities. A reduction in the period for equity settlement should be accompanied by a similar measure in fixed income trading platforms. Settlement of OTC trades in fixed income are generally linked to finance and monetary policy transactions, i.e. generally between T+0 and T+N. Since these are professional wholesale markets, this issue is not considered to be problematic. Finally, a non standard settlement period should be allowed for special funding transactions such as repos and securities loans. (53) What types of trading venues should be covered by a harmonisation? Please explain the reasoning. The Committee considers that efforts at harmonisation should cover all the following trading systems: Those based on order books (regulated markets and MTFs) have established a single settlement cycle and, therefore, would be covered by harmonisation. Nevertheless, as has been commented in the past, such harmonisation should extend to all other forms of trading. This would maintain neutrality between the existing trading regimes. (54) What types of transactions should be covered by a harmonisation? Please explain your reasoning. As mentioned above, harmonisation should extend to all market operations. But not to funding transactions such as repos or securities loans. Also, this exception could also apply to transactions designed to remedy settlement fails on the settlement date. On an exceptional and restrictive basis, it should also be possible to allow certain bilateral transactions to use a non standard settlement period based on their specific characteristics. (55) What would be an appropriate time span for markets to adapt to a change? Please explain. The Committee considers it advisable that any change to be implemented should take account of the time horizon of the TARGET2 Securities project because of the changes and investments that it will impose on the industry. Consequently, the date of commencement of TARGET2 Securities and its various waves of implementation would be appropriate times to impose this obligation on the market. 14

15 7. Sanctions (56) According to you, how should the principles examined in the communication on sanctions apply in the CSD and securities settlement environment? The Commission's communication on "Reinforcing sanctioning regimes in the financial services sector is addressed principally to national regulators and it refers to sanctions imposed by national authorities while exercising their powers under public law. Therefore, that is a completely separate issue from the section on sanctions in the consultation paper, which refers to fines or penalties that might be imposed by CSDs on their participants for settlement breaches. National regulators may also impose administrative penalties on CSDs for breach of the applicable legislation. However, a broader debate is required on how to structure sanctions on CSDs since their role as infrastructure means that the revocation of their licence (or the imposition of fines far in excess of their ability to pay) would create a systemic risk. This debate should consider how to assure business continuity in the event of revocation of the licence. 15