Discussion Paper – Draft Technical Standards for the Regulation on improving securities settlement in the European Union and on central securities depositories (CSD)
We refer to your 20 March 2014 invitation to comment on the Draft Technical Standards for the Regulation on improving securities settlement in the European Union and on central securities depositories (‘CSD’), as presented in Discussion Paper 2014/299. We appreciate the opportunity to participate in this consultation and provide comments to the European Securities and Markets Authority (‘ESMA’).
Norges Bank Investment Management is the investment management division of the Norwegian Central Bank (Norges Bank) and is responsible for investing the Norwegian Government Pension Fund Global (the ‘fund’). We are not a CSD nor a CSD participant; however, we are a user of services provided by such entities or participants. The fund is invested in assets in excess of NOK 5 100 billion (EUR 600 billion) of which approximately EUR 240 billion is invested in European listed equities and euro-denominated bonds.
We engage in the development of regulatory frameworks and industry-wide standards to safeguard the long-term interests of the fund. Well-functioning financial markets are important for us as a large and global investor. We believe efficient settlement facilities and safe securities depository are elements of a sound financial market infrastructure.
Your discussion paper describes possible contents of the regulatory and technical standards that ESMA is required to draft under EU CSD regulation. We support initiatives which standardise and harmonise regulation of financial market infrastructure across Europe. Such standardization can contribute to increase efficiency, reduce costs for market participants and improve safekeeping of financial assets. We have reviewed the questions in the discussion paper and provide our comments and suggestions in Annex 1 to this letter.
Our main considerations with regard to the discussion paper are as follows:
- Incentives for early input of settlement instructions (Question 5)
You present how settlement instructions which are not received by the CSD by certain deadlines should be subject to disincentives by the CSD. We believe this view should be investigated further and reconsidered. The risk of penalties could create incentives to circumvent industry standard trade matching engines in order to ensure trades are instructed to the CSDs on trade date, even if mismatched. We believe that although there could be benefits to the suggested approach, we are concerned that it could lead to a less efficient process than what is currently in place.
- Buy-in mechanism (Questions 13 and 14)
You have proposed an extension period of the settlement cycle before a buy-in takes place. We believe the objective should be to create a robust mechanism with few rules to enable parties to monitor and address issues. It is our opinion that the suggested rules are complex. We suggest a simple settlement cycle based approach: one cycle for standard settlement, a second cycle for failing participants to attempt to deliver, and a third cycle for trading venues to execute buy-ins. We believe this approach also could reduce the need for the short sale restrictions currently in place.
- Suspension of failing participant (Questions 18 and 19)
You are considering conditions for a potential suspension of a participant deemed to consistently and systematically fail to deliver the financial instruments to the CSD. A suspension could have unforeseen, wide-reaching and significant negative consequences for the market at large, the clients, as well as the suspended participant. Due to this we do not support your suggestion to sanction participants with significant and systematic fails.
- Systemic risk (Questions 6, 24, 41 and 46)
You discuss several issues which may impact systemic risk related the financial market infrastructure. We believe it is important to limit counterparty risk in the settlement process. In order to mitigate such risk we support a strict regulatory regime with regard to the CSDs’ possibility to diversify into other businesses.
We would like to thank ESMA for providing us with an opportunity to contribute our views. NBIM will be pleased to discuss our proposals directly with ESMA should that be of value for its considerations.
Yngve Slyngstad Age Bakker
Chief Executive Officer Chief Operating Officer