Introduction

Central securities depositories (CSDs) are financial market infrastructures that hold and transfer fungible securities. This occurs either in the form of physical certificates, which is now fairly unusual, or in the form of book entry securities. CSDs act as a kind of notary function in the issuance of securities and ensure the correct registration of the issued securities. As a result, the CSD is responsible for contributing to the integrity of the issue over the securities' entire life cycle. For book entry securities, this involves the secure storage of certificates (usually what is known as a global certificate) in the CSD's safe. It also involves regularly tallying the total stock of issued securities (based on the certificates it holds in safekeeping) and the individual holdings of the CSD's participants in the respective security.

CSDs do not generally know the end-investors (ie the owners of the securities), as the securities are usually held by custodian banks in one or more omnibus accounts. There are only a few countries (eg Greece, Finland) where, owing to statutory requirements, CSDs offer account management at the level of the end-investor without corresponding omnibus accounts (direct-holding markets).
In addition to holding and transferring securities, some CSDs offer supplementary services to their customers. These can relate to corporate actions or collateral management, for instance. Furthermore, it can be assumed that services in the area of collateral management will play an increasingly important role in future, among other things because of the greater significance of collateralised interbank transactions.

There are several points of contact between central banks and CSDs, which is why the secure and smooth functioning of CSDs is of particular interest to central banks.

• With regard to the stability of the financial system as a whole, central banks have a major interest in CSDs functioning in a reliable manner.
• CSDs play an important role in the collateralisation of central bank monetary policy operations. For example, stocks of securities held by banks at a CSD can be pledged as collateral for such operations.
• Central banks and CSDs cooperate in the cash settlement of securities transactions in order to ensure delivery-versus-payment settlement (transfer upon payment of rights to the securities) in risk-free central bank money.

In principle, securities transactions can also be settled in commercial bank money. For example, CSDs with a banking licence can maintain cash accounts of their own in which cash settlements can be effected using commercial bank money as and when necessary.

In the case of cross-border securities transactions, CSDs facilitate the delivery of securities across borders via links to other CSDs. For this purpose, CSDs open accounts at foreign CSDs and often become ordinary participants in the settlement process in that country.

The delivery-versus-payment principle and settlement made in central bank money mean that it is generally safe to assume that the operations performed by CSDs are free of counterparty and credit risk. CSDs are mainly exposed to operational risk. Settlements in commercial bank money, on the other hand, essentially entail credit and liquidity risk, though the much tighter collateralisation and liquidity provisioning requirements mean that the latter are considerably less severe than they are for banks.

Entities subject to oversight

Clearstream Banking AG (CBF) is the CSD in Germany. As a subsidiary of the Deutsche Börse group it offers its participants (ie banks or other financial service providers) custodial and settlement services for securities issued in Germany and, via CSD links, abroad.

CBF's settlement services extend to all exchange-traded securities in Germany and are also available for participants' OTC securities transactions as well. CBF's two settlement systems (CASCADE in central bank money, Creation in commercial bank money) have been notified to the European Commission pursuant to the Settlement Finality Directive of 1998.

CBF's custodial services for securities issued in Germany are, as a rule, provided for book entry securities in accordance with the principle of collective safe custody. The investor obtains a right to the security held in custody in proportion to the amount of his or her holdings in relation to the total stock of the respective security held by CBF.

CBF has a banking licence. This enables CBF to maintain cash accounts and to grant loans to participants for settlement in commercial bank money.

The Bundesbank and CBF have various dealings with each other as cooperation partners and business partners. For example, both institutions interact closely in the cash settlement of securities transactions, as CBF uses the Bundesbank's TARGET2 service to effect delivery-versus-payment settlements in central bank money. The Bundesbank is itself a regular participant in CBF and therefore settles its own securities transactions via CBF. In addition, the Bundesbank uses the services offered by CBF in the area of collateralisation of monetary policy operations, eg CBF's Xemac© collateral management system.

Implementation

The monitoring of CSDs by central banks reflects the fact that CSDs, as financial market infrastructures, make a major contribution to the stability of the financial system. Owing to interdependencies with other infrastructures and the magnitude of settlement volumes, this contribution is not limited solely to securities business, but extends to the entire financial system. For example, downtimes in the clearing and settlement business can have negative repercussions on the availability of liquidity for the affected participants and lead to serious disruptions to interbank payments.

To date, the Bundesbank has conducted its oversight of CSDs on the basis of the CPSS and IOSCO recommendations for securities settlement systems finalised in 2001. These were adapted to suit European standards by the ESCB and CESR (Committee of European Securities Regulators) in 2009 ("ESCB/CESR recommendations for securities settlement systems"). As part of this oversight, the CSDs are evaluated on the basis of 19 pre-defined recommendations and, where necessary, encouraged to eliminate any weaknesses. The Eurosystem has decided to use the CPSS/IOSCO Principles for Financial Market Infrastructures (PFMIs) finalised in April 2012 as a single oversight framework for CSDs.

In March 2012, the European Commission put forward a legislative proposal to transform the previous, rather non-binding, oversight and supervisory framework for CSDs at the European level into a legally binding regime. This was partially concluded in August 2014 with the adoption of Regulation (EU) No 909/2014 on improving securities settlement in the European Union and on central securities depositories (CSDR). The regulation defines, among other things, a harmonised regulatory framework for CSDs in the EU, setting out requirements for the CSDs and providing a single supervisory and oversight mandate for the responsible authorities. Numerous provisions pursuant to the CSDR are not, however, being fleshed out as part of the European legislative procedure (basic legal act, level 1) but are to be drafted by June 2015 through delegated legal acts (level 2) by the European financial supervisory authorities ESMA and EBA in close consultation with members of the ESCB. The Bundesbank is taking part in the drafting of these regulatory and implementing technical standards.

In addition to CSD oversight, the Eurosystem regularly carries out user assessments of CSDs given that its status as a user of securities settlement systems means that it takes delivery of collateral for monetary policy operations. If CSDs and the links that exist between them correspond to the requirements of the Eurosystem and are thus found to be permissible, monetary policy counterparties can submit marketable assets via these CSDs and CSD links to the individual central banks of the Eurosystem. These user assessments are designed to ensure that no inappropriate risks arise for the Eurosystem as a result of the chosen delivery channels.