2.5 Transformation of KELER pursuant to CSDR

in 2014, the EU Regulation on Central Securities Depositories (CSDR) came into effect, and the development of regulatory technical standards (RTSs) setting out specific rules is also in progress, the provisions of which must be complied with in the future by KELER as a central securities

depository. In developing CSDR and the associated RTSs, legislators considered the lessons learned in connection with regulations on central counterparties (EMIR). Consequently, CSDR is expected to be a more practicable regulation, which in several aspects is based on industry best practices. To promote the safe, efficient and smooth settlement of financial instruments in the Union, the Regulation and the related rules lay down uniform requirements for central securities depositories. The second level legislation of CSDR comprises a total of six RTSs, five of which were prepared by the European Securities Markets Authority (ESMA) and one by the European Banking Authority (EBA). These specify detailed rules, among other aspects, for the settlement process, default, the maintenance of records, risk assessment, as well as the authorisation processes and investment policy of central securities depositories. In addition to the foregoing, four implementing technical standards (ITSs) and two other technical recommendations are being developed in connection with the RTSs. As both EBA and ESMA are required to submit draft secondary-level legislation to the Commission by 18 June 2015, the second-level, detailed rules of CSDR are expected to become effective by the end of 2015. Central securities depositories, including KELER in Hungary, are required to submit their applications for authorisation within six months of the RTSs being issued. Preparations within KELER are being coordinated by a working group set up for this purpose, enabling the authorisation of KELER under CSDR in 2016.43

The regulations for central securities depositories prescribe tighter rules in respect of the continuous monitoring of defaults and securities reconciliation.

Although in order to promote financial stability, international regulators have been making efforts to ensure that most financial transactions are cleared through central counterparties so that the clearing and settlement risk associated with the transactions is reduced, this is not always possible. In such cases, securities leg settlement, and occasionally also cash leg settlement, continues to take place directly in the central securities depository – such transactions outside the regulated or guaranteed markets are referred to as OTC transactions, the volume and value of which is significant in Hungary today44 (Chart 1). In the case of OTC transactions, orders for debits and credits involving securities accounts held with the central securities depository are initiated by account holders on behalf of their own or their customers. Having regard to the significant clearing and settlement risk associated with OTC transactions, CSDR requires central securities depositories to continuously monitor defaults and impose fines on defaulting parties. As another new element of regulation, central securities depositories are required to match with credit institutions and investment firms, at least once a day, the transactions booked by the depository on the day concerned, and at least on a weekly basis in respect of all holdings recorded on securities accounts.45 Last but not least, as part of the new regulation, internalised securities settlements will also be monitored.

43 As KELER is both a central securities depository and a specialised credit institution, it remains subject to local and EU level regulations on credit institutions. As opposed to EMIR, authorisation under CSDR does not require convention of a CCP college, leaving authorisation within the powers of Member States. 44 The volume of the OTC market is more than 35 times that of the guaranteed market. 45 Currently KELER issues unilateral account statements on a daily basis.

Box 5 Authorisation of KELER CCP under EMIR and regular reviews

in addition to standardising the sector, the regulation of central counterparties at EU level (EMiR) aims to facilitate

the appropriate detection, measurement and management of systemic risks. In order to ensure compliance with EMIR, central counterparties within the EU are required to complete an authorisation process, which is carried out by a college comprised of international members. The international college is needed to ensure standard assessment across the Union. In addition to the MNB and the European Securities Markets Authority (ESMA), the college of KELER CCP also included authorities of countries from which KELER CCP has participants, including representatives of the financial supervisory authorities of Ireland, Belgium and the UK. As part of the authorisation process, college members examined compliance with the EMIR rules, and following a prolonged procedure, on 4 July 2014 KELER CCP, as the ninth central counterparty in Europe, was granted an operating license under EMIR in accordance with college members’ opinion; thus its operations, including risk management tools and procedures, are now officially compliant with EU requirements. Under EMIR requirements, KELER CCP must comply with the requirements on a continuous basis, which is to be reviewed by the college at least once a year in addition to receiving continuous information about any material changes and events concerning the central counterparty that are relevant to risk.